Time to rethink EPM capabilities

Increasing business volatility, diversity of global markets and changing drivers of value call for fundamentally rethinking enterprise performance management (EPM) capabilities.

Stacey Thomas of Accenture said this during the ITWeb SAP-Accenture EPM Executive Forum at the Westcliff Hotel yesterday.

“Organisations should not take EPM for granted for it is about survival and prosperity,” stressed Thomas.

Alluding to the object-oriented analysis and design loop fashion, she noted that when deploying EPM, organisations must continuously observe, orient, decide and act in order to achieve and maintain freedom of action.

According to Thomas, the key for EPM is being able to execute strategies, saying: “High-performing businesses believe that EPM enables strategic execution... High performers should be able to automate strategy, capability, information, decisions, as well actions, in order to create value for their businesses.

“They have a deep understanding of the drivers of value for the organisation and they also have an integrated EPM framework in place,” she added.

However, Thomas pointed out, very few businesses succeed in implementing EPM, stressing that companies often struggle when it comes to getting their strategic plans out of the executive office.

“In most cases, you would find that organisations do not have the right metrics and drivers in place to support the execution of strategy and deliver the desired results.

“Businesses should also ask themselves: 'Are our employees completely focused on reaching our strategic goals? Are we leveraging the information in our systems to enhance decision-making? Do we provide our employees with a clear direction to guide their decision making?'” she said.

Another problem Thomas raised is that businesses tend devote most of their energies managing current year operating performance.

She gave an example of her client whose enterprise value, representing current debt plus the market value of equity, totals $30 billion.

“Of this amount, only 24% reflects the value of operations while the rest is expected future growth. Yet, about 60 000 workdays are spent on managing between 2.4% and 24% of the value of the enterprise,” she explained.

She believes companies are usually caught off guard, as they are uncertain of what to do, where to begin and how to prioritise and implement due to difficulties to achieve a common view and decision going forward.

“There is also an unclear business case for investments into new EPM capabilities. This is not just about finance headcount reduction due to process inefficiencies since the primary benefit of new EPM capabilities is inherent in the ability to drive smarter business decisions.”

Thomas also expressed that lower levels of the organisation usually view EPM as a bureaucratic exercise characterised by gaming and non-added negotiation.

In this vein, she encouraged organisations to enable the right understanding of what is driving value and how the culture needs to be shifted.

In her presentation, Thomas noted a marked increase in organisations making use of EPM in the face of today's highly volatile global market.

“The traditional approach to EPM, as an ineffective and slow solution, has been rendered obsolete presently.

“Today, companies have made and are continuing to make significant investments in EPM capabilities. A recent survey revealed that 77% of companies change their process every year; 85% are planning to enhance their core capabilities in the next one to two years.”

On the other hand, Thomas noted - in practice - the value created has been limited, as only 11% of the companies are fully satisfied with their capabilities compared to 17% two years ago and 20% a decade ago.

She also stressed that business plans and budgets of many organisations have become redundant due to business volatility in the markets, commodity prices and exchange rates.

“Almost two-thirds of companies quote budget as a major constraint in their ability to respond to changes in the business environment.”

Thomas also pointed out that companies also tend to be worried about their capital efficiency and the external factors that are impacting their business in a context of shrinking sales and credit, as the credit crunch has been at the top of business risk rankings for the last several years.

“Managing for uncertain times requires a different degree of flexibility on how and when actions need to be taken. In a Conference Board Report published in the fall of 2008, the capability described as 'speed, flexibility, and adaptability to change' ranked as number three among the CEO challenges,” she reckoned.

Nonetheless, Thomas also pointed out that companies are still facing are complications though. “Planning in a volatile business environment, when targeting new markets, developing new products and navigating in a complex landscape, is becoming progressively more challenging.

“About 45% of finance executives believe that building finance capabilities and the need to support an increasingly complex enterprise strategy will be their greatest challenge in the next two years.”

It is also Thomas' view that in a global market characterised by different growth rates, risk profiles as well as regulatory regimes, it is increasingly becoming more challenging for companies to make smart resource allocation decisions, as capital constraints increase opportunity costs of sub-optimal decisions.

She also revealed that given that the majority of business value today is driven by intangible assets that tend to require SG&A investment, companies find themselves under a growing pressure to more effectively balance short-term profitability with long-term value creation while managing investor expectations.

“Today, 75% of value of the average company is driven by intangible asserts compared to 20% in 1980. Yet, less than a third of the companies execute comprehensive planning for investments into tangibles,” she revealed.

To deal with these complications, Thomas said, companies should be able to better navigate thorough different business cycles in the volatile environment.

“They should also strike the right balance between short-term profitability and long-term value creation through both ups and downs of the economics cycles.”

Highlighting some of the benefits of EPM, Thomas said: “There is a strong value proposition in implementing new EPM capabilities if it is done correctly.”

Besides giving the company a competitive edge, she said, EPM standardises the approach to structuring management process change.

“It also improves the execution of organisational strategy and maximises sustainable shareholder value by facilitating better and faster decision making,” adding that EPM promotes optimal resource allocation while supporting a value-added culture.

In closing, Thomas noted that EPM positions finance as an intimate partner within the business.