THE PERFORMANCEMANAGEMENT REVOLUTION

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Business Results ThroughInsight and Action

HOWARD DRESNER

JOHN WILEY & SONS, INC.

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THE PERFORMANCE MANAGEMENTREVOLUTION

|

THE PERFORMANCEMANAGEMENT REVOLUTION

|

Business Results ThroughInsight and Action

HOWARD DRESNER

JOHN WILEY & SONS, INC.

This book is printed on acid-free paper.

Copyright 2008 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

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Library of Congress Cataloging-in-Publication Data:

Dresner, Howard, 1957-The performance management revolution: business results through insight and action/

Howard Dresner.p. cm.

Includes index.ISBN 978-0-470-12483-3 (cloth)

1. Management information systems. 2. Information technologyManagement.3. PerformanceManagement. I. Title.

HD30.213.D74 2008658.4038011dc22 2007023152

Printed in the United States of America10 9 8 7 6 5 4 3 2 1

www.wiley.com

To my wife, PattyAnd to my childrenSarah, Joshua, and Ethan

ContentsForeword xiPreface xiiiAcknowledgments xxi

PART ONE A CALL TO ARMS 1Chapter 1: The Need for Change 3Whats Wrong with this Picture? 5A Simple Model for a Simple Business 7

Chapter 2: A Model for a Modern ManagementSystem 9

Connecting the Cycle 10Rationalization 10Commitment 11Tracking 11Perspective 12

Problems with the Status Quo 12Toward Better Processes: EPM and anEPM System 14The Management System at GreenCo 17Vision and Strategy 17Goals and Objectives 18Execution 19Evaluation 20

Chapter 3: The Role of EPM 21EPM and Planning 25Unified Planning 26Dynamic, Real-Time Updates 26Multitiered Aggregation and Granularity 27Integration with Enterprise Application

and Data Sources 27Translation between Financial and

Operational Metrics 28Enhanced Creation and Management ofWhat-If Models 28

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viii CONTENTS

Planning as a Driver of Process Change 29EPM and Compliance 33Leveraging Compliance to Improve Performance 36How EPM Works from a Users Perspective 38Drivers of EPM Adoption 41Modeling as the Key to a SuccessfulGrowth Strategy 42

A Broad Range of Motivations 45Toward Greater Accountability 48

Chapter 4: Barriers to EPM Adoption 53A Multitude of EPM Approaches 53One Size Fits All 54A Thousand Flowers Bloom 54The Middle Ages 55Other Bad Behaviors 55Utopia 56

Current State of EPM Tools and Technologies 57

PART TWO PREPARING FOR BATTLE 61Chapter 5: Draw an Accountability Map 63Using an Accountability Map as a Consensus-Building Tool 66

Chapter 6: Achieve Information Democracy 73Chapter 7: Build an EPM Center of Excellence 78Why You Need a Center of Excellence 78First Steps 81Roles and Responsibilities 82Reporting Structure 83Required Skills 84Funding 85Tasks 86Sustaining a Center 87Relating to Other Initiatives 87Its Worth It 88

Chapter 8: Standardize and Consolidate EPM Tools 93Standardization 94Consolidation 95

Chapter 9: Deploy a EPM System 98EPM System Components 99EPM Applications 101

CONTENTS ix

Financial Management 101Planning 103Modeling 106Dashboards and Scorecards 108Reporting and Analysis 119

BI Platform 128EPM Environment 132Common Services 133The Power of Master Data Management 134The Future of EPM Systems 138

Chapter 10: Comprehensive View ofPerformance Management 141

Tenet #1: Finds Truth in Numbers 141Tenet #2: Sets Accurate Expectations 143Tenet #3: Anticipates Results 144Tenet #4: Plans with Impact 145Tenet #5: Achieves On-Demand Visibility 147Tenet #6: Delivers Continuous PerformanceImprovement 148Tenet #7: Reports with Confidence 149Tenet #8: Execute with Conviction 150Tenet #9: Stands up to Scrutiny 151

PART THREE LET THE REVOLUTIONBEGIN 157Chapter 11: Determine Your Immediate Priorities 159Chapter 12: A Model EPM Methodology 177

Follow a Structured Methodology 179Envision an EPM Solution 180Implementation 181Analyze and Plan 182EPM Solution Selection 184Design 186Build 186Test 187Rollout 188Review 190Make Changes 190

Education 191Change Management 191

x CONTENTS

Ensure a Supportive Organizational Environment 192Ensure Sufficient Funding and Resources 192Obtain Employee Buy-In 193Advice from the Trenches 194Prepare for Some (Pleasant) Surprises 195

Chapter 13: Measuring Outcomes 198Provide Feedback 200Align Personal and Corporate Objectives 200Combine EPM and Enterprise Risk Management 201Anticipate Behaviors 202Reward the Right Behaviors 202Define Metrics that Drive the Right Behaviors 203

Afterword 204Appendix 209Glossary 211

Foreword

Some revolutionslike the American Revolutionarebloody, noisy, and everyone nearby knows about them.Otherslike the Industrial Revolutionare quieter,slower, and many people at the time may not even real-ize theyre happening. In the long run, though, both kindsof revolutions lead to profound change.

Today, I believe we are in the early stages of one ofthe quiet revolutions. At the heart of this revolution is anincrease in human freedom in business.

Key enablers for this revolution are the increasing avail-ability of information and new technology that helps peopleact on it. When people have access to more information,they can make more sensible decisions. They dont have towait for orders from someone above them in a hierarchywho supposedly knows more than they do. And when theyhave the freedom to make decisions and the ability to takeaction for themselves, they are often more highly motivated,more creative, and more flexible.

In our increasingly knowledge-based and innovation-driven economy, these benefits of decentralized decisionmakingmotivation, creativity, and flexibilityare oftenthe critical factors in business success. And thats why I be-lieve this increase in human freedom in business will spreadthroughout many parts of our economy. In the long run,

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xii FOREWORD

I think it will be as important a change for business as thechange to democracies was for governments.

But what does this really mean for you?Of all the businesspeople I know, Howard Dresner has

some of the deepest insights into the practical implicationsof this revolution. In the eloquently written book youreabout to read, youll see how Dresners concept of Infor-mation Democracy has profound implications for the wayyour company can operate. Youll see how a new generationof performance management software enables InformationDemocracy. And youll see how all this leads to a new wayof managing companies in the first place: empowered in-dividuals at all levels working collaboratively toward sharedobjectives, with full knowledge of how their own actionsaffect performance.

Will everything be different after this revolution? No,of course not. When a country changes from a kingdom toa democracy, many aspects of daily life dont change at all.But there are profound changes in some aspects of politicallife: where power comes from, how it is exercised, and whatthe countrys leaders try to do.

In the same way, many aspects of daily life in businesswont change in the business revolution were now enter-ing. But there will be profound changes in how we useinformation, how decisions are made, and in some of ourbasic assumptions about management.

This book provides a compelling and insightful de-scription of what these changes will really mean for youand how you can take advantage of them to improve yourbusiness performance.

Thomas W. MalonePatrick J. McGovern Professor of ManagementDirector, Center for Collective IntelligenceSloan School of ManagementMassachusetts Institute of Technology

Preface

This book is about the coming revolution in performancemanagement in global enterprises.

Throughout human history, revolutions have led to rad-ical changes in the governments, economic systems, so-cial structures, and even the cultural values of nation states.The American Revolution of the late 1700s, for example,achieved the political separation of the 13 colonies in NorthAmerica from the British Empire and led to a new form ofdemocracy with respect for individual rights and propertyat its center.

The ancient Greeks took a rather dim view of revolu-tion, believing it to be the result of an undesirable break-down in social values and structures. It wasnt until the Re-naissance that revolution acquired a more positive image,coming to be viewed as a sometimes necessary means ofachieving freedom or advancing a cause.

Regardless of whether their outcomes are positive ornegative, successful revolutions always result in fundamentaland often irreversible changes in the established order.The coming revolution in performance managementwill be no different, resulting in fundamental and verylikely irreversible changes in how organizations approachorganizing and providing access to information, planning

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xiv PREFACE

and implementing performance management initiatives,and using technology to support these activities.

Perhaps the most dramatic outcome of the performancemanagement revolution will be the ascendancy of a newmanagement system for the global enterprise in the 21st

century. This modern management system will consist ofpeople, processes, and technologies unified and optimizedto achieve higher levels of performance and accountability.It will empower individuals to make decisions and take ac-tion on their own; define management processes to supportincreasingly decentralized organizational structures; and in-clude technology that supports people and processes dayto day while providing a platform for long-term businessgrowth.

Central to this modern management system is a way oforganizing and providing access to information I call Infor-mation Democracy. Information Democracy is a principleof equality that demands actionable insight for all. When itis achieved, everyone in even the largest organizations has allthe information they need to make decisions without hav-ing to rely on someone from Information Technology (IT)to give it to them and without being filtered or censoredby management. At the heart of Information Democracyis the ability of everyone to access data, turn it into knowl-edge and insight through analysis, and share that insightwith others.

Anyone who has ever worked in a large organizationwill recognize what Ive just described as a radical departurefrom how information is usedand sometimes abusedinorganizations today. Too often, information is locked awayin complex systems accessible only to experts and reservedfor an elite few, making it hard for the people who are pri-marily responsible for managing performance in a businessday to day to get their jobs done.

Revolutions are typically sparked by prolonged and deepdissatisfaction with the status quo. As I travel the world

PREFACE xv

talking with executives and managers in organizations aboutperformance management, this is often what I hear aboutthe state of information in organizations today:

Im sick and tired of not having the right informationto do my job and having to guess at what it is.

Im sick and tired of multiple, inconsistent answers toa single question.

Im sick and tired of people hoarding information.Im sick and tired of our inability to act quickly and

decisively when business conditions change.Im sick and tired of complex systems and tools that

are virtually impossible to use.Im sick and tired of spending more time in meetings

arguing over the data than deciding what to do about it.These and similar complaints amount to nothing less

than an indictment of the way organizations treat informa-tion. And as a student of historyand a long-time tech-nology revolutionaryI am convinced that we are on thebrink of a long-overdue revolution.

As for the desired outcome of this revolution, I wouldput it this way: We seek common business truth and un-derstanding across the entire organization and for all userswith the objective of aligning everyone with the mission ofthe enterprise in a meaningful way.

Ive addressed the questions of why and what, butthere remains the question of why now? What is it aboutthe current business climate that has created a sense of ur-gency about solving problems that have existed for decades?

Here is what I believe. Just a few years into the 21st cen-tury, the world already seems a very different place. U.S. andglobal populations are growingand growing increasinglydiverse, dynamic, and interdependent. Technology and theInternet are permanently blurringand often dissolvinggeographic, economic, and cultural borders. And globalgeopolitical tensions are raising the stakes for all nationsto live together peacefully and productively.

xvi PREFACE

While these extraordinary factors have profound impli-cations for our daily lives, their impact on business is equallyprofound. Globalization and the hypercompetition it fos-ters, technology with all its promises and challenges, andgeopolitical uncertainties that keep us in a permanent stateof anxiety about external forces over which we have nocontrol combine to create a harsh and unforgiving businessclimate. And thanks to the ethical lapses of a few high-profile corporations and executives in the early 2000s, reg-ulatory scrutiny of financial and accounting practices is atan all-time high.

In this new century, many organizations struggle tomeetlet alone anticipatetheir stakeholders objectives.At the same time, they are under increasing pressure tomaintain strong corporate controls and offer greater degreesof transparency. Misaligned strategies, outdated plans, andunreliable forecasts inhibit success. Many businesses dependon performance measures that lack consistency and do notreflect structural business drivers. Most cannot reliably un-derstand the past in time to make decisions about the future.

As a result, executives and managers are being asked toassimilate vast amounts of information and adopt new man-agement techniques such as Economic Value Added (EVA),Balanced Scorecard, virtual close, event-driven planning,Six Sigma, and rolling forecasts, to name just a few. Theyare being asked to incorporate evolving legal reporting anddisclosure regulations, constantly revise plans, participatein extended business models that include partners in otherorganizations, and leverage investments in existing businesssystems.

The situation is further compounded by the presence ofmultiple, stand-alone systems in most organizationsoftendistributed across different countries of operationthat failto present a unified picture of the business, support collab-oration between teams, or drive the execution of frequentlyrevised plans.

PREFACE xvii

How can organizations reconcile the enormous pres-sures they face with the increasingly difficult task of gener-ating the growth in stakeholder value that these same marketconditions offer? A large part of the answer lies in adoptingthe right tools for the job. And among the right tools isEnterprise Performance Management (EPM).

EPM is a relatively new category of enterprise soft-ware that replaces the tools organizations use today to man-age performanceoften spreadsheets and static reportswith more flexible, scalable, and dynamic tools. EPM goesbeyond the specific functions automated by transactionalsystemsaccounting, billings, bookings, supply chain, salesforce automation, and call centers. Consisting of a consol-idation, planning and analytics platform, and financial andbusiness applications, EPM uses data from the transactionalsystems to increase visibility, drive forecasts, predict results,manage financial and operational performance, and reporton outcomes both internally and externally.

Especially as part of a modern management system forthe global enterpriseadding the technology piece to thepeople, processes, and technology triadEPM gives exec-utives, managers, and knowledge workers deep insight intotheir businesses today and tools for improving performancetomorrow. With EPM, companies can actively manage theirsuccess.

And, while the desire for better solutions to activelymanage performance is the primary driver of EPM, it turnsout that EPM has other benefits as well.

For example, better access to better qualityinformationa hallmark of EPMenables organiza-tions to move away from using purely financial metrics forgauging performance to a broader range of value-based andbalanced indicator approaches. These broader measure-ments are especially effective at linking strategic objectivesto operational drivers and managing the discrepancybetween the market and book value of businesses. Many

xviii PREFACE

organizations are having success using these techniques,especially as they mature and build a critical mass ofexperiences and well-trained talent.

EPM also adds value to organizations existing transac-tional systems by unlocking information trapped in themand making it available to decision makers. Transactionalsystems increase efficiency by streamlining operational pro-cesses and generating large quantities of valuable data, butmany organizations find themselves with multiple systemsdue to acquisitions, mergers, or the autonomous nature oftheir business units or geographies. Often, these systems arenot integrated with one another, which makes it difficultto gain access and share valuable data.

Support for increasingly decentralized organizationalstructures is another added value of EPM. More organiza-tions today are adopting strategies that involve using sharedservices, outsourcing, or a network of business partners toextend their capabilities. These strategies require more flex-ible ways of organizing and managing processes that canadapt to an open and fluid organizational model.

As it becomes clear that EPM can address these andmany other issues challenging organizations, interest in thecategory has expanded. But organizations can be slow tochange. That is why a revolution in performance manage-ment is brewing, and why, in my view, it is necessary. It isbrewing in finance departments, business units, and execu-tive suites. It is brewing in businesses in all industries. It isbrewing in geographies all over the world. And it cant bestopped.

Still, revolution is hard work. I know this from expe-rience. I spent 13 years at Gartner, the worlds largest ITadvisory company, and have been Chief Strategy Officerat Hyperion. As a research fellow and a lead analyst forBusiness Intelligence (BI) while at Gartner and even beforethen, I had a chance to be part ofand even instigatesome exciting technology revolutions of my own.

PREFACE xix

In 1989, for example, I startedsome might sayincitedthe BI revolution with the premise that all usershave a fundamental right to access information without thehelp of IT. Just a few years later, in 1993, I expanded thatpremise into the concept of Information Democracy. Sincethen, the industry has made modest progress toward achiev-ing Information Democracy, but were not there yet, andfrankly, we have a long way to go.

And so in this book, I offer executives and managers in-sight into what my fellow revolutionaries and I have learnedin our push for Information Democracy and other essentialcomponents of more effective performance management.My hope is that if you havent already joined the perfor-mance management revolution, you will after reading thisbook.

Remember, though, revolution is not the endgame.Information Democracy isnt even the endgame. Both aremeans to an endthe realization of a new managementsystem for global enterprises in the 21st centuryone thatempowers individuals and puts organizations on a path tobetter performance through insight and action.

Let the revolution begin.

Howard DresnerMay 2007

Acknowledgments

I am grateful to many colleagues and friends who con-tributed ideas, information, and facts to this book.

I especially want to acknowledge my colleagues at Hy-perion, whose knowledge and expertise were invaluable inwriting this book. Ron Dimon deserves special thanks forhis tireless work in getting this project off the ground andhis many contributions along the way. I would also like tothank John Kopcke, Rick Cadman, John ORourke, FrankBuytendijk, and Phyllis Davidson for their ideas and contri-butions; Kathy Horton, Toby Hatch, and the other DomainLeads for their contribution to the chapter that includes anEPM self-assessment; and Godfrey Sullivan for his leader-ship.

My gratitude goes to Dr. Raef Lawson for his researchand content on creating Centers of Excellence.

I benefited from the project management, writing, andediting skills of Susan Thomas. Her participation madewriting this book easier and more fun than I could haveimagined.

I owe a debt to Tom Malone, certainly for the forewordto this book, but also for his keen insights and groundbreak-ing work in demonstrating how technology can make ourwork and personal lives richer and more productive.

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xxii ACKNOWLEDGMENTS

I want to thank my agent, Susan Barry, for her instinctsabout how to package my ideas and whose efforts quicklyled to a publishing contract. My editor, Tim Burgard, of-fered valuable feedback and encouragement along the way.

All the companies mentioned in this book have helpedbring its concepts to life. Named and unnamed, their par-ticipation was critical. I especially want to thank DanielM. Morales of Bank of America, Spencer Taft and NeilJohnston of Cox Enterprises, and Michael Benjamin ofPearson.

To my wife Patty, my daughter Sarah, and my sonsJoshua and Ethan: thank you for your love and unwaveringsupport. They mean everything to me.

THE PERFORMANCE MANAGEMENTREVOLUTION

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xxiv

Part One|

A CALL TO ARMS

{1|

The Need for Change

In his 2004 book, The Future of Work, Thomas W. Malone,the Patrick J. McGovern professor of management at theMIT Sloan School of Management and the author of theforeword to this book, wrote about a dramatic shift that isoccurring in how businesses are organized. According toMalone, the first and second stages of the shift are alreadymostly complete, as large, centralized corporate hierarchieshave come to replace small, informally organized businessesover the last 200 years.

There is a third stage, howeverone in which cor-porate hierarchies evolve to more decentralized businessnetworksand its just beginning. In this stage, enabled bytechnologies that drive down the cost of communications,large corporations actually shrink in size through a combi-nation of outsourcing and vertical disintegration. Throughoutsourcing and vertical disintegration, big companies off-load work to contractors and create networks of separatebut interrelated businesses. These business networks per-form much of the work that previously has been done insidelarge organizations.

Malone often cites eBay as a prime example of a com-pany that operates as a business network. Today, several hun-dred thousand eBay sellers around the world make theirfull-time living on eBay. If these people were employees

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4 THE NEED FOR CHANGE

of eBay, the company would be one of the largest globalemployers and retailers in the world. But eBay sellers areindependent business people.

This way of organizing delivers huge benefits to eBay,which can grow bigger and faster with fewer resources thantraditionally organized companies. But it also creates newand interesting challenges. Because eBay has less controlover its direct business activity than many other compa-nies, it must take into account opinions from both sellersand buyers in the eBay network before making many of itsdecisions.

This increase in what Malone calls human freedom inbusinesswhere employees, suppliers, partners, contrac-tors, and even customers get to have a say in how organi-zations are runis just one of the many changes that resultas businesses decentralize.

But even before the emergence of radical new businessstructures such as the one exemplified by eBay, the trend to-ward decentralization in business gave rise to changes in theroles employees play in organizationsespecially employ-ees whose main contributions depend on the productiveuse of information instead of manual labor.

Nearly 50 years ago, Peter Drucker coined the termknowledge worker to describe this category of employee.Back then, Drucker predicted that knowledge workerswould grow as a proportion of the total workforce, becom-ing its center of gravity and forever changing the natureof organizations, management, and work.

Drucker was right. Today, knowledge workers are anincreasingly large percentage of the global workforce, espe-cially in developed countries. Across all industries, knowl-edge workers represent at least 25 percent of the workforce,and in financial services, health care, high tech, and media,the percentage is even higher.

And today, knowledge workers perform many of the keyfrontline activities in organizations. In so doing, they have

Whats Wrong with This Picture? 5

become primarily responsible for driving day-to-day per-formance in businessfulfilling another Drucker prophecy.In his 1966 book, The Effective Executive, Drucker wrote,Every knowledge worker in modern organization is anexecutive if, by virtue of his position or knowledge, he isresponsible for a contribution that materially affects the ca-pacity of the organization to perform and to obtain results.

WHATS WRONG WITH THIS PICTURE?

You would think that with more than 50 years to thinkabout ita time span in which knowledge workers evolvedinto the key managers of day-to-day performance in orga-nizations and technology has enabled access to informationand better, faster, cheaper communicationorganizationswould have figured out how to provide their people withthe information and tools they need to do their jobs.

Yet, in most organizations today, people waste countlesshours searching for the data they needeven when it residesin their own companies. Countless more hours are wastedtrying to coordinate their work with others. The fact thatthe volume of corporate emailthe communication toolof choice in businesshas risen to 35 billion a day from just10 billion a day five years ago is testimony to the difficultyof this task. And just imagine how many of those emailsinclude spreadsheet attachments.

There is something wrong with a picture of modernbusiness that shows people in critical positions strugglingto get the information they need to do their jobs. Butthere is an explanation for it. Many organizations todayare still coming to terms with the changes in their busi-nesses so eloquently described by experts such as ThomasMalone, Peter Drucker, and others. And they are still us-ing models of management designed for large, central-ized organizations and using management systemspeople,

6 THE NEED FOR CHANGE

processes, and technologythat support these outdatedmodels.

Organizations technology investments reflect this dis-connect between modern organizational structures and out-dated management models. Here is one example.

Over the past two decades, companies have poured hun-dreds of millions of dollars into transactional systems, espe-cially enterprise resource management (ERP) systems. Asa result, most businesses today can take orders, fill orders,generate invoices, populate a general ledger, and so on withgreat efficiencyall of which are critical to running a largebusiness.

But managing a large business is an entirely different en-deavor. While it may start with the same data at the samelevel of granularity as running a business, managing a busi-ness requires access to value-added informationraw datathat has been transformed, analyzed, and presented to in-dividuals who use a variety of management processes ap-propriate to their organizations to make decisions and takeactions from a variety of perspectives. Managing a businessis, by definition, a dynamic activity requiring flexible pro-cesses and tools that are different for every organization andthat can adapt to change over time.

But because the purpose of ERP systems is to performand store vast amounts of mission-critical transactions, theyare inflexibleby design. And ERP systems automate pro-cesses that are inflexibleby design. In fact, once thesesystems are in place and working well, organizations willdo just about anythingincluding changing the way peo-ple worknot to have to change them. And while theygenerate large amounts of valuable data, most organizationshave many ERP systemsa dozen or morethat are notintegrated.

To cite just one example: A multibillion dollar Euro-pean provider of retail and wholesale services with 120business units across seven divisions and operations in seven

A Simple Model for a Simple Business 7

countries has more than 20 ERP or accounting systems.In companies such as thistypical of businesses its size andscopereconciling so many different views of reality is achallengea challenge, by the way, the company has mas-tered.

Viewed this way, its clear that whats needed for or-ganizations to manage performance is the mirror oppositeof what transactional systems deliver: flexibility. They needflexible processes and technologies because managing per-formance today is a dynamic activity full of complexity andnuance.

Bottom line, ERP systems help organizations run theirbusiness by standardizing and automating high-volume,transactional business processes across an organization. Butthey do little or nothing to help them manage their business.

A SIMPLE MODEL FOR ASIMPLE BUSINESS

To gain greater insight into what is needed to manage abusiness, lets consider the example of a single-proprietorcandy store.

In a single-proprietor candy store, the owner likely doeseverything associated with managing the business, includ-ing front room and back office functions. For example, heobserves firsthand the makeup of his customer base and theirbuying patterns. He knows which customers prefer whichproducts and how often they buy them. He knows whenhe is serving a repeat customer or a new one. He knowswhich of his products are more popular with his customersthan others are. And he knows when customers are askingfor products he doesnt carry.

Because its a business managed by one person, infor-mation can be quickly analyzed and incorporated back into

8 THE NEED FOR CHANGE

strategy and decision making. He may decide that he needsto increase his inventory of some products and decreaseothers. He may decide to start carrying new products forwhich there is demand. And after having made decisionslike these, he can evaluate whether they were good or badones and make midcourse corrections, if necessary, in a veryshort period of time. The activities and processes requiredto run his business are simple and straightforward and, sincethe owner is the only person who uses them, they dontneed to be documented.

But what happens if the owner hires a counter clerk ora bookkeeper so he can spend less time in the store? Ordecides to open another candy store in the next town?

As soon as more than one person works in his busi-ness, the owner must formally define, possibly modify, anddefinitely document critical management activities and pro-cesses. He must do this because he can no longer person-ally observe and take part in everything that goes on in hisbusiness. He must do this because he wants to make surehis business is managed in the right way even when he isnot around. For all its elegance and simplicity, the single-proprietor candy store model just doesnt scale.

However, there are lessons to be learned here that applyto all businesses of all sizes. And regardless of scale, we mustall strive to attain the customer intimacy and business agilityof the single-proprietor candy store.

{2|

A Model for a ModernManagement System

In theory, there is no difference in the activities requiredto manage a single-proprietor candy store and those re-quired to manage a business of 100, 1,000, or even 100,000employees. Regardless of the size of the business, man-aging it requires four basic activities coming together inwhat I call the management cycle: vision and strategy;goal and objective setting; execution; and evaluation (seeExhibit 2.1).

Ideally, the activities in this management cycle shouldsupport the purpose of the organization, the means ofachieving it, and its ability to adapt. But in actual practiceand especially as businesses grow in sizethese activitiescan quickly become unsynchronized and end up in con-flict with one another. For example, in many large orga-nizations, functional departments, and geographic regionsdisregard corporate strategy in favor of local and parochialconsiderations. And oftentimes, strategy becomes discon-nected from reality, as those who create the strategy areremoved from the customers and markets they supposedlyserve.

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10 A MODERN MANAGEMENT SYSTEM

EXHIBIT 2.1 The Management Cycle

CONNECTING THE CYCLE

Ideally, these activities would not exist in isolation from eachother and would not occur sequentially. Instead, they wouldhave well-defined processes to connect them and supportthe flow of work between them. And they would unfold it-eratively, creating cycles within the cycle. The connectiveprocesses necessary to make this possible are rationalization,commitment, tracking, and perspective (see Exhibit 2.2).

Rationalization

Once vision and strategy have been established, an orga-nization should go through a process of rationalization toensure that the strategy is attainable and realistic before set-ting goals. Managers might ask, Does the organization haveample resources (capital, expertise, and so on) to achieve thestrategy? Is the market nascent, supply driven, or demanddriven? Can the organization develop the market or over-come current perceptions to compete successfully? Therewill be a healthy amount of debate and negotiation in thisenterprisewide conversation. Once a rationalization process

Connecting the Cycle 11

EXHIBIT 2.2 The Management Cycle and Connective Processes

is complete, an organization can set goals and objectiveswith confidence, knowing that they are achievable and sup-port the organizations vision and strategy.

Commitment

Before an organization executes a strategy, it should col-lectively commit to specific areas of focus and deliverables.The commitment process documents the investments an or-ganization will make (capital, people, materials, programs,and so on) and the expected outcomes, including revenue,expenses, profit, and market share. Once the commitmentprocess is complete, an organization can begin executing.

Tracking

Tracking is a process that should be used during executionto provide an operational feedback loop. Tracking progressagainst stated goals and objectives enables an organizationto constantly fine tune to ensure optimal performance.

12 A MODERN MANAGEMENT SYSTEM

Perspective

Perspective is a process an organization should adopt duringthe evaluation activity to ensure it has the most completeview possible of what worked and what didnt, and whatmust be changed in the future to improve performance. Toborrow a phrase from Italian filmmaker Sergio Leone, per-spective provides insight into the good, the bad, and theugly. Managers might ask, What synergies in our businesshelped us achieve success? Were there areas of misalign-ment that caused problems? Are there best practices thatworked in one area of our business that we should repli-cate across the entire organization? An organization canuse conclusions drawn during this phase to modify strat-egy to better map to market, customer, and organizationalrealities.

The four management cycle activitiesvision and strat-egy, goal and objective setting, execution, and evaluationcombined with these connective processes form the basis ofa modern management system.

PROBLEMS WITH THE STATUS QUO

All organizations have a management system; it would beimpossible to function without one. However, many or-ganizations management systems are deeply flawed, andthe problem often is that the connective processes betweenmanagement activities are weak, inconsistent, unsynchro-nized, or in some cases, completely absent.

The problem usually begins with vision and strategy.In many organizations, senior management defines a strat-egy to support its vision based on past experience or gutfeelingor even just a strong desire to do things a certainwaywithout rationalizing or fully vetting it. When therationalization process is flawed or nonexistent, every other

Problems with the Status Quo 13

activity in the management cycle is doomed to failure as theimpact of a poorly thought-out strategy ripples throughoutthe organization.

For example, if the strategy is flawed, goals and objec-tives may not be attainable. If goals and objectives arentattainable, those attempting to achieve them either aban-don them for fear of failure or execute against a differentstrategy they believe will yield better results.

Another area where disconnects are common is betweenstrategy, execution, and tracking. The strategy may be soundand execution crisp, but if the organization does not haveaccess to meaningful information in the tracking process, itmay be impossible to determine whether actions are result-ing in the desired outcomes and if not, what must be doneto correct the problems. Even the best information withoutcontext is useless.

This kind of disconnect is common in companies thatrely on Business Intelligence (BI) alone to manage per-formance. BI is knowledge gained through the access andanalysis of business information. BI tools and technologiesinclude query and reporting, OLAP (online analytical pro-cessing), data mining and advanced analytics, end-user toolsfor ad hoc query and analysis, enterprise-class query, analysisand reporting, including dashboards for performance mon-itoring, and production reporting against enterprise datasources.

BI is of great value in managing performance, but haslimitations in that its main purpose is to provide informationabout what happened and not much else. And too often,that information lacks context.

As an analogy, think of a soccer game and the role of ascoreboard. A scoreboard simply keeps track of the score.It doesnt tell spectators anything about the play action thatled to the teams achieving that score. It doesnt provide anyinformation to the coach of the trailing team that wouldhelp it catch up and overtake its opponent. It doesnt tell

14 A MODERN MANAGEMENT SYSTEM

individual players what they can do to play better for theremainder of the game.

BI is the scoreboard of the enterprise and nothing more.It doesnt facilitate the business or improve it in any way. Itdoes not provide context. It simply tells the score.

Not only is this partially useful, without the proper con-text it might be telling the score of something that has noth-ing at all to do with the ability of a business to achieve itsgoals. And even so, organizations need more than the scoreof the game to figure out what to do next.

For example, they need to know what they can do toimprove their business. This requires more than reportingand analysis; it also takes management, and managementrequires planning, which is beyond the scope of BI.

Organizations also need to establish repeatability bymoving from focusing on analytic processes to focusing onbusiness processes. This requires an understanding of all thecomplexities of the business, which is also beyond the scopeof BI.

Organizations also must foster accountability, which canonly be achieved if they and the individuals who workin them know how to measure performance. Account-ability requires documenting assumptions about the busi-ness, understanding what drives it, and making investmentsaccordinglyanother capability beyond the scope of BI.

TOWARD BETTER PROCESSES: EPMAND AN EPM SYSTEM

Whats needed beyond transactional systems and BI aremore capable tools and technologies that are part of andsupport a modern management system for the global en-terprise in the 21st century. The tools and technologies mustempower individuals in organizations through Information

Toward Better Processes: EPM and an EPM System 15

Democracy, enable processes that support increasingly de-centralized organizational structures, and provide a platformfor growth.

This is where Enterprise Performance Management(EPM) technology comes in. EPM technology is enterprisesoftware with applications and tools that drive managementactivities and processes forward with the agility to supporttheir inherently dynamic nature.

EPM does this by fortifying the management cy-cle through support of the connective processesratio-nalization, commitment, tracking, and perspectivewithenterprise-class modeling, planning, BI, and analyticsfully integrated into a single system (see Exhibit 2.3).

Having these capabilities integrated into an EPM systemis important, even though a number of EPM solutions todayare packaged as integrated suites. The distinction is an all-important detail. Heres why.

A suite is a collection of programstypically ap-plications and some programming software of relatedfunctionalitythat share a more or less common user

EXHIBIT 2.3 Activities and Connective Processes Supported by anEPM System

16 A MODERN MANAGEMENT SYSTEM

interface and have some capability to share data. The ap-plications in most suites start out as stand-alone productsand are often integrated and placed under a common userinterface at a later date.

In contrast, a system is a group of interacting, inter-related, and interdependent elements that together form aunified whole.

As an analogy, consider music before iPod. Music loverslikely had a number of incompatible devices for listeningto music, each of which had its own interface. The musicthey purchased came in different formats, and even if itwas downloadable, was probably obtained from a variety ofsites.

With iPod, music lovers can obtain everything they needto listen to whatever audio programmingand more re-cently, also movies and television programmingthey de-sire by purchasing iPod and some accessories, and by down-loading from the iTunes store. In the iPod system, iTunescan become the single source for programming and iPodthe single device for accessing programming. With a com-puter, music lovers can even create their own programming,store it on iTunes, and access it using their iPod. One en-vironment . . . one interface . . . fully integrated for ease ofuse and deployment.

Organizations gain similar advantages when EPM is in-tegrated into a system. They gain actionable insight andthe ability to link strategies to plans, continuously monitorexecution against goals, and drive higher levels of perfor-mance. They can share goals and progress with individualsresponsible for achieving them. And individuals can shareinsight and information with management and their peersto ensure alignment. All through one environment . . . oneinterface . . . fully integrated for ease of use and deployment.

An EPM system is a logical next step for organiza-tions seeking more advanced and effective performancemanagement tools. This is because applications and tools

The Management System at GreenCo 17

that help people perform management activities and sup-port management processes are good, but they are not goodenough. All of these processes generate data that must beshared, and all of these processes are iterative and so theymust be linked. Therefore, EPM must be integrated into aunified system that includes a user environment throughwhich people access applications, tools, and the infor-mation they generate, and common services to ensure acommon repository, integration and data sharing, and userprovisioning.

In addition to tools for business users, the system mustinclude tools for IT people who deploy and manage it.

To sum up, the role of an EPM system in a modernmanagement system is to help automate the managerial ac-tivities and processes, to function as the connective fabric,and to make the complete cycle more effective, consistent,and reliable in supporting business performance.

THE MANAGEMENT SYSTEMAT GREENCO

For a model view of a modern management system sup-ported by an EPM system, lets look at how the activitiesand processes that define the system play out at a hypothet-ical company: GreenCo.

Vision and Strategy

In the vision and strategy stage, top management literallydetermines the purpose of the enterprise and the high-levelstrategies the organization will adopt to realize its vision. Inour example, the top management of GreenCo wants tochange the way people live in the 21st century by helpingthem be more environmentally responsible.

18 A MODERN MANAGEMENT SYSTEM

To realize this vision, GreenCo intends to build a lineof green products for homeowners such as alternativeelectricity generation devices, including photovoltaic panelsand wind-driven power generators.

Rationalization with ModelingBefore GreenCo can reasonably set goals and objectives forthis line of products, it must create models to test whetherit is even feasible to do so.

Models are the rules of business, and if GreenCo is goingto build and sell something, it needs rules for funding, de-signing, manufacturing, marketing, selling, delivering, andsupporting it and so on. Models will tell GreenCo howit must do all of that to be successful. And in the case ofGreenCo, politics play a rolewhat if GreenCo doesntconsider the impact of various environmental legislative ini-tiatives on its business? How would these various initiativesaffect the companys ability to sell products?

Once finalized, rules determined through modelingneed to be documented. And if they change, the new rulesneed to be propagated throughout the organization so ev-eryone knows theyve changed.

Goals and Objectives

Once GreenCo is satisfied that its strategy is feasible, it mustorganize and task its employees to deliver on the strategy.GreenCo might start by setting a goal of 10 percent penetra-tion of the addressable market with a series of efficient, low-cost units for the average homeowner. Specific goals andobjectives will touch multiple functions, including R&D,manufacturing, sales, and marketing.

Commitment with PlanningPlanning is the process that connects goals and objec-tives to execution by operationalizing them and setting

The Management System at GreenCo 19

specific numerical goals for each functions. For example,GreenCos sales and marketing must develop campaigns tocreate awareness and generate sales leads. Based on resourcesand channel capacity, specific sales targets must be set, andexpense, revenue, and profit plans developed. Once thisdemand planning has been completed, manufacturing andsupply chain planning must be accomplishedwith specificmaterials and production and distribution plans developed.And, finally, R&D must plan to deliver a series of increas-ingly advanced devices to satisfy changing or growing mar-ket demands, should all the other plans prove out.

Put another way, plans are what an organization commitsto do in support of its objectives. Plans are the system ofrecord of assumptions about its business and of what it hasdecided it is actually going to do. Without plans, there areno commitments. And without commitments, there is noaccountability.

Execution

This is the phase where GreenCo will test and realize itsgoals and objectives. This is also where key learnings takeplace and where GreenCo can test its assumptions aboutthe market, its own abilities and competition, and so on.

Tracking with Reporting and MonitoringIn between execution and evaluation activities are the mea-surement, monitoring, and reporting processes that will tellGreenCo whether it is attaining the expected outcomesbased on the plan of record for the business. If GreenCodiscovers that something is not working, the company canmake decisions to reallocate resources and alter tactics tobetter execute the plan.

These processes sit on top of the operational data,whether the data is in a data warehouse or not, and are

20 A MODERN MANAGEMENT SYSTEM

a formal way of observing a business. Remember the candystore analogy? In the single-proprietor candy store, all of thisobservation is done by one person with his own eyes. In thelarge, modern organization, these observations are made bymany people and many systems, including transactional sys-tems such as ERP. When made by transactional systems, theobservations consist of data locked away in those systems.Reporting applications tap into this data in a useful way.

Evaluation

Here we take stock and determine whether we haveachieved our goals. Were GreenCos strategy and abilityto execute up to par? Which aspects of GreenCos strategyworked and which did not? Where did the company ex-perience operational issues? Which processes were most orleast efficient?

Perspective with AnalyticsOnce GreenCo has evaluated its performance and deter-mined where it was successful and unsuccessful, it mustbegin an analytical process to study the results in a more in-depth fashion to determine causal factors, changes to theenvironment that were not expected, and possible futureoutcomes. Based on the outcome of this process, GreenComust feed its new understanding of the market and its ca-pabilities back into the vision and strategy activity to betteroptimize it and align it with the real world.

All of these management activities and processes oc-cur simultaneously and not necessarily in this order. Eachpiece informs the next, iteration is ongoing, and many sub-processes support each step. But this simplified model isuseful in clarifying the key components of a managementsystem, no matter the size or focus of an organization.

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The Role of EPM

Enterprise Performance Management is a relatively newterm that refers to a processcentric, holistic approach toimproving the capability of a business to gain insight andmanage its performance at all levels.

The seeds of EPM were present 20 years ago in Deci-sion Support Systems (DSS), which consisted of businessanalytics presented in a format appropriate for use by exec-utives in making decisions. The strengths of DSS were alsoits weaknessesthese tools were created by highly trainedusers for use primarily by a select group of elite users andlimited to large enterprises.

DSS solutions also were limited to expensive and com-plex statistical analysis or standard reporting packagestypically on 132-column green-bar paper. Spreadsheetswere becoming more popular, but were not connected tocorporate data. To analyze corporate data, users had to re-enter that data from hardcopy reports into spreadsheetsatime-consuming and error-prone process. Executive Infor-mation systems (EIS) were on the horizon, promising todeliver high touch applications for executives to analyzedata.

Since the days when cut-and-paste was cutting edge,business analytics have made huge strides, evolving intowhat we now know as BI. Today, BI tools and technologies

21

22 THE ROLE OF EPM

have become more usable, functional, and scalable. Standar-dization around Web interfaces and Data ManipulationLanguages (DML) have simplified their implementation anduse.

However, in spite of this, the overall penetration of BIremains relatively low. Even in well-established markets, likeNorth America and Western Europe, less than one quarterof potential users have been automated with BI solutions.Why is this? There are several answers, including the compl-exity, lack of skills of average users, and the overall cost of BI.

In addition, often when BI is established, it has beenpurchased by an isolated department or is being used ina tactical fashion. It may also be driven by IT, which, nomatter how visionary or well intentioned, will never replacethe business as the driver of business initiatives.

To illustrate my point, consider that much of the IT buy-ing behavior in large enterprises is focused on ad hoc queryand reporting tools. This has generated some very large,enterprisewide BI purchases. Often, the intent is to moveusers to self-service. This is a response to the myriad re-quests for custom reports, which has created huge backlogswithin IT. While this may reduce IT costs and backlogs inthe near term and initially increase user penetration, it willnot deliver actionable insight to an organization. Therefore,increases in usage gradually decline as the tools shortcom-ings come into focus.

Although ad hoc query and reporting may be in thespotlight today, the future focus of BI is elsewhere. An in-creasing number of organizations are approaching BI as partof EPM. The integration of BI with EPM gives BI real pur-pose and makes it infinitely more actionable. It also givesquery and reporting toolsused in conjunctionmore ofa context for detailed analysis.

The reason this transformation is important is that thegoal of BI is to provide insight, while the goal of EPM is tolink the insight provided by BI to the planning and control

The Role of EPM 23

cycles of the enterprise, which deliver tangible action and,consequently, business value. This difference in the way in-formation is used to drive business change is defining thenext generation of business innovators and leaders.

To further illustrate the importance of this transforma-tion, consider that with BI there is no direct link betweena report or a dashboard that identifies an emerging issueand the systems a decision maker would use to carry out anappropriate response. For example, if a report reveals that agiven hotel within a global chain is experiencing low occu-pancy rates, someone has to view the report, recognize theimportance of that data point, and notify another individualwho is empowered to act on that information. That personthen must create and execute a suitable response using theappropriate financial and/or operational systems.

These multiple steps introduce latency and potential hu-man error into what should be a fast-response process. Evenworse, as the players move from system to system, the in-tegrity of the underlying data may be compromised, result-ing in the very real risk of losing sight of the essential dataanalysis or trend.

In contrast, with EPM, the insights coming out of BIand the responses to it are tightly linked. In our example of aglobal hotel chain, if a BI system indicates that hot weathercauses low occupancy rates in Montana, then the responseof seasonally adjusting prices to rebalance occupancy can beautomatically initiated and flagged for approval by the ap-propriate manager. This automated process accelerates re-sponse and virtually eliminates the risk of a missed handoff.It also allows the connection between information discov-ery and the corresponding action to be automatically andelectronically documented, so that the entire informationchain becomes fully auditable. This takes transparency to anentirely new level.

Similar examples are easy to envision. A supply chainmight have inherent inefficiencies. Using BI, one might

24 THE ROLE OF EPM

discover that a key supplier is unable to deliver a certaincomponent as quickly as the marketplace demands. EPMtells us the overall impact and allows us to model alternativesand select the best options.

Similarly, a customer database might hold great insightsinto purchasing patterns. BI can establish that a particularproduct is underperforming in a given region. But EPMcan deliver the distribution, pricing, and packaging changesnecessary to optimize revenue and profitability.

As organizations have become much more aware of thepower of timely, relevant, and actionable insight, EPM isfast becoming a topic of discussion in conference rooms allover the worldin concept if not in name. For example, itis not difficult today to have a discussion with most exec-utives and managers about planning, Balanced Scorecards,dashboards, or predictive modelingsomething that couldnot have happened 20 years ago.

Much of the appeal of EPM exists because it offers away to strategically improve the quality of management in-formation and process, and therefore grow an organizationfrom a collection of loosely coupled business units into thehighly coordinated and agile enterprise that is necessary tosucceed in todays global markets.

For example, EPM closes what I call the fact gap,which is a lack of factual information or real understandingof an organizations performance during decision making.In a fact gap, organizations make decisions using outdatedinformation, borrowed perspectives, and sometimes evenpure guesswork.

There are two categories of fact gapsoperational,which affects the measurement of efficiency, and market-focused, which affects customer leverage and market op-portunities. Left unchecked, fact gaps have the potential tocause business initiatives or even entire businesses to fail.

EPM also delivers management information in a timelyway and hosts management processes in a single, interactive,

EPM and Planning 25

and collaborative environment. This allows teams of man-agers across the enterprise and the extended enterprise tocollectively plan, measure performance, anticipate results,and drive profitability.

And EPM can play a crucial role in helping an organi-zation manage its relationships in a decentralized businessnetwork. Using EPM, organizations can plan and measuretogether with its partners and adjust accordingly. This canbe done daily, weekly, monthly, or in whatever timeframesmake sense. It can also help foster collaboration and trustby facilitating shared goal setting and providing access toinformation that helps all parties monitor and confirm mu-tual success. In a decentralized business network, objectivedata is often the best arbitrator.

EPM AND PLANNING

Perhaps nowhere is the impact of EPM felt more dramat-ically than in the enterprise planning process. This is be-cause advances in planning practices are largely dependenton advances in planning technology. EPM can transformplanning from an annual exercise that adds little value to anorganization to one that ensures the continuous optimiza-tion of resource allocation decisions and consistent, effectiveexecution of business strategy across an enterprise.

As is the case with all important management pro-cesses, enterprise planning and the tools that support it havecontinually evolved together over time. Before computers,companies performed planning tasks with paper spread-sheets and calculators. The introduction of PCs and desktopspreadsheets made planning faster, offered opportunities forgreat flexibility, and made it easier to share and update plan-ning documents.

Spreadsheet programs were later enhanced with spe-cialized budgeting applications, and then more recently,

26 THE ROLE OF EPM

the Internet and Web-based applications provided browser-based access to shared planning databases and documents.This meant that planning documents could be maintainedon central servers rather than being stored on multiple in-dividual users desktops.

Both of these innovationsspecialized applications andWeb-enabled applicationsmade enormous contributionsto the effectiveness of the enterprise planning process. Spe-cialized programs enabled businesses to more quickly andreliably build planning documents based on more sophis-ticated models. And Web-enabled applications solved theproblems of version control and auditing because planningdocuments could then be stored centrally. But neither ad-vance did muchif anythingto introduce dynamism andcollaboration into what was still largely a static, top-downprocess. The advance that was required to make that happenwas EPM.

Among the improvements EPM can make to the enter-prise planning process:

Unified Planning

There are a multitude of financial and operational plans,budgets, and forecasts in any organization, including strate-gic and operating plans, outlooks and scenarios, revenue,expense and cash flow forecasts, capital expenditure andworkforce plans, and marketing, sales, and administrativebudgets.

EPM brings these separate planning processes together.

Dynamic, Real-Time Updates

Business today moves too quickly for organizations to relyon annual or quarterly numbers alone. Allocation decisionsand forecast revisions have to be made based on conditionsthat can change at any time.

EPM and Planning 27

EPM facilitates the ability to adjust more frequentlyoreven continuouslyby providing automated, Web-basedlinks to planning drivers across the enterprise. As a result,events or initiatives in one part of the organization can driverapid responses in other parts of the organization. This dy-namic approach eliminates the lag times and disconnectsassociated with conventional planning tools and the annualor quarterly planning process.

Multitiered Aggregation and Granularity

Planning takes place on many levels, from the boardroomto the front lines. But if each level uses a separate plan-ning system, aggregating plans becomes a difficult andtime-consuming process. Even worse, it can be virtuallyimpossible for top management to drill down from anaggregated document to discover underlying issues at thedesired level of granularity. In addition, the manual aggre-gation of multiple spreadsheets introduces the possibility oferror.

EPM solves these issues by unifying all planning systemsinto a single planning environment in which all data is ap-propriately linked vertically across all organizational levelsand horizontally across all departments and functions.

Integration with Enterprise Applicationand Data Sources

Planning and budgeting are affected by a diverse range ofenvironmental factors: sales pipelines, burdened labor rates,cost of materials, interest rates, currency exchange rates,and so on. This data is typically stored in ERP systems, HRapplications, external information services, and other inter-nal sources. It makes good sense to tap into these sourcesto dynamically adjust planning variables to reflect changingconditions.

28 THE ROLE OF EPM

EPM provides the integration interfaces and variableadjustment functions necessary to do this. And, becauseplanners often want to work with such data with familiartools, EPM also provides interfaces to such familiar tools asMicrosoft Office.

Translation between Financial andOperational Metrics

One of the keys to good planning is collaboration of allappropriate people across the enterprise. A Web-based ap-plication fosters collaboration by facilitating the distribu-tion of functionality anywhere and everywhere its needed.However, its just as important to facilitate collaboration be-tween business userswho think and act primarily in termsof business operationsand finance userswho typicallydrive planning processes using budgets.

EPM facilitates collaboration between finance and oper-ations by providing automated translations between finan-cial and nonfinancial metrics such as headcount, materials,and product units.

Enhanced Creation and Management ofWhat-If Models

A big part of planning is the modeling and assessing ofmultiple, divergent scenarios. What if we add more regionalfacilities? What if interest rates rise dramatically? What ifsales misses its quarterly goal by 10 percent? Managers mustcontinually ask these types of questions and accurately gaugetheir implications. Spreadsheets make it difficult to workwith multiple theoretical scenariosespecially since theylack tools for linking related scenarios to one another inmeaningful ways.

EPM allows multiple alternative scenarios to be man-aged in a common manner, allowing decision makers across

Planning as a Driver of Process Change 29

an organization to freely experiment with various hypo-thetical conditions without creating document chaos in theprocess or undermining the integrity of the core planningdocuments.

Of course, technology alone has little value; it requiresthat organizations apply it in the right way by using it tosupport best practices. In the case of the enterprise planningprocess, using EPM to support best practices in planningresults in the following benefits:

Faster, more appropriate response to change by reduc-ing planning cycle times

Actionable insight at users fingertips by making allplanning data across the enterprise available in a single,easy-to-use application

Predictable performance by enabling continual assess-ment of real performance versus projected results andmaintaining alignment between projections and exe-cution

Optimal allocation of resources by linking planningacross the enterprise based on logical dependencies

Full enfranchisement and unity of direction across theenterprise by ensuring that everyone at every levelworks together to achieve common goals

Clearer vision, greater creativity, and stronger leader-ship by enabling an organization to examine multiplewhat-if scenarios

More confidence in planning and forecasting by usinga disciplined approach

PLANNING AS A DRIVER OFPROCESS CHANGE

As an example of an organization using EPM to implementplanning best practices, consider this major U.S. university.

30 THE ROLE OF EPM

An early adopter of EPM for operational analysis, the uni-versity decided in 2007 to extend its use of EPM to planningand budgeting functions. The goal is to gain more accurateinsight into both its financial and operational data, enablingmore reliable plans and forecasts and more insightful analysisof ongoing operations.

Specifically, this university wants to give its financial an-alysts access to a centralized performance management sys-tem that provides an in-depth look at university operationsand their related impact on financials by tightly integratingfinancial and operational planning models. Once in place,the new system will enable the universitys fiscal managersin central university offices, individual schools, and busi-ness units to generate reports to keep university administra-tors current on the status of key business processes affectingevery member of the community.

To accomplish this, the system will tap into the univer-sitys data warehouse, which contains information directlyfrom the universitys student information system and var-ious financial systems. With the systems reporting tools,university staff members can then access an intuitive andhighly interactive interface to design their own dashboardsfor monitoring status and drilling down on relevant infor-mation.

By integrating management, planning, and modelingfor various financial and business applications into a singlesystem, the university will have reports that are drawn fromthe same consistent set of information and a unified viewof its financial and operational data whenever its needs it.

Another example of an organization using EPM to driveprocess changespecifically to unify its planning and fore-casting processesis a U.S.-based leader in security soft-ware. The company has operations in more than dozens ofcountries and employs more than 15,000 people.

The challenge of unifying planning and forecasting atthe company was made more complex by the companys fast

Planning as a Driver of Process Change 31

growth through a series of acquisitions. Each new acquisi-tion brought new systems for functions such as reporting,planning, and financial consolidation. Because each depart-ment had one or more of its own systems for managing thesefunctions, the business planning process involved financialanalysts interviewing each budget manager individually toobtain forecast and budget data. The analysts would thenrekey this data into a homegrown tool or spreadsheet. Asthe company grew to more than 6,000 cost centers, com-pleting a forecast cycle typically took each analyst a solidmonths work.

In addition, discrepancies in how product data was cap-tured by different business units made it difficult to produceaccurate rollup information to analyze product sales consis-tently.

In implementing EPM, the companys top priority wasto find an integrated platform that would be accessibleto all employees. In addition to automating the planningprocess, the company wanted to add more accountabil-ity to the process by having business unit managers beresponsible for entering their own information into thesystem.

After selecting its EPM solution in 2003, the planningprocess took about four weeks for system design and an-other month for testing and refining. Training sessions wereheld in stages for the 800 users of the system. Deploymentsof subsequent components of the system were completedwithin an average time of three months.

With EPM, the company has streamlined its planningprocess and enabled more people to actively participatewhile reducing the time it takes to gather and analyze theunderlying data. As a result, even though the company hasdoubled in size in the past few years, it has increased its abil-ity to react to business change by having a more accurateand accessible view of business conditions available to morepeople in the organization.

32 THE ROLE OF EPM

One more example is a U.S. firm that provides homesfor nearly 10,000 seniors and uses EPM to streamline itsplanning processes and plan for future growth. With seniorcampuses in six states, the firm plans aggressive expansionover the next five years. One of the biggest challenges asso-ciated with its expansion plans was budgetinga problemthat no longer exists since the company implemented EPM.

Prior to EPM, the company was unable to give its 300business managers in various locations direct access to itsERP system to create their own budgets. Therefore, thefirm identified as its primary need the ability to keep stan-dardized forms and reports in a centralized location, yet beable to distribute them on the Web to a large number ofusers. The company also needed the ability to modify andretrieve collected data and create a standard package of re-ports. Since implementing EPM, budgeting at the firm has,in the words of one executive, gone from a nightmare toa nonissue.

The firm also will use EPM to forecast labor and con-struction costs for new campuses. Its goal is to have 30communities within the next five years, a growth of sixtimes its current size, and so careful planning is essential toensure this growth is profitable. Each campus is built one ata time, and construction takes about three to five years.

Forecasting labor and construction costs will consist ofentering the expenses from every phase of a jobfrom thecost of dry wall to on-site laborinto a general ledger sys-tem. With this information, the company will be able tofind variances within the budget, compare one job to an-other, and create standards for future jobs.

Today, EPM also simplifies the firms entire financialmanagement process, helping managers focus their effortson budget analysis, planning, modeling, and forecasting in-stead of the data entry and collection mechanics.

This company demonstrates how EPM takes financeto a new levelhelping managers create accurate financial

EPM and Compliance 33

plans to achieve company goals, while cutting costs and,therefore, increasing profits.

EPM AND COMPLIANCE

Another area in which EPM has had an enormous impactis in compliance with financial and other regulations thataffect businesses and business reporting. While many of theheadlines have been reserved for new financial regulations,other laws such as the Health Insurance Portability and Ac-countability Act (HIPAA), designed to improve health careaccess and prevent health care fraud and abuse in the UnitedStates, and the Patriot Act, which gives the U.S. govern-ment access to business information previously consideredconfidential, have raised the bar on compliance as well.

In particular, stringent new corporate accounting andreporting rules have surfaced in recent years as govern-ments all over the world have responded to the crisis ofconfidence in business that arose in the wake of Enron andother high-profile corporate cases in the early 2000s. Inthe United States, for example, based on recommendationsfrom the Securities & Exchange Commission (SEC) andpublic pressure, a massive corporate reform measure knownas the Sarbanes-Oxley Act became law in 2002.

The Sarbanes-Oxley Act demands more auditing in-sight and requires CEOs and CFOs to personally certifytheir companies financial results or suffer severe civil andcriminal penalties.

Similarly, the European Union (EU) parliament en-dorsed a proposal that requires all EU companies listedon a regulated market to prepare and publish their con-solidated accounts in accordance with a single set of In-ternational Accounting Standards (IAS), also known asInternational Financial Reporting Standards (IFRS). Theaim of standardizing the reporting of results was to make

34 THE ROLE OF EPM

financial results more comparable, thereby making theEuropean capital market more efficient. Without standard-ized reportingeven if all other barriers to efficiency areremovedinvestors likely will remain skeptical and demanda premium for their capital.

By any yardstick, regulations such as the Sarbanes-OxleyAct of 2002 and IAS/IFRS 2005 are extraordinary measuresthat pose extraordinary challenges for companies affectedby them. In the United States, adequate integrated finan-cial management systems and internal controls are no longernice to have: they are the law under Sarbanes-Oxley. In ad-dition, credibility is paramount and must be demonstratedby faster reporting cycles, full disclosure, and no restate-ments.

These regulationsand the very real personal liabilitythey createdhave caused changes from the boardroom tothe mailroom as boards of directors and management teamshad to rethink how their companies plan, measure, andreport performance. The goal was to find and implementsolutions that would enable them to report openly and com-prehensively on their performance with confidence.

Purposeful violations aside, many companies legiti-mately struggle to gather, understand, and report financialinformation. Because financial information is often siloedin transactional systems or locked in spreadsheets, it canbe extremely difficult if not impossible to create a singlereliable, accurate, and complete view of a companys per-formance. The problem is compounded in large companieswith numerous individual, geographically dispersed, oper-ating units, many of which likely use transactional systemsfrom different vendors.

Specifically when it comes to reporting, however,another problem is that many companies lack a singlereporting infrastructure that enables managers to createcomprehensive management-oriented reports for internaluse and to generate reports for external use that comply

EPM and Compliance 35

with statutory reporting requirements and other needs ofexternal stakeholders. This disconnect between reports forinternal and external use adds to the difficulty of creatinga single version of the truth about a companys financialperformance.

As companies that have implemented EPM are discover-ing, EPM can play a crucial role in addressing this disconnectby providing a single view of the companys performancethat includes both financial and operational information in-tegrated into a single reporting structure. This ideathatcompliance and performance are linkedis very much inthe spirit of Sarbanes-Oxley, IAS/IFRS 2005, and otherregulatory reforms. Whatever their merits or shortcomings,these reforms are intended to restore public trust in corpo-rations ability to produce shareholder value. That spirit isas much about performance and accountability as it is aboutcompliance.

To illustrate this point, think of a company that has dif-ficulty putting together its income statement and balancesheet each quarter or knowing within 48 hours when amaterial event has happened. Is this really a company thatcan consistently produce a profit quarter after quarter, yearafter year? How would the executives know for sure thatthe company did in fact operate profitably over the longhaul if it has a hard time arriving at its numbers today?

Conversely, think of a well-run company that under-stands and tracks its key performance indicators (KPIs)whatever they may bea company that knows whichproducts, customers, regions, and production plants aremost profitable and does a good job of monitoring cashflow. This company will find it much easier to becomecompliant.

With an understanding that more substantial benefitscome from greater visibility into your business and withit, the ability to make mid-course corrections to improveperformancecutting costs in difficult times and investing

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in more robust timesthe question is, how can you moveyour organization beyond compliance to breakthrough per-formance?

The answer, of course, is EPM.

LEVERAGING COMPLIANCE TOIMPROVE PERFORMANCE

A European financial services provider is an example of acompany that uses EPM to achieve both compliance andbetter performance. As a fully licensed bank, the company issubject to the changing solvency requirements in the bank-ing industry.

Specifically, banks are currently required to reserve 8percent of issued loans to absorb losses, but from 2007 on-ward, they will be allowed to diversify their risks to a greatextent. These arrangements were agreed to in new regula-tions known in banking circles as Basel II.

This particular companys response to Basel II, IFRS,and other changing international regulation was to leverageits short-term requirement of compliance into a long-term commitment to more sophisticated techniques formonitoring and improving performance. These includeeconomic capital (EC) modeling, risk adjusted return oncapital (RAROC) modelingfor which IFRS providesthe required calculation methodsand value-based man-agement (VBM), which is a comprehensive set of activitiesthat maximize value.

The company had earlier implemented EPM for bud-geting, which enabled it to more easily produce reportsrequired under Basel II and RAROC requirements. Thecompany is currently implementing an EPM system thatwill further enable it to establish links that will let its var-ious EPM applications share data and metadata. This willyield data and knowledge that will determine the desired

Leveraging Compliance to Improve Performance 37

shareholders equity on every deal the company does. Theseand other changes are bringing the company closer toVBM, a major change from a strategy geared more towardfinancial control and book profits to one that is more fo-cused on strategic control and value.

One of the largest electronics retailers in the UnitedStates is another example of a company that leveragedcompliance into performance management. Its primarymotivation in adopting EPM was to solve the problem ofa frustrating disconnect between information required bymanagement to run the company and information neededfor external reporting.

As recently as 2002, the firm suffered from a decentral-ized budgeting and reporting process and inconsistency inhow each company group did its budgeting and reporting.Similar to other large, decentralized companies, the firmhad some groups with a manufacturing focus, others witha retail focus, and no alignment between how groups re-ported performance internally and how it needed to reportexternally.

The companys issues were heightened by its use of aspreadsheet-based budgeting system. This meant that head-quarters was routinely receiving budgets from 12 differ-ent entities without much visibility into how those budgetswere being created. In addition to a lack of visibility andcommon processes, the company lacked a clear company-wide goal in its budgeting process.

When the firm decided to tackle the problem, the com-pany included in its defined requirements a need for top-level visibility into all budget details; better communicationat all levels regarding current budget numbers and issues; auniform income statement hierarchy for all reporting units;easy-to-use reporting tools; and a means to incorporate cur-rent financial reporting data into budgeting systems.

To meet these requirements, the firm combined EPMplanning and reporting software to pull company financial

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data from existing applications and to enable collaborativebudgeting and forecasting throughout the company. Groupsnow prepare a standard set of monthly financial reports, andare free to create their own ad hoc reports. Most important,all reportswhether corporatewide or ad hoc for a group,whether internal or externalare all driven by a single ver-sion of the truth about the companys performance.

HOW EPM WORKS FROM AUSERS PERSPECTIVE

Up to now, the real-world examples of EPM I have citedhave focused on process changes and benefits to organiza-tions. But to understand how EPM improves the workingstyles of individual users, consider this before-and-after sce-nario.

Before EPM, a manager might get a report or spread-sheet indicating a variance from plan. To better understanddetails/causal factors, he or she would have to access mul-tiple application or reporting systemsall with differentviews and perspectives on the data. These different per-spectives then would have to be manually reconciled (usingspreadsheets and cut-and-paste) and then compared to theplan of recordanother spreadsheet typically held by thefinance department. Any changes to the plans would haveto be authorized and made by finance. The new plan ofrecord would then be emailed to all of management withan explanation for the changes.

Multiply this process by the number of managers in anyorganization and it becomes clear how problematic it is.

In contrast, with a modern EPM system, a manager ispresented with a scorecard or dashboard displaying met-rics that are relevant to his or her performance. Variancescan easily be seen and explained by examining the infor-mation, from all perspectives, to fully comprehend what

How EPM Works from a Users Perspective 39

occurred and why. Any required changes to plan are madeby the manager and approved in the same system and with-out having to populate and email spreadsheets. Annotationsare made to the plan so other managers can understand therationale for the changes.

Here is an even more specific scenario. Suppose youwere a regional vice president of a bank, and when view-ing your dashboard, you noticed an unfavorable variance innet income for one of your branches. Using conventionaltools, youd have to jump through an endless web of hyper-linked reports, or drill through multiple layers of data, orsift through reports in a repository. More likely, youd callsomeone and have him or her do it for you.

But imagine if you could just type in a few key wordsin a search bar and be immediately presented with a set ofrelevant business topics related to net income and driversof profitability. And for any one of those topicsproductprofitability, for examplethe system presented you withpredefined questions in your native language. And then gaveyou the ability to refine the question to get the specificanswer you wanted.

And if you then wanted to change the time period foryour inquiry from a quarterly view to a year-to-date view,making that change would just be a matter of clicking onthe time period and selecting your alternative.

But what if you were interested in understanding whatsbehind those numbers? Where would you start?

EPM would help guide you along that path. For ex-ample, you could mouse over the gross profit metric for aparticular product and be presented with a menu of relevantmetrics that relate to or drive gross profit, such as market-ing expenses, growth rate, or plan variance for that productarea.

Another way in which EPM would help you is throughadaptive visualization. If youve used Amazon, youre famil-iar with how the system remembers your past experiences

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on the site and adapts that historical memory to your cur-rent interactions, presenting information and suggestionsthat are of direct relevance to you at that moment in time.Adaptive visualization is one capability required to makethis work.

The fact is that people like to view information in differ-ent ways, depending on individual preferences, the type ofinformation, and its business context. Using adaptive visual-ization, EPM would automatically select the most optimalviews of information based on your history, preferences,and the nature of the data.

For example, if you were to add additional KPIs tothe report described earlier, the tables presenting the datawould become much more complex. So, wouldnt it be niceif, upon selecting those additional performance indicators,EPM automatically changed your view from a table to abubble chart that used color, size, spatial placement, andannotations to make it easier to immediately understand?

Another area of emerging focus for EPM is decisionmanagement. Have you ever encountered a situation inbusiness where a decision was made, acted upon, and then,after the fact (either because it turned out to be a great de-cision or a horrible decision), no one could remember howthe decision was made in the first place? EPM should be ableto record the decision-making process, making it easier toaudit how and why business decisions are made, ultimatelyso that best practices can be captured and embedded intofuture behavior.

Much of what Ive discussed in this example focuses onthe business user, but the burden of making EPM successfulultimately rests on the shoulders of IT. Its hard, especiallywhen things change on a daily basis. Reports change, ap-plications change, source systems change,