How technology impacts financial reporting results

At the outset, one may think that when business drives results, then how can a support function like technology have any impact on reported numbers(except maybe as a cost driver)? The reality is that accounting is driven by many estimates/time lags etc, and anything that impacts the accuracy/speed of those estimates(be it technology, systems, processes etc) affects financial reporting. Below are some examples of the same

1. ERP system allowing weighted average inventory costs:-In an inflationary environment, companies using FIFO would report more cost of sales(and therefore lesser profits) when their ERP system permits weighted average cost of inventory calculations
2. Systems speed allowing faster booking of sales:- Unilever Plc reported in its 3Q'11 statement that Major SAP upgrade in North America brought sales forward into Q3 from Q4. That means that while earlier processes may have lead to time lag in recognizing sales, the upgrade allowed faster recognition. While this issue is one-time, it is still good to know
3. Indian bank system generated NPAs method lowering profits! An oft cited reason for rising NPAs in the banking system, is that the earlier manual system of assigning borrowers accounts as 'non performing' and provisioning, has been transitioned to system generated provisions for all major banks, which reduces the margin of error in these. 
4. Barcoding inventory ensuring accurate shrinkage calculations:-Otherwise, small value items theft can be missed out in inventory due to unfavourable cost benefit calculation of manual verification. But having bar codes in place would allow higher accuracy of measuring those losses, and consequential lower reported profits.

The above examples would illustrate the non obvious impact of IT on finance. No wonder then, that the CFO often oversees the information systems function as well. After all, the financial information supply chain heavily depends on information systems(more so for financial institutions), and therefore an effective oversight must encompass both systems. But business heads should also take the impact of any systems changes on their reported, earnings, while signing off on the required change requests

Zynga and Google-more simillar than different?

Many of you would heard of Farmville/Cityville. The company which produced those games('Zynga') recently had an IPO at a $10bn valuation, riding the dotcom bubble. To be fair, the company has been making profits though. At first blush, nothing seems to link Zynga and Google except that Google was a pre IPO investor in Zynga, and has been linked to takeover attempts/bids. But on a closer reading of the Zynga prospectus(http://sec.gov/Archives/edgar/data/1439404/000119312511341923/d198836ds1a.htm), quite a few similarities pop out. The small text is a direct quote from the Zynga prospectus, and the text in normal font is my remarks.

1. Free:-All of our games are free to play, and we generate revenue through the in-game sale of virtual goods and advertising. Even Google does the same, with only enterprise applications being priced, and that too selectively.
2. Network Effects:-Because the opportunity for social interactions increases as the number of players increases, we believe that maintaining and growing our overall number of players, including the number of players who may not purchase virtual goods, is important to the success of our business. Google search results are 'intelligent' and improve from each search. Also for applications like Gmail, the network externalities are good. 
3. Data driven:-gather daily, metrics-based player feedback that enables us to continually enhance our games by adding new content and features.We continually analyze game data to optimize our games. We believe that combining data analytics with creative game design enables us to create a superior player experience. Google is also a famous analytics fan, which it uses to inform decisions.
4. Dual Class voting shares:-Zynga has a triple class voting share, which gives the founder around 36% voting power post IPO(1 share of his Class C shares=70 votes of Class A shares). This structure was held by Google as well.
5. Cloud Computing Dependence:-Zynga uses Amazon Web Services, while Google is all about cloud computing especially for Google Docs
6. Hiring through acquisitions: We have historically hired a number of key personnel through acquisitions, and as competition with several other game companies increases, we may incur significant expenses in continuing this practice. It is a lesser known fact that many popular Google applications like Orkut, Picasa and the like were acquired through early M&As. 
7. Letter from founder in IPO document:- Actually this is more like what Amazon did! But since Google tomtoms its principle especially 'Do No Evil', I thought there was a similarity there.

Still, one should not stretch the analogy too far. Google has survived multiple crisises and competitors, which Zynga brokeven only in FY10, and has yet to survive  extreme competition. But one must admire the essential freemium similarity in the business model. 

Beyond IPR-how companies protect their intellectual property

I enrolled for the elective 'Strategic Management of Intellectual Property rights' taken by the legendary Prof Anil Gupta. During the second session, while discussing the terminator gene technology, he explained that the best way to protect intellectual property is often without legal protection. This comment of his sparked off some thinking in me, and below are the examples I came up with, as substitutes for the below IPRs.

• Patents;-Incomplete(from angle of copying) patent applications often compel wouldbe imitators to approach the patent assignee for the exact technical know how for working the patent, and theteby prevents imitation.
• Copyrights:- Digital Rights Management(DRM) is used to protect copyrights from unauthorized use and copying. This is analogous to the terminator gene technology used to protect Bt seeds.
• Trademarks:-This is maybe the only IPR for which law is the best protection.
• Trade Secrets:-By definition, this cannot be protected if not disclosed. Hence, contractual forms of control are exercised to protect this as in the Coke formula.
• Designs:- Companies like the centuries old TBZ keep changing their designs, so they do not deem it fit to register their designs. But given the high profile of their clients, any piracy is soon brought to light there.

The simillarity between cloud computing and malls

In his excellent article in the HT Media weekly supplement 'Brunch'(full article can be read here) the noted foodie and journalist Vir Sanghvi explains the rise of restaurants in malls by rationalizing that the restaurateurs have found a way around the restrictions imposed by India’s corrupt real estate scene. The development of shopping malls all over the country has made it possible for restaurateurs to function without having to worry at all about dodgy landlords and corrupt Municipal officials. Moreover, the basics – water, electricity, security, air conditioning etc – are all guaranteed. Nor do restaurateurs have to spend money on marketing and advertising to announce their presence. At the malls, the customers are there for the taking.

This article reminded me of why Cloud computing is thought the way of the future. When the storage, processing power and software can all be obtained on a pay-per-use basis, fixed costs turn into variable costs. No longer does the entrepreneur need to fuss about technology cycles, IT Depts etc. Instead, he can use cloud computing to set up a virtual company online without much risk. Though spending on marketing will be still needed, Google Adsense allows even that costs to be variable(as opposed to flat rates for mass media). And while customers are not 'for the taking', sudden spikes/downturns in their number can be easily adjusted for in changed capacity, rather than facing the classic newsvendor/OM optimization problem. 


Granted that the above largely holds for 'digital businesses' like media, writing, IT etc. But even small conventional businesses seeking to have an e-commerce presence, will have an option beyond EBay. So like malls, cloud computing serves the same economic function of leveling the playing field for industries.

How IT/BPR has revolutionized the Income Tax Dept

The Budget documents give interesting nuggets. And the document on fiscal policy strategy was no exception(available here). There, the use of information technology in the BPR of the IT Dept was explained. I was aware about the drastically improved processing speed of the Dept(assessments finished quickly, appellate tribunals backlog reduced etc) but these points explain why it has happened. The Centralized Return Processing Centre(CPC) at Bangalore now processes 1.5 lakh returns/day(or 5.4 crore returns/yr). By May-11, two more CPCs will be operational in Manesar and Pune, with another planned in Kolkata by 2012.

This automation(mostly of retail individual tax payer returns) applies the retail banking approach(low cost high technology low touch) approach to tax. This Budget will nearly do away with most salaried tax payer returns so the high risk business/professional segment will be focussed on. And this may improve tax compliance, reducing black money in the bargain.

Information flows have been shifted online(e-returns, e-TDS, electronic reporting of high risk transactions) and human interface has been reduced(automated refunds etc). One of our IIM-A professors was associated closely with this project and had shared with us the benefits of this approach.