IBM announced it has acquired Clarity Systems, a Toronto-based vendor of performance management software and consulting. Terms of the deal were not disclosed. (My most recent blog and analysis about Clarity Systems can be found here. The acquisition fills an important hole in the IBM Cognos applications portfolio, as Clarity FSR is a leading application for automating and managing the close-to-report cycle. This capability has become essential for companies that are required to file financial statements with the U.S. Securities and Exchange Commission (SEC) under its “interactive data” mandate. That mandate, which is being phased in now, requires these corporations to tag their financial statements (and most of the footnotes attached to the statements) as well as their 8-K forms (which are essentially press releases, but especially earnings announcements). I estimate that for a large majority of Fortune 1,000-size public companies, automating the close-to-report cycle alone will have a positive ROI and a short payback period. This is why earlier this year I listed automating the close-to-report cycle as a 2010 priority for finance departments. Many finance departments use up a great deal of time of highly paid employees in this process, cobbling together tables with data from multiple sources; writing, editing  and reviewing scattered snippets of text and triple-checking the resulting documents for errors. Many of them, too, will have to automate the process of tagging data to reliably meet filing deadlines. I also expect that most corporations ultimately will prefer to prepare their own filing documents internally and use the financial publishers (Bowne, Donnelley and Merrill are the leaders) as conduits rather than outsourcing this work to them.

The combination of FSR and the recent acquisition of OpenPages, a compliance management product, gives IBM increased opportunities to sell to the office of finance and improves its positioning relative to Oracle, which has its own close-to-report application and a range of governance, risk and compliance (GRC) applications aimed at the finance departments of large and larger midsize companies. Despite the fact that FSR has been purchased by many large companies, I suspect that Clarity’s size (I estimate its revenues at well below US$100 million) prevented it from closing business with others concerned about its viability. This is no longer an issue and probably will enable Clarity to close business immediately that it could not have before. (Underscoring the importance of having a close-to-report automation capability, Longview recently entered this market.)

FSR integrates with IBM Cognos’ consolidation system, but having that direct connection is not essential because data from the statutory consolidation process accounts for few of the numbers a company files. Data going into a 10-K/Q annual/quarterly report, 14D proxy and other, non-SEC filings may come from unconsolidated elements stored in an ERP or other enterprise system, an Access database that (for example) tracks leases of property and equipment, and spreadsheets of all kinds that are kept on controlled servers. Because FSR can handle any sort of reporting task that requires the integration of numbers from a variety of source systems with text in an automated and controlled fashion, organizations can extend its use to save time and reduce the risk that reports and filings contain errors. This use includes any external regulatory filing to any government body, earnings press releases (which typically are already incorporated in 8-K filings for the SEC), reports to third parties (such as lien holders or lenders) or internal reports such as Board Books (we’re waiting for the PowerPoint addition to this mix). Importantly, none of these items by themselves would justify purchasing a reporting platform, but once deployed for the high-value close-to-report cycle, such a system can generate additional benefits for finance departments that deploy it.

IBM will continue to support Clarity 7 users with no plans at this point to sunset the application, but IBM/Cognos’ existing financial performance management suite is the focus of all future sales efforts for both larger and midsize organizations (see my comments on IBM Cognos Express here.

One aspect that remains unclear at this point is the ultimate fate of Clarity’s sales and consulting organizations. For me it will be a measure of success if IBM is able to use the acquisition to create a team focused on financial performance management that truly understands and delivers on the needs of the finance organization.

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Robert D. Kugel – SVP Research