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

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

 

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.

What’s Broken About Budgeting? – Part 1

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

So tell me, how did your EPM system stack up against the vision I outlined in my last blog? Hopefully you’re in the “exceptional” category, but if not quite yet then maybe I’ve given you a few ideas to think over. I’m switching attention now to focus in on one area of EPM, but because it’s a big area I’m going to split this across two blogs. How many people in your organization love the annual budgeting process? Probably none. The mere mention of the name “budget” raises eyebrows and evokes cynicism. It should. That’s because the agonizing annual budget process may include:

  • Obsolete Budgeting – The budget data is obsolete within weeks after it is published because of ongoing changes in the environment. Customers and competitors usually change their behavior after the budget is published, and a prudent reaction to these changes often cannot be accommodated within it. In addition, today’s budget takes an extraordinarily long time to create, sometimes the process begins six months in advance and in the time taken to finish it the organization may often be reshuffled and resized.
  • Bean-Counter Budgeting – The budget is considered a fiscal exercise produced by the accountants and is disconnected from the strategy of the executive team – and from the mission-critical spending needed to implement the strategy.
  • Political Budgeting – Listening to the loudest voice, caving in to the strongest political muscle and using the prior year’s budget levels as a baseline are not be ideal ways to award resources for next year’s spending.
  • Over-Scrutinized Budgeting – Often the budget is revised midyear or, more frequently, with new forecast spending. Then an excess amount of attention is focused on analyzing the differences between the actual and projected expenses. These include budget-to-forecast, last-forecast-to-current-forecast, actual-to-budget, actual-to-forecast and so on. This reporting provides lifetime job security for the budget analysts in the accounting department.
  • Sandbagging Budgeting – The budget numbers that roll up from lower- and mid-level managers often mislead senior executives because of sandbagging (i.e., padding) by the veteran managers who know how to play the game.
  • Blow It All Budgeting – Reckless “use it or lose it” spending is standard practice for managers during the last fiscal quarter. Budgets can be an invitation to managers to spend needlessly.
  • Wasteful Budgeting – Budgets do nothing to help identify waste, unused capacity, or low productivity because they are not visible from the prior year’s spending. In fact, inefficiencies in the current business processes are often “baked into” next year’s budget. Nor to budgets do not support any form of continuous improvement.

The “traditional” annual budget is ingrained in an organization, yet the effort of producing it heavily outweighs the benefits it supposedly yields. How can budgeting be reformed? Or should the budget process be abandoned altogether because it can drive behavior counter to the organization’s need to rapidly respond to changing goals? How? Because managers will view end of fiscal year fixed targets as a “contract” they need to meet when instead they should be shifting their priorities in respond to changing business conditions. If the budget is to be abandoned, then what should replace its underlying purpose? 

The Evolutionary History of Budgets[1]

Why were budgets invented? Organizations seem to go through an irreversible life cycle that leads them toward specialization and eventually to turf protection. What do we mean by this? When organizations are originally created, managing spending is fairly straightforward. With the passing of time, the number and variety of products and service lines change as well as the needs of their customers. This consequently adds to more complexity and results in more indirect expenses and overhead to manage it.

Following an organization’s initial creation, all of the workers are reasonably focused on fulfilling the needs of whatever led to its creation in the first place. Despite early attempts to maintain flexibility, organizations slowly evolve into separate functions. As the functions create their own identities and staff, they seem to become fortresses. In many of them, the work becomes the jealously guarded property of the occupants. Inside each fortress, allegiances grow, and people speak their own languages – an effective way to spot intruders and confuse communications.

With the passing of more time, organizations become internally hierarchical. This structure remains even as value generating transactions and workflows flow through and across the internal and artificial organizational boundaries. These now-accepted management hierarchies are often referred to, within the organization itself as well as in management literature, as “silos,” “stovepipes” or “smokestacks.” They influence managers to act in a self-serving ways, placing their functional needs above those of the cross-functional processes to which each function contributes. In effect, the managers place their personal needs above the needs of their co-workers and customers.

At this stage in its life, the organization becomes less sensitive to the sources of demand placed on it from the outside and to changes in customer needs. In other words, the organization begins to lose sight of its raison d’être. The functional silos compete for resources and blame one another for any of the organization’s inexplicable and continuing failures to meet the needs of its customers. Arguments emerge about the source of the organization’s inefficiencies, but they are difficult to explain.

By this evolution point, there is poor end-to-end visibility about what exactly drives what inside the organization. Some organizations eventually evolve into intransigent bureaucracies. Some functions become so embedded inside the broader organization that their work level is insensitive to changes in the number and types of external requests. Fulfilling these requests were the origin of why their function was created in the first place. Yet, they become insulated from the outside world. This is not a pleasant story, but it is a pervasive one.

In part 2 I’ll discuss the evolving role of the CFO and ways in which budgets can be reformed.

[1] This section is drawn from Better Budgeting; Brian Plowman; 2004; http://www.develin.co.uk.

 

 

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

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

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