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To Truly Manage Financial Performance, Bridge the Gap Between Strategy and Execution

by Richard Barrett | insiderPROFILES

October 1, 2010

Agility. Insight. Alignment. Visibility. These are all benefits of a well-designed performance management strategy. Using Zions Bancorporation as a case study for success, SAP’s Richard Barrett details the performance management best practices that can be implemented at any company and the importance of using multiple solutions to achieve success.

Implementing individual enterprise performance management (EPM) applications brings undoubted benefits — such as automating manually intensive budgeting processes and speeding up the financial close — to organizations, especially when these applications replace inefficient, spreadsheet-reliant processes. But if your organization wants to achieve best-in-class performance management, in-line with leading practices established by Robert S. Kaplan and David P. Norton in their book The Execution Premium,* your performance management processes must run seamlessly across all those individual EPM applications.

* Robert S. Kaplan and David P. Norton, Harvard Business School Publishing Corporation: Boston, MA (2008).

This heightened level of performance management permits data sharing, enabling business managers to collaborate and make better, quicker decisions that give the organization the agility it needs in today’s climate of economic uncertainty.

The Execution Premium outlines a six-step, closed-loop performance management process — from developing a strategy to driving performance to optimizing data — as shown in the figure below.

Execution Premium Process

The six-step closed-loop performance management process, as described in The Execution Premium Process (XPP)

The benefits of adhering to this closed-loop process can be summarized in four broad themes:

  • Agility: The quicker organizations can detect adverse variances, such as supply chain issues that could negatively affect customer service and ultimately revenue, and assess different scenarios to remedy them, the faster and more incisive their response is.
  • Insight: With knowledge of the underlying drivers of cost and profitability, managers can recognize why variances occur, understand how to address them, and fully justify any related budget requests.
  • Alignment: Vertically and horizontally aligning strategies with plans, shared services resources with front-line needs, and operational capacity across responsibility centers leads to more efficient and effective organizations.
  • Visibility: Through rapid, frequent forecasting that accurately reflects operational needs and minimizes the likelihood of variances, organizations can have better visibility into future profitability.

Achieving Closed-Loop Performance Management Requires Multiple Solutions

Several SAP solutions underpin closed-loop financial performance management: SAP BusinessObjects Strategy Management, SAP BusinessObjects Planning and Consolidation, and SAP BusinessObjects Profitability and Cost Management, with multiple applications typically involved in each of the loop’s six steps.

For instance, the first step — developing a strategy — clearly relies on a strategy management solution such as SAP BusinessObjects Strategy Management. However, whenever a company reviews its strategy, it first needs to understand the profitability of each product line, customer, channel, and region — the type of insight SAP BusinessObjects Profitability and Cost Management provides.

Process costs that are routinely calculated as part of cost and profitability reporting also form many of the measures that populate the internal processes perspective of a balanced scorecard. Plus, many of the activity drivers used for cost assignments also need to be reported as productivity measures in various scorecards and dashboards. Yet, the Financial Executives International survey (conducted by Gartner) found that 51.9% of financial executives view measuring product and customer profitability as a key constraint,** indicating that many companies still have significant holes to fill before they can achieve closed-loop performance management.

** “FEI Study Shows Financial Executive View of IT and Opportunities to Improve Collaboration,” (July 21, 2009).

For example, many organizations lack an important capability: “what-if?” scenario modeling that enables companies to model the key drivers of financial performance — such as productivity levels, sales win rates, market share, and market growth — to provide better visibility into future earnings. So, rather than stumble across an issue in the future, when the issue may have already become a major problem, the organization gives itself time to assess the likely impact of changes in a leading indicator and respond accordingly. Such a capability gives the organization agility and critical time to act and defend the bottom line.

Cost and profitability models in which drivers and expenses are already linked with cause-and-effect assignments can already provide this functionality. However, companies are increasingly developing more empirical driver-based planning and budgeting models in SAP BusinessObjects Planning and Consolidation that business users can widely access. (For an example of an SAP customer that is leveraging this application as well as SAP BusinessObjects Profitability and Cost Management, refer to the sidebar to the right.)

Keep in mind that when the model’s underlying assumptions become apparent to all, managers have less opportunity to submit an easily achievable budget or reforecast in order to secure their bonuses. Therefore, over time, everyone should work to smooth the peaks and troughs and close the gap between demand and provisioned capacity, improving organizational efficiency and ultimately optimizing the bottom line.

Develop a Closed-Loop Vision at Your Organization

Presently, many organizations are still at the stage of implementing point solutions to remedy the problems of laborious budgeting systems and inadequate cost and profitability reporting. While they will gain undoubted benefits from these implementations, experiences like those of Zions Bancorporation clearly demonstrate the transformational benefits of sharing data across EPM solutions, making it increasingly important to develop a vision of how closed-loop performance management would benefit your organization.

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