This is part 3 of our investigation into the impact of semantic web technology on accounting, financial reporting and business intelligence. Here are Posts 1 and 2. This is one of the markets we look at in our Creative Destruction 7 Act Play series.

Image coutesy Flickr and Bill Sheridan

Specifically we look at XBRL adoption as the driver. There are some companies working on applying broader semantic web to enterprise financial systems. However the traction here looks limited, for reasons that we will explore in this post.

As we outlined in our earlier post on the XBRL Triple Play, the driver for XBRL is simple – regulatory pressure. You have to use XBRL to keep regulators around the world happy. It is just a “cost of doing business”.

This is part 3 of our investigation into the impact of semantic web technology on accounting, financial reporting and business intelligence. Here are Posts 1 and 2. This is one of the markets we look at in our Creative Destruction 7 Act Play series.

Image coutesy Flickr and Bill Sheridan

Specifically we look at XBRL adoption as the driver. There are some companies working on applying broader semantic web to enterprise financial systems. However the traction here looks limited, for reasons that we will explore in this post.

As we outlined in our earlier post on the XBRL Triple Play, the driver for XBRL is simple – regulatory pressure. You have to use XBRL to keep regulators around the world happy. It is just a “cost of doing business”.

Semantic Web Is More Than XBRL

We see companies that are working on broad semantic web implementations within the enterprise. The ones getting traction seem to have a vertical focus, specifically in healthcare/medical. But the companies focused on generic solutions may be painting themselves into a corner.

When you look at the arguments being used for adopting semantic web standards in the enterprise, they all sound very sensible. But the IT folks will remind them that techniques such as Model Driven Architecture (MDA) and Master Data Management (MDA) have similar objectives and more proven implementations.

So we see only lukewarm enthusiasm within enterprise IT for semantic web. They have their skill sets and investments in other competing approaches. More importantly, these kinds of IT infrastructure investments with long implementations and uncertain ROI are getting much tougher to get approval for. The trend is for “quick wins” that meet an immediate need and that is sponsored by a line of business manager.

XBRL falls into that category and that is why we see real traction and why XBRL is the focus of our post

Waves Of XBRL Innovation

These waves overlap and therefore the real world picture will look a lot more messy, but we find this a useful conceptual framework for looking at the market:

• wave # 1: Preparation software & services. This comes first as companies have to meet the regulatory mandate. So the initial driver is simply “get our accounts prepared so that we meet regulatory mandates”. This wave is fairly mature. The vendors are well established, there are substantial revenues and the products are mature. The market is still quite early, there is plenty of room to grow and there is continuous incremental innovation. But we are unlikely to see game-changing innovation in this area and we are now in a battle for market share phase that will probably move to a consolidation (M&A) phase soon.

• wave # 2: Analysis tools for investors. This is just starting. The SEC Mandate means that not all companies report in XBRL yet, only the larger ones. But enough are reporting to enable the analysis tools to be tested. This is potentially game-changing for the investment management industry, but that is further in the future and we look at that in a different series of posts. The impact of this wave on the companies preparing reports to investors is minor for now.

• wave # 3: Internal systems. This is the Triple Play approach – create one set of accounts that is used for i) investors ii) regulators iii) internal reporting. Here again, the driver is regulatory, specifically Sarbanes Oxley “Sarbox”. In the first phase of Sarbox, companies raced to comply by adding data via semi-manual means. That is horribly inefficient and error-prone. That gives Sarbox a bad name. Sarbox then gets blamed for the high cost of running a public company, lack of good IPOs etc. In the next wave of XBRL-driven innovation, data will flow from operational systems all the way through consolidated internal reporting to external reporting to investors and regulators. This will enable a) regulators to get the transparency that they mandate and b) companies to meet this mandate without extra reporting costs and c) companies to get better internal business information/management reporting systems.

XBRL Based Analysis Tools For Investors

One company innovating in this area is Rivet Software. They have been innovators in XBRL since the early days and have solutions in Wave # 1, XBRL preparation. However it is their early innovation on the other side of the pipe – the consumption of XBRL data by investors to make analysis easier – that is interesting.

You can see the results of their work in a site called The Daily Extension.

Look at their post on Software Companies And Goodwill As A % Of Assets. This is a fairly routine type of analysis done by investors. The result will be something like this:

The result is not that much of a big deal. Lots of investment banks, hedge funds and mutual funds routinely do this type of analysis. However what you don’t see is the amount of manual work that goes into collecting that data. Typically the process is something like this:

• 1. define what stocks to analyze and what data points are needed. Build a spreadsheet model. This phase is always needed.

• 2. find those data points by looking at the SEC 10Q and 10K reports.

• 3. Copy and paste that data into the spreadsheet model.

• 4. Repeat steps 2 and 3 every quarter or whenever the companies report a change in a press release.

The drill down from the chart, the underlying data, will look a bit like the spreadsheet model you see on The Daily Extension:

The automation of the data collection is a big deal for the kinds of analysis done by investors. These are typically “comparables”, comparing one company with a basket of similar companies, looking for triggers to buy or sell/short. In the past this kind of work was done by fairly recent MBA graduates working as Financial Analysts in major centers such as New York and London. In the last 10 years, that manual data collection work moved to offshore centers, mostly in India. In the next phase that work will be mostly automated (with a bit of human QA that reduces as users gain confidence in the automated results) .

That is a cost-saver for the investment banks, hedge funds and mutual funds – automation is cheaper than offshore labor. But the game-changing proposition is that this automation will enable a whole new breed of securities analysts. If you don’t need to hire teams of number crunchers and data collectors, the individual or small niche firm with the insight can compete against the current giants.

This long-tail of research will also enable the small cap stocks to escape “small cap hell“.

XBRL For Internal Systems: Governance Risk & Compliance

The complexity of multinationals with multiple lines of business and layers of financial engineering innovation has got out of control. This makes investors nervous as scamsters can hide their frauds behind that complexity. That brings on the regulators. That makes the boardrooms and corner offices ring with words such as governance, risk and compliance. So, of course, the software industry turns that into an acronym and a market – GRC.

One company focused on Governance, Risk and Compliance is Trintech. Trintech is a small publicly listed company trading under the TTPA ticker symbol. They are a classic small cap that would benefit from greater investor interest. The SEC XBRL Mandate does not impact them yet. They are small enough to miss that net. Yet they recently reported their results in XBRL. Indeed they went further and issued:

“fully XBRL-compliant Form 20-F with the U.S. Securities and Exchange Commission — including detailed level 1-4 XBRL tagging.”

Clearly Trintech does not simply want to get a step or two ahead of the SEC Mandate. They sell GRC solutions that use XBRL so they clearly wanted an internal test bed (to “eat their own do food” in start-up language) and a reference they can show to clients who do have to comply with the SEC XBRL Mandate today.

Charles Hoffman, the accountant who created XBRL, has a good post on the future of XBRL where he asks:

“Is XBRL destined to remain only a tool IT departments can leverage? Or will business users ever be able to make use of XBRL: one business user exchanging business information with another business user without the involvement of the IT department? That is why I am interested in XBRL.”

Looking at what Rivet is doing, we can certainly see securities analysts using XBRL data. And all they are using is a spreadsheet like tool. One thing that every business manager knows how to do is use a spreadsheet. So, if XBRL data can be easily consumed in spreadsheets, we will see wide adoption.

The devil of course is in the details. Hoffman’s posts are looking at issues such as the harmonization of different taxonomies so that the data really is the same. He is working an a “Business Reporting Logical Model“, so that a business user can extract data from two different internal systems by referencing a common data type. We will be exploring this in future posts.
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CONVERT BREAKS: __default__

Semantic Web Is More Than XBRL

We see companies that are working on broad semantic web implementations within the enterprise. The ones getting traction seem to have a vertical focus, specifically in healthcare/medical. But the companies focused on generic solutions may be painting themselves into a corner.

When you look at the arguments being used for adopting semantic web standards in the enterprise, they all sound very sensible. But the IT folks will remind them that techniques such as Model Driven Architecture (MDA) and Master Data Management (MDA) have similar objectives and more proven implementations.

So we see only lukewarm enthusiasm within enterprise IT for semantic web. They have their skill sets and investments in other competing approaches. More importantly, these kinds of IT infrastructure investments with long implementations and uncertain ROI are getting much tougher to get approval for. The trend is for “quick wins” that meet an immediate need and that is sponsored by a line of business manager.

XBRL falls into that category and that is why we see real traction and why XBRL is the focus of our post

Waves Of XBRL Innovation

These waves overlap and therefore the real world picture will look a lot more messy, but we find this a useful conceptual framework for looking at the market:

• wave # 1: Preparation software & services. This comes first as companies have to meet the regulatory mandate. So the initial driver is simply “get our accounts prepared so that we meet regulatory mandates”. This wave is fairly mature. The vendors are well established, there are substantial revenues and the products are mature. The market is still quite early, there is plenty of room to grow and there is continuous incremental innovation. But we are unlikely to see game-changing innovation in this area and we are now in a battle for market share phase that will probably move to a consolidation (M&A) phase soon.

• wave # 2: Analysis tools for investors. This is just starting. The SEC Mandate means that not all companies report in XBRL yet, only the larger ones. But enough are reporting to enable the analysis tools to be tested. This is potentially game-changing for the investment management industry, but that is further in the future and we look at that in a different series of posts. The impact of this wave on the companies preparing reports to investors is minor for now.

• wave # 3: Internal systems. This is the Triple Play approach – create one set of accounts that is used for i) investors ii) regulators iii) internal reporting. Here again, the driver is regulatory, specifically Sarbanes Oxley “Sarbox”. In the first phase of Sarbox, companies raced to comply by adding data via semi-manual means. That is horribly inefficient and error-prone. That gives Sarbox a bad name. Sarbox then gets blamed for the high cost of running a public company, lack of good IPOs etc. In the next wave of XBRL-driven innovation, data will flow from operational systems all the way through consolidated internal reporting to external reporting to investors and regulators. This will enable a) regulators to get the transparency that they mandate and b) companies to meet this mandate without extra reporting costs and c) companies to get better internal business information/management reporting systems.

XBRL Based Analysis Tools For Investors

One company innovating in this area is Rivet Software. They have been innovators in XBRL since the early days and have solutions in Wave # 1, XBRL preparation. However it is their early innovation on the other side of the pipe – the consumption of XBRL data by investors to make analysis easier – that is interesting.

You can see the results of their work in a site called The Daily Extension.

Look at their post on Software Companies And Goodwill As A % Of Assets. This is a fairly routine type of analysis done by investors. The result will be something like this:

The result is not that much of a big deal. Lots of investment banks, hedge funds and mutual funds routinely do this type of analysis. However what you don’t see is the amount of manual work that goes into collecting that data. Typically the process is something like this:

• 1. define what stocks to analyze and what data points are needed. Build a spreadsheet model. This phase is always needed.

• 2. find those data points by looking at the SEC 10Q and 10K reports.

• 3. Copy and paste that data into the spreadsheet model.

• 4. Repeat steps 2 and 3 every quarter or whenever the companies report a change in a press release.

The drill down from the chart, the underlying data, will look a bit like the spreadsheet model you see on The Daily Extension:

The automation of the data collection is a big deal for the kinds of analysis done by investors. These are typically “comparables”, comparing one company with a basket of similar companies, looking for triggers to buy or sell/short. In the past this kind of work was done by fairly recent MBA graduates working as Financial Analysts in major centers such as New York and London. In the last 10 years, that manual data collection work moved to offshore centers, mostly in India. In the next phase that work will be mostly automated (with a bit of human QA that reduces as users gain confidence in the automated results) .

That is a cost-saver for the investment banks, hedge funds and mutual funds – automation is cheaper than offshore labor. But the game-changing proposition is that this automation will enable a whole new breed of securities analysts. If you don’t need to hire teams of number crunchers and data collectors, the individual or small niche firm with the insight can compete against the current giants.

This long-tail of research will also enable the small cap stocks to escape “small cap hell“.

XBRL For Internal Systems: Governance Risk & Compliance

The complexity of multinationals with multiple lines of business and layers of financial engineering innovation has got out of control. This makes investors nervous as scamsters can hide their frauds behind that complexity. That brings on the regulators. That makes the boardrooms and corner offices ring with words such as governance, risk and compliance. So, of course, the software industry turns that into an acronym and a market – GRC.

One company focused on Governance, Risk and Compliance is Trintech. Trintech is a small publicly listed company trading under the TTPA ticker symbol. They are a classic small cap that would benefit from greater investor interest. The SEC XBRL Mandate does not impact them yet. They are small enough to miss that net. Yet they recently reported their results in XBRL. Indeed they went further and issued:

“fully XBRL-compliant Form 20-F with the U.S. Securities and Exchange Commission — including detailed level 1-4 XBRL tagging.”

Clearly Trintech does not simply want to get a step or two ahead of the SEC Mandate. They sell GRC solutions that use XBRL so they clearly wanted an internal test bed (to “eat their own do food” in start-up language) and a reference they can show to clients who do have to comply with the SEC XBRL Mandate today.

Charles Hoffman, the accountant who created XBRL, has a good post on the future of XBRL where he asks:

“Is XBRL destined to remain only a tool IT departments can leverage? Or will business users ever be able to make use of XBRL: one business user exchanging business information with another business user without the involvement of the IT department? That is why I am interested in XBRL.”

Looking at what Rivet is doing, we can certainly see securities analysts using XBRL data. And all they are using is a spreadsheet like tool. One thing that every business manager knows how to do is use a spreadsheet. So, if XBRL data can be easily consumed in spreadsheets, we will see wide adoption.

The devil of course is in the details. Hoffman’s posts are looking at issues such as the harmonization of different taxonomies so that the data really is the same. He is working an a “Business Reporting Logical Model“, so that a business user can extract data from two different internal systems by referencing a common data type. We will be exploring this in future posts.
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• Don’t forget to propose your startup for our Semantic Web Impact Awards. The deadline is Sept. 15.

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