How Does Integrated Business Planning (IBP) Support Driver-Based Budgeting?

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

In my initial blog in this series related to integrated business planning (IBP) I described IBP as seamlessly integrating user interfaces and workflows. IBP links strategic, operational, and financial objectives and plans to improve employee alignment with the executive team’s strategy and financial performance. In my second, third and fourth blogs I discussed, respectively, how IBP is part of the solution for issues and needs related to strategy execution and next to product, channel, and customer profitability and them to operations, processes and productivity improvement.

In this blog I will discuss issues, needs and solutions related to driver-based budgeting and rolling financial forecasts and how IBP is part of the solution.

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Problems with the annual budgeting process

There are criticisms with the annual budgeting process. They include it starting months before the fiscal year start and being obsolete a few months after being published; it being disconnected from the strategy; it not being volume sensitive; and it caving in to the loudest voice and strongest muscle of long-term experienced managers who are skilled at padding their projected expenses.

How can budgeting be reformed?

To answer this question 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)? 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, what are CFOs 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 IBP 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 IBP 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 IBP 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 IBP 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 CFOs who are 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 IBP platform offers a sorely needed upgrade toward a more high-speed budgeting process.

Additionally, statistical forecasting can be combined with the information on the IBP 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 s 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. IBP 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.

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

IBP as for enterprise wide improvement

As mentioned, integrated business planning (IBP) integrates financial, strategic, and operational information.

In my final blog for this blog series I will discuss behavioural change management needed to get buy-in from managers and overcome human nature’s resistance to change.

 

 

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, Methods, Risk, and Analytics and Predictive Business Analytics.

 

A View into the Future of Financial Planning and Analysis by Finance executives from Asia/Pacific Region

By Pras Chatterjee, Sr. Director Product Marketing, SAP.

Highlights from the latest study by CFO Research and SAP

Leading-edge financial planning systems promise to resolve many of the technical information gaps that have plagued many enterprises. At the same time, finance leaders recognize their own responsibility to gain the maximum value from the robust, real-time analysis these systems can deliver as managers put it to use across the enterprise.

CFO Research conducted a global study sponsored by SAP and surveyed senior finance executives to gain a better understanding of how leading-edge financial planning and business analysis capabilities can support effective decision making. Finance executives from the Asia/Pacific region (including India and Australia) recognize the need to improve their teams’ contributions to high-value FP&A activities will become increasingly urgent in the coming years.  The good news is they appear to feel they have the tools and resources they’ll need in order to fulfill that promise.

In the survey, practically all of the finance executives from the Asia/Pacific region (95%) agree that over the next two years, the demand on the finance function to supply highly responsive, interactive, and flexible business analysis to decision-makers is likely to increase. Nearly as many expected the demand for ad-hoc decision support and analysis to increase (90%), and improving the ability to conduct highly sophisticated, predictive business analysis (e.g., scenario planning, “what-if” analysis, risk modeling) would yield substantial, measurable financial benefit to their company (92%).

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These finance executives believe they are up to the task, however. More than half (53%) of the respondents from the region give the highest marks to their IT systems for financial planning, saying they believe their systems make a substantial contribution to their ability to support decision making. Respondents from Europe and North America, in particular, are much less likely to place themselves in this top tier.

With 95% of respondents from the Asia/Pacific region also agreeing that pressure is increasing on the finance function to improve its contribution to high-value planning, analysis, and decision-support, these executives appear to be better-positioned than most to meet those expectations.

Read the full report here:

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How the Future of Financial Planning and Analysis would look in Latin America

By Pras Chatterjee, Sr. Director Product Marketing, SAP.

Highlights from the latest study by CFO Research and SAP

Finance executives from Latin America (including South America and Mexico) believe that the pressure to deliver clear, actionable business insight to their colleagues is increasing (CFO.com/SAP Research). But do they also feel they have the right tools and resources in order to make good on that promise and their contribution to high-value planning and analysis?

For finance leaders and their teams, the challenge ahead goes well beyond ensuring high-quality, forward-looking information and analysis reaches the hands of decision makers with the speed and interactivity they increasingly demand. In addition to supplying swift, powerful, interactive information and analysis, finance teams will be called upon to make certain that decision makers are in a position to make effective use of that information and analysis.

In the survey conducted by CFO.com, more than nine in ten (93%) finance executives from Latin America agree that over the next two years, the demand on the finance function to supply highly responsive, interactive, and flexible business analysis to decision-makers is likely to increase. Of those, nearly four in ten (39%) expect the increased demand will be substantial—the highest of any region in terms of the intensity of that demand.

At the same time, virtually all of the Latin American respondents (98%) say they could provide substantial, measurable financial benefits to their companies if only they could improve on the speed and responsiveness with which they supply business analysis to decision makers.

These respondents clearly take pride in their responsiveness. Respondents from Latin America lead the pack in their belief that they can respond to a typical ad-hoc request for business analysis within minutes, if not instantly.

They do think they have room for improvement, however, on both the front end and the back end of the data analysis process. More than half of the Latin American respondents (52%) feel strongly that to maximize the benefit of financial planning and business analysis, the finance function needs to spend less time on simply moving the data around—that is, the amount of time, attention, and resources they devote to manually migrating and reconciling data from system to system.

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And even more (61%) agree strongly that improving the finance function’s ability to communicate business analysis effectively—in a way that would allow decision makers to grasp key insights, underlying risks, and assumptions easily—would yield substantial, measurable financial benefits to their companies.

Once they can overcome those hurdles, there appears to be little standing in the way of their aspirations to improve their contribution to high-value planning, analysis, and decision-support.

Read the Executive summary of the report here

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How Does Integrated Business Planning (IBP) Support Process Improvement?

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

In my initial blog in this series related to integrated business planning (IBP) I described IBP as seamlessly integrating user interfaces and workflows. IBP links strategic, operational, and financial objectives and plans to improve employee alignment with the executive team’s strategy and financial performance. In my second and third blogs I discussed, respectively, how IBP is part of the solution for issues and needs related to strategy execution and next to product, channel, and customer profitability.

In this blog I will discuss issues, needs and solutions related to operations, processes, and productivity improvement and how IBP is part of the solution.

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The strategic versus operational view

In commercial companies there are two levers to increase profits: (1) raise top line revenues and (2) reduce expenses. Although a company cannot continue to reduce costs forever to achieve prosperity, there are always opportunities to reduce waste, increase throughput cycle time, improve quality, and consequently improve processes. A top line revenue increase places more emphasis on a strategic view whereas expense reduction places more emphasis on an operational view.

The strategic view is primarily enterprise-wide and involves first “doing the right things.” That is, selling profitable products to customers that are profitable to conduct business with. As described in my prior blog the strategic view is about enhancing revenues and assuring higher profits based on the product’s or service’s value to draw good prices and the considering varying levels of demanding behavior of different types of customers.  In contrast the operational view is not enterprise-wide, but rather addresses individual functions, departments, or business processes. It involves “doing the right things well.” Its intent is less about analyzing profit contribution margins, but rather focuses on improving processes, managing them more efficiently, and optimizing asset utilization all for which to better manage costs.

The operational view for productivity improvement

The pursuit of benefits from the operational view involves quality management, lean management with value stream mapping of processes, activity analysis, cost driver analysis, and scoring activity costs with attributes, such as for nonvalue-added costs. IBP supports all of these endeavors. Here are a few examples:

Quality management – In the 1960s Japanese manufacturers began to increase market share by providing higher quality products. Manufacturers in North America and Europe began to copy some of the Japanese practices. There came a point in time however when senior executives began to question the return on investment with quality initiatives, and this spawned interest in Six Sigma. Six Sigma is a set of techniques and tools for process improvement. It was initially developed at Motorola and soon embraced at General Electric. Six Sigma seeks to improve the quality output of processes by identifying and removing the causes of defects and errors and minimizing variability in processes.  It uses a set of quality management methods, mainly statistical methods, and creates a special infrastructure of people within the organization (“Champions”, “Black Belts”, “Green Belts”, “Yellow Belts”, etc.) who are experts in these methods.

Lean management – In the 1990s lean management stemmed from a method used at Toyota in Japan called the Toyota Production System. Its premise is that by smoothing the flow of work then quality problems are exposed. As they are addressed, waste is reduced and throughput cycle time speed increases. A technique applied is value stream mapping. Lean management amplifies quality management techniques by placing attention on the value add of the steps and work activities belonging to processes.

Cost driver analysis and cost of quality (COQ) – The management accounting function eventually found ways to make a contribution to process improvement. As activity-based costing (ABC) has been embraced, based on cause-and-effect principles, companies benefit from visibility to the cost drivers of making products or delivering services. With accounting information as the operations work force can decrease the quantity, frequency, or intensity of a cost driver (e.g., the number of machine set-ups) then costs can decline. ABC also provided a way to score the work activities displayed in a value stream map as value-added or nonvalue-added (or as a spectrum of value-add) to enable focus based on the magnitude of costs. Progressive accountants recognized they could add another scoring method to classify activities as correct, prevention, appraisal, internal defect, or external defect. This is the basis for measuring the cost of quality (COQ). With repetitive COQ reporting companies can monitor the shift of their costs from the latter to the former of the five COQ classifications as well as reduction of the last four of them.

IBP for productivity improvement

IBP should be viewed as holistic where as an umbrella it covers strategic issues, as described in my three prior blogs in this blog series, as well as operational issues discussed in this blog.

There is some controversy. Just as there is organization chart silo behavior that becomes an obstacle for better integration of how employees should work together there can also be improvement method silos. Some advocates in the lean and quality management communities promote their methods (e.g., fish bone diagrams), as the primary ones to adopt. To their credit, their methods do educate employees on how to think. But IBP’s broader suite of methods aids managers and employees on where to think. As a result IBP provides focus to better address which improvement opportunities will lead to improved troubleshooting for corrective actions. This also includes the broader set of products available now to users to perform their analysis on the different silos of information.  With In-Memory technology it’s easier to consume disparate sets of information into one source as well as analytical tools that provide easy visualization options the convergence of strategic and operational analysis comes together easier.

IBP is for enterprise wide improvement

As mentioned, integrated business planning (IBP) integrates financial, strategic, and operational information. It can help the enterprise integrate all their objectives and ensure synchronization.

In my next blog I will discuss integrated business planning for improved budgeting, rolling financial forecasts, and evaluating proposed business decisions.

 

 

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, Methods, Risk, and Analytics and Predictive Business Analytics.

 

Linkedin contact:

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

North American View into the Future of Financial Planning and Analysis

By Pras Chatterjee, Sr. Director Product Marketing, SAP.

Highlights from the latest study by CFO Research and SAP

Recently CFO Research conducted a global study sponsored by SAP, that shows that finance executives from North America (the United States and Canada) acknowledge that pressure on finance teams to improve their contribution to high-value planning and analysis is increasing. The question, however, is whether they feel they have the tools and resources they’ll need in order to make good on that promise.

In the survey, nine in ten (91%) finance executives from North America agree that over the next two years, the demand on the finance function to supply highly responsive, interactive, and flexible business analysis to decision-makers is likely to increase. Even more respondents (93%) expected the demand for ad-hoc decision support and analysis to increase, and nearly the same number (94%) agreed that improving the ability to conduct highly sophisticated, predictive business analysis (e.g., scenario planning, “what-if” analysis, risk modeling) would yield substantial, measurable financial benefit to their company.

But 90% of them also say that, to maximize the measureable financial benefit of financial planning and business analysis, the finance function needs to spend less time on simply moving the data around—that is, spending time, attention, and resources on manually migrating and reconciling data from system to system.

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Their primary obstacle seems clear—a lack of integration between IT systems for financial planning and the company’s ERP system. North American respondents report the lowest level of integration of any region, and in fact, 38% of executives from North America say that their systems are only loosely integrated (20%) or not integrated at all (18%). They also take longer than their peers from other regions to respond to ad-hoc requests for business analysis, with more than half (58%) saying it takes them up to a day or more.

The result? Less than a third (31%) of North American finance executives in the survey believe that their IT systems for financial planning currently can make a substantial contribution to finance’s ability to support decision making. With practically every one of the North American respondents (96%) agreeing that pressure is increasing on the finance function to improve its contribution to high-value planning, analysis, and decision-support, the current technology gap threatens to become a chasm.

Read the full report here

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About This Study

In May 2015, CFO Research, in collaboration with SAP, conducted a global survey of senior finance executives to gain a better understanding of how leading-edge financial planning and business analysis capabilities can support effective decision making. We collected 335 responses from large companies with at least US$500 million in revenues, representing a broad range of industries. We received 20% of our total responses from North America (U.S. and Canada), 25% from Latin America (Mexico, Central America, and South America), 24% from the Asia/Pacific region (including India and Australia), and 30% from Europe.

Sponsor’s Statement

As a leader in enterprise performance management, SAP provides the necessary tools to assist the office of the CFO. By providing integrated solutions for financial planning and analysis, SAP offers real-time financial insights into the enterprise. For more information, please visit http://go.sap.com/solution/lob/finance/financial-planning-analysis.html

 

How the Future of Financial Planning and Analysis should be; A European Perspective

By Pras Chatterjee, Sr. Director Product Marketing, SAP.

Highlights from the latest study by CFO Research and SAP

In a recent global study conducted by CFO Research and sponsored by SAP, finance executives from Europe acknowledge increasing pressure to deliver clear, actionable business insight to their colleagues—just not as much as their peers from other regions of the world.

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Overall, European respondents agree that the demands on them to supply highly responsive, interactive, and flexible business analysis will increase. But, compared to other regions, far fewer of the Europeans—only 13%—feel that the increase will be substantial. Similarly, just 12% of European respondents believe that the demand for ad-hoc decision support and business analysis will increase substantially over the next two years.

Yet, regardless of feeling less demand, nine out of ten respondents from Europe (90%) still say that they could provide more of a substantial, measurable benefit to their companies if they could improve the speed and responsiveness of the business analysis they supply to decision makers. And eight out of ten (79%) do agree that their companies would see a significant benefit if they could improve their ability to conduct highly sophisticated, predictive business analyses, such as scenario planning, “what-if” analysis, and risk modeling.

One area where the European respondents lag best-practice companies in other regions is in the level of integration between their IT systems for financial planning and their company’s ERP systems. Although about two-thirds (67%) of the European respondents acknowledge that their systems are “fairly well” integrated, compared to other regions Europe has the fewest respondents—just 6%—who characterize their systems as “very tightly” integrated.

The result? Only a fifth (22%) of European finance executives in the survey believe that their IT systems for financial planning currently can make a substantial contribution to finance’s ability to support decision making, lagging every other region in this regard. If their ambition is to move up to the first tier of performance and responsiveness, European finance executives would do well to pay close attention to this threatening technology gap.

Read the full report here

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About This Study

In May 2015, CFO Research, in collaboration with SAP, conducted a global survey of senior finance executives to gain a better understanding of how leading-edge financial planning and business analysis capabilities can support effective decision making. We collected 335 responses from large companies with at least US$500 million in revenues, representing a broad range of industries. We received 20% of our total responses from North America (U.S. and Canada), 25% from Latin America (Mexico, Central America, and South America), 24% from the Asia/Pacific region (including India and Australia), and 30% from Europe.

 

Why is Integrated Business Planning (IBP) so Critical?

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

If you have not heard about or read articles or blogs about integrated business planning (IBP) until you are now reading this article then welcome to learning about a topic that will be critical to you and your organization. For those of you who have heard of the term, this blog is intended to remove any confusion you may have about what IBP is.

This blog is the first of a series on IBP. The blogs in the series will involve the increasing role of the CFO and finance function with other line management functions that often operate in silos. In this blog I will discuss issues related to IBP. My next blogs in this series will address the various integrated components of IBP.

To begin with the issues, for many of us there may likely be a nagging question: “Is IBP such a big deal that if our organization is late to the party of deploying IBP, then will we never catch up to our competitors that have deployed it?”

Which type of capability is more critical?

I have personally gone back and forth on wondering if applying IBP is now an urgent imperative for an organization to survive or if it is simply a “nice to have” relative to other more potentially critical “must have” capabilities that an organization should ideally possess or need to improve them.

In my opinion critical capabilities involve forecasting, modeling methods, business analytics, and multi-platform reporting. Their purpose is to increase profitability, strategy execution and decisions. However, a case may be made that there is a sufficient competitive edge from simply using traditional commonly accepted managerial improvement methods without these four mentioned methods. Organizations can have risks by relying on only standard methods like lean and six sigma quality management methods or traditional standard costing. But can those methods provide a sustaining competitive edge?

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Some managers view their organization as a big machine, and they believe they simply need to fine-tune its pulleys, levers, gears, and dials to maximize performance and results. The reality of this situation if often much more complex. Fine-tuning will not be sufficient. What is needed are new sets of levers, pulleys, and gears as well as better ways to manage them and display what they are doing.

Up until now many organizations believe they are not ready to apply IBP. They believe their problems have not been complex enough, their need for a large level jump in improvement is not essential, and the computing power has not been sufficiently powerful. As a result, their skepticism of the urgency for IBP is based on doubt since they observe that most companies have gradually improved without needing an IBP capability.

How much things have changed

I suggest that skeptics become advocates regarding the urgent need for IBP capabilities.

IBP is becoming an imperative for successful organizational performance. Many professionals today grew up with computers and digital devices. They understand this imperative. They embrace the need for better planning and decision making. They possess passionate brainpower combined with the now proven and accepted tools needed for forecasting, higher data quality, and timely reporting. The imperative also involves the current challenge all organizations have on how to cope with the five “Vs” of Big Data: volume, variety, velocity, viability, and value.

Regrettably many professionals prefer to rely on gut feel, intuition, and experience for making decisions. They are weighted with transactional processing that denies needed time for analysis. Fortunately today there are increasingly fewer professionals since most rising managers are tech-savvy and prefer fact-based decision making by leveraging quantitative information.

So, just what is Integrated Business Planning?

IBP seamlessly integrates user interfaces and workflows. It links strategic, operational, and financial objectives and plans to improve employee alignment with the strategy and financial performance.

Data replications drawing from disparate data sources are no longer an obstacle. IBP removes the walls between the silos in organizations regardless if they are multiple line management functions (e.g., marketing, sales, and operations) or technology platforms.

IBP integrates forecasting, resource capacity planning, what-if scenario planning, analysis, and more. With today’s previously unimaginable in-memory chip database power, calculations can be dynamically made in real time on massive amounts of data. The calculated results can be displayed on a laptop computer or any mobile device. The calculations can be performed with on-premises hardware or in the cloud.

IBP saves time and errors with a single integrated solution. It simplifies what in the past has been complex and cumbersome tasks. Bothersome reconciliations are eliminated. Tasks involving time and effort, like period-end financial closing the books and cash management, are reduced.

Note to reader – Get on the bus or be under the bus

If a task is complex with lots of data and a goal or objective to maximize, minimize, or optimize, then the capability day for IBP has arrived. IBP is essential to effectively framing problems, devising their solutions, making decisions, and taking actions.

The type of managers, hopefully only a few, who do not embrace having a strong quantitative capability will risk the consequences of being classified as Medieval. The world is no longer flat.

In my next blogs I will delve into the components that comprise IBP, starting off with a look at the link between planning and strategy execution.

 

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.