The CFO’s Expanding Role – Reality or Delusion?

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

Did my last blog on the topic of the annual budget resonate with anyone? I have a suspicion that it probably did. Here in my final blog for a few weeks I am going to turn my attention to the CFO.

Am I alone in wondering if the many references and articles concerning the CFO’s emerging role as a “trusted advisor” is more hype than reality? Increasingly, I read articles and research studies alleging this emerging CFO role to be actually happening. In an article written by Gianni Giacomelli, senior vice-president at Genpact, titled “Can a CFO Innovate?” he states:

“Modern financial executives are moving toward a more central and expanded role as stewards of the company’s longevity, using the finance function to enable growth, especially in new markets and in response to market changes. For those who are ready for change, the new finance is an exciting and rewarding way to help shape a more intelligent enterprise that is better connected to the market and its customers.”

Really? Just to devil’s advocate for a moment, what proof do we have that Gianni’s observation is true? When we cut to the chase, what are CFOs more concerned about – regulatory compliance or organizational performance improvement? Certainly many CFOs monitor and report on performance using scorecards and dashboards. But do they actively participate in assisting line managers to move those dials. For example, do they:

  • Assist sales and marketing managers with identifying which types of customers to retain, grow, win back, and acquire?
  • Assist operations managers to determine which productivity actions and projects will realize gains in efficiency, effectiveness, quality, and cost reduction?

Or do they simply serve as gatekeepers and keep score?

Bean counter or bean grower?

In an article by Myles Corson, a consultant with the Financial Accounting Advisory Services of Ernst & Young LLP, titled “The Evolving Role of Today’s CFO”, he writes:

“In addition to overseeing the company’s financial health, CFOs are increasingly involved in setting operational and commercial strategy, navigating their companies safely through tighter credit markets, more complex regulation and unstable trading conditions. … As organizations continue to adjust to market volatility and economic uncertainty, CFOs must increasingly provide expert advice to support boardroom decisions. In fact, many CFOs feel that they are in an exceptional position to offer this level of strategic counsel because of their ability to gather information from disparate parts of the company.”

But is this evolving role one of just better reporting or one creating a greater impact on analysis and decisions?

In a survey conducted by my fellow Big Fat Blogger Mary Driscoll of the America Productivity and Quality Center, titled, “A New CFO Priority,” she writes:

“Surprisingly, only five percent of survey respondents believe that finance is currently delivering game-changing value to their enterprises. Is this cause for concern? … Finance organizations that are seen as a partner to the business generate thoughtful, clear, and authoritative analyses. However, the biggest barrier preventing business partnership is the lack of time to perform this same work.”

My intent is not to be a naysayer and deny there is truly an evolving and expanding role of the CFO. In fact, my intent is just the opposite. I am a believer that, particularly given the opportunity provided by the nexus of technological forces ( advanced analytics, cloud, in-memory computing, mobile and social computing) the CFO’s finance and accounting function is uniquely positioned at this moment in time to accelerate the adoption rate of enterprise performance management (EPM) methods along with emerging business analytics to gain crucial insights that were previously inaccessible and truly facilitate business innovation in new and novel ways. Finance and accounting professionals were born with a quantitative aptitude – which technology will only further fuel.

Boeing 747 Jetliner Taking Off, Sunset Silhouette

Delusion or reality?

But do we know or just think we know? Which is it – delusion or reality? I along with my colleagues, for example, bemoan the slow progress in performance improvement methods such as the adoption of activity-based costing (ABC) principles. If ABC is done at all it is typically only taken as far as product and service-line gross profit margin line reporting and does not look beneath that line to report and analyze channel and costs-to-serve for arguably more critical customer profitability reporting and analysis. And what about marginal / incremental expense analysis for that matter? This involves classifying available / used resources as sunk, fixed, step-fixed, semi-variable, or variable. This involves an understanding managerial economics, not just managerial accounting. How many finance organizations have built core competencies in these functions?   My suspicion is that many finance organizations are for the most part dealing with more fundamental problems and have yet to build core competencies in many of the practices espoused by analysts, consultants and business pundits.

For now though, my opinion is the CFO function is about to enter a golden age of business analytics and managerial accounting. But we need more evidence. Are CFOs taxiing on the runway, or have they begun lift-off?

I hope that you have enjoyed reading my series of blogs over the last few weeks. I’m taking a break now as I prepare to head to Chicago for the SAP Conference for EPM on 13/14 October, where I’ll be talking more about the subject of performance management and analytics and looking at best practice approaches, as well as taking a look to what we might expect to see in the future. If you’re in Chicago why not pop along and take in the show – but if not then please watch out for my next article as I shall look forward to resuming my blog series soon. Thanks for reading!

 

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

The best part of the annual budget is when it is over!

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

Jeremy Hope (1948 – 2011) was a special type of management consultant and colleague who I highly respected. He started a revolutionary movement when he co-authored with Robin Fraser the book, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap (Boston: Harvard Business School Publishing, 2003). Their basic message was that the annual budgeting process is so broken and dysfunctional that the best solution is not to reform it but rather to abandon the process altogether.

Their solution was to understand the underlying purposes of a budget and apply methods, like driver-based rolling financial forecasts, to fulfill the purposes of the budget.

The best part of the annual budget is when it is over!

During a breakout session at a finance and accounting conference that I attended last year, a CFO remarked that the best part of the annual budget is when it is over! The laughter was thunderous. Sadly there is truth in the humor. Many are questioning if the value of budgeting is worth the effort. An annual budget process can take six months or more to develop and finalize (following multiple executive tweaks and revisions), and it can be obsolete almost from the moment it is finished.

Jeremy Hope and Robin Fraser suggested a better way. They co-founded with Peter Bunce an organization called the Beyond Budgeting Round Table (www.BBRT.org ). These BBRT founders explain that the annual budget is a fiscal exercise done by accountants that is disconnected from the executive team’s strategy and is usually insensitive to forecasted volume, product and customer mix. Typically the budget simply increments or decrement’s each department’s line-item expense (e.g., 3% for inflation) without considering the interdependencies of cross-departmental process flows.

The BBRT solution acknowledges that budgeting line-item expense limits are more like shackling handcuffs on managers who may need to justifiably spend more than was planned and approved many months ago in the past in order to capture benefits from newly emerged opportunities. BBRT replaces budget controls by giving managers the freedom to make their own decisions regarding the use of resources. BBRT does invoke controls, but it does so by monitoring non-financial key performance indicators (KPIs) against targets. As a result managers do not avoid being held accountable.

Nor does BBRT leave the accountants empty-handed. Treasury cash flow management, periodic interval-based rolling financial forecasts, and probabilistic what-if marginal/incremental expense scenarios (e.g., make versus buy decisions) are modeled using activity-based costing methods that calibrate cost consumption rates with substantial accuracy.

Risks from being blunt and radical

Jeremy Hope was radical in his thinking. To accounting and finance traditionalists, the thought of operating without an annual budget may be beyond their comprehension.

Perhaps, they could reflect that the electric light bulb replaced oil lamps that replaced wax candles for producing light – while reading Hope’s book in a candle lit room.

I admire radical thinkers like Jeremy. He will be missed. So many organizations are wed to tradition and insulated from change. It is a bit like keeping employees in an echo chamber to ensure they reinforce the same rigid ways of running the business. Jeremy’s observation was that the closer one is to a customer, the faster things speed up and the more dynamic they become. Therefore a static budget is like a fixed contract with managers accountable for meeting or exceeding the planned fiscal year-end results. Locking up resources in an annual plan is too long a horizon. It severely limits an organizations need for agility and flexibility in the face of continuously changing conditions for which constant adjustment and fine-tuning are needed.

Management movements for progressive methodologies need more activists like Jeremy Hope.

In my next blog, to be published just a few days before I am due to speak at the SAP Conference for EPM in Chicago, October 13-14, I’m going to turn my attention to consider the expanding role of the CFO, and ask if this is in fact a reality, or whether it is just hype.

 

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

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

 

Why is Modeling Foundational to Enterprise Performance Management?

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

The confusion, ambiguity and lack of consensus about what enterprise performance management is will continue for a long time. Fortunately, many are realizing that enterprise performance management (EPM) is much broader than how it’s often narrowly perceived – as just a CFO initiative consisting of bunch of dashboard dials and some better reports.

In my last blog I shared some of my thoughts on what exactly is the broad topic of enterprise performance management. This time I’m going to take the narrow route and focus on an essential capability within enterprise performance management – modeling.

Managing performance requires a deep understanding of causality

I often use an analogy that compares EPM’s various integrated component methods to meshed gears in a machine operated by something akin to global positioning system (GPS) for navigating strategy. I think of this as enterprise optimization. I really like the term “optimization” even though it can be dismissed by some managers as theoretical or impractical to achieve. Enterprise optimization can be described as “the pursuit and realization of an organization’s strategic objectives with the least amount of total resources in an ever-changing environment.” This pursuit maximizes the creation of long-term shareholder wealth through a deep understanding of the needs and preferences of customers. Great – but what does business analytics and modeling have to do with enterprise optimization?

A model is a representation of physical activities and their outcomes. Models are essential for improving decision making. In some models, such as weather forecasts, complex interdependencies between variables result in decreased accuracy. Hence, the model needs to be frequently re-calculated. For example, reliable weather forecasts, at best, project a week or two into the future. However, at its core a model is based on understanding cause-and-effect relationships – and typically multiple and simultaneous ones. The better the relationships are understood, then the more reliable and longer lasting will be the model’s projections.

The understanding of the input-output relationships in a model requires analytics of all flavors, including segmentation, clustering and statistical correlation analysis.

The emergence of business analytics

Modeling is prominent in fields such as skyscraper construction and oil and gas exploration. Biologists model cell behavior. Geneticists model DNA to understand diseases. Baseball executives model batter and pitcher outcomes to determine who to trade or pay higher salaries. When I was a junior at Cornell University in 1970, I wrote a computer baseball game with a classmate, based on a dice baseball game I played when I was a kid. The computer game simulated the 1969 National League season by calibrating the batters and hitters to their records, and the computer’s team rankings and win-loss records nearly matched the actual results. My program was accepted by the National Baseball Hall of Fame as the oldest computer baseball game.

When we can relate modeling in this way to sports or other interests we have we can begin to understand how it helps us interpret complex issues that confront us professionally. We can see it is not a big leap to see how scientific and engineering skills can be applied to the management of organizations.

In organizations, decisions abound – requiring marketing analysts to determine which types of customers to retain, grow, win back or acquire – and which types to not. More deeply, what is the optimal spending amount on deals, discounts and offers necessary to optimize future customer net revenues (profits)? How should an organization’s risk appetite be balanced against its risk exposure? How should the CFO report reliable rolling financial forecasts (since the budget is so quickly obsolete due to unexpected changes)? How should a personnel department identify the next employees who are likely to voluntarily quit or who to hire next? These questions can all be answered by using business analytics.

Strategy maps and companion balanced scorecards have long been popular for aligning the behavior and priorities of managers and teams to measureable strategic objectives for which they are accountable. Very simply, a strategy map is a model of an organization. They track your most vital key performance indicators (KPIs)

Optimization is about resources and outcomes

Some mistakenly think that enterprise resource planning (ERP) applications are the ultimate enterprise optimization solution. They are not. Managerial tasks – such as planning, simulating, defining and analyzing alternatives, and then selecting the optimum outcome – require far more input than transactional data from an ERP system. Getting all of the information needed for optimization is only accomplished by integrating the various methods of the enterprise performance management framework and embedding business analytics, especially predictive analytics, within each method.

Optimization is about determining the best level of resources (i.e., human capital or equipment) to produce the highest yield and desired outcomes. Optimization includes managing that same “best level” of resources – and aligning their behavior and priorities with the strategic objectives of the executive team. Optimization cannot be realized without business analytics. Modeling is foundational to achieving effective enterprise performance management, and business analytics is at the heart of modeling.

Keep an eye out for my next blog in which I talk about decision management.

 

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

Where Do You Begin Implementing Enterprise Performance Management?

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

I’m half-way through my current blog series where last time I looked at the budgeting process, and just two-weeks away from appearing at the SAP Conference for EPM in Chicago, October 13-14, where I plan to expand further on some of the concepts and ideas I’ve been writing about. So far I have considered the constituent parts of EPM, what makes for good and for bad EPM systems, and pointed to some ideas for evolving and improving EPM. But as organizations embrace the full vision of enterprise performance management – not just the narrow financial definition of better budgeting, planning and control – they frequently ask, “Where should we start?” Some may be eager to begin with a balanced scorecard, others by measuring channel and customer profitability. Still others want to take it to the limit by redesigning their core business processes.

In fact, there is no one-size-fits-all answer. So where you start depends on which enterprise performance management methodology you consider provides the fastest significant return and gets the employee buy-in ball rolling quickest.

Enterprise performance management is not new. Organizations have been doing it for years, arguably even before computers arrived on the scene. The traditional version of enterprise performance management involved a weakly communicated strategy that was followed up by measurements of customer service, sales and order-fulfillment functions. There was no attempt to integrate the varied components of enterprise performance management or to develop proactive core processes. Today, top performing organizations realize they must integrate methodologies and their supporting systems, visually display measurements and apply predictive analytics to all their processes. This is the new version of enterprise performance management.

As organizations realize that enterprise performance management is really much more about improving performance rather than just controlling and managing it, they begin asking, “Where do we begin to take what we already do to a much higher level?”

Accept that enterprise performance management is about integration and speed

An organization attains the full vision of enterprise performance management when executive leaders expediently communicate strategy to managers and employees alike and are committed to providing continuous updates to their plans.

leaders1_birds

This allows everyone to act in sync and without wasted effort. Speed matters in communications. Performance suffers when managers and employees are forced to repeatedly react to unexpected changes. To realize maximum benefits, any of the methodologies – such as strategy mapping, customer relationship management, Six Sigma, lean management and anticipatory capacity resource planning – must be robust, seamlessly integrated and in sync. Because some organizations already have several of these methodologies in place but not necessarily connected, the “where to get started” question depends on identification of the key factors relating to the organization’s current situation.

For example, if a reasonably sound, activity-based accounting system already provides information on which specific combinations of products, services, channels and customers earn or lose profit, executives may want to focus on successfully incorporating this information into a strategy map and associated balanced scorecard implementation. Failure to execute a well-formulated strategy is a major frustration that frequently prompts executives to pursue a broad enterprise performance management initiative. On the other hand, the executive team might be receiving cost information that is either incomplete, for example, because the team is receiving only product- or service-line profit information and not the full-channel and customer-segment information or inaccurate, perhaps because of distorting indirect cost allocations. In this case the executives may want to upgrade their management accounting system by applying activity-based principles.

Again, determining where to start on integrating an enterprise performance management framework depends on the organization’s weaker links.

Any approach to enterprise performance management begins with the attitudes of senior leaders. If they launch into enterprise performance management with a Darth Vader attitude – seeking underperformers to expose and cut off their air supply – the process will be painful with potentially negative repercussions. Employees will experience fear. Enterprise performance management should focus on remedy not punitive measures; A trust-based approach involves a great deal of accountability from individuals for achieving desired results. Wise leaders see their role as setting direction and continuous redirection, clearly communicating their ideas, and empowering their managers and employee teams to determine the best methods for moving the organization forward in the direction communicated by its leaders. These fine leaders are coaches not dictators.

Assuming an enlightened leadership team, then what?

Organizations will not make speedy progress by focusing exclusively on one methodology, such as better forecasting, and taking a year or longer to implement these improvements. If you take this approach then in all likelihood your competitors will beat you, or your customers’ expectations will outpace you. Instead, you need to enact multiple methodology improvements simultaneously. An increasingly accepted best practice for such improvements is to apply the “plan, do, check, act” (PDCA) cycle. Start with rapid prototyping, followed by iterative remodeling for all of the relevant methodologies. Naysayers will argue that the organization can handle only a few projects at a time, but they underestimate the capabilities of people to work together when they are being guided by leaders, not just managers.

With these rapid prototyping techniques, an organization makes mistakes early and often, not later when more has been invested and it is more costly to make corrective changes. This do-it-quick approach accelerates learning and brings fast results that in turn gain buy-in from employees who by nature are naturally resistant to change. Iterative modeling allows for scaling each of the prototyped methodologies into repeatable and reliable production systems. Enterprise performance management is like gear-teethed cogs in a machine: The more closely linked and better meshed the methodologies are during implementation, the smoother and faster the organization moves forward Software applications are very relevant, but their purpose is to support all of the methodologies. They are enablers of processes, not complete solutions on their own.

Embrace uncertainty with predictive analytics

Gradually, managers and employee teams will begin to see and understand the big picture, including how all of the methodologies fit together. Those in commercial organizations will realize that creating higher profits and increasing shareholder wealth is not a goal but a result. For these organizations, the true independent variable is finely managing the innovation-based R&D and spending on marketing to focus on the desired customers to retain, grow, acquire and win back – and cut lose the unprofitable ones. Leaders in public-sector organizations may view funding as a scarce commodity; therefore, they need to maximize outcomes by increasing output or improving service delivery without the use of additional resources.

Executives are constantly on a quest for the next breakthrough in managerial innovation. My suggestion is to start by integrating and enhancing existing methodologies that have proved their worth. It’s likely that the organization has attempted applying already to some level of competence. However, integration deficiencies may exist in some areas, leading to time lags that cause excessive and costly reactions.

Successful organizations can gain much insight by performing much deeper analysis, such as better and more granular customer segmentation. This more detailed business intelligence can be utilized within the methodologies in use and supporting systems for better decision making. The next major task is to get in front of the wave, using predictive analytics to mitigate risk by making changes before the effects can occur. Predictive analytics may well be the next major competitive differentiator, separating successful from mediocre or failing organizations. The uncertainty of future demands or events should not be viewed as a curse, but rather embraced as something organizations can tame with the powerful and proven probabilistic tools that already exist.

So what to do? Start now – everywhere. Most organizations over-plan and under-execute. For organizations that have experienced recent upheaval, now is the time to regain some order. With a nurturing attitude from executive leaders who act more like coaches than bosses then organizations can move quickly towards completing the full vision of enterprise performance management. But it requires a willingness for executives to step forward, initiative and empower their organizations to embrace enterprise performance management as the new culture for how the business operates.

Next time I shall discuss why modeling is an essential capability within 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

Predictive Isn’t Just for IT Anymore

Coffee-break with GameChangers

“No excuses, play like a champion.” How does this quote from the 2005 Vince Vaughn comedy Wedding Crashers relate to the financial world? Well, the key players in your Finance organization – your controller, accountant, treasurer, etc. – have no excuses left for ignoring modern technology. The reality is that understanding, employing, and advancing the innovative options in the industry is de rigueur if you want to meet and exceed your CFO’s performance goals while staying ahead of competitors.

During a recent SAP Game-Changers radiocast, panelists Anders Reinhardt, head of global business intelligence at VELUX; Nancy Jones, an accounting professor at San Diego State University; Robert Kugel, SVP and research director at Ventana Research; and Henner Schliebs, senior director in strategic product marketing at SAP analytics, weighed in on the role of predictive analytics in finance.

Seek data quality over quantity

According to Reinhardt, a solid analytical strategy must be in place before you can reap the benefits of predictive analytics or Big Data. Jones agrees, adding, “The problem is that people think that the more data they have, the more they can make good decisions, when in fact it’s not necessarily quantity. It’s more [about] quality.”

When you run predictive analytics on high-quality data, you can, for example:

  • Create more nuanced and accurate forecasts
  • Set realistic goals and measuring performance to such goals
  • Spot deviations from expected results

Kugel argues, “How well predictive analytics is going to work for any company is going to depend a great deal on the data quality and its availability.” Research shows that companies’ data issues are proportionate to their size. Larger corporations with more resources shoulder a bigger burden when dealing with data quality – and Big Data only aggravates the issue, as it requires new methods to make systems adaptable.

IT departments have to manage data stewardship before realizing the full value of predictive analytics. Reinhardt sees the fundamental challenge: “Big Data currently contains a lot of noise. And, do we have the analytical skills to see past that noise and get [to] the real gold in the data?”

Promote the marriage of IT and accounting

Business and IT must work in tandem in order for the Finance department to serve as a strategic partner to the rest of the business. Schliebs explains, “This is what the younger and more proactive CFOs are really requesting from their Finance departments: How do I apply analytics to a business problem that we’re having here – right now – that we are trying to solve?”

Problem solving must happen across the whole organization, not just in finance – and technology aids the process. The rising complexity of operations has frustrated many of the financial players. To encourage the adoption of predictive analytics, something needs to be simplified. Finding talent with both accounting and IT acumen is a promising start.

“You want to instill the notion of elegance as opposed to complexity. And elegance requires a high degree of sophistication to be made real,” adds Kugel. That sophistication can be gained by adopting cutting-edge innovations. The panelists hope that in the next five years, we’ll be talking about results instead of the technology that breeds them.

Have you already taken the leap to adopt predictive analytics? To find out how far you can go, listen to the full radiocast.

Are Exceptional EPM Systems the Exception?

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

Last time out I set a challenge for readers of this blog to question the performance management strategies and practices of their own organizations and executive teams. I hope you found this to be a useful and interesting exercise.

Quite naturally, many organizations over-rate the quality of their enterprise and corporate performance management (EPM / CPM) practices and systems. In reality they lack in in terms of how comprehensive and how integrated they are. For example, when you ask executives how well they measure and report either costs or non-financial performance measures, most proudly boast that they are very good. Again, this is inconsistent and conflicts with surveys where anonymous replies from mid-level managers candidly score them as “needs much improvement.”

Every organization cannot be above average!

What makes exceptionally good EPM systems exceptional?

Let’s not attempt to be a sociologist or psychologist and explain the incongruities between executives boasting superiority while anonymously answered surveys reveal inferiority. Rather let’s simply describe the full vision of an effective EPM system that organizations should aspire to.

First, we need to clarify some terminology and related confusion. EPM is neither solely a system nor solely a process. It is instead the integration of multiple managerial methods – and most of them have been around for decades arguably even before there were computers. EPM is also not just a CFO initiative with a bunch of scorecard and dashboard dials. It is much broader. Its purpose is not about monitoring the dials but rather moving the dials.

What makes for exceptionally good EPM is when multiple managerial methods are not only individually effective but also are seamlessly integrated and enhanced through embedded analytics of all flavors. Examples for using analytics to enhance EPM are to perform data segmentation, clustering, regression, and correlation analysis.

Winds section in orchestra

EPM is like musical instruments in an orchestra

I like to think of the various EPM methods as an analogy of musical instruments in an orchestra. An orchestra’s conductor does not raise their baton to the strings, woodwinds, percussion, and brass and say, “Now everyone play loud.” They seek balance and guide the symphony composer’s fluctuations in harmony, rhythm and tone.

Here are my six main groupings of the EPM methods – its musical instrument sections:

  1. Strategic planning and execution – This is where a strategy map and its associated balanced scorecard fits in. Together they serve to translate the executive team’s strategy into navigation aids necessary for the organization to fulfill its vision and mission. The executives’ role is to set the strategic direction to answer the question “Where do we want to go?” Through use of correctly defined key performance indicators (KPIs) with targets, then the employees’ priorities, actions, projects, and processes are aligned with the executives’ formulated strategy.
  2. Cost visibility and driver behavior – For commercial companies this is where profitability analysis fits in for products, standard services, channels, and customers. For public sector government organizations this is where understanding how processes consume resource expense in the delivery of services and report the costs, including the per-unit cost, of their services. Activity-based costing (ABC) principles model cause-and-effect relationships based on business and cost drivers. This involves progressive, not traditional, managerial accounting, such as ABC rather than broadly averaged cost factors applied without consideration of any causal relationships.
  3. Customer Performance – This is where powerful marketing and sales methods are applied to retain, grow, win-back, and acquire profitable, not unprofitable, customers. The tools are often referenced as customer relationship management (CRM) software applications. But the CRM data is merely a foundation. Analytical tools supported by software, that leverage CRM data can further identify actions that will create more profit lift from customers. These actions simultaneously shift customers from not only being satisfied to being loyal supporters.
  4. Forecasting, planning, and predictive analytics – Data mining typically examines historical data “through the rear-view mirror.” Then using hindsight directs attention forward to look “through the windshield”. The benefit of more accurate forecasts is to reduce uncertainty. Forecasted sales volume and mix of products and service are core independent variables. Based on these forecasts, process costs can be calculated from the required resource usage. CFOs increasingly look to driver-based budgeting and rolling financial forecasts grounded in ABC principles to determine future requirements of other dependent variables such as headcount and related spending.
  5. Enterprise risk management (ERM) – This cannot be overlooked when discussing EPM. ERM serves as a brake to the potentially unbridled gas pedal that EPM methods are designed to step on. Risk mitigation projects and insurance requires spending, therefore somewhat reducing resources that could otherwise be directed towards revenue generating activities. Many executives are resistant to anything that impacts profits – and bonuses. So it takes discipline to ensure adequate attention is placed on appropriate risk management practices.
  6. Process improvement – This is where lean management and Six Sigma quality initiatives fit in. Their purpose is to remove waste and streamline processes to accelerate and reduce cycle-times. They create productivity and efficiency improvements.

EPM as integrated suite of improvement methods

CFOs often view financial planning and analysis (FP&A) as synonymous with EPM. It is better to view FP&A as a subset. And although better cost management and process improvements are noble goals, an organization cannot reduce its costs forever to achieve long term prosperity.

The important message here is that EPM is not just about the CFO’s organization; but it is also the integration of all the often silo-ed functions like marketing, operations, sales, and strategy. Look again at the six main EPM groups I listed above. Imagine if the information produced and analyzed in each of them were to be seamlessly integrated. Imagine if they are each embedded with analytics – especially predictive analytics. Then powerful decision support is provided for insight, foresight, and actions. That is the full vision of EPM to which we should aim to aspire in order to achieve the best possible performance.

Today exceptional EPM systems are an exception despite what many executives proclaim. If we all work hard and are smart enough, in the future they will be standard practices. Then what would be next? Automated decision management systems relying on business rules and algorithms? But that is an article I will write about some other day.

In my next blog I shall change focus slightly, to look a little more deeply at the budgeting process, the challenges many organizations face in producing budgets and the possibilities for taking different approaches.

 

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