Human Nature and XBRL

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As a teenager in northern New Hampshire, I worked after school and on weekends in a small country store. I calculated retail prices, stamped them onto cans, then stocked the shelves. I also worked the checkout register, carefully entering each item's price into the register. This was before the use of UPC bar codes—indeed, before the ubiquitous use of microprocessors.

Beyond nostalgia, this tale has a bearing on the argument to implement XBRL, and the inherent difficulties therein. As both an investor and someone engaged in the financial services sector, I am interested in the benefits of XBRL and amazed at the deep skepticism I encounter that XBRL will ever be adopted in the United States.

XBRL stands for the "eXtensible Business Reporting Language." XBRL is to business information what UPC codes are to retail product packaging. XBRL's premise is simple: Instead of treating business information as a large block of text, it should be structured in meaningful tagged XML chunks. The benefits of this XBRL chunking are similar to other XML content applications, and with the same initial human resistance to change. 

The benefits come right out of the Content 2.0 playbook. XBRL benefits include: repurposing and reusing content; reducing dependence on proprietary solutions; controlling information at its source; facilitating new kinds of text analytics and searching; improving financial processes; and enhancing records management and compliance with mandates. And yes, reducing costs.

Typical responses to XBRL initiatives include: "Yes, but we understand the tools we have;" "The costs to develop new processes, buy new tools, and convert our financial processes are just too expensive;" and (usually unspoken), "We don't want to do something new." Although most good ideas eventually succeed, change is never easy. How long before XBRL becomes accepted in financial reporting processes the way UPC codes replaced my hand-stamping of prices on bean cans?

XBRL adoption requires a sea change in the way firms manage and publish financial information, yet XBRL projects are underway worldwide: several in the United States, many in Europe. Even Colombia and the United Arab Emirates have XBRL projects under way. Late last year, two dozen major U.S. firms, including United Technologies, joined the SEC in a one-year XBRL test pilot.

Still, this feels like the SEC initiating the change, rather than a proactive adoption by U.S. public firms. Why? As with any enterprise push to redesign processes, you hear that adding all those XBRL tags just isn't going to happen because XBRL is too expensive, and "we'll adopt XBRL after others do." With worries about the U.S. losing its financial competitive edge, the SEC's promotion is praiseworthy and can help the U.S. maintain its financial leadership. The SEC has even mandated web-delivery of shareholder documents by January 2008. But why aren't public companies leading the charge?

I spoke with Mike Willis, founding chairman of XBRL International and partner at PricewaterhouseCoopers to get his insights. Willis adopted the grocery-store analogy, and pointed out that the original approach to UPC labeling was to put UPC labels on cans of beans in the store, at the very end of the retail process. To realize benefits, stores had to upgrade their registers with scanners and integrate them with pricing and inventory systems. All that seemed like a big price to pay just to reduce register-clerk errors. Inventory clerks, customers, and perhaps even the bean counters resisted the change, too. Store clerks viewed inventory standardization as a threat. Customers were skeptical about the lack of visible prices on goods.

In time, everyone realized that the UPC focus was at the wrong end of the supply chain; those labels should be affixed at the factory. That insight not only increased store efficiency but also enabled real-time monitoring of inventory and a host of other benefits across the entire supply chain. Willis claims the same concerns may be hampering XBRL adoption in the United States. "XBRL has more to do with economic benefits and less to do with regulatory mandates. XBRL proponents haven't explained this well. Think of XBRL as a supply-chain standard, increasing accuracy and reducing the cost of delivering, accessing, validating, and analyzing business information." Willis pointed out that John Stantial, director of financial reporting at United Technologies, plans to reduce business reporting costs by 20% and speed up the process by an equal amount.

When will XBRL be as common as UPC codes? The country store of my teenage years never did adapt. Now there's a Wal-Mart down the street.