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BPM: In Practice

Financial Implications of CPM White Paper

Corporate performance management offers more perceptiveness and agility to enterprises that have already attained a cohesive infrastructure.

written by Alex Veytsel Aberdeen Group Alex Veytsel is a research analyst at the Aberdeen Group. His research practice focuses on financial and analytical software that is a major component of corporate performance management. In that capacity, he tracks four interrelated technology areas: · Real-time analytics · Risk analytics, including fraud detection as well as compliance with anti-money-laundering (AML) legislation, Basel II, and the Sarbanes-Oxley Act · Financial value chain management, including process automation and analysis in accounts payable, accounts receivable, and treasury departments · Financial analytics, including budgeting, planning, and forecasting, cost-based accounting, prediction, and optimization along with the accompanying reporting and analysis mechanisms.

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Many enterprises have lost the ability to manage themselves.Why? Because organizational size and digital complexity now often mask the linkage between a business decision and its operational consequences. And the time-tested techniques that once heaped profits on the company’s bottom line are simply too sluggish for today’s hyper-competitive businesses. Decision-makers, no matter how brilliant they are, cannot grasp the full impact of their choices without technological assistance. Although business has always been intricate and cross-functional, only a few aspects were truly unpredictable. Contrast that with the daily instabilities of today’s big business: Fluctuations formerly reserved for international currency markets now pervade the day-to-day activities and well-established relationships of commerce. Against this backdrop, a new technique, corporate performance management (CPM), promises to deliver the perceptiveness and agility managers require for effective decision-making. CPM presents managers with an integrated, analyzable view of the entire enterprise. To balance the enterprise and prevent operating units from clashing, CPM uses metrics and key performance indicators (KPIs), underpinned with analytics, to calibrate management actions with broader enterprise strategies. CPM unabashedly borrows the best concepts from management theory, injects causality into the balanced scorecard, and gives decision-makers an analytic lens into strategic decisions. Attaining excellence under CPM will require an amalgam of new and existing technologies, both of which are analytic and transactive in nature. CPM is accretive: Each technical building block increases the value of each of its predecessors. CPM is flexible: the methodology can absorb small, medium, or megadoses of technology, depending on the company’s available resources. And CPM promises to be a boom market. Aberdeen expects CPM-related spending to approach $5 billion by 2005. We’ll examine how CPM can be used to manage an enterprise’s operational strengths and weaknesses.

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Although CPM continually encounters the intersection between finance and other operational centers, this article focuses predominantly on making financial awareness pervasive throughout the enterprise. Covering the five disciplines of CPM – corporate objectives, accounting, reporting/analysis, prediction, and optimization – this article describes a few of the innovative technologies in each discipline and offers end-user enterprises a practical guide to implementing them effectively. Every organization can point to a competitor that has recently emerged or re-energized itself with an innovative technological initiative. It is clear that modern enterprises can no longer erect insurmountable barriers to entry, nor rest on their current competitive advantages. Enterprises face a stark reality: operate at peak efficiency in every aspect of the business or give way to others.

‘Organic’ Business Meeting this challenge head-on requires a solution that can harness and shift the corporate culture. CPM entwines strategy and technology into a process that can transform the entire organization. CPM approaches business as an organic whole – as the sum total of processes and individuals. Under CPM’s guiding principles, an organization will be in top form only if every employee – from salesperson to senior executive – is working in top form. CPM thus requires a corporate culture and technical platform that presents workers with the business and financial import of any action. Helping the enterprise to observe and balance the actual with potential short- and long-term effects of decisions, CPM can boost a corporation’s financial and operational performance by: • Creating corporate and market knowledge: Using scenario-driven analysis, metrics, KPIs, and optimization techniques to discover the most efficient use of capital resources, including cash, people, material goods, and intangibles; • Increasing the quality of business decisions: Providing role-based information that employees

BPM: In Practice Financial Implications of CPM

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at each operating unit and level can use to understand the financial and operational consequences of possible courses of action; and Reinforcing common goals: Adopting a common internal language to ensure that the corporation coordinates its tactical decision-making processes with overall enterprise strategies.

Companies can achieve these CPM objectives by integrating and supplementing five financial and analytical disciplines – corporate objectives, accounting, reporting/analysis, prediction, and optimization (a relatively new financial discipline). Despite the scope of its vision and the expansiveness of its IT architectures, CPM is not intended to supplant the financial functions of accounting; budgeting, planning, and forecasting; and financial reporting/analysis. These traditional techniques establish CPM’s baseline: the creation of corporate goals and the financial analysis of operational strategies. CPM-driven innovations to existing corporate objectives, accounting, reporting/ analysis, and prediction technologies – as well as the processes used with them – can include: • Role-based metrics and KPIs (including applications that subsume them, such as balanced scorecard) to establish the context for measures of enterprise, unit, and individual performance; • Reconciliation of data models, either physically or virtually, to integrate budgeting, planning, and forecasting technologies; • Fair valuation of corporate intangibles, which expands the scope of accounting by measuring some or all nonphysical corporate assets; • Activity-based costing, which breaks down the true cost of business functions and can be applied with varying degrees of precision; • Real-time reporting and event stream management, which fits CPM into the day-to-day work processes of company employees; • Predictive forecasting, which allows the enterprise to assess, quantify, and manage uncertainty by assigning probabilities of occurrence to various scenarios; and • Risk assessment, which determines the potential for loss associated with each

planning alternative, on both the operating unit and enterprise levels. But optimization technologies are the key to integrating the financial disciplines, at both a technical and conceptual level, as well as arbitrating often-conflicting businessunit demands. Using multiple techniques to keep decisions well within special constraints, optimization finds a best-fit combination of strategies between the twin poles of risk and reward.

of the enterprise. Because business users, not technologists, typically interact with the CPM platform, the data model and the tools used for reporting and analysis must be particularly framed for nontechnical personnel. In addition to measurements from a financial perspective, the tools deliver performance-based KPIs that map the health of each aspect of the business and relate how these functional units affect the bottom line. Elaborating on the principles of a balanced scorecard, CPM not only maps the company’s progress toward achieving

CPM requires a corporate culture and technical platform that presents workers with the business and financial import of any action.

Getting CPM Ready CPM will most likely enter the enterprise as a collaborative effort of technology suppliers, professional services organizations with both strategy and technology leanings, and the enterprise’s own IT and management groups. Companies should not be put off by the potential scope and breadth of CPM. All CPM is evolutionary. Carefully planned CPM is nondisruptive. Moreover, enterprises do not even need all the pieces of the puzzle to benefit from CPM. Firms can separately deploy the technology building blocks (from different suppliers, should the enterprise choose) within each CPM financial discipline to satisfy immediate performance needs. CPM as a methodology appreciates not only that every enterprise has a different business culture, but also that it has different technical leanings. Deployed incrementally, the CPM initiative can be self-reflective and develop the business user’s trust and reliance on its metrics. Conversely, pursuing predeployment perfection often tangles the initiative in unneeded complexity and alienates decision-makers who are excluded from behind-the-scenes development.

CPM in a Nutshell To measure, monitor, and manage enterprise performance in real time, CPM demands a data model that distills the past, present, and future

nonfinancial objectives, but it also delivers insight into the drivers of that performance. Although many financial and business intelligence (BI) suppliers specifically address CPM with their offerings, most financial and operational software can be viewed as a CPM contributor.

Profitable Decisions CPM provides workers with information that can escalate the enterprise’s journey along the path to profitability.“Escalate” is the operative word. And to speed up decision-refining analyses, CPM melds both finance and financial analytics with the operational underpinnings of the enterprise. This new combination represents a sea change; the separation between finance and operations has polarized many BI technologies. Most BI suppliers specialize in either operational views or financial views of the enterprise, requiring individuals to switch back and forth if they want to get the fuller picture and to extrapolate the intersection between these views. For example, a view from an operational perspective would present the cost incurred

weblink For more information about using legacy systems, see ERP as a Strategic Management Tool: Six Evolutionary Stages at www.CFOProject.com.

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BPM: In Practice Financial Implications of CPM

for building a product, whereas a financial view would project the budgeted and actual profit margin of product lines. The two representations do not show what CPM might reveal at a glance: which product – at the company’s current sales price and cost of manufacture – is quickly draining profits at $5 a sale. When financial applications work in tandem with operational systems, users are able to see the financial implications of operational performance. But decision-makers also must look speculatively.

many post-merger hangovers attest to the need for such a clear vision. •

Augmenting Existing Technology Most enterprises that will find CPM appealing will have already bought into one or more BI initiatives. CPM builds on this foundation. To deliver a true assessment of an enterprise’s performance, CPM extends the value of other strategic data knowledge investments – data warehousing, analytical applications, enterprise

with the universally accepted financial concepts of net income and cash flow; and Predictive posture: CPM automatically views every past and present event in the context of the event’s potential effect on the enterprise’s future. In contrast, reporting systems typically focus on the present, and analysts must work hard to extrapolate future events using the data warehouse’s present and past data contents.

The Five CPM Disciplines

Optimization (How should we adjust?) Prediction (Where could we be in the future?) Reporting and Analysis Accounting (How far along the way are we?) Corporate Objectives (Where are we going?)

figure 1

The Five CPM Disciplines

What are alternative courses of action, and how will they speed up, or slow down, the enterprise’s progress? CPM can give tenable answers to these and other speculations and questions. Surrounding workers with metrics, KPIs, and performance measurements that represent the enterprise, CPM makes the employee’s role and contribution to the enterprise explicit. By metering the employees’ operating results and relating them to overall profitability, CPM encourages personal accountability. The self-reflection that CPM fosters reveals the company’s true nature to itself. Choice of measurement discloses the mission and the guiding principles. This self-scrutiny can be particularly helpful to companies in the midst of mergers. At its simplest potential, CPM can help the enterprise map itself against the acquired entity. The delta between the current metrics and what they would be after an acquisition describes the stumbling blocks in merging two corporate cultures and presents an effective game plan for overcoming the hurdles. And

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Source: Aberdeen Group, October 2002

reporting, and business portals. But CPM adds the following functionality: • Accessibility: CPM not only leverages the data warehouse, but it also hides complexity, guides users through its contents, and relates detailed subject area information in a way that encourages seamless navigation; • Metrics that adjust: The CPM methodology discovers the optimal metrics, rather than settling for the prebuilt portal-style, a priori model of the business. As a result, the CPM metrics remain relevant to workers; • Strategic mindset: In addition to its tactical tasks, CPM tackles trade-offs at the highest level (for example, the choice between increasing revenue and cutting costs to achieve greater returns). Most analytical applications work solely at tactical level (showing which markets have the most potential for revenue increases, based on a specific initiative, for example); • Financial focus: CPM reconciles and prioritizes nonfinancial objectives (such as those developed in balanced scorecards)

Although its aims and scope diverge from other BI projects, successful CPM builds on BI’s ability to extract, transform, and integrate important business and transactional data from a variety of sources. These data sources include not only the company’s transactional and financial systems, but also external sources related to the extraprise, industry statistics, global events, and financial measures (interest rates, for example). While deploying CPM, the enterprise must align the optimization discipline that serves as the arbitrating decision engine with four existing financial analytical disciplines (see Figure 1): • Corporate objectives: The budgeting, planning, and forecasting activities that are still primarily based on spreadsheets and intuition but are acquiring more rigor through the addition of specialized systems using common data definitions and deploying role-based business metrics; • Accounting: Powered by operational software that builds the general ledger accounts – and the supporting subsidiary ledgers, such as accounts payable and accounts receivable – the accounting discipline is expanding to account for intangibles created by the enterprise; • Reporting and analysis: This includes a variety of applications and tools for delivering financial and operational data to the decision-maker, including the still important financial consolidation and reporting financial functions. Traditionally an extension of a static repository, reporting is now being applied to live transaction data via event stream management; and • Prediction: Prediction addresses the projection of historical patterns onto current

BPM: In Practice Financial Implications of CPM

OLAP

Internal Reporting

Dashboard

Alerts

Metrics/ KPIs

Revenue Optimization

Internal Cost Optimization

Liquidity Optimization

Profit Optimization

Data Mart/ Warehouse

Event Stream Management

Data Mining

Regulatory Compliance

External Reporting

Pricing Optimization

External Cost Optimization

Risk Optimization

Capital Use Optimization

Reporting and Analysis

Optimization

Corporate Objectives

Prediction

Accounting

Fair Value Accounting

ActivityBased Costing

ERP

Accounts Payable

Accounts Receivable

General Ledger

Supply Chain Management

Financial Value Chain Mgmt.

Reconciliation

Internal Knowledge

Predictive Forecasting

Risk Assessment

Budgeting

Planning

Financial Modeling

Industry Trends

Forecasting

Strategic Plan

Legend CPM Discipline

figure 2

Financial Analytics Tech.

General-Use BI Technology

Tech-Assisted Activity

Other Info Source

Operational Technology

A Detailed View of the CPM Technical Ecosystem

data, including assessments of seasonal patterns, customer demand, risk, and possible worst-case scenarios, such as a rise in fuel costs or interest rates; this futureoriented insight enables enterprises – and their supply chains – to plan for inventory and production needs. It is important to remember that each of the enumerated disciplines is itself a complex combination of technology and process (see Figure 2). No single supplier can serve as a onestop shop for Aberdeen’s expansive view of CPM. But a handful of suppliers have stepped forward with technologies that can play the role of centerpiece.

Showcasing CPM’s Key Technologies Although many CPM technologies (budgeting, for example) are already familiar to the business user, other types of software are still finding a place in the enterprise. Activity-based costing and predictive forecasting are known – but not well-understood – disciplines (at least in most enterprises) that CPM will push into enterprises. Whether familiar or new to users, these technologies can truly increase the value of CPM to the organization.

Data Flow

Source: Aberdeen Group, October 2002

Each technology – budgeting, planning, and forecasting; fair value; activity-based costing (ABC); real-time reporting; event stream management (ESM); predictive forecasting; risk assessment; and optimization – typically elevates the value of the tools with which it works in concert. Some overlap is inevitable, but the stand-alone value of these tools is significant.

Conclusions The sheer scope of CPM’s reach distinguishes it from other corporate self-help methodologies and technologies. CPM emphasizes the delivery of critical information to decision-makers – and the use of performance measures to align actions with overall strategic goals. Done with deep thought and strong technology, CPM improves the productivity of everyone, from individual workers in departments to the highest levels of senior management. If CPM were only a methodology, it would still be able to push an enterprise along the path to increased profits. But when CPM’s holistic philosophy is combined with a comprehensive technical platform, the true power of this management system reveals itself – such a system is able to propagate the best situationspecific practice to every decision-maker.

But CPM has a catch. It requires what many enterprises have failed so far to achieve: a cohesive business and technology infrastructure. Most enterprises have implemented their technologies into silos, at the same time creating a divide in business culture – a business-unit-by-businessunit sensibility. As a result, management still faces the task of arbitrating between conflicting departmental values, with attentiveness to the good of the corporation and its shareholders. Numerous methodologies have attempted to give much-needed balance to the enterprise. Performance measurement is effective. But unless the enterprise can cross-compare the effects of different business functions on the entire business, performance metrics are only an incremental gain. CPM is a study in contrast and an examination of the pros and cons of every business decision. Management teams of many visionary companies have only been able to dream of implementing such a combined methodology because they lacked the technologies to proceed. But companies in all markets – Global 2000, large, mid-market, or SME – now have a CPM vision, methodology, and technology blueprint to measure, monitor, and manage stellar corporate performance. ■

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