Use Gartner's Pace Layers Model to Better Manage Your Financial Management Application Portfolio

Research Publication Date: 24 June 2011 ID Number: G00213657 Use Gartner's Pace Layers Model to Better Manage Your Financial Management Application Portfolio Nigel Rayner, John E. Van Decker To develop a pace layered application strategy, start by deconstructing your portfolio into individual applications and identifying the specific business processes each application supports. The characteristics of the applications and processes will determine where they belong within the three areas of the pace layer model: systems of record, systems of differentiation or systems of innovation (see "How to Get Started With a Pace Layered Application Strategy"). Use this approach to create a financial management (FM) application strategy that prioritizes initiatives, guides investments and accommodates the flexibility required of dynamic markets. Key Findings Applications are classified as systems of differentiation or systems of innovation based on the business activities they enable or support. The terms "differentiation" and "innovation" refer to the business process, not the software. Many applications will move among layers as their associated processes and business requirements change. Connective tissue and systems of record form the foundation of FM, while enabling new applications that support the competitive differentiation and innovation to be integrated into that foundation. The systems of record for FM are most likely to be an integrated suite of core financial applications (general ledger [GL], accounts payable [AP], accounts receivable [AR] and fixed assets [FA]). This will provide an auditable, robust repository for financial transaction data. Corporate performance management (CPM) applications offer opportunities for innovation and differentiation, regardless of organization size and industry. Recommendations Use pace layering to help define your FM application strategy. Recognize that application needs change over time and that applications can move among pace layers based on those needs. The level of granularity also can change over time. 2011 Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. or its affiliates. This publication may not be reproduced or distributed in any form without Gartner's prior written permission. The information contained in this publication has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information and shall have no liability for errors, omissions or inadequacies in such information. This publication consists of the opinions of Gartner's research organization and should not be construed as statements of fact. The opinions expressed herein are subject to change without notice. Although Gartner research may include a discussion of related legal issues, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner is a public company, and its shareholders may include firms and funds that have financial interests in entities covered in Gartner research. Gartner's Board of Directors may include senior managers of these firms or funds. Gartner research is produced independently by its research organization without input or influence from these firms, funds or their managers. For further information on the independence and integrity of Gartner research, see "Guiding Principles on Independence and Objectivity" on its website, http://www.gartner.com/technology/about/ombudsman/omb_guide2.jsp

Ensure that you have a strong foundation for systems of record in place. You should be comfortable to leave these applications in place for at least 10 years to support current and projected business activities. Use systems of differentiation to create competitive advantage in terms of finance process efficiency and effectiveness. Use systems of innovation to support strategic finance processes that will enable and support business transformation. Make sure to take into account connective tissue issues such as master data management (MDM) and process integration when making sourcing decisions between integrated and specialist solutions. Publication Date: 24 June 2011/ID Number: G00213657 Page 2 of 18

TABLE OF CONTENTS Analysis... 4 Introduction: The Scope of FM Applications... 4 What Is Pace Layering?... 4 What Is Connective Tissue?... 5 EIM and Analytics... 5 Business Process Management... 6 Application Architecture and Process Integration... 6 FM Applications... 7 Classifying FM Applications to the Right Pace Layer... 8 Questions to Identify of Systems of Innovation... 8 Questions to Identify Systems of Differentiation... 8 Questions to Identify Systems of Record... 8 Applying Pace Layering to FM Applications... 9 Midsize, Product-Centric Company With a B2B Focus... 9 Midsize Service-Centric Company... 10 Large Multinational With Single-Instance ERP and Shared Services... 11 Recommendations for FM Pace Layers... 14 Guidance for Systems of Record... 14 Guidance for Systems of Differentiation... 15 Guidance for Systems of Innovation... 15 Applications Frequently Migrate Among Layers... 16 New Applications Should Be Classified at Point of Conception... 17 Conclusion... 17 LIST OF TABLES Table 1. FM Apps by Segment... 7 LIST OF FIGURES Figure 1. Figure 1. Application Pace Layers... 5 Figure 2. FM Pace Layers for a Hypothetical Midsize B2B Product-centric Company, 2011... 9 Figure 3. FM Pace Layers for a Hypothetical Midsize B2B Product-Centric Company, 2016... 10 Figure 4. FM Pace Layers for a Hypothetical Midsize Service-Centric Firm... 11 Figure 5. Hypothetical Large Multinational Company Example, 2011... 12 Figure 6. Hypothetical Large Multinational Company Example, 2016... 13 Figure 7. Recommendations for Layers: FM Apps... 16 Publication Date: 24 June 2011/ID Number: G00213657 Page 3 of 18

ANALYSIS Introduction: The Scope of FM Applications FM applications have evolved over the last 30 years from relatively basic core financial ledgers to a diverse and complex portfolio of applications that helps automate and optimize a wide range of finance processes. Finance organizations are now faced with managing an application portfolio that extends beyond the core financial ledgers into areas like treasury management, financial governance and CPM. At the same time, the depth of functionality in core financial applications has evolved significantly to address different industry and geographic needs. Finance and IT organizations are thus faced with a challenging task to identify the right mix of applications and vendors to meet their business requirements. Gartner advises the use of pace layering to manage the FM applications portfolio effectively. What Is Pace Layering? We describe pace layering for applications in detail in "How to Get Started with a Pace Layered Application Strategy." The notion of pace layers comes from the realm of buildings and architecture. The idea was to design buildings that would adapt and be useful for different purposes over a long span of time (hundreds of years) without major disruption. For business applications, pace laying means creating an application strategy that can adapt and be useful for changing business needs over time. Traditionally, most companies have had one strategy for selecting, deploying and managing applications. While they may have had methodologies for classifying applications by value or technological viability, they did not typically recognize that applications are inherently different based on how the organization uses them. Gartner has defined three application categories or "layers" to distinguish these application types: Systems of Record Applications that make up an organization's systems of record typically support administrative and transaction processing activities, such as finance, HR, asset management, core banking or procurement. Systems of Differentiation Applications that support processes unique to the organization or its industry. Systems of Innovation Applications built to support new, innovative business activities and are constructed quickly to enable enterprises to take advantage of these new ideas and opportunities. By using the pace layer model, organizations can develop more appropriate strategies for each one (see Figure 1). Publication Date: 24 June 2011/ID Number: G00213657 Page 4 of 18

Figure 1. Figure 1. Application Pace Layers Source: Gartner (June 2011) These layers correspond to the nature of the processes that are supported and the rate of change required of the application. The same application may be classified differently in one company than another based on how it is used and the organization's business model. Applications may move from one layer to another as they mature, or as a business process evolves from experimental to well-established to industry-standard. What Is Connective Tissue? Connective tissue is another name for technology that allows applications in different pace layers and within layers to work together as a whole, much the way integration applications allow applications from different vendors to work together (see "Connecting Technology for a Pace- Layered Application Strategy"). There is a wide diversity of connective tissue strategies deployed in FM applications, and connective tissue is important for allowing internal enterprise applications to work together, as well as to facilitate external collaboration. EIM and Analytics MDM is an important aspect of connective tissue. Some FM applications include MDM-like capabilities. For example, financial consolidation applications can map different GL structures into a consistent consolidated view. However, where it is likely that applications from multiple vendors will be used, a more robust approach will be needed to manage specific master data, including suppliers, customers, cost centers, etc. In addition, analytical master data (for example, the aggregation hierarchies used in financial reporting) will be an important part of the connective tissue for FM apps, so it is important to establish an MDM strategy that encompasses both operational and analytical use cases. Many FM applications include their own embedded analytics, and in some cases may require the deployment of an application data mart and/or data warehouse (for example, SAP NetWeaver BW). In addition, packaged analytic applications will be deployed as part of the overall portfolio, and these will have their own data repositories. It is vital to implement a strategy that ensures data consistency and quality across these applications, and across the pace layers. This goes beyond master data, as it should include definitions of shared business data (such as key performance indicators [KPIs] or key financial and management reporting entities). Some FM applications have ETL-like tools to import, extract and transfer data, and these should be assessed for their suitability as part of an information management strategy, compared with ETL capabilities. These tools should not be managed by the finance team at a departmental level. Publication Date: 24 June 2011/ID Number: G00213657 Page 5 of 18

Business Process Management Business process models are embedded in FM systems of record, and any evaluation should include an assessment of these "best practice" models against business requirements. Process variation in FM systems of record should be discouraged. However, in systems of differentiation and innovation, process agility may be key to achieving business value, so any assessment of these applications should include the way in which the process model can be adapted by users. The majority of FM applications now includes some form of business process orchestration and workflow management capability, and in some areas, such as AP invoice automation, the flexibility of the workflow and business process model is the primary value proposition of the application. Evaluations of FM applications for systems of differentiation and innovation should include an assessment of the composition technology provided as part of the application and how easy it is for users to manage and maintain the business process model. We anticipate that the majority of business processes in FM applications will be orchestrated by process management and composition technologies inherent in the applications. However, in some areas, it may be necessary to use third-party business process management suite or composition technologies, so any FM application should be assessed for its fit with any organizational technology standards (for example, if Microsoft SharePoint is used to create mashups across organizations, whether the application can deliver content through SharePoint). Application Architecture and Process Integration A major issue for FM applications is integrating the applications among and within the pace layers. One of the arguments for using suite-based solutions is that they provide the necessary integration, especially when it comes to maintaining the consistency of financial data. This is of significant value in FM applications, where auditability of financial record-keeping is a fundamental principle of a well-managed finance operation. These integrated applications maintain both process and data integrity. This is why we would expect to see a preponderance of suites for FM systems of record, and our advice reflects this. All FM applications have various interface and integration capabilities, ranging from batch interface routines through to rule-based interface modules. Consequently, evaluations of FM applications should include an assessment of their native interface and integration capabilities, and how well these fit into an organization's overall application architecture standards. Increasingly, we are seeing adoption of less-proprietary, service-oriented approaches to integration, perhaps using some form of enterprise service bus. This allows third-party middleware to be used to orchestrate processes among applications, so it may be possible to leverage middleware tools already used in your organization to provide some connective tissue. Alternatively, some application vendors provide this type of technology as a way of linking different products in their portfolios (and also linking them with third-party products). Evaluations of FM applications should include an assessment of how easily they will work with third-party middleware, and if vendors provide their own middleware capabilities. Some FM applications will require external integration; for example, supplier e-invoicing and AP invoice automation will require links to suppliers. This could be as simple as providing a portal to allow suppliers to enter invoices and retrieve information directly about their invoices and payments. This may be appropriate for smaller suppliers, but supplier networks are more useful for suppliers with which a significant volume of business is conducted. These networks provide integration services to link suppliers directly with an organization's internal FM applications. EDI is still commonly used in some industries, and often for external integration with the very largest suppliers. There will also be requirements for bank/cash management systems to link directly with banks or third-party communication platforms like SWIFTNet. Collection and deduction Publication Date: 24 June 2011/ID Number: G00213657 Page 6 of 18

management systems will need to link to third-party credit management services and should also provide "self-eservice" capabilities to allow customers to access account and invoice information. Consequently, expect to deploy multiple connective tissue strategies in connecting with partners, because the requirements for connectivity will vary across the portfolio (see "Taxonomy, Definitions and the Vendor Landscape for Application Integration Solutions, 2011"). FM Applications FM applications manage finance processes. These applications are the primary responsibility of the CFO and the office of finance, although some, such as CPM suites, have wider applicability across the organization. The main application segments include: Core financial applications Core financial applications are part of the ERP market, and include the applications that provide visibility into an enterprise's financial position through automation and process support for any activity that has a financial impact. These include the core functional areas of GL, AR, FA and project accounting (PA). These applications also provide financial reporting data as needed by local and international regulations. CPM suites CPM includes the processes used to manage corporate performance, such as strategy formulation and budgeting, planning and forecasting (BP&F), as well as the methodologies that support these processes, including the balanced scorecard, or value-based management, and the metrics used to measure performance against strategic and operational performance goals. CPM also comprises a series of analytic applications, such as BP&F, financial-consolidation and financial-reporting solutions, that provides the functionality to support these processes, methodologies and metrics, targeted at the CFO, the finance team, senior executives and corporate-level decision makers. Financial governance applications These are focused on improving financial processes and controls, particularly in the final stages before disclosure. The main components of financial governance are close management and disclosure management, although financial governance suites are emerging to provide a more comprehensive solution to the needs of the finance function. Financial value chain (FVC) applications The FVC is the flow of cash from company to company, and three types of technology support it: supplier-facing applications, customer-facing applications and internal cash management. Although some functionality in this area is provided by core financial applications, many specialist solutions provide additional functionality in areas such as AP invoice automation, collection management and corporate treasury. Table 1 shows a listing of applications used in this research by application segment. Table 1. FM Apps by Segment FM Application Segment Core Financial Applications CPM Suites Financial Governance Applications Application GL, AP, FA, AR, PA and billing Strategy management, profitability modeling and optimization, forecasting, budgeting and planning, financial consolidation, financial and management reporting, XBRL-based management reporting Close management, disclosure management Publication Date: 24 June 2011/ID Number: G00213657 Page 7 of 18

FM Application Segment FVC Applications Source: Gartner (June 2011) Application Supplier e-invoicing, AP invoice automation, travel and expense management (expense reimbursement, travel booking), collection and deduction management, treasury management (bank and cash management, in-house banking, risk management, debt and investment management) Classifying FM Applications to the Right Pace Layer Classifying FM applications to the proper pace layer is a matter of characterizing solutions in terms of the way they add value to a particular organization. Specific FM solutions are not always tied to a particular layer, because variations in size, location, industry and strategy impact the effects of the solution on a given organization. Generally speaking, systems of record are used for core processes that change infrequently, systems of differentiation support processes that drive competitive advantage via unique capabilities, and systems of innovation enable new ideas, unique processes and emerging strategies. There are a few simple questions to ask to help decision makers and IT determine where to slot the applications within the pace layers. Below, we list questions to consider for each pace layer. If you answer yes to most of the questions for one of the layers, then the application falls into that layer. Questions to Identify of Systems of Innovation Are the capabilities able to support business transformation and business model innovation? Is the functionality innovative and only deployed by a small number of organizations? Are small, boutique specialty vendors just as credible as larger vendors for this functionality? Questions to Identify Systems of Differentiation Do the capabilities allow the organization to differentiate its processes, providing a competitive advantage for the company? Are most solutions highly configurable with some minor customization? Are most technology providers delivering best-of-breed solutions that can work with any core financial applications? Questions to Identify Systems of Record Are the capabilities essential to core finance processes within the organization, but do not provide a competitive differentiation? Is the functionality commoditized so that most solutions provide very similar functionality? Are most solutions able to be implemented almost completely out of the box, with little customization or configuration, leveraging best-practice templates? Publication Date: 24 June 2011/ID Number: G00213657 Page 8 of 18

Is this functionality usually delivered as part of a suite? Applying Pace Layering to FM Applications To understand how to apply pace layering, it is useful to look at examples that illustrate different ways in which applications would be categorized. Midsize, Product-Centric Company With a B2B Focus In this first example organization, most FM applications are systems of record, because there is little the company can do to differentiate itself through its finance processes. Instead, it needs a stable core of FM applications that supports its business operations in a cost-effective manner. The FM applications for this organization might look like Figure 2. Figure 2. FM Pace Layers for a Hypothetical Midsize B2B Product-centric Company, 2011 Source: Gartner (June 2011) However, there are some areas where FM applications can support differentiation. Certain customer- and supplier-facing applications allow users to build differentiating relationships, compared with their peers. Collection and deduction management systems allow better targeting and management of customer debt, while AP invoice automation and supplier e-invoicing can better manage supplier payment processing and build a stronger, more collaborative relationship with suppliers. One area that offers opportunities for differentiation and innovation is CPM. Organizations can use budgeting and planning applications to differentiate the speed with which they can react to new business opportunities, compared with the competition. Similarly, they can use financial and management reporting applications to differentiate the way they report to shareholders and investors. Some CPM applications are systems of innovation if they are deployed in the right way: strategy management, profitability modeling and optimization, and Publication Date: 24 June 2011/ID Number: G00213657 Page 9 of 18

forecasting applications all provide capabilities that allow organizations to identify what drives their business performance, and to create and manage strategic innovation in business strategy. Forecasting applications play a key role in supporting innovative business practices like Pattern- Based Strategy. Looking forward five years, there are some potential changes in the way the application portfolio would be categorized. AP invoice automation will be more widely deployed to become "commodity" functionality that will form part of the AP element in systems of record. Similarly, supplier e-invoicing will increase its penetration to become a standard, nondifferentiating way of doing business, even among midsize companies. Strategy management, profitability modeling and optimization, and forecasting will remain systems of innovation, because this is an area where there is significant innovation in the applications as more vendors deliver predictive analytic capabilities coupled with in-memory technology to support complex and dynamic scenario modeling and simulation. Figure 3 shows FM pace layers for a hypothetical midsize B2B product-centric company five years down the road. Figure 3. FM Pace Layers for a Hypothetical Midsize B2B Product-Centric Company, 2016 Source: Gartner (June 2011) Midsize Service-Centric Company Our next example is for a midsize, service-centric organization that is primarily focused on delivering B2B consulting services (through billable consultants). For this company, CPM applications are classified in the same way as the midsize product-centric company, but there is a different focus for systems of differentiation. Here, the project and billable hours focus mean that travel and expense management becomes a system of differentiation organizations that can Publication Date: 24 June 2011/ID Number: G00213657 Page 10 of 18

get their people to project locations more efficiently and effectively can differentiate themselves against competitors and to potential employees. PA and billing systems also offer opportunities to differentiate how projects are costed and charged to clients. Collection and deduction management applications can be deployed to support differentiation in the way the company manages its clients. Travel and expense management is also an area of differentiation, because firms that can manage travel effectively when dealing with a highly mobile billable resource base can differentiate themselves to clients and employees. Figure 4 shows FM pace layers for a hypothetical midsize service-centric firm today. Figure 4. FM Pace Layers for a Hypothetical Midsize Service-Centric Firm Source: Gartner (June 2011) We don't see the classification of pace layers changing over the next five years for this type of company. As described, the three systems of innovation in Figure 4 will still offer opportunities for innovation, while developments in travel and expense management will offer continued opportunities for differentiation. We anticipate that vendors will offer more functionality specifically for more effective, resource-based budgeting and planning, while the functionality around project billing and collection management will also still remain a key differentiator. Large Multinational With Single-Instance ERP and Shared Services Our example in Figure 5 shows what the pace layers might look like for a large, multi-billion-dollar multinational that has implemented a single-instance administrative ERP system and is implementing finance shared services. Publication Date: 24 June 2011/ID Number: G00213657 Page 11 of 18

Figure 5. Hypothetical Large Multinational Company Example, 2011 Source: Gartner (June 2011) The pace layers for this organization show more opportunities for differentiation and innovation, because of the scale of investment in the single-instance administrative ERP system and shared services. CPM applications are classified in the same way (reinforcing the message that aspects of CPM support differentiation and innovation regardless of company size or industry). However, applications supporting financial governance (close management and disclosure management) become differentiating. This is because large organizations can differentiate themselves to investors and shareholders based on the speed and quality of their external financial reporting. Similarly, some areas of treasury management (in-house banking and risk management) can be differentiating for large companies, while debt and investment management can support innovative ways of generating corporate financing. To support differentiation and innovation, these applications require a degree of sophistication among treasury users that will not be found in smaller companies. Supplier e-invoicing becomes a system of innovation for large companies. In a midsize organization, these support differentiation through greater efficiencies of AP processes, but larger organizations can leverage some of the new collaborative capabilities enabled by this technology (such as dynamic discounting) to create new collaborative ways of working with suppliers that can yield significant economic benefits. We have also identified extensible Business Reporting Language (XBRL)-based internal management reporting as a system of innovation. XBRL-based Publication Date: 24 June 2011/ID Number: G00213657 Page 12 of 18

external reporting is part of disclosure management, which in itself is not innovative. However, Gartner advocates the use of XBRL for internal management reporting because this can provide real-time visibility into management information across the enterprise. Using XBRL technology in this way would be innovative because it leverages a new technology, and few, if any, companies are using XBRL in this way. Organizations that adopted this would be able to respond more rapidly to changing business conditions and new business opportunities. Figure 6 shows a sample large multinational in 2016. Figure 6. Hypothetical Large Multinational Company Example, 2016 Source: Gartner (June 2011) This figure shows how the classification into pace layers may change over the next five years. As with the midsize product organization, AP invoice automation will become part of AP, while supplier e-invoicing will be widely adopted and thus commoditized. Although in the short term there are opportunities for innovation, we expect large organizations to adopt supplier e-invoicing rapidly over the next five years, so it will become hard even to differentiate among peers with this technology. Travel and expense management will be split across the layers, because expense reimbursement will become a commodity functionality; however, for large organizations with a significant number of employees that travel on company business, travel booking will remain a system of differentiation. Financial governance applications will become more widely adopted, making it harder to create differentiation through more-effective reporting and disclosure, while inhouse banking will become a standard treasury functionality for most large organizations. XBRL- Publication Date: 24 June 2011/ID Number: G00213657 Page 13 of 18

based management reporting will be deployed by leading companies, making it a system of differentiation, rather than innovation. Recommendations for FM Pace Layers Create a pace layered application landscape for FM applications. Differentiate among: Systems of record for core finance processes that change infrequently: The greatest benefits from these systems come when they are implemented using out-of-the-box functionality to drive greater efficiencies from transaction processing. These systems should provide a stable core for recording and managing all financial activity of the organization for at least 10 years. So they must allow for any anticipated growth in scale. Systems of differentiation for processes that drive competitive advantage: These applications may be part of a suite, but can equally be best-of-breed applications. These will be implemented to accommodate finance processes required to differentiate the organization's business activities, so they are less likely to use best practice process templates. Instead, users will configure the applications so that the finance processes can support differentiating business processes (for example, using AP invoice automation systems to create stronger relationships with key suppliers). Systems of innovation to support business transformation: These systems will either support innovative new technologies to deliver new capabilities (such as in-memory technologies) or deliver strategic value from the finance function. For example, profitability modeling and optimization applications enable executives to understand what drives profitability, and to create new strategies that can transform corporate performance. Develop an approach for each layer (see below). Finally, establish standards for connective tissue across the layers. Guidance for Systems of Record Systems of record for finance will typically be an integrated suite of financial applications. Best-of-breed subledgers should only be deployed if there is a strong business case for them being classed as systems of differentiation. Ensure that the existing systems are adequate to support your current and anticipated business operations for at least 10 years. If they are not, identify what you need to do to stabilize them (which could include an upgrade or implementation of alternative applications). You should anticipate potential regulatory changes in this planning, as generally only the most current application versions will support major regulatory changes. Review your vendor's road map to identify whether major upgrades or new versions are planned in the next 10 years that will impact your current release level. If so, assess their impact, and plan accordingly. Define a clear strategy for your finance systems of record, and make sure this is documented and agreed on by the management team. This should be used to avoid periodic soul searching about whether the current finance systems of record should be changed based on new technology trends or competitor marketing. Only review this strategy if there is a significant, unanticipated change in business conditions or the scope of the organization's business activities. Publication Date: 24 June 2011/ID Number: G00213657 Page 14 of 18

Business processes managed by systems of record will typically be standardized as much as possible across the organization, and should be supported by best-practice templates in the applications. The pace of change of business processes in systems of record should be slow, thus allowing long-term investments in applications. If business processes need to be dynamic to support the business strategy, these are most likely systems of differentiation or innovation. Define how these systems will interact with other systems of record, especially where they may form part of a wider ERP strategy (see "ERP Strategy: Why You Need One, and Key Considerations for Defining One"). Guidance for Systems of Differentiation Evaluate best-of-breed solutions against offerings from your core financial application suite vendor. Although the suite vendor offerings may offer integration benefits, choose the solutions that offer the best support for differentiated business processes. Do not be swayed by promises of integration benefits. Re-evaluate solutions in this layer every two to three years, and monitor your suite vendor's solutions. These often lag behind best-of-breed vendors, but catch up over time, or best-of-breed vendors may be acquired by suite vendors. Consider leveraging software-as-a-service (SaaS) or cloud-based delivery as a way of augmenting your systems of record (which, in most cases for FM applications, are onpremises applications). Guidance for Systems of Innovation Evaluate specialist and niche vendors equally with larger, more established vendors. Don't be swayed by vendor viability in this area; instead, work with the vendor that has the most innovative solutions, as this will drive maximum benefits. Although some applications are genuinely new and innovative (such as XBRL-enabled management reporting), most applications in this area have not been widely deployed, even though the technology may have existed for many years. For example, profitability modeling and optimization applications have not been widely deployed and usually in a tactical manner, and the more advanced optimization modeling tools have very limited penetration in the FM applications portfolio. You may need to source skills externally to help get the maximum benefit from systems of innovation, because most finance users will be unaware of the potential of these applications (as they are unlikely to have experienced them). Your vendor evaluation should include their skills capability (or that of their partners) to support a visionary implementation of their applications that will truly drive greater innovation. Figure 7 shows the recommendations for layers for FM applications. Publication Date: 24 June 2011/ID Number: G00213657 Page 15 of 18

Figure 7. Recommendations for Layers: FM Apps Source: Gartner (June 2011) Applications Frequently Migrate Among Layers One of the important concepts in the pace layered model is that applications are likely to move among layers. Applications frequently move "downward" through the layers, often as the functionality becomes more widely deployed and commoditized. For example, budgeting and planning functionality in CPM applications is shown as systems of differentiation in our examples because they are not widely deployed, so organizations that implement them effectively can create differentiation over their competitors. However, as more organizations deploy these applications and system integrators develop a range of best-practice deployment templates, they will become systems of record. There will be less need (and opportunity) for configuration and flexibility. Most systems of innovation will become systems of differentiation as they are more widely adopted. However, in some cases, applications that start out as systems of record may need to become systems of differentiation. For example, a manufacturing company that changes its business strategy to focus more on delivering advisory and design services to other manufacturers might find that its project costing applications become systems of differentiation, rather than systems of record. The examples above show that the migration of applications varies by company size and industry. For example, the large multinational organization has a more complex portfolio of FM applications, compared with midsize organizations. Application managers and IT strategists need to ensure that they have the right approach to connective tissue to support their application portfolio. For example, a more dynamic application portfolio will more likely require a standardsbased approach to connective tissue that does not rely too heavily on a specific application Publication Date: 24 June 2011/ID Number: G00213657 Page 16 of 18

vendor technology, whereas less-dynamic portfolios could make more use of integration technologies from application vendors. New Applications Should Be Classified at Point of Conception The pace layer model is not only valuable for improving the management of applications, but also can guide decisions about new applications. When the business or IT identifies the need for a new business application, either one should be able to assign it to a layer based on assumptions about its strategic focus, rate of change and process characteristics. This will determine what governance model should apply to decisions about ownership, funding, architectural standards, etc. If the determination is that this is a system of innovation, then there should be a process that ensures the elapsed time from concept to delivery is as short as possible. By contrast, a proposal for a new system of record should be subjected to intense scrutiny to determine if the process and the application satisfy a tough set of criteria around long-term value, technical stability and ROI. A pace layered strategy, and the associated governance models, should be biased to control IT spending and begin to shift the available resources from systems of record to systems of differentiation and systems of innovation. Conclusion Our hope is that clients will use the pace layer model to move beyond the tired old debates about packaged applications versus custom-developed applications, or suites versus best-of-breed applications. We believe that the right application strategy for most organizations is a hybrid model that can accommodate integrated suites, departmental point solutions and ad hoc custom applications, with a mix of on-premises and cloud deployment. The range of business requirements and the pace of technological change simply make this a necessity. Many businesses actually have this mix, but they don't have a strategy, governance model and architectural environment that embrace and support it. This research is part of a set of related research pieces. See "What Can Gartner's Pace Layered Application Strategy Do for an Enterprise's Business?" for an overview. Publication Date: 24 June 2011/ID Number: G00213657 Page 17 of 18

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