The Soft Stuff is the Hard Stuff

By Gary Cokins, Founder of Analytics-Based Performance Management LLC

I hope that you enjoyed my last blog on the topic of modeling. Perhaps it gave you some cause for thought about the type of business models you use in your own performance management systems. In this blog I am turning my attention to decision management.

I like to think of myself as a technical person. We techie-types are fact-driven. We embrace technologies of all flavors including computer hardware, software, mobile devices, the Internet, and social media. We prefer tangible and hard evidence to support a position or argument. We like research studies and the use of analytics to gain insights and foresights as well as to solve problems and pursue opportunities. But darn it there are all those other types of personalities to that sometimes just seem to be in the way of us fact-oriented types.

Decision agreement – possibility or delusion?

Just consider the USA campaigns for President. Both candidates refer to studies by think tanks that contradict different studies or surveys. Imagine if these think tank research teams were forced to be in a room and not emerge until they reconcile their data and assumptions and instead were forced to reconcile their results and conclusions. My imagination would lead me to believe that they could never emerge with a common agreement. Why? Because they are people with emotions, pre-conceived notions and positions about what is right or wrong.

So how do we resolve this? How do we use information that is unbiased to draw unarguable conclusions? Maybe it is not possible and is just a pipe dream. Maybe we might not want agreement because we always want open forums for debate regardless of the conflict and tension it creates. Argument can be good. It reveals ideas not previously considered.

There is hope

Inevitably, however, decisions must be made in order for any organization to advance and improve. One area of information management that has caught my eye is as the concept of “decision management systems” advocated by James Taylor, CEO of Decision Management Solutions. Taylor’s belief is that traditional systems are too inflexible, fail to learn and adapt, and cannot apply analytics to take advantage of “Big Data.” This is because traditional systems ignore decision-making and keep analytic systems separate from operational systems. He advocates decision management systems that are agile, analytic and adaptive.

Decision management systems make assessments based on an evaluation the interdependencies of variables such as time, quality, service level, capabilities, capacity, and cost. Cost is particularly relevant because money stated in financial terms, like the return on investment and spending is usually an overriding determinant of decisions.

Taylor defines decision management systems as being:

  • Agile – so they can cope with rapidly changing business conditions and new regulations.
  • Analytic – so they can leverage an organization’s data to improve the quality and effectiveness of decisions.
  • Adaptive – so they can learn from what works and what does not work to continuously improve over time.

In Taylor’s mind the role of analysts, now popularly referred to as “data scientists,” is to use business rules, data mining, analytics workbenches and optimization suites (that all leverage in-memory database technologies and high performance analytics) to build systems that manage decisions rather than making individual decisions themselves.

Technology is no longer the barrier

The challenges in implementing a decision management system are daunting. The least obstacle is technology which currently exists and is proven. Instead, the major obstacles are social and cultural barriers. We return to people. Leadership, so often mentioned as essential to drive change, will need to demonstrate more vision and inspiration. Exponentially increasing data mean C-suite executives can no longer make as many decisions alone as before. They still need to make the big strategic decisions, but need to let the other multitude of daily decisions be made by their workforce and partners.

The title of this blog is “The Soft Stuff is the Hard Stuff.” Few of any of us were trained in the field of behavioral change management. We’ll need to get better at it. Most likely this will come in the form of on-the-job training, but gaining competencies in it will be essential for any organization’s performance improvement.

Look out for my next blog, in which I turn my attention to the annual budget.

 

About the Author: Gary Cokins, CPIM

Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949.

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

 

What’s Broken About Budgeting? – Part 2

By Gary Cokins, Founder of Analytics-Based Performance Management LLC

If you missed part 1 of this blog then you can find that here. In it I talk about why the traditional budgeting process, for right or wrong, is an ingrained part of business. Or is it? Are there options available for budgeting to be reformed, and if so what will propel organizations toward such change? 

A Sea Change in Accounting and Finance

How can budgeting be reformed? To answer this let’s first step back and ask some other broader questions. What are the impacts of the changing role of the chief financial officer (CFO)? How many times have you seen the obligatory diagram with the organization shown in a central circle and a dozen inward-pointing arrows representing the menacing forces and pressures the organization faces – such as outsourcing, globalization, governance, brand preservation and so on?

Well, it’s all true and real. But if the CFO’s function is evolving from a bean-counter and reporter of history into a strategic business adviser and an enterprise risk and regulatory compliance manager, then importantly, what are they doing about reforming the archaic budget process to be more reflective of forecasted demand and projects?

Progressive CFOs now view budgeting as consisting of three streams of spending converging into a river:

  • Recurring expenses –ongoing resource capacity planning similar to 1970s factory managers projecting the operation’s manpower planning and material purchasing requirements.
  • Non-recurring expenses –the one-time investments or project cash outlays necessary to implement strategic initiatives and risk mitigation spending.
  • Discretionary expenses –optional non-strategic spending.

Within the broad portfolio of interdependent methodologies that make up today’s enterprise performance management (EPM) framework, two methods offer the capability to accurately project recurring and non-recurring spending streams:

  • Activity-based planning – In the 1990s, activity-based costing (ABC) solved the structural deficiencies of myopic general-ledger cost-center reporting for calculating accurate costs of outputs (such as products, channels and customers). The general ledger does not recognize cross-functional business processes that deliver the results, and its broad-brush cost allocations of the now-substantial indirect expenses introduce grotesque cost distortions. ABC corrects those deficiencies. Advances to ABC’s historical snapshot view transformed it into activity-based management (ABM). These advances project forecasts of customer demand item volume and mix and forecast the elusive customer cost-to-serve requirements. In effect, ABC is calculated backward, and named activity-based planning, based on ABC’s calibrated consumption rates to determine the needed capacity and thus the needed recurring expenses. Without that spending, service levels will deteriorate.
  • The balanced scorecard and strategy maps – By communicating the executive strategy and involving managers and employee teams to identify the projects and initiatives required to assure that the strategy map’s objectives, non-recurring expenses, are funded. Without that spending, managers will be unjustly flagged red as failing to achieve the key performance indicators (KPIs) they are responsible for in their balanced scorecards.      

The Financial Management Integrated Information Delivery Portal

Today’s solution to solve the budgeting conundrum and the organization’s backward-looking focus is to attempt to create a single integrated business intelligence platform – together with its Web-based reporting and analysis capabilities. Speed to knowledge is now a competitive differentiator.

The emphasis for improving an organization and driving higher value must shift from hand-slap controlling toward automated forward-looking planning. With a common platform replacing disparate data sources, enhanced with improved data integrity, cleansing and data mining capabilities, an organization can create a flexible and collaborative planning environment. It can also provide on-demand information access to all who need to perform what-if scenario and trade-off analysis. For the bold CFO not wary of radical change, continuous and valid rolling financial forecasts can replace the rigid annual budget. Today, organizations need to be able to answer more questions than “Are we going to hit our numbers in December?” That’s not planning but rather performance evaluation. For the more traditional CFO, the integrated data platform offers a sorely needed upgrade toward a more high-speed budgeting process.

Additionally, statistical forecasting can be combined with the integrated information on the platform. This results in customer demand forecasting that seamlessly links to operational systems, activity-based planning and balanced scorecard initiatives. It provides the ultimate financial view for CFOs with valuable and needed real-time or right-time feedback to managers as part of this package.

All of this – traffic signaling dashboards, dynamic drill-down, customizable exception alert messaging to minimize surprises, profitability analysis and reporting, consolidation reporting, Excel linkages, multiple versioning and more – is available for decision making from a single shared solution.. Enterprise performance management resolves major problems: lack of visibility to causality, lack of timely and reliable information, poor understanding of the executive team’s strategy and wasted resources due to misaligned work processes.

Enterprise performance management provides confidence in the numbers, which improves trust among managers. What today will accelerate the adoption of reforms to the budgeting process and an enterprise performance management culture – senior management’s attitude and willpower or the information technology that can realize the vision described here? I’d choose both.

Look out for my next blog in which I consider how to get started in implementing an EPM system.

 

 

About the Author: Gary Cokins, CPIM

Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949.

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

 

Would you want to work for this CEO?

By Gary Cokins, Founder of Analytics-Based Performance Management LLC

The focus of my last blog was to examine just what EPM is, and the various methodologies encompassed by the term enterprise performance management. I hope that the blog made you think a little about your own organization’s performance and the systems you have in place. But, have you ever worked for an organization where you doubted the leadership capability of your CEO, Managing Director, division president or head of your agency? Have you ever been disturbed that your organization is not living up to its full potential in terms of its enterprise-wide performance management?

Businesspeople in meeting

Imagine that I am a journalist reporting on a recent interview with a CEO…

Cokins: What is your position regarding how your organization views quality and waste?

The CEO: The quality community often provides lists about the five or so quality problems, such as non-conformance to product design specifications or insufficient focus on customer service. My observation is these lists always omit a much more critical deficiency: the inability to enable employees to achieve their full potential to contribute toward the organization’s strategic goals. This is a huge waste – and also an opportunity. My position is our manager’s main function is to unleash the power and intellect of our employees.

Cokins: How have you created a work environment that makes this possible?

The CEO: I set the tone at the top as a role model by placing a high priority on three character traits: trust, a high tolerance for dissent, and innovation. This combination is very potent in a positive way. Without trust employees do not feel they are adequately involved in decision making. Without allowing for dissent employees will not feel their opinions aren’t valuable. Without innovation competitors will catch us and leave us chasing them. We highly value innovation, especially information technologies.

Cokins: This sounds like you are big advocate of employee empowerment, but can’t this lead to chaos from employees when teams exhibit departmental self-interests rather than a unified interest in your organization as a whole?

The CEO: Conflict and tension is natural in all organizations. There are always trade-offs. From my view from the top I struggle to properly balance multiple, sometimes conflicting, dimensions such as how to improve customer service levels and cost-saving initiatives while restricted to financial budget constraints and profit targets. I constantly assess balancing our risk exposure with our risk appetite. My belief is the primary role of my executive team is to set the strategic direction; and then secondarily to hire, grow, and retain excellent employees. With empowerment and involvement then our employees are tasked to determine how we get there – to pursue the strategic direction I have set. The autocratic command-and-control style of management no longer works today. My managers and employee teams decide on which initiatives are required and which business processes we must excel at. I then assure them the financial funding of their projects and process improvements – regardless of a temporary dip in our short-term financial results. The bottom line is we must put our money where our strategy is.

Cokins: You side-stepped my question. How do you unify your organization?

The CEO: It’s basic. My executive team communicates our strategy with a strategy map, and then afterwards our workforce constructs and continuously modifies our balanced scorecard of initiatives, processes, and associated key performance measures (KPIs) derived from our strategy map. This aligns our employees’ priorities, plans, and actions with our strategy. With the cascading cause-and-effect linkage of strategic objectives from our strategy map, the tension and conflict I mentioned becomes self-balancing. Our measurements are critical. You get what you measure. I also provide them the latest and greatest information technologies – software – to accomplish their jobs. I’ve made enabling strategy through improved practices and the right software a priority.

Cokins: How do you motivate employees?

The CEO: Leaders like me must motivate through communicating vision and providing inspiration. Not all executives do this well – some poorly. But to get true organizational traction, we link financial bonuses for all employees in a large part to the performance indicators in their cascaded scorecards. Their financial bonuses are also augmented by traditional soft and subjective assessments, such as their professional growth and attitude toward working together cohesively. Bonuses are not always motivational to some employees. I also try to allow them autonomy to pursue mastery and their self-purpose taken right out of Daniel H. Pink’s book, Drive. My job is to remove obstacles that prevent my managers and employee teams from achieving their objectives and to facilitate the conflicts amongst them.

Cokins: OK. So monitoring the KPI dials on your scorecards is obviously important, but how do you move the financial and non-financial dials to achieve or surpass your organizational targets and in turn realize your strategy, vision and mission?

The CEO: That is where business intelligence and our enterprise performance management (EPM) methods fit in. We have invested in robust information technologies such as our enterprise resource planning (ERP) software. This foundation has already given us a performance lift and an impressive ROI. We are now integrating our tools and using modeling techniques and their supporting technologies to make better decisions and further improve performance. We view employee competency with analytics of all flavors – and particularly predictive analytics – as our means to a sustainable competitive advantage. We have shifted from focusing on control to anticipatory planning so we can be proactive not reactive.    

Cokins: One final question. Are you winning?

The CEO: Organizational performance improvement is a marathon where there is no finish line. It’s a case of staying ahead rather than winning. Where we are winning is with the hearts, minds and loyalty of our customers, our employees, our suppliers and our governance boards. And there is a bigger stakeholder. Where we all need to win – and that includes all organizations collectively – is with our planet. My organization takes being green and behaving with environmental and community responsibility very seriously. When we talk about sustainability we mean all these things.           

Now imagine, what do you think that such an interview would be like with members of your executive team and ask yourself; How would their answers differ? What are the next steps for your organization in in realizing the full vision of enterprise performance management (EPM) methods embedded with business analytics? And, what benefits will these bring it in terms of sustainable performance across the criteria shared by my CEO in the last answer above?

Hopefully this is some food for thought. In my next blog I shall ask what you should look for in exceptional EPM systems.

 

About the Author: Gary Cokins, CPIM 

Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949.

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

Enterprise Performance Management: Integrating a Suite of Proven Methodologies

By Gary Cokins, Founder of Analytics-Based Performance Management LLC 

In my first blog of this series I talked about a Tipping Point in EPM. I’ll be expanding on this theme a little more when I present at the SAP Conference for EPM in Chicago on 13/14 October. But before that I’d like to invite you to join me as I continue this blog series with an examination of EPM and its constituent business processes from a number of perspectives.

Enterprise performance management (EPM) can be described as the integration of various methods that translate plans into results – execution. It is a framework for managing your strategy. Strategy is of paramount importance and is senior management’s number one responsibility. For commercial companies, strategy usually answers three key questions:

  1. What products or service lines should we offer or not offer?
  2. What markets and types of customers should we serve or not serve?
  3. How are we going to win?

EPM provides insights to improve all performance in the above three choices. But, its main power is in achieving number three – winning – through adjusting and executing strategies. EPM does this by aiding managers to sense earlier and respond more quickly to uncertainty. It does this by pushing accountability for results to the lowest possible organization levels.

In contrast to the popular 1990s business process reengineering (BPR) approaches, where after radical redesign every single step and task were explicitly mapped, EPM instead relies on the power of focusing on the pertinent and relevant information. After determining the organization’s strategic objectives, measures (i.e., key performance indicators, KPIs) and their supporting projects, the rest will follow naturally. That is, employee work activities align to pursue strategy, often intensely customer-focused, as job number one.

umbrella

So what then is it that EPM is comprised of- if it offers companies so much potential? EPM is an umbrella-like concept covering tightly integrated and universally applicable methods: strategic planning, scorecard measurements, budgeting, rolling financial forecasts, costing (including activity-based costing [ABC]), forecasting resource requirements, and also financial consolidations. EPM also includes the important adjacent neighboring methods that are independent of any industry: business intelligence tools, customer relationship management [CRM], specifically sales performance management; supplier performance management; shareholder valuation (e.g., cost of capital, economic profit and value); human capital management (HCM); and six sigma and lean operations.

Key elements to EPM

There are three primary elements for EPM:

  1. Focus. The task of managing strategy begins with making choices and focus. There is never enough money or resources to chase every opportunity or market on the planet. We are continually limited by scarce and precious resources and time, so focus is key – and strategy yields focus.
  2. Communicatation and Feedback. The task of managing strategy continues with communication. This context is reserved for senior management articulating its strategy to employees, typically with a strategy map. Along with articulating strategy comes the all-important feedback to managers and employee teams. It allows everyone to answer the question, “How am I doing on what is important?” A balanced scorecard is the key tool for reinforcing communication of the strategy. Think of a balance scorecard as the drive gears of the strategy map. Think of the strategy map’s strategic objectives as a set of chain links, where each chain link uses if-then relationships. The leading and lagging measures steer work efforts to align with the organization’s mission and vision. By integrating, distributing, and analyzing enterprise-wide information, an organization gains the power to act on this information – ahead of its competitors.
  3. Collaboration. The task of managing strategy ends with collaboration. (It is essentially a never ending iterative loop.) By aligning the strategic objectives among the various departments and functions, the organization taps into the collective knowledge of its employees and unleashes each person’s potential. The EPM framework truly makes executing strategy everyone’s job. Collaboration in this sense is all about collective dialogue. Management is not equivalent to control – management is coaching people for continuous improvements.

A simple way to think about EPM is that it embraces both planning and executing. However, EPM is greatly aided when managers and employee teams have good visibility into the drivers of performance in particular fact-based intelligence on product, channel, and customer profitability reporting. With fact-based intelligence, better strategic objectives are more likely to be formulated, and employee teams can analyze what is happening and what might happen (e.g., what-if planning scenarios) in order to make better decisions.

People and culture matter

Business schools tend to divide their curriculums between hard quantitative oriented courses, such as operations management and finance, and soft behavioral courses, such as change management, ethics, and leadership. The former relies on a run-by-the-numbers management approach. The latter recognizes that people matter most.

The quantitative approach applies Newtonian mechanical thinking as if the world and everything in it is a big machine. This approach speaks in terms of production, power, efficiency, and control, where employees are hired to be used and periodically replaced, somewhat as if they were robots. In contrast, the behavioral approach views an organization as a living organism that is ever changing and responding to its environment. This Darwinian way of thinking speaks in terms of evolution, continuous learning, natural responding, and adapting to changing conditions.

The trick to general management is integrating and balancing the quantitative and behavioral approaches. In today’s knowledge-worker dominated world where customization and personalization are increasingly the ‘norm’, old-school, command-and-control style executives who prefer to leverage their workers’ muscles but not their brains run into trouble.

Increasingly, the strategy must reflect customer preferences and needs, while also satisfying shareholders (i.e., owners) entitlement to wealth creation. Translated, this means top-down guidance with bottom- up execution. From the shop floor to the top floor – and back again, EPM bi-directionally converts plans into results.

EPM provides robust and practical insights. EPM informs an organization about its current position, which direction it is going, which direction it should be headed, and what it will require to get there.

Performance Management is Based on Business Modeling

With new advances in software modeling tools, data warehousing and mining, technology is no longer the obstacle – but our thinking is! Modeling is best done using a combination of principles and tools. Business modeling is central to the performance management suite. Senior managers can verify the feasibility of their proposed initiatives using computerized business models to predict results rather than through experience gained in the school of hard knocks.

These tools provide every manager with the needed ability to:

  • Identify business problems and
  • Uncover opportunities to improve, and then to size their impact if successfully improved.

Executives can rely on these same systems to foster communications among managers and employee teams. Employees can actively manage with an increased confidence that what they choose to work on aligns with the organization’s strategy and goals.

In my next blog I’ll invite you to walk with me through a discussion about performance management with a CFO, and set the challenge for you to ask the hard questions in your own organization.

 

About the Author: Gary Cokins, CPIM 

   
Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949.

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

 

 

 

 

Realizing a Tipping Point for Enterprise Performance Management (EPM)

By Gary Cokins, Founder of Analytics-Based Performance Management LLC 

When should an organization decide to implement one or more components of an enterprise performance management (EPM) system? To answer this we can learn a lesson from Malcolm Gladwell, a social scientist and author of the best-selling book The Tipping Point, who describes how changes in mindset and perception can attain a critical mass and then quickly create an entirely different position of opinion. Let’s apply Gladwell’s thinking to the question of whether the widespread adoption of EPM solutions is near its tipping point or whether we will only realize this in retrospect after it has happened.

Gladwell observed that to determine whether something is approaching the verge of its tipping point, such as an event or catalyst, it should cause people to reframe an issue. For example, in the 1990s just-in-time (JIT) production and inventory control reframed manufacturing operations from classical batch-and-queue economic order quantity (EOQ) thinking to the method based on customer demand-pull product throughput acceleration. So, is EPM reframing organizational challenges and nearing its tipping point? To answer this, we should first acknowledge that EPM is not a new concept that everyone has to learn, but rather it is the assemblage and integration of existing methods that most managers are already familiar with. Collectively, these methods help better manage the execution of an organization’s strategy, planning and analysis functions together with the support of business intelligence tools.

Multiple Tipping Points of Performance Management Components

Enterprise performance management is comprised of multiple methods, all interdependent and interacting. They have been around for some time but what is profound is that we are now experiencing the combined influence of multiple and concurrent sub-tipping points all at once. Ultimately their collective weight is resulting in an overall tipping point for adopting EPM. These tipping points are:

  • The Balanced Scorecard (BSC) – Thanks to successes on how to properly implement the combined strategy map and balanced scorecard framework (and there are plenty of improper implementations), executives are now viewing BSC differently. Rather than the focus of a BSC being a means of reducing the massive number of collected measures (the so-called key performance indicators, or KPIs) and distilling them down to the more relevant few, executives now understand the strategy map and BSC framework as a mechanism for improving strategic execution and performance improvement programs. They are reframing BSC as a way to better execute their strategy by communicating it to employee teams in a way they can understand it, and then aligning the employees’ work behavior, priorities, and resources with the strategy.
  • Decision-Based Managerial Accounting – Reforms in management accounting practices, led by activity-based costing (ABC), may once have been viewed as simply a more rational way to trace and assign increasing indirect and shared overhead expenses to products and standard service-lines (in contrast to misleading and flawed cost allocations based on broad, cost distorting averages). Today, reforms to management accounting practices are being reframed as the essential managerial information necessary to better understand which products, services, types of channels, and types of customers are more profitable or not – and why. There is a shift from less cost control (hindsight cost monitoring to correct unfavorable deviations from expectations) to more cost planning (providing a level of spending supplied to match demands). This is because most capacity spending cannot be quickly adjusted up or down in the near term. This means better capacity and resource planning, understanding of cost drivers, and less historical cost variance analysis.
  • Customer Value Management – Customer relationship management systems (CRM) have been narrowly viewed as a way to communicate one-to-one with customers. However, executives have learned that it is more expensive to acquire new customers than to retain existing ones, and that their products and service-lines have become commodities that offer little competitive advantage. As a result, organizations are reframing CRM more broadly as a way to analyze and identify characteristics of existing customers that are more profitable and valuable, and then apply these traits to formulate differentiated and tiered treatments (such as marketing campaigns, deals, offers, and service levels) to existing customers as well as targeting new customers that possess relatively higher future potential value. This reframing places much more emphasis on micro-segmenting customers and post-sale value-adding services via cross-selling and up-selling. The new recognition is to not just grow sales but rather grow the more profitable sales.
  • Shareholder and Business Owner Wealth Creation and Destruction – The strong force of the financial capital markets to assign financial value to organizations has caused executive teams and governing boards to realize that old, traditional methods of placing value on a company are obsolete. Balance sheet assets now only account for a small fraction of a company’s market-share price capitalization. As a result, executives are reframing their understanding as to how to increase its positive “free cash flow,” the financial capital market’s metric of choice, to convert potential value (ideas and innovation) into realized value (financial ROIs). Consequently, they have reframed a path of continuous shareholder wealth creation governed by customer value management.
  • Advances in Technology – There is now a growing consensus that technologies, such as cloud computing and in-memory computing, are competitive advantage differentiators for those organizations that embrace them. Organizations are reframing their view of technologies as not just being tools but as enablers.

Synergy from the Links Among EPM’s Components

Each of these five tipping points have interdependencies. Transactional systems now provide valuable source data at faster speeds, and EPM methods then transform data into decision-based information. This produces even a higher ROI of an organization’s prior investments in its information technology assets. The tipping point then is the growing demand for EPM solutions as value-multipliers.

 

About the Author: Gary Cokins, CPIM

Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

 

Technology Imperative for Financial Planning and Analysis – Part 1

From Malcolm Faulkner, Senior Director Product Marketing EPM, SAP

In the opening blog for this series, Technology Imperative for Financial Planning and Analysis, I will address two points that apply to most companies:

1. Thinking they are behind the technology wave and
2. Dealing with more fundamental issues

Addressing the fundamentals is top priority within Finance

The simple fact is that despite the plethora of stories about emerging software technologies and applications most companies are dealing with more fundamental problems that need to be addressed in order to survive and thrive, regardless of the technology employed.

Shaping the Finance Function of Tomorrow: 2013, a CFO Research study* sponsored by SAP, noted though that many analysts and vendors tout the latest trends and advancements in technology. It’s their job to do so. The CFO study also reported that “to fully take advantage of these innovations, finance executives will need to understand them better”. Respondents were equally split on how well they do or do not understand uses for big data (48% saying they get it and an equal 48% wanting to increase their understanding). Comprehension of cloud computing and mobile technology is becoming more within finance executives grasp.

But you could be forgiven in thinking that everyone is embracing the wave of technology now and that if you are not you are way behind. This is simply not the case. Innovators and early adopters make up 16% of the bell curve. That said the new technologies of cloud, in-memory columnar databases, mobile apps, predictive analytics are mature and production ready.

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The reality is most companies struggle more with fundamental issues involving fixing broken processes and making them more efficient. Finance executives, it would appear from the above noted study, are a pragmatic bunch with the largest group (46%) recognizing better integration of existing information systems as most important for improving their ability to deliver services effectively.

Many organizations are simply nowhere near ready for new technology, like predictive analytics, regardless of how compelling it may sound.

Let me provide a couple of anecdotal examples

  1. In the late 1990’s, I taught Visual Basic (a popular language for bespoke applications at the time) programming courses. Some of the students programmed in COBOL, a language developed in the 1960s. So there I was thinking this is really great because all these COBOL applications would need to be replaced with Visual Basic apps. Now, I suspect many are still in use in what we call legacy apps.
  2. I once proposed a mash-up solution to a craft brewery that utilized GIS, BI, CRM , social media and point-of-sale data to provide a sales management solution to track and chart sales on maps, among other things. Brewers in the US struggle to get good POS data because the distributors own the sales data and not them (a legacy of Prohibition laws). This is compounded since many of these distributors are small outfits who still use paper based fax machines.

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Lessons Learned on Writing a Book for Finance

From Malcolm Faulkner, Senior Director Product Marketing EPM, SAP

I recently blogged on my book on Financial Planning and Analysis (FPA). If you are thinking about writing your first book too, then you are probably interested in the experiences of others including myself as to what to expect. So here’s my story – with my best intent to encourage you to follow your dreams of becoming an author. I hope this will make you a little bit more prepared in your undertaking.

People studying in library

Let me say off the bat that I like books. I like browsing in book stores, I like the feel of new books, I like libraries, and I like the idea of absorbing knowledge. I especially like well-written books – the ones that have beautifully crafted sentences and contain elegant turns of phrase.

Most importantly you’ve got to have both the desire to write and the idea for the book. I always wanted to write a book and assumed one day I would. It came down to a matter of timing – having a thorough-enough idea for a book and the relationship with a publisher. I suspect in these days of self-publishing the latter is less important in terms of writing the book. But it certainly helps to manage the project – because that is a huge part of it.

The SAP Connection

Because of my role at SAP, I had the opportunity to meet personally with SAP Press and talk to them about the idea. So getting a publisher to listen to me wasn’t a problem. I still had to pitch an idea and have them do their own internal analysis as to the viability of it. Part of this process involved producing a fairly detailed, chapter-by-chapter outline of the proposed book. This I found quite challenging but it really helped later. Even if the contents change – and it will – having a plan is an essential first step if it is ever going to get done, just like any project.

I also had two book ideas. The first was on the concept of business transformation in finance processes – how to make finance more efficient and effective through process improvements and the judicious use of software applications. In hindsight, while this is a topic of interest to me, it is not where I spend much of my time in my current job. So writing a book on this subject would have been too much of a challenge. Lesson learned – pick a subject in which you have some experience as well as an interest.

Making It Happen – Challenges and Obstacles

For the book I did choose to write, I had a co-author, William D. Newman.   It was, for me, the price of admission since a related book had already been published by SAP Press previously. This, even though our new book was of a much grander scale and had a completely different objective in mind than the earlier work.

Writing a book with someone else has pros and cons. Certainly, there are advantages in having other authors writing chapters and sections. But you also have to deal with differing schedules, styles, viewpoints, and so on. It’s not for everyone and something to consider carefully if you’re facing a similar situation. That said, it would have been extremely hard to complete the book without my co-author (or even get the project off the ground). So for that, I am eternally grateful.

In the end, it was not the actual writing that was difficult for me for the most part. That’s not to say there weren’t times when I had writer’s block. Largely, it was the amount of research and access to relevant content that I found most challenging. I often found myself, to quote John Naisbitt, “drowning in information but starving for knowledge.”

In part this was due to the subject of my book – using SAP solutions for financial planning and analysis is a massive topic.

Achieving the Author’s Objective

Towards the end, completing the book wasn’t much different than finishing a software product. It was a compromise between content and timeline. Any creative work is likely to be never perfect at least in the eyes of the creator. That is what next versions are for, and today with the internet there are plenty of options for continuing to evolve a topic beyond the foundation provided by a book.