Delivering scenario analysis in closed-loop EPM

There is broad agreement that the core methodologies that make up Enterprise Performance Management are budgeting, cost and profitability reporting, strategy management and financial reporting. There is also a lot of discussion of the importance of providing business managers with scenario modeling functionality so they can rapidly assess the impact that changes in internal or external factors have on future financial performance.

In fact as long ago as 2004, analysts Aberdeen found that providing such functionality was a key discriminator in the success of an EPM implementation with Best in Class companies delivering 5.4 percentage points more than their industry norm in return on assets and 4.8 percentage points more in gross margin. So if scenario modelling is so important, how exactly is it delivered?

Douglas T Hicks* and other writers have consistently pointed out that the application of the cause-and-effect principles that underpin activity-based costing continues to be the only method of creating a valid economic model of an organization. A well-designed model is based upon empirical relationships between key business volumes, (sales volumes, number of customers, invoices and returns), consumption and productivity data (held as resource and activity drivers and cycle times) and expenses, revenues and ultimately profits. But a cost and profitability model is not simply a turgid repository and classification of enterprise data. As Hicks indicates, it is a dynamic economic model of the enterprise inside which changes to any piece of data directly impacts other pieces of data and consequently financial outputs. In fact without an activity-based model, most organizations simply have a void.

 

Some organizations with cost and profitability models already extend their use beyond reporting on the historical cost and profitability of products and customers by using their “what-if?” functionality to test assumptions about the future. By modeling anticipated sales volumes and varying inputs such as the average salary cost in each department and the underlying business drivers to reflect changes to processes and productivity improvements, they can quickly generate a revised resource and capacity plan and a new high-level profit and loss account. The output of this type of activity-based or driver-based modeling does not typically go down to the detailed level of chart of accounts that is produced as part of the annual planning and budgeting process and excludes new business and other strategic initiatives that require zero-based or bottom-up budgeting. However it does provide significant benefits for generating the operating expenses for ongoing businesses that will expedite the more detailed budgeting process. I’ve recently been working with three organizations who have adopted such an approach – two from the public sector and a bank and the benefits they are reporting are

•  More accurate resource plans and budgets – which is a definite benefit for public sector organizations as it means they don’t have go back to central government with cap in hand for more funding during the year.
• Shorter budgeting cycle in that business managers don’t have to build up their budget submissions themselves and can simply review many of their key line items – particular those for staff and other variable expenses.
• Greater agility in that they can finally move to managing the business with rolling quarterly re-forecasts. Personally I have struggled to understand how rolling re-forecasts can ever be delivered unless some kind of modeling is involved.

So this is encouraging news for those folk who have been advocates of driver-based approaches to planning and budgeting and with the advent of finance-friendly tools such as SAP BusinessObjects Financial Information Management for moving data between previously silo-ed EPM applications, it’s now easier to deliver. Using such an approach also achieves a happy half-way house between those who criticize traditional budgeting as being unable to cope with today’s uncertainty and those who still regard it as the main performance management tool in their organization. Everybody wins.

* "I May Be Wrong, But I Doubt It: How Accounting Information Undermines Profitability", Douglas T Hicks, Lulu Publishing, 2008, ISBN 0557031591

 

SAP and Microsoft Join Forces in Enterprise Performance Management

You may recall that in January 2009, Microsoft announced it would be discontinuing PerformancePoint Server, its standalone BI/EPM offering. Many of the elements of PerformancePoint will be bundled with Microsoft SharePoint Server; however, the planning module/capabilities within PerformancePoint will no longer be developed. This announcement surprised many, and industry analysts like Forrester’s Paul Hamerman, who wrote about the news, suggested that companies evaluating Microsoft’s planning, budgeting and forecasting capabilities should now look elsewhere. But where exactly should they look? While there are a number of vendors that provide planning capabilities based on Microsoft technology, they are smaller, niche vendors. What’s been missing is a Microsoft strategic partner with global reach, delivering a suitable offering to support many of Microsoft’s enterprise customers.

Until now that is, as SAP today announced that is has joined forces with Microsoft on the EPM front; more specifically, Microsoft supports SAP BusinessObjects Planning and Consolidation, version for the Microsoft platform (formerly known as OutlookSoft and Business Planning and Consolidation, and often referred to as simply, “BPC”) as a preferred planning, budgeting, and forecasting application for its customers. As part of a strategic partnership the two organizations plan to engage in joint go to market initiatives and collaboration on the product front – in fact some of the collaboration has already begun . This is a very exciting announcement at a time when according to research recently conducted by AMR Research and SAP, many organizations see investments in planning, budgeting, and forecasting solutions as their most strategic priorities in 2010. You can read the announcement here: http://www.sap.com/solutions/sapbusinessobjects/large/enterprise-performance-management/newsevents/index.epx

So what was the genesis of this partnership? This announcement is the culmination of discussions that began soon after Microsoft ‘s announcement. As already mentioned the move surprised many and left Microsoft customers wondering what they should do when it came to selecting a planning application or in the case of services partners/value added resellers, an application to align (re-align) their practice around. The only leading (as recognized by industry analysts such as Gartner and Forrester) unified planning and consolidation application built on a Microsoft platform is SAP’s BusinessObjects Planning and Consolidation, version for the Microsoft platform (built on Microsoft Office i.e. Excel, .Net and Sql Server). Over 1400 customers are already using the application (the installed base has more than doubled since SAP acquired OutlookSoft in 2007) or the recently launched SAP BusinessObjects Edge Planning and Consolidation, designed for small to midsized enterprises and also built on the Microsoft platform.

This announcement should also help answer a question that has been lingering in many people’s minds ever since OutlookSoft was acquired by SAP, and the application was ported to the SAP NetWeaver platform (in case you weren’t aware, there are now two versions of the product – the successor to the OutlookSoft product built on the Microsoft platform and a new version built on SAP’s NetWeaver technology platform): Is the Microsoft version of SAP BusinessObjects Planning and Consolidation going away and/or not being invested in? The answer is no. SAP’s roadmaps have clearly stated this - much of the confusion surrounding this has been fueled by competitors trying to spread fear, uncertainty and doubt in the minds of existing customers and prospects. So let’s set the record straight - the reality is that SAP is continuing to optimize its EPM solutions for SAP and non-SAP environments and SAP BusinessObjects Planning and Consolidation, version for the Microsoft platform is a key part of the roadmap moving forward. The SAP and Microsoft partnership around SAP BusinessObjects Planning and Consolidation is testament to this.

Industry analyst and media comments on the announcement have been positive (http://blogs.wsj.com/digits/2009/11/17/microsoft-and-sap-again-team-up-against-oracle/ , http://seekingalpha.com/article/173987-microsoft-and-sap-vs-oracle-a-very-big-deal, http://www.amrresearch.com/content/view.aspx?compURI=tcm:7-49246&title=SAP+Partners+With+Microsoft+for+Planning+and+Consolidations) but what does this partnership mean to you if you are an organization looking to invest in a planning solution? To begin with you can rest assured that your investment is safe – as mentioned above, SAP is continuing to invest in the SAP BusinessObjects Planning and Consolidation, version for the Microsoft platform. Secondly, SAP and Microsoft product teams plan to collaborate focusing on continuing to optimize the application for the Microsoft platform and leverage key Microsoft technology components. Thirdly, you have an option to consider that is backed by two of the leading global software organizations.

'You don't need a weatherman to know which way the wind blows’

Most national metrological services have the most powerful computing power available in their country. The system installed in the UK Metrological Office takes up the area of two football pitches, is capable of 125 trillion calculations per second and is reported to take two months to boot up. This has enabled it to incorporate more data into its predictive models and to forecast down to 5km by 5km zones – four times more detailed than the current granularity of 10km by 10km zones. Such advances have definitely bought benefits and today the 72 hour forecast is more accurate than the 24 hour forecast was a quarter of a century ago – see inset photograph to be reminded of what a weather forecast looked like at the time!

The amount of information the Met Office can now produce has undoubted use in science and commerce, but the British public remain unconvinced. In fact they are starting to vocalize their frustration at the amount of detail being communicated in radio and television forecasts which is causing them to mentally switch off and not absorb any information at all.

In response to listener’s suggestions, BBC Radio 4 has been testing a new way of reading a weather forecast, clearly flagging the region being discussed before giving a concise summary of how the weather will change in the next 24 hours, much like a shipping forecast. That’s all most of us really want to know to help us make decisions about what to wear and whether we should plan a round of golf or go see a movie. Those involved in activities such as sailing and mountaineering who need more detail can get it from more specialist forecasts available online.

There is an obvious lesson for all of us involved in performance management here. Reporting tends to come as an afterthought and all too often we inundate business users with data that they don’t have the time to digest and most of the time don’t actually need. Worse still, we don’t invest the time in observing how business users consume information for decision support and how they prefer to have it presented, (in my experience that typically means as ratios and trends so that exceptions and changes can be quickly detected).

Self-service business intelligence tools such as SAP BusinessObjects Explorer now means that users can gain immediate insight into vast amounts of data on demand and visualize it in a way that makes sense to them personally improving their ability to make timely and informed decisions. So if you have budgeting data generated in SAP BusinessObjects Planning and Consolidation or cost and profitability data generated in SAP BusinessObjects Profitability and Costing Management then using tools like SAP BusinessObjects Explorer make a lot of sense especially when you don't quite know exactly what information you want to analyse. For me this is better than having to rely on someone else prepare reports or dashboards for my consumption as all too often they get carried away with the technology rather than focusing on the needs of the business user. Perhaps we should invest in some training in information design and simplification techniques for them – something that would have undoubtedly benefited those responsible for our broadcast weather forecasts.