Opportunity in crisis

In a perfect world, a business plan would stand a chance. But tsunamis, widespread political change and financial crises can make nonsense of the best strategies. And a sluggish financial reporting and planning process can make an otherwise lean business too slow to grab sudden opportunities.

Making strategic decisions faster, with a better grasp of cost, is what enterprise performance management (EPM) is about. While most mature in the financial and telecommunications sectors in SA, an EPM approach to business is relevant in other industries too - it isn't just a balanced scorecard to report business performance.

"When the sub-prime crisis hit, some mining groups came out within a couple of days, saying how this would influence their profit and organisations. Other groups just kept quiet," says Pierre Naude, MD at Progneo.

"Groups that come out quickly probably have a sophisticated EPM strategy in place. Others may be working on spreadsheets, so they have to run through an annual budget process to come to a result in a crisis."

Opportunity can also present in a crisis. With mature EPM, many what-if scenarios can be considered before a decision is made.

"Somebody gets an idea while they're having dinner. They write that idea on a napkin. They certainly don't commit to that until they understand implications for the decision,” says Thomas Popp-Madsen, director of EPM at Oracle MEA.

"A CEO has so many choices,” continues Popp-Madsen. “He can optimise his business in a variety of ways. He can buy additional companies or sell off certain parts of the business. To make these kinds of high-level decisions, he typically needs data from the CFO. Even if he has great ideas about generating revenue, cash flow might not be available, but an ERP system would not show that.

“So the CEO asks the CFO, 'What will it cost me? If I have 10 projects, which five can I afford? Will it make more sense for me to buy something that will supplement my strategy? What if I rearrange, and build it organically inside my company? What price to buy our competitor - at least I should know how much I am paying in premium to get rid of this one?'"

When we start looking at linking strategy, the BI dashboard should be turned into an EPM balanced scorecard.

Thomas Popp-Madsen, Oracle

With EPM in place, the CFO may be able to provide these kinds of answers, but he needs more than software licences to do that.

“EPM is a management approach rather than a tool set,” states Craig Stephens, director of product marketing at Epicor. With EPM, a business can identify specific activities to execute its business strategy, and then measure them with relevant and realistic key performance indicators (KPIs).

"There is no business that is not running EPM, although it might not have a specific EPM system,” adds Ryno Abrie, senior EPM pre-sales specialist at SAP.

“In every business, managers have to focus on how they're going to balance their strategy, how they will execute it, how they view performance and risk-adjust it, manage collaboration and make the company more agile. All this provides context for making decisions. They must have trusted information sources, must be proactive towards risk and really have visibility when they make decisions."

Not knowing which way to jump in a crisis is one thing. But even in calm times, many businesses don't know where they're actually making profit. Without some form of implemented EPM, head office may spend months preparing annual budgets, without understanding what happens on the shop floor. Or spend a whole month preparing a budget for the next month. Worse, management may have to wait almost a month for financial results.

In contrast, head office trusts its cost centre managers to help build accurate plans and forecasts in a mature EPM implementation. Such a business can set realistic targets, track actuals against targets, fine-tune processes and change KPIs if needed. When the market changes suddenly, such a business is ready to move quickly to another strategy, or at least minimise damage.

Plans, targets, actuals... EPM needs lots of enterprise information for those what-if scenarios, preferably available in enterprise systems, and not manually typed in. No one needs more 'Excel hell' as some refer to spreadsheet financial planning practices without EPM.

Business intelligence (BI) systems, data warehouses and ERP systems already contain much of the information EPM must have in many large businesses.

“BI works across computing platforms, making visible information from all kinds of sources. It's about data sets, data integration, quality and stewardship, through managing data over its lifecycle, and all reporting that goes on top of that,” says Frank Naude, pre-sales manager for business analytics solutions at SAP.

“BI stores and manages data in a standardised way across an enterprise, gives access to it, and provides reporting ability with a standard toolset. BI stretches across an enterprise. But in the EPM space, tools are very specific, such as a balanced scorecard."

There has to be benefit in asking the person at the coalface what he thinks he can sell, and to whom.

Kevin Phillips, idu Software

But BI is not EPM, firstly because of what-if scenario planning.

"BI is about looking into data, even down to transactional data. BI gives a detailed picture of the past and where we are right now, but it doesn't really support what-if questions”, explains Oracle's Popp-Madsen.

“But EPM supports what-if questions in operations or finance, and in specific finance processes such as financial consolidation, where you don't just report data in the transactional system, but also need to do other processes along the way.”

Secondly, where BI and EPM systems differ is linking a business' strategy to performance.

"When we start looking at linking strategy, the dashboard should be turned into a balanced scorecard,” continues Popp-Madsen. “A dashboard is traditional BI, where we take the temperature of the company, get some red lights and focus on them. What the dashboard doesn't do is ask if the red light is relevant to our strategy.

“But the balanced scorecard will actually start with a strategy definition - what it is that we want to achieve - and then break down those critical success factors to KPIs. That is why a balanced scorecard is considered performance management, but a dashboard is considered BI," he says.

Measuring what people do in the business world, using KPIs, is not simple. A business needs to know where it is heading to measure individual performance in relevant ways.

"A lot of businesses don't know what their strategies are, analysts tell us,” says SAP's Naude. “To varying degrees, many organisations don't know beyond the mission statement what the big picture is. Often, people are not measured according to business strategy."

Adds Stephens: ”The problem is that the KPIs you want to set in place in the EPM programme need to be specific to tactical level activities you undertake, which drive you towards a strategic goal. So saying the strategic goal is to grow our market by 15% in the next year and we will measure revenue every month is reporting, not EPM.”

You don't make strategic decisions in real-time.

Craig Stephens, Epicor

Another snag with KPIs is who decides what they are and how. EPM needs accurate information, but many businesses do their annual planning in a way that creates disinterested, disempowered cost-centre managers, leading to less precise information.

"Take a gas salesman in Cape Town as an example. Three years ago his numbers went from R3 million to R40 million in one year. So head office sitting in Texas said, 'Brilliant, your target next year is R45 million',” says Kevin Phillips, MD at idu Software. “But the next year the power stations start working again, people don't buy gas, so his sales go back down to R4 million. His target is still R45 million. Why? Because no one asked him why his numbers were so big last year, and whether they are repeatable.

“But if you sit at headquarters, trying to work out what products you will release to the market next year, there has to be a benefit in asking the person at the coalface what he thinks he can sell, and to whom."

Where EPM budgeting and forecasting has been rolled out to cost-centre managers, they will input their sales and costs forecasts into the system themselves, in simplified, controlled input screens. Apart from encouraging managers to take responsibility for their budgets, the enterprise benefits from potentially much more trusted information, which may be provided much faster than using spreadsheets.

Where a business has taken a deep breath and decided to go for the most accurate measurement method of its business processes, it may implement Activity Based Costing (ABC). ABC is a rigorous methodology to figure out which products, services and customers are more profitable and why.

If a business implements ABC, the first phase focuses on what is going on in the business, what information is available from what systems and what things cost.

“We look at four components on a balanced scorecard - finance, operations, the customer and human capital. These make up the EPM framework, and are linked to the business strategy,” says Francois Beyleveld, principal consultant for performance management at SAS Institute.

BI stretches across an enterprise. But in the EPM space, tools are very specific, such as a balanced scorecard.

Frank Naude, SAP

"For example, finance would be linked to strategy to reduce cost and increase profitability. In operations you want to improve efficiency. With the customer, you want to increase customer satisfaction. In human capital, you want the right mix of talent and you want to measure the cost per employee and total operating cost per employee.

“Then we combine each of these four components with four dimensions - time, cost, quality and risk. We measure these in conjunction with the four components.”

With this approach, the business is first analysed minutely, and KPIs built in later project phases.

Implementing ABC can be invasive for a business. Some recommend this for mature businesses only. ABC takes time, buy-in from employees and, usually, outside consulting.

“In an operational process, for example, we consider the time, cost and human capital it needs,” continues Beyleveld. “Also the amount of re-work, to determine the quality and inefficiencies in the process. We look at the risk involved in getting the product to the customer and the risk to the organisation. Then we consider how each of these can be measured."

Following this, measurements are linked back to the overall company strategy. To do that, all the processes in the business - enabling, maintenance and closing processes - have to be identified and described.

KPIs you want to set in place in the EPM programme need to be specific to tactical level activities you undertake, which drive you towards a strategic goal.

Craig Stephens, Epicor

Speeding up financial reporting is a first goal for many EPM initiatives.

“The reason you are doing financial reporting is to understand your actuals and compare them to budget,” says Progneo's Naude.

“Typically, EPM is about quickly getting to a place where you can analyse your results. For a large organisation, a good time frame is five working days. For a small organisation, it can be between one and three days before you get your results out.”

EPM absorbs great amounts of real-time information to enable faster strategic decision-making. But decisions are made according to a slower schedule, argues Stephens.

”Some in the industry say EPM is about enabling strategic decisions in real-time. But you don't make strategic decisions in real-time, you make tactical decisions in real-time,” states Stephens.

“You make strategic decisions over a period: you review historical and the latest information together. Then you can say, 'This is where we want to go with company strategy'. You break that down into operational objectives, KPIs and goals at a lower level, where you may need to pull business levers in real time. But one doesn't change strategy in real-time."

One can compare this to an airliner pilot who makes tactical decisions in real-time, changing course to a different airport because of bad weather, or making adjustments for thunder clouds. But the strategic decision to increase weekly trans-Atlantic flights is taken because of a recommendation in a management meeting.

While most operating businesses practise some form of EPM, measuring performance according to strategy is a big undertaking. Effort in establishing appropriate parts of EPM methodology and tools for a business may be most relevant when planning to out-manoeuvre competitors in a tough market.