SAP Cloud for Planning – We Changed the Old Rules

by Gerrit Simon Kazmaier, Vice President and Head of Engineering, SAP Cloud for Planning

In our last blog, Ivo Bauermann asked me about “Why design isn’t just for designers, but also engineers for whom “Code is law.”

We changed the rules when we designed SAP Cloud for Planning. SAP Cloud for Planning is truly a designed application, and I would like to share with you what that means for us.

Design is not a department. It is culture, behavior, attitude, and a key ingredient for an engineering organization. True design is pervasive in the software development process and the software itself. To design an application means to craft software that is tailored to a specific process, a use case, and eventually, a person. However, classical computer science is having its own technical value propositions such as decoupling, abstraction, independence, generalization, and so on. They are, when applied correctly, powerful concepts. But when overused they lead to suboptimal solutions, poor performance, and just-wired applications.

A very interesting characteristic of design is that it is an emerging property of systems. You cannot track it down to a single piece of an application such as a beautiful logon screen, one well-working function or a nice chart. It is the result, or better the symphony, of every piece in an application working together as a whole. In reverse, you cannot destroy a good design by removing one single part. However, when removing too much from it, good design suddenly vanishes. It’s more than the sum of all parts and only emerges when it’s present in every one of them.

Beijing Bird's Nest sunset scenery

Form and Function Meet in New Generation of Planning in the Cloud

Lawrence Lessing coined this famous term “Code is Law” in an essay on liberty in cyberspace. I found this to be very true for business applications as well. When any programmer writes any line of code it reflects his understanding of the subject matter. It precisely defines the laws of how something executes, how it is called and what results it produces. He becomes the lid of how a piece of software can be used.

Ever wondered why an application behaves so weirdly? During my university days I worked for multiple software companies as a programmer. One experience nicely shows this principle. In an ordering system, the first view for customer data was “change customer.” Weird, right?! I expected the common case would be to create a customer and so I asked the responsible developer and got a perfectly logical answer: “I have one customer record. To test new functions I just alter this one, much easier than to create one from scratch”. Code is law, enforced on every single customer

When you experience odd behavior, bad scaling or performance, most likely something – maybe you – is just violating the laws of the system. I used to be a programmer, and I still am. This doesn’t happen because we are bad guys secretly teaming up to torture users. It happens unconsciously – lack of domain knowledge, systems context, business development (scale issues). But still code is law.

Melvin Conway introduced the “Conway’s Law “in 1968. He stated “Organizations which design systems … are constrained to produce designs which are copies of the communication structures of these organizations.”

Conway’s law nicely states a key flaw in many software systems. People create interfaces and abstractions to decouple themselves and foster independence between groups. Often you find vertical departments or teams for the user interface, application logic, database schemas, and so on. The vast majority has a hard cut at the database because its development is not part of the company that develops the application. Exactly these organization-cuts are reflected in the system architecture and are deeply rooted in the reasoning of engineers.  And yet this has nothing to do with the problem they are trying to solve.

In addition, they’re having an extreme separation at the database level which mostly ends up in virtualizing data centric functions on top and (consequentially) inhibiting real optimization and scale. Oddly, they are making this an argument – “It runs on any database.” Good marketing… and just so old school.   Why should anyone care in a cloud solution? And how will they ever provide you the best possible performance?

SAP Cloud for Planning – The Differences are Key

So what did we do differently for SAP Cloud for Planning that allowed us to build this beautifully designed application?

For SAP Cloud for Planning, we removed all “cuts”. From the graphical designers to the SAP HANA engineers, we were an intermixed cross functional team that sat side-by-side in one big space that we called our “Engineering War Room.” This enabled us to streamline the whole application without any artificial boundaries. Unlike first generation cloud vendors, we didn’t abstract away from the database. In fact, we optimized for SAP HANA to the fullest and decided to stay “native” wherever possible. All planning operators were developed directly as a first level engine in SAP HANA and as an extension of the general calculation engine. This not only gave us maximum performance but also unlocked the direct usage of all other data engines such as analytics, predictive, search ….you name it.

We embraced design thinking when we developed SAP Cloud for Planning. A methodology to enable us to be conscious about the people using the application, their environment, and ultimately their work. We just visited a large company in China and researched how they work, sat in on their daily work, and talked to them. We created prototypes, validated them and re-iterated. Over and over. Everyone is involved in this: every developer, designer, solution expert and manager to establish one common understanding about how we create the biggest value for our users. We have quite a unique setting – one team that brings in core database developers of SAP HANA (which is one of the most disruptive innovations in data management), application experts, user experience and graphical designers. This is one awesome, creative cocktail. It’s wild and challenging but ultimately yields results that are beyond reach for each single group.

We go native and remove all boundaries throughout the entire software stack to create the most streamlined application that brings true value to our users. And yes, it will have kick-ass performance.

Originally published on SAP Analytics, 27 October 2014. Reprinted with permission.

Is Finance Equipped to Go Mobile?

Coffee-break with GameChangers

How do you know if your organization is ready for enterprise mobility? Without a cohesive plan, all you have are a bunch of tablets and dashboards telling pieces of a story that need to be streamlined into a compelling narrative.

In a recent SAP Game-Changers radiocast, panelists Nick Castellina, research director for the Aberdeen Group’s business planning and execution practice; Kaan Turnali, global senior director of BI at SAP; and Pete Graham, director of finance solutions and enterprise mobility at SAP explore the building blocks needed to reap the benefits of mobile solutions:

  1. Active executives who are technology champions, leading by example
  2. Effective tools that lend themselves to new mobile strategies
  3. Passionate employees who can work mobile technology to your company’s advantage

CFOs are going mobile with more than lip service

If any group needs mobile solutions to be part of its daily life, it’s the C-suite. According to Castellina, “23% of reports today are delivered after an executive needed them to make a decision, so they are getting information and saying, ‘Well, I could have really used this yesterday.’”

What this amounts to is wasted effort, which can be rectified by putting mobile devices in executives’ hands. Aberdeen’s data shows that best-in-class organizations are more than twice as likely as the laggards to have the ability to access data on a mobile device.

Turnali agrees, saying, “The executive is keen not only to consume the data on these mobile devices, but also to apply the insight and – this is more important – derive insight from these mobile assets to [make] decisions that matter.” The CFO sets an example for the rest of his or her direct reports and their teams and recognizes the information available on these mobile BI assets as the single version of the truth – sending a clear, consistent message.

Referring to the mobile revolution, Graham muses, “It’s really allowing the CFO to get out and meet more people or be that dynamic change agent.” It’s not just business processes connecting, but people connecting across all company levels.

Spreadsheets are getting put in their place

If there’s one thing that screams “Dark Ages” in finance, it’s reliance on that lumbering cave creature known as the spreadsheet. Castellina, however, believes that we’ll never truly rid ourselves of it – employees are just too used to it. Many companies now take a “beyond spreadsheets” approach as it relates to its mobile devices. What they view may mimic the look of a spreadsheet and be simple for a business user to navigate, but it’s more nuanced than opening Excel on your smartphone – a vast improvement considering how difficult Excel can be to navigate.

Millennials are ushering in a new era of adept mobile adoption

All organizations crave innovation without disruption. And there is no bigger disruption than instituting a mobile policy that no one knows how to use.

Fortunately, more millennials are entering the workplace, and these digital natives can pick up new technology and run with it. This new generation of employees expects to be granted mobile access to do their job – giving employers even more incentive to invest in enterprise mobility. The savviest, most qualified prospects will want to work in organizations that are on the vanguard of mobile technology.

As mobile solutions become more embedded into finance processes, you’ll be capable of running your entire office from a smartphone or tablet – and enterprise mobility will be a natural part of the process.

To learn more about what it takes to implement a viable mobile strategy, listen to the full radiocast.

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

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

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