EPM Reflections 2015 #6 – CFO Research

What is the next step in transforming finance operations?

During this year, a global survey was conducted to study the efficiency of finance operation functions where the results pointed to a need to advancing future finance operations through better information tools and simpler processes in order to unleash their full potential.

A well run finance operation is comprised of accounts payable and receivable, working capital, supplier management, expense management, and compliance all need to be harmonized and seamless to ensure optimal business execution.

financeoperations

The study shows that a majority of finance executives valued upgrading information systems in companies the most, followed by a close second in making process improvements.

Read the original blog post for more information on how making changes can transform and improve your finance operations. The research paper can also be found here.

EPM Reflections 2015 #5 – What happened at SAPPHIRE?

SAPPHIRE NOW is one of the biggest events in the year and it was a tremendous success this year! Many conversations and key note sessions were around digital transformation.

sapphire

An example of transformation came from one of SAP’s customers, ServiceNow, who has transformed the way people work, with a focus on service orientation, user experience, and real time calculation after transitioning to SAP applications. They now incorporate improved automated consolidations as well as strategic, operational, capital expenditure, and human resources planning. Learn more about how SAP has helped them run simpler here.

The most visited area of the show floor was the SAP Boardroom, otherwise known as the Boardroom of the Future. This showcase offered event attendees a contextualized boardroom experiences that connects people, places and devices into a real-time enterprise. The boardroom incorporated 3 large touch screen monitors and enabled executives to monitor, stimulate, and drive meetings. Watch the SAP Boardroom Redefined here.

These are just two of the many great experiences attendees got to experience. For a full list of replays and information on SAPPHIRE, visit here.

Are You Seeing the Signals? How Finance Analytics and KPIs Can Help CFOs Guide the Way

by Henner Schliebs, Head of Finance Audience Marketing 

Have you ever taken a close look at your dashboard when the car computer displays key performance indicators (KPIs)? No? Yes, but not really? I am confident in saying that 99.9% of you will answer with a “not really” type of response, as there are many misleading, so-called KPIs that don’t provide guidance to make the right decision. I can’t understand why customers/drivers of cars have not yet complained about being misled. And I’m surprised they haven’t sued manufacturers for astronomical amounts of money in countries like the U.S. where this is a practice that can get downright bizarre (like this case about a toilet paper injury). Here’s some rules to follow to keep your KPIs from going wrong.

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Make Sure That Your KPI Is Sufficient to Guide a Decision

I recently took a look at the mileage on my truck and was surprised how the MPG rocketed up when I took my foot off the gas. So if I see MPG as a leading indicator to optimize my trip, I would never arrive at my desired destination, as I’d stop to max out on MPG. (See the picture of my car’s computer display showing above-average mileage – Italian Trucks rule!)

So, in financial taxonomy this would translate into something like a famous saying, “Zero budget is not an option.” Don’t focus on cost exclusively without having the broader goal (like margins improvement) in mind. You can’t cannibalize outcome with cost reduction—at least you’d have to achieve the same outcome at reduced costs.

Your analytics have to provide insight into the root cause for your indicators to optimize. In this case, it’s margins in the means of a decision tree, a value map, or the like so you can see the immediate outcome of any planned action. Simulation and prediction would be needed, combined with visualization of the context, in order to make it understandable for your executives and stakeholders.

Make Sure Your KPI Is Taking All Known Information into Consideration

To stick with the road trip example, I don’t understand the GPS producers being so ignorant of the value of including some kind of data mining into their offerings. The GPS knows the distance, the type of roads followed, the time of the day, and the season you’re in (like wintery conditions that might influence the trip).

It could know how many miles in which conditions you can go per gallon—or even pull this information from the car computer if it’s an integrated system. It could measure how much time you’d take to fill your car up at the gas station. Since it can measure how long you’re there, it can even deduce if your stop is for gas or just to pick up a six-pack on your way home from office.

So, assuming you want to go on a longer trip, say from San Francisco, CA to Austin, TX, why can’t the GPS guide you to the optimal speed to arrive at your next stop as soon as possible? This would take typical “bio breaks” into consideration (info available when you usually stop besides the freeway), gas stations to fill the car, projected traffic jams due to rush hour in metropolitan areas (Los Angeles!!!!) and the like. It could even run simulations like “If you go 70 mph instead of 85 mph you’d manage to get to your stop with this one tank…”

Sound familiar? So, let’s translate this into finance, using the planning process for example. You have all long-term planning information available, including the company’s strategic plan and the related KPIs (hopefully clear and leading ones as mentioned before), and all good information from any kind of ERP-like system. Also, you might have the plans from other areas like product sales plans, workforce plans, production plans (if applicable) and cost center plans. This would all be needed to arrive at an integrated business plan, driven by the long term financial plan.

You now would have almost all the ingredients to simulate outcomes based on different distributions of funds available for the current planning period. You won’t get trapped into pitfalls like having to pull additional funds into this planning period although served for later period use (having to stop at the gas station). You’d see how budgetary decisions would influence achievement of your company’s targets and would uncover potential correlations between driving indicators and outcomes (like HR development vs. hiring ofexternal people going through the value chain arriving at optimized investment in your workforce).

shark

Don’t omit these factors, since they’re contributing to your KPIs. Even worse, there are correlations between factors that you can’t easily figure out but would have to use statistical algorithms. For example, what makes a certain customer pay on schedule vs. being an “overdue receivable”? This is not as easy to understand as the famous “There is a correlation between sales of ice cream and shark attacks” example. But to find a causation and guide the way, you need tens or even hundreds of dimensions correlated.

What Does this Mean for You?

Things that are obvious for you as a driver of a car and that you take into consideration when planning your road trip are not as easy to uncover in your professional life as a finance expert, as many more dimensions are affecting business performance. Given that the additional charter of any mature finance organization is to provide excellent service to the other business functions within your organization, it’s your duty to support the cost center manager, the sales executive, and last but not least, every employee by providing them with relevant and contextual finance data that enables better and fact-based decisions.triangle

In addition, sophisticated finance analytics uses the support of visualization and predictive functionality to guide the way through the core finance tasks around financial planning and analysis, accounting, treasury, operations, and even risk management, compliance and audit functions. It helps achieve more with less—operational excellence at reduced cost by supporting every finance function to deliver on the promise of simple data and intelligence provision for the whole organization.

This means that the finance function of tomorrow has a new credo: Be a partner to the company and support to differentiate from your peers, add value to the bottom line, and strategically consult the executive leadership team of your company to achieve sustainable growth.

Three Lines of Defense: Claiming a Seat in the Digital Boardroom

by Bruce McCuaig, Director, GRC Product Marketing

SAP recently announced SAP Cloud for Analytics, a planned software as a service (SaaS) offering that aims to bring all analytics capabilities into one solution for an unparalleled user experience (UX). The intent is for organizations to use this one solution to enable employees to track performance, analyze trends, predict, and collaborate to make informed decisions and improve business outcomes.

To me this sounds a lot like the mandate of governance, risk and compliance.

The Digital Boardroom

At SAP we’ve already begun to imagine a digital boardroom. As part of our Analytics business, my colleagues and I in governance risk and compliance (GRC) are keenly aware of the contribution our solutions can make to improving business decisions and business outcomes. But is the world of GRC ready for the digital boardroom?

And if the Three Lines of Defense is the framework we are advocating, what can we digitize for the digital boardroom? There is plenty of literature on implementing the Three Lines of Defense. I am basing much of this blog on the IIA’s guidance. However, this does not provide guidance on what to report or how to report it.

Five Requirements for Claiming a Seat at the Digital Board Room

  1. Reporting by the first line of defense – operating management

Operational management is responsible for maintaining effective internal controls and for executing risk and control procedures on a day-to-day basis. How can this be reported? One of my colleagues mocked up the report below. It illustrates a possible report on the management of controls in a particular area. It’s a useful beginning. But if the digital boardroom is supposed to drive better outcomes, we need to find a way to illustrate the impact of controls on performance.

Figure 1

 

  1. Reporting by the second line of defense – risk management and compliance

Management establishes various risk management and compliance functions to help build and/or monitor controls for the first line of defense. What would it take to understand the effectiveness of first line of defense controls? A few years ago, I mocked up a simple app that aggregated losses and incidents by risk category. The best way to understand control effectiveness is to understand the losses and incidents that occurred. If the second line of defense classifies the root cause of the issues and losses, the Board can make intelligent decisions and come to sound conclusions. Right now the Board gets subjective opinions on control effectiveness from assurance providers. Control effectiveness opinions are not comforting to me. They make sense only when objective information is not available. I would prefer the facts and I believe the Digital Board wants its facts digitized.

Figure 2

 

  1. Reporting by the third line of defense

Internal auditors provide the governing body and senior management with comprehensive assurance based on the highest level of independence and objectivity within the organization. So how do we digitize “assurance”? I have asked myself this question for years. In my view internal audit can add value by “painting a picture” of the world of governance, risk and compliance. One way to do this is by showing how the organization conforms to a set of criteria.

There are many criteria. The Committee of Sponsoring Organizations (COSO) provides one. The International Standards Organization (ISO) provides others. OCEG provides yet another, specifically the GRC Capability Model, a detailed set of criteria designed to help organizations achieve principled performance.Figure 3

The Role of Analytics

Reporting to the digital boardroom will require classifying and tagging information and then slicing, dicing, and visualization. That is what analytics tools and BI solutions do. It is close to the opposite of reporting on control and risk effectiveness. It is reporting on control and risk facts. Nothing less will do.

Uncharted Territory

The digital boardroom will take the Three Lines of Defense and GRC generally into uncharted territory. If we as GRC professionals have anything to say, it had better be digital and it had better be useful.

As always, I am interested in your comments. The Three Lines of Defense concept is far from perfect but as I have suggested in my earlier blogs it is a sound basis for collaboration and a fine starting point.

How do you report on GRC topics to your Board today? Do they read your reports? Are they visual? What do you see in the future?

 

How Does Integrated Business Planning support Profitability Analysis?

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.

IBP_Image_3_V2

In my second blog I discussed issues, needs and solutions related to strategy execution and how IBP is part of the solution.

In this blog I will discuss issues, needs and solutions related to product, channel, and customer profitability and how IBP is part of the solution.

The expansion from product to channel and customer profitability analysis

I would like to believe that the reporting of more accurate product and standard service-line cost and profitability information using activity-based costing (ABC) principles is now common. ABC accurately traces expenses into costs with resource and activity drivers and provides cost visibility that is traditionally hidden.

Sadly, many organizations continue to use a single indirect and shared expense “pool” that allocates resource expenses into costs based on a single cost factor, which violates cost accounting’s causality principle (also see my earlier blog post on this topic). Hence, compared to ABC’s disaggregating a single cost pool into multiple ones and then tracing each pool with an activity cost driver based on a cause-and-effect relationship, the existing costs are flawed and misleading. The products and service-lines are simultaneously over- and under-costing because allocations always have a zero sum error. It’s baffling how accountants can accept this deficient costing practice when ABC is a better alternative.

But let’s put that observation aside and focus on an increasingly more relevant information need: channel and customer profitability reporting. This includes not just product-related expenses but also the “costs to serve” expenses incurred through sales and distribution channels and by customers.

Why do channel and customer costs matter?

In the past, companies focused on developing standard products and standard service lines and then incenting their sales force to push and sell them to existing customers and prospects. But many products or service lines are one-size-fits-all and have become commodity-like. For example, most banks offer similar checking and deposit services. In addition, today competitors can more quickly replicate a company’s standard products and services. Consequently, the importance of services rises, which results in a shift from product-driven differentiation toward service-driven differentiation to differentiated customer microsegments in order to gain a competitive advantage. That is, as the competitive edge from product advantages is reduced or neutralized, the customer relationship grows in importance.

To complicate matters, suppliers are aware that they have a broad range of high- and low-demand customers. For example, high-demand customers might regularly change delivery schedules, require special treatments, return goods, or frequently phone the customer service help desk. Low-demand customers do none of these things. The extra consumption of expenses from high-demand customers means they are relatively less profitable than you might assume from the sales volume of their purchases. What this means for the marketing and sales functions is that their objective is no longer solely about increasing market share and growing sales but about growing profitable sales. That requires tracing expenses below the product gross profit margin line, including channel distribution, selling, marketing, and customer service costs to serve.

The crucial challenge is to use ABC beyond calculating valid customer profitability data for decision support. The benefit comes from identifying the profit-lift potential of customers, and then realizing the potential and fulfilling it with smart decisions and actions. Marketing and sales need to view customers as an investment, such as in an individual’s personal stocks and bonds portfolio, rather than as someone or some company to spend money on.

Creating a customer profit and loss financial statement
Customer profit and loss (P&L) information quantifies what everyone already may have suspected: Customers who purchase roughly the same volume and mix at similar prices aren’t nearly the same when it comes to profit. As I just described, some customers may be more or less profitable based strictly on how demanding their behavior is on a supplier. This information also provides cost visibility and transparency when it comes to the business processes and work activities that cause the higher or lower costs – the cost drivers.

Although customer satisfaction and loyalty are important, a longer-term goal is to increase both customer and corporate profitability. There must always be a balance between managing the level of customer service to earn customer loyalty and the impact it will have on increasing owner and shareholder wealth.

There are two major “layers” of profit margin in a company’s P&L:

  1. The mix of products and service lines purchased.
  2. The non-product “costs to serve” apart from the unique mix of products and service lines purchased.

Figure 1 combines these two layers in a two-axis grid: (1) the composite product gross profit margin of the product mix each customer purchases (reflecting net prices to the customer), and (2) their cost to serve. Any individual customer (or grouped cluster) can be located at an intersection where the circle’s diameter size reflects each customer’s revenues. The figure debunks the myth that customers with the highest sales volume are also generating the highest profits.

Cokins Q2 2015 blog no 3 figure (2)

The objective is to drive customers with profit-increase potential to the upper-left corner of the grid through a host of actions, such as surcharge pricing, upselling, and cross-selling. For example, if a customer purchases a set of golf clubs, can they also be sold a golf shirt? And if they purchase the shirt, can they be sold a second shirt at a discounted price? The data could also help suppliers identify customers who are substantially unprofitable: those who reside deep in the bottom-right of the grid. These relationships can be terminated through actions such as increased pricing or reduced service-level tactical actions that might encourage customers to “de-select” themselves (i.e., “firing” the customer).

One critical reason for knowing where each customer is located on the profit matrix is to protect your most profitable customers from your competitors.

Integrated Business Planning (IBP) leverages customer profitability reporting

The message here is that management accounting must help the sales and marketing functions. A company needs to know which types of customers are attractive to retain, grow, win back, and acquire – and those who are not. To maximize shareholder wealth, a company also needs to know how much to optimally spend retaining, growing, winning back, and acquiring each type of customer. It can unnecessarily spend excessively on loyal customers and therefore destroy shareholder wealth. Or it can spend too little on marginally loyal customers and risk their defection to a competitor. Without this information, financial performance falls short of its full potential.

Integrated business planning integrates financial, strategic, and operational information. For example, individual customer profitability information may be linked to KPIs in the balanced scorecard referenced in my prior blog. The same information may be used as compensation bonuses against targets for the sales force instead of exclusively using only sales volume.

In my next blog I will discuss integrated business planning with operations for productivity improvement.

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.

 

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?

P-Automation-gears

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.

GRC 2015 – One Week On!

By Thomas Frenehard, GRC Solution Management

Originally posted on SAP Analytics, 23 June 2015

Steve Lucas delivering the keynote address at SAPinsider 2015 Nice

Steve Lucas of SAP delivering the keynote address at SAPinsider 2015 Nice

Last week, SAPinsider held its GRC 2015 event in Nice, France and it was energising and fast paced! For those who couldn’t attend, I thought I’d share with you some of the great discussions I had with customers and also one of the announcements made that should be of interest to SAP’s GRC community.

Do More With Less

Of course this has been top of mind for many companies with the recent economic turmoil where resources are scarce and investments most often reduced to vital activities. But every customer I spoke with mentioned that their management is now asking them to increase their regulatory and operational efficiency coverage with “optimized options”. In essence, to do more controls with less resources.

It was motivating to hear feedback from customers who have already taken this path and leveraged their internal audit department to help. This showed that a true collaboration between the compliance team and the internal auditors can lead to the set-up of a sound and very efficient internal control system.

Three Lines of Defense

The three lines of defense was definitely THE hot topic at the event. And I could see the acronym 3LOD gain more and more traction, day by day. Many companies were interested in discussing how to align their operations, compliance, and audit departments. Interestingly, IT and business departments both mentioned this as a key (process) roadmap item for them in the near future. For business, the intent is to achieve the assurance level required by their executives and for IT departments the rationalization of the software landscape that would be brought with this approach was a definitive winner.

Operational Risk Management

Here I’m not referring to the banking Operational Risk Management (ORM) approach, but the intent to do risk management (identification, analysis and mitigation) at the operations or asset level. Having the ability to still be able to integrate the results in a wider Enterprise Risk Management framework so that a unique reporting of the company risk profile can be displayed at any time – without requiring lengthy manual risk consolidation.

It was interesting to hear the different opinions on what ORM is for each sector as there doesn’t seem to be a single – widely adopted – definition or approach. This is definitely one of the key points I took home that I’ll need to think about this summer!

Congratulations are In Order!

Last but not least, congratulations to EY and Integrc, two of our great partners in the area of GRC who have decided to combine forces. I wish them all the very best in the process! In conclusion, if you’ve never been, Nice is a lovely city, filled with history, beautiful landscapes, and delicious food. Associated with a great event, I have to admit that my week was far from being a punishment.

 

Note from the editor:

Thank you Thomas for this succinct wrap-up of GRC focus topics and discussions at the recent SAPinsider event in Nice.

Should readers of CFOKnowledge want to learn more about the GRC or Financials events, here are a few links to some excellent blogs from my colleague Derek Klobucher. I think you’ll enjoy them!

ŸHow Real-Time Analytics Will Kill a Financial Tradition

ŸWhy Paranoia Is Good for Business

ŸScreen Your Partners or Risk Guilt by Association