New SAP Press Book Offers Primer on Financial Planning and Analysis

From Malcolm Faulkner, Sr Director Product Marketing, SAP

A book I co-authored has recently been published by SAP Press and is now available on their website. I’ve been asked by my SAP enterprise performance management (EPM) marketing colleague, Mr. Chris Grundy (who manages our EPM social media programs) to write a blog explaining why we wrote the book, and to describe the whole experience. In this blog, I’ll provide a short overview of the book itself and in a second blog, I’ll share some of the lessons I learned in writing a book.

FPA Book

First off, the intention in writing the book was to explain in one place what financial planning and analysis processes are and how SAP software can make them more effective and efficient. The book is written as a primer for everyone interested in implementing SAP’s enterprise performance management applications to improve their strategic, financial planning and profitability analysis processes.

To that end, I truly believe the book provides enormous value to anyone interested in these functions and how software applications support them – in general and specifically, SAP applications. Enterprise performance management is an enormous subject that embraces many functions and business practices.

If you work in strategy, financial planning, or business analysis or a related field, and particularly, if you use or are considering using SAP software, then I hope you’ll check out Financial Planning and Analysis with SAP: SAP Solutions for EPM, by William D. Newman and myself.

Part 1 – The EPM Foundation

In Part 1 of the book, we define enterprise performance management, discuss it’s relation to business intelligence (BI), describe the financial planning and analysis lifecycle, and cover the key processes that occur in it. These include strategy development and translation (execution), planning, budgeting and forecasting, profitability and cost analysis, and internal monitoring and external reporting of performance. We also introduce the EPM portfolio from SAP.

Part 2 – EPM Products from SAP

In Part 2, we explore the three key EPM applications used to enable financial planning and analysis – SAP Strategy Management, SAP Business Planning and Consolidation, and SAP Profitability and Cost Management. We also have a chapter on SAP Financial Information Management, the “glue” for integrating SAP’s EPM solutions. Lastly, we discuss the use of both SAP’s EPM products and BI tools for continuous performance monitoring and support of reporting requirements.

Part 3 – Leveraging Capabilities from Alternative Software Solutions

An important component of EPM applications is financial consolidation. This is the sister of financial planning, so we include one chapter on it just for completeness. For more information on financial consolidation you can also read Accelerated Financial Closing with SAP by James Fisher, Elizabeth Milne and Birgit Starmanns.

Deploying an EPM application shouldn’t be a protracted process. While they may embody sophisticated forecasting and modelling processes, they aren’t massive ERP applications. Therefore, the implementation times should be correspondingly shorter.

Customers are also looking for pre-built content and best practices. SAP bundles (and sells) pre-built content along with the underlying applications and a prescribed set of services that are called rapid deployment solutions (RDS). We discuss the RDS’s that currently exist to help accelerate the adoption of SAP’s EPM solutions within financial planning and analysis.

EPM is a broad domain and uses data pulled from many other systems and sources, particularly ERP and data warehouses. Therefore, it would be remiss not to include some discussion of peripheral solutions, integrating SAP EPM with them and investigating how to extend EPM capabilities into other SAP solutions.

Part 4 – The Future of Enterprise Performance Management

Anybody involved with financial planning and analysis (whether on the business or IT side) is well aware of the developments in Big Data, cloud, and mobility, along with innovations in analytics. These advances are beginning to change the way we access and use applications along with providing additional power, capability and convenience. This last section talks about the relevance of these emerging technologies and highlights the future and planned innovations for EPM from SAP.

Wrapping it up

As I wrote in the forward, when writing this book, we focused on four key processes in financial planning and analysis, which themselves are composed of many sub-processes and activities. That’s a ton of stuff before we even begin to think about SAP’s EPM portfolio. On top of this, we have to consider the turmoil from a rapidly changing global business environment and huge technology shifts that are dramatically changing the way in which applications are built, deployed, and used. To say that writing this book was a massive undertaking would be an understatement to say the least. However, we believe that it fills a void and hope that it will help all readers better grasp the issues and importance of EPM.

This blog article originally posted on SAP Analytics 14 August 2014

Is Your Finance Organization Thriving or Merely Surviving?

Coffee-break with GameChangers

Enterprise performance management (EPM) solutions are redefining how organizations manage and grow business. New technologies have exploded and the possibilities must seem endless to those in charge. In a recent SAP Game-Changers radiocast, panellists Steve Sussman, VP of sales and marketing for Column5; Michael Svolos, senior director of TekLink; and Karuna Mukherjea, senior director of product marketing on the SAP solutions for EPM team, offer insights into three main areas: enterprise mobility, cloud, and social and beyond.

Determine the value of your enterprise mobility processes
Moderator Bonnie Graham quotes Mukherjea as saying that “mobility is core to a successful EPM solution workforce.” Mukherjea asserts that EPM processes have gone mobile, giving users the ability to provide real-time input while on the job.

Mobile solutions are helping companies expand and accelerate EPM advancement, but, as Sussman cautions, “without doing the hard work up front of rethinking the process, they are putting themselves at risk of actually seeing any value from that investment in the project.”

He continues, “The big challenge sometimes is to convince the organizations not to just apply the technology to the existing process but to really use that as an option to rethink the process and how it currently operates today.”

Svolos echoes, “It’s important not to fall in love with what you are doing but rather understand why you are doing it.” This is the kind of distinction that makes the difference between surviving and thriving.

Accelerate innovation through cloud adoption
Svolos explains that many of his larger customers – Fortune 500 companies – are not adept at quickly shifting technology. With the cloud, however, they’re able to quickly see results such as proof of concept – enabling them to take their data, try it out on a cloud-based system, and achieve the ROI that they are expecting.

Mukherjea adds that cloud “has not only reduced the barrier to entry into organizations as we develop new solutions… but more importantly it’s about agility.” Svolos agrees that part of the allure of cloud is the predictability of cost to implement and support the platform over time.

Get ready to go “mocial”
And get ready for another industry buzzword. According to Mukherjea, the terms mobile and social have formed the amalgam “mocial,” referring to social collaboration that promotes work-life balance.

Many new technologies, such as the SAP Jam social software platform, foster real-time collaboration within a small network. Integrated with EPM processes, such platforms can greatly simplify and accelerate problem solving or keep problems from cropping up in the first place.

So where can all these innovations take EPM and finance? The panellists foresee a new title called “Chief Financial Technology Officer (CFTO)” coming into the mix to more seamlessly handle the new technologies that will define EPM.

To learn more, listen to the full radiocast.

How do we transform finance to cope with constant change? One word; Collaboration!

From Steve Player, North America Program Director for the Beyond Budgeting Round Table (BBRT)

Throughout my ten part blog series I have been discussing how CFOs can use new technologies to help leverage the finance team in providing greater organizational value. In the capstone summary I also wanted to note that underlying each of the changes discussed is a theme of greater collaboration.

Businessman and businesswoman using digital tablet in office

In many ways technology is enabling this collaboration. But your speed of adoption will increase if you start with a spirit of collaboration before any implementation begins:

  • A strong CFO looks to collaborate with his or her key lieutenants. More effective plans are developed when everyone is looking to optimize the whole organization.
  • A strong corporate finance team looks for ways to team with the business units they support. How can information be shared across units to make the whole stronger than the individual parts?
  • Strong finance teams also look to gain advantage by teaming up and down the value stream. For instance, the concept of eliminating duplicate data entry extends up and down the value stream. Why re-key a key vendor’s data or ask your customer to re-key yours?

New technologies such as integrated planning modules are leveraging collaborative work flows which are often imbedded into the design of new modules. These systems provide real time status of work flow which can be tracked automatically. Group messaging and polling functions facilitate online dialogues which can be happening with people around the globe. Joint work efforts can be tracked by automated audit trails maintaining change history. Teams can access the organization’s knowledge bases though on-line content management systems – anytime, anywhere. Even security concerns are better addressed as prepackaged solutions build in the security checks.

Old approaches that relied on linked spreadsheets had finance teams constantly trying to validate if they were working on the right numbers. Past surveys [1] have estimated that FP&A teams spend 47% of their time collecting and validating date. They spend another 30% of their time administering the planning process. As a result, they only have 23% of their time to do any real value added planning work. The new technologies we are discussing (mobile, in-memory, predictive analytics, and cloud) can flip this equation leaving finance teams free to focus just on collaborating and doing real planning work.

In addition to collaboration, success with these new technologies requires three key elements. The first is leadership and whether they are willing to explore new ways that finance can improve organizational value. This is likely a CFO who is looking to have greater impact. The second is an organization with a willingness to change. In addition to collaborating, there also needs to be an openness to what is possible. This leads to the third element which is experimentation. As Peter Drucker advised, systemic innovation “consists in the purposeful and organized search for changes, and in the systemic analysis of the opportunities such changes might offer for economic or social innovation.” [2]

Whether you are a CFO or just someone in looking to add greater value, ask yourself these questions:

  1. What changes should we be making to expand the value our finance team creates?
  2. How should our planning, budgeting and forecasting process change to take advantage of the next generation planning tools already here?
  3. How can in-memory computing help us harness Big Data for greater insights?
  4. What predictive analytics will provide us with greater lead time for improving?
  5. How can we better reach our strategies by aligning our execution efforts? What should be dropped to create capacity for what needs to be added?
  6. Which customers provide our current profitability? How will that change in the future?
  7. How can we improve the return on all expenditures?
  8. How can we eliminate wastes by moving to real time consolidation?
  9. How can we increase our response times using real time close and disclose approaches?
  10. How can finance improve collaboration?

Finally, how can finance find the time to pursue these goals? That begins with your leadership and identifying dumb stuff you are currently doing that should stop. I hope this series of blogs have helped get you started.

[1] See joint studies by APQC/ Beyond Budgeting Round Table (BBRT) and by Business Finance Magazine and BBRT. See “The Budget (1922 – 2009) Is Dead” by Jack Sweeney, Business Finance magazine, June 1, 2009.
[2] Drucker, Peter, Innovation and Entrepreneurship: Practices and Principles, (New York: Harper & Row) 1985, page 35.

Steve Player

Integrating Financial Analytics with Operational Transfer Pricing to Optimize After-Tax Profitability – Part Two

From Rob Jenkins, SAP Global Center of Excellence

In my previous blog, I discussed a variety of financial planning and tax modeling requirements and the disparate analytic tools finance teams are using to achieve their objective of partnering with the business to optimize decision making. Today, I want to discuss the rise (again) of profitability and cost management software.

For more than 20 years, profitability and cost management software has served a niche in finance and operations where organizations needed to model complex business rules of cost assignment, attribution and allocation in multiple process steps using driver volumes and multi-dimensional views. These data inputs often include financial values and non-financial measures by department, account, process, customer and/or product components in multiple layers all the way down to the bill-of-materials.

Gartner refers to this application space as Profitability Modeling and Optimization (PM&O) – part of corporate or enterprise performance management. These enterprise applications enable business users to use a point and click interface to rapidly build profitability and/or cost models and leverage built-in reports and OLAP (online analytical processing) multi-dimensional database for storage. Originally developed for activity-based costing purposes in the 1990’s, these PM&O applications have been adapted over the years to enable any methodology of complex revenue or expense allocation using a multi-dimensional database environment.

Organizations can transform source financial data where revenue and expense are typically captured in disparate dimensions into aligned, common dimensions. For example, revenue is captured by product and customer in a billing system whereas most expense is captured in the financial system by responsibility center without direct linkage to “market-facing dimensions.”

This transformation can incorporate robust rule sets that are visually depicted and easily maintained while accommodating large data sets. These types of models would be onerous to build, document, and maintain in spreadsheet software or would require IT to build a custom OLAP application with user interfaces and reporting tools.

Planning systems can be configured to import actual data and apply complex rule sets though the interface and dimensional data model are not pre-configured for multi-step, activity-based cost allocation purposes.

Integrating Planning Systems with Profitability and Tax Impact Modeling
PM&O applications can easily handle integrating budget, forecast or other scenario data using the version dimension. This enables alignment of planned financial data with actual results for revenue and cost following the mapping from resource center or account to process all the way to customer, product or other business dimension. Planned data can include financial data and driver-volumes or different capacity estimates if changes in operations or efficiencies are targeted.

PM&O applications have seen a recent resurgence given the applicability to modeling detailed operational transfer pricing rules. These rules are structurally very similar to activity-based methods and include robust, multi-step, driver-based allocation of shared cost pools along with the capability to model the detailed supply chain process steps and the tax impact based on jurisdiction, rates, etc

These applications can provide one integrated financial modeling solution that serves both FP&A and corporate tax enabling collaboration on inputs, rules and a single source of truth. With the proper configuration, an implementation team can create an accurate, documented view of pre-tax product / customer margin based on the true “economic map” of the business along with a tax-impacting process view of transfer prices, debt location, IP royalties and passive income.

The calculations can include actual results and “what-if” scenarios for the executive team to strategically organize global resources and operations.

So while taxes are a certainty, corporations will continue to deploy capital to maximize after-tax return on investment and finance organizations will be able to continue to use technology to be a strategic partner in modeling decisions and optimizing outcomes.

I’d like to hear your thoughts…where do you see financial analytics software heading given the convergence of planning, profitability and operational transfer pricing?

Is Your Finance Organization a Big Data Dinosaur?

Coffee-break with GameChangers

By now, every finance executive is hyper-aware of the bevy of business intelligence tools that help collect and analyze Big Data – but many are just not equipped to leverage them. First, they need to grasp fundamental planning points by rethinking the approach to data and finance’s role in the business.

In a recent SAP Game-Changers radiocast, Gary Cokins, founder of Analytics-Based Performance Management; Jon Essig, CPA with Optimal Solutions; and Rob Jenkins, global finance technology leader at SAP, offered advice on how to predict profitable performance in challenging times.

You can’t solve a problem you don’t understand

All panellists agree that there is a distinct resistance to change in the finance world – and this makes organizations ill-equipped to deal with emerging data challenges posed by innovative technology.

According to Cokins, “We need to close what I consider the wide gap between the CFO and the CMO, because the key is marketing has to answer the question: What types of customers do we basically retain, do we grow, do we win back, do we acquire? We are going to have to see that gap gets closed by finance and accounting function providing more and better information about customer profitability levels.”

Essig thinks there is a good chance at closing that gap, since tools are getting easier to use and require less expertise. The new workforce is also more comfortable interfacing with new technology.

Jenkins, however, still sees data interpretation as a big stretch in finance. “Getting to a fully absorbed profit view by product or by customer takes a lot more judgment and a lot more imagination and it really is worth the effort, but we don’t see a lot of firms doing that.” The fundamental issue is figuring out what to do with all the data to make it valuable and improve planning and forecasting.

Take the risk on technology

Essig believes that the next few years will bring the risk-averse finance sector further along in software investment. As tools become more available and cost-effective, “You no longer need the higher teams of the consultants and data scientists to come out and invest hugely in a project to benefit from these tools.”

According to Jenkins, you can achieve a near-forensic view of product and customer profitability with increased computing power that proves its merit in the form of improved decision making.

One implication of such a shift could mean the end of the dreaded annual budget. Instead, progressive economics and management accounting pave the way for rolling forecasts at more frequent intervals, providing a fresh perspective.

As a new era of tech-savvy CFOs is ushered in, technology will be seen as an enabler instead of a barrier. What do you think are the possibilities once this shift is completed? Listen to the full radiocast for more details.

Integrating Financial Analytics with Operational Transfer Pricing to Optimize After-Tax Profitability – Part 1

From Rob Jenkins, SAP Global Center of Excellence

Benjamin Franklin once noted “In this world nothing can be said to be certain, except death and taxes.” Finance professionals must deal with uncertainty as they model the future and partner with the business to optimize decision making. And while taxes are a certainty, tax jurisdiction and therefore tax rates are a function of how and where a business process is executed and assumptions made by the business. And those assumptions should be well documented for regulatory agencies.

Every for-profit entity’s objective is to deploy capital to maximize the after-tax return on investment. This requires a tight collaboration between financial planning and analysis (FP&A) and corporate tax functions to provide insight into the past and potential economic profit of products and customers and the available possibilities of organizing operations to maximize after-tax profit.

Many companies are in the news for performing “tax inversions” as part of a strategic acquisition of a non-US-based entity due to U.S. rates now exceeding the simple average of other OECD nations by 14.1 points and the GDP-weighted average by 10 points. [1]

Modeling After-Tax Financial Impact of Business Operations
Given the disparity in global tax rates, process and asset location along with transfer prices can have significant impact on after-tax income. Various operating scenarios can result in “profit shifting” among tax regimes and the business analyst can calculate the impact on statutory results by modeling the following:

  • Whether a business activity is active or passive
  • Where activities occur including R&D and “management”
  • The location of intellectual property
  • Placement of debt and borrowing costs (thin capitalization rules)
  • Transfer pricing (inter-company pricing arrangements between related business entities)

Choosing the Right Tool for the Task
A variety of tools are available to enable business users to estimate financial outcomes based on input variables and assumptions about their systemic relationships.

Spreadsheet technology is ubiquitous in finance for ad hoc modeling with some companies building complex, interdependent workbooks with macros for automation and detailed documentation for knowledge management, while others rely on a single subject matter expert to maintain the “black box”. These webs of interconnected cells and sheets are notorious for their error rates and hardwiring with one study finding “errors of at least 5% were found in 91% of all spreadsheets with more than 150 rows.” [2]

My previous blog post, Big Data for Finance, referenced how Big Data and analytics can be utilized to model the future based on historical data relationships and advanced analytic algorithms – though few finance organizations have yet to embrace the suite of predictive analytic tools now targeted at the business user.

Managing the Scope of Planning, Budgeting and Forecasting Systems
However, most finance organizations are using enterprise software applications for planning, budgeting, and forecasting with a large number of firms incorporating driver-based techniques for quantifying revenue forecasts and gross margin (for example, estimated product volume x selling price and standard cost for cost of goods sold).

For planning indirect operating expense including the cost to acquire, serve, and retain customers, the vast majority of companies budget expenses by function, responsibility center, and account, and rely on streamlined allocations to create a pre-tax operating margin view with most management attention focused on “controllable margin.”

These enterprise planning systems are extremely valuable for gathering inputs from decentralized sources, managing workflow, recording audit trails, aggregating actual results, calculating budget variances and reporting multi-dimensional financial statements for management.

Since FP&A teams are traditionally focused on financial reporting aligned with GAAP or IFRS requirements, these planning systems are rarely configured to calculate the detailed dynamics of how hundreds or thousands of shared indirect labor or overhead cost pools are attributed (sometimes in multiple steps) to products or customers based on usage-based drivers or activity-based methods.

Nor do these systems typically account for the tax impact of supply chain logistics, asset location, and transfer prices. Complex driver-based attributions and operational transfer pricing have been the province of cost accounting and tax accounting, respectively, and rely on specific techniques, operational data sets and levels of detail not ordinarily integrated into corporate planning systems.

The result is that most FP&A and tax teams use separate systems to plan and model pre-tax economics at a high-level vs. a granular view of profitability by customer and product vs. the tax impact of how business operations are organized.

So, what’s the solution? In my next blog, I will discuss operational transfer pricing and the rise (again) of profitability and cost management software. Stay tuned!

[1] Tax Foundation, OECD Corporate Income Tax Rates, 1981-2011, http://taxfoundation.org/article/oecd-corporate-income-tax-rates-1981-2011.

[2] http://www.isaca.org/Journal/Past-Issues/2007/Volume-1/Documents/jopdf0606-controlling-spread.pdf

 

Real time close and disclose

From Steve Player, North America Program Director for the Beyond Budgeting Round Table (BBRT)

As we continue to examine how technology is helping CFOs successfully deliver greater value, I wanted to extend last week’s discussion of real-time consolidation to also include real time closing and disclosing of financial information. These can provide real benefits to all organizations from small to gigantic and everyone in between.

Technology has expanded the work day. Many business are 24/7/365 (hours per days/ days per week/ working every day of the year). The business is like a ship on the ocean, constantly serving. In most organizations, the work does not stop. For these, an accounting close of a month, a quarter or a fiscal year is merely a defined reporting period for comparison purposes. You want it to be accurate, but you also want it to be as unobtrusive as possible. For most, that means cut-off procedures with minimal disruption.

Clock in train station, Liege, Belgium

Achieving real time closing follows this same steps discussed in last week’s real time consolidations – it starts with finance efforts to stop doing dumb stuff. This means eliminating the need for duplicate data entry, converting manual account reconciliations to automated approaches, simplifying other monthly systems interfaces, and getting systems to exchange and validate information.

About 15 years ago, this approach was described as being able to do a virtual close. One of the key benefits claimed was providing management with financial information faster. Frankly, I see this as a misleading claim. In successful organizations, any critical information needed by management is already being provided.

The real reason that CFOs need to move to real time closing is that doing so will free up a huge spike in the finance team’s work load. Streamlining the manual interfaces and account reconciliations means digging up the root causes and eliminating them. The monthly time saved by these improvements is better spent developing and implementing improvement plans.

The most recent advances have extended real-time information to also include the disclosure process – which has been called the last mile of reporting. The use of the new XBRL reporting language enables information to be tagged and reused. Initially, the benefits of this development was sold as a check to make sure that any late changing numbers would be captured and updated. When Sarbanes/ Oxley began to require CFO the sign that their financial statements were accurate, this feature became an even bigger deal. Adding this capability has been a must have for most publically traded companies.

As finance teams have become more familiar with XBRL, they are beginning to see opportunities to expand its use. From its roots in financial reporting, new disclosure reporting is expanding additional external reporting such as:

  • Linking to all footnote reporting including executive compensation
  • Covering sustainability reporting issues
  • Tracking social responsibility issues

It is also begun to be used for internal reporting such as:

  • Tracking total costs of ownership
  • Quality performance reporting
  • Measuring employee personnel productivity

By using these technologies to help CFOs cover the basics, they also create more capacity to expand into additional areas. Next week, I will recap our process and look at what else the future may hold.

Steve Player