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Beyond Finance: 5 Crucial Capabilities for Extending Enterprise Performance Management into Operations

by Lothar Schubert and Ravi Mohan | SAPinsider

October 1, 2008

Financial metrics are inherently valuable to companies looking to measure their performance. But without also taking operational metrics into account, a company will struggle to truly understand where it excels and which areas could use improvement. Uncover the five key IT capabilities that will arm your business to become even more efficient, effective, and information-driven.
 

Superior enterprise performance is no accident. Consider a consumer goods company that simplifies its worldwide raw material specifications, such as product and packaging material specs, from 22 down to just three. This decrease qualifies the company for volume discounts, saving an estimated US$7.5 million on material costs in the first year alone.

Think of a services company that improves control over its supply chain network by pinpointing and closely monitoring its most critical metrics, such as shipment status and cycle time. It then establishes processes for insight-guided action, improving its on-time delivery rate by 11%. This, in turn, results in substantial improvements in customer satisfaction and shareholder value.

Or picture a chemicals company that overcomes rapid trading growth and dramatic price increases, as well as supply chain disruptions and material shortages. This company maintains profits by making informed procurement choices and timely pricing decisions and by closely monitoring the business in near-real time.

What do these companies have in common? All are businesses that have measurably improved their companies' financial results by demonstrating operational excellence, enabled by timely and actionable insights that were linked to strategic enterprise goals, such as improved profitability, lower risk, or improved customer satisfaction. In other words, they are all information-driven companies — organizations that use operational metrics to determine where their business excels and to identify and correct areas that could use improvement.

Key Term

Operational metrics span the entire gamut of enterprise operations. Examples include metrics for service (first-call resolution), sales (conversion rate), supply chain (perfect order rating), procurement (contract compliance), or workforce management (training cost) — all of which companies use to measure the overall efficiency and effectiveness of a business process.

Why Operational Metrics Matter

Traditionally, companies focus primarily on financial metrics to measure success. Understanding cash flow, profitability, or cost of goods sold is certainly important to assess a company's performance. But measuring and analyzing operational metrics — and clearly understanding the cause-and-effect relationships between operational metrics and financial ones — is just as critical. Let's take a closer look at why operational metrics are so important.

Operational metrics explain financial performance. Financial performance is directly affected by operational performance: Revenue is affected by a successful sales pipeline and time-to-market strategy, cost of goods sold is affected by procurement cost, and cash flow is affected by contract compliance with suppliers. It is therefore critical for the finance department to understand the operational drivers that impact financial metrics. Traditional financial aggregations and classifications — like marketing expenses or product revenue — are no longer enough. They overlook the underlying details of operational activities needed to drive corrective action.

Operational metrics are predictors of enterprise performance. While financial metrics tend to focus on historical measures, operational metrics tend to be more timely and forward looking. For example, measured improvements in perfect order rate, customer satisfaction, innovation, or employee retention may have a miniscule impact on the current quarter's finances; however, they may have major impacts on future earnings (see sidebar).

Operational metrics can drive strategy. Timely insight into operations is key for collaborating within increasingly complex networks of customers, manufacturers, and suppliers. And operational metrics allow companies to translate their enterprise strategy into clear, measurable goals and to identify and correct weaker areas within their business.

Operational metrics are becoming mandatory. Stakeholders are increasingly demanding operational information to get a more holistic view of businesses. For example, in a recent survey of CFOs, analysts, and investors across over a dozen industries, the vast majority of those surveyed indicated that to get a good read on the business as a whole, the most important information was contextual (such as blogs and customer feedback) and nonfinancial (as opposed to the comparative handful who cited financial information's importance). In addition, compliance mandates increasingly require the disclosure of nonfinancial metrics, such as carbon emission, water neutrality, or export compliance. Several analysts suggest that by 2012, approximately half of public companies will face mandatory nonfinancial reporting requirements. Even today, the Global Reporting Initiative (GRI) is encouraging companies to voluntarily provide information about their environmental sustainability, worker conditions, and corporate citizenship.

Become an Information-Driven Company

So how can an organization embrace operational metrics to become an information-driven company? On the business side, it requires commitment and executive support, including incentive programs and mechanisms that will prevent any one department or contingent from presenting self-serving or falsified metrics. To this end, businesses often establish competency centers to act as neutral parties that will consolidate and prioritize feedback from stakeholders and govern and monitor the implementation and interpretation of metrics.

But IT also has a crucial role to play in making a company more performance driven: Companies embarking on this endeavor need a solid yet flexible IT infrastructure that provides the following capabilities.

Business success increasingly depends on a company's ability to deliver operational excellence while balancing risk management and competing external and internal expectations.

1. Metrics That Matter

It can be difficult for the many lines of business to arrive at a consensus about which metrics really matter — and then to communicate and track the meaning of those metrics. There are three types of metrics: regulated metrics, industry best practices, and company-specific metrics. A good performance management application needs to be able to deal with all three. Furthermore, to develop a full understanding of these metrics, it's important to support impact analysis and simulations so decision makers can understand the qualitative and quantitative relationships between metrics. A solution like SAP Supply Chain Performance Management can help.

This application allows companies to foster strategic alignment and accountability across the supply chain network and to effectively balance risk as well as financial and operational goals — all while linking supply chain execution to financial and strategic corporate targets and results (see Figure 1).

Figure 1
SAP Supply Chain Performance Management includes an intuitive dashboard that lets users see a variety of key operational metrics

2. Real-Time, Proactive, Process-Relevant Insights

Pulling together a forward-looking strategy is important, but executing on that strategy is even more so. To take that next step, companies must gain insight into the most current data to help them make the most informed, strategy-conscious decisions.

SAP has a variety of functionality aimed at making this decision-making process more intuitive — SAP solutions for enterprise performance management, for instance. Let's take a closer look at just one solution in this suite: SAP Spend Analytics. This solution (see Figure 2) allows customers to easily identify savings opportunities, improve sourcing strategies, negotiate strategic supplier relationships more effectively, make better-informed decisions, and perhaps most importantly, take action more quickly.

Figure 2
SAP Spend Analytics allows users to see important metrics — such as the current and historic spend with top suppliers — at a glance

3. A Feedback Loop Between Operations and Finance

To assess the impact of operational decisions, it is critical to probe multiple options and make a decision based on maximum benefit and lowest risk. BusinessObjects Profitability and Cost Management provides a deep view into operational cost drivers — such as transportation or call center costs — and their impact on overall enterprise profitability. Then there's SAP GRC Risk Management,1 which helps companies assess and quantify risks associated with their decisions — regarding stock outage, loss of key customers, or competitors' movements, for example.

4. A Trusted Data Foundation

Data is typically distributed across multiple systems — occupying several ERP systems plus supply chain, customer relationship, and supplier relationship management systems. In addition, these systems come from multiple vendors, and companies need to consume data from customers, suppliers, and partners. On top of all that, IT must deal with market information and risk indicators.

To keep track of all this and to ensure that information is easily accessible to those who need it, companies should aggregate data from disparate sources and work to normalize, enrich, and classify it, perhaps through a taxonomy. Again, a solution like SAP Spend Analytics can help, with its integrated data services and technologies for supplier data normalization and enrichment and for transaction classification.

5. Nimble, Self-Sufficient Capabilities

Businesses change rapidly and IT departments often struggle to keep up, having to constantly redesign data models, systems, reports, and dashboards. To lessen the strain on IT resources, it's important to set up tools and technologies that enable business users to change and maintain their own reports and dashboards. Companies can leverage the market-leading capabilities of BusinessObjects Data Integrator to gain the flexibility they need to quickly integrate into heterogeneous environments and adjust to the changing needs of even the most demanding business users.

Closed-Loop Performance Management for the Entire Enterprise

In the end, becoming an information-driven company is all about taking an integrated approach to capturing and analyzing performance metrics — both financial and operational ones — and linking them to planning and execution processes.

It's key to remember that these metrics are all connected. For example, profitability planning and analysis processes are fed by operational metrics, allowing companies to better evaluate financial metrics like customer, product, and channel profitability.

Once companies make better use of operational metrics across the business, they will be in a much better position to improve their top line and bottom line — both undeniably important metrics.

NOTE!
For more information on SAP solutions for EPM, visit http://www.sap.com/about/press/press.epx?pressid=9967.

Additional Resources

  • The Reporting & Business Intelligence with SAP and Business Objects seminar in Orlando, October 27-29, 2008, and Copenhagen, January 19-21, 2009, for information on SAP solutions for EPM and BusinessObjects solutions (www.sap-businessobjects.com)

  • The Reporting and Analytics 2008 conference in Marseilles, October 28-30, 2008, and Las Vegas, November 17-19, 2008, for more information on SAP Supply Chain Performance Management and SAP Spend Analytics (www.sapreporting2008.com)

Lothar Schubert (lothar.schubert@sap.com) is Senior Director of Solution Marketing for enterprise performance management applications at Business Objects, an SAP company. Lothar has over 15 years of leading industry experience in the enterprise solutions space. Some of his prior roles include product management, strategic consulting, and project management across the US, Japan, and Europe. Lothar is based out of Palo Alto, California.

Ravi Mohan (ravi.mohan@sap.com) is Vice President of Solution Management for enterprise performance management applications at Business Objects, an SAP company. Ravi has worked in the software industry for more than 10 years, serving in a product management capacity at a data integration and analytical applications company before joining the SAP enterprise performance management team. After earning his MBA in finance and marketing, Ravi began his career in the automobile industry as a mechanical engineer.

 



1 For more information on SAP solutions for GRC, see "Risk-Adjusted Strategy Management: A Necessity, Not a Luxury, in Today's Business Environment" by Stephanie Buscemi — or the GRC special feature — of this issue of SAP Insider. [back]


 

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