Thursday Mar 27, 2014

Customer Lifetime Value: Viewing Customers as an Investment


In this age of customer-centricity, do you really know how to put a value on your customers? I had the pleasure of interviewing Gary Cokins, the founder of Analytics-Based Performance Management - an advisory firm in Raleigh North Carolina - for a Thought Leadership podcast on this topic. We discussed Customer Lifetime Value and how to view customers – not only as profitable or unprofitable to a business – but similar to investments for a business like in an equity stock portfolio. The objective from a shareholder’s view is increase the return on investment from the customers. Gary has written a dozen books on Enterprise Performance Management, Activity-Based Costing, Quality Management and more.

Many of you likely already have a firm grasp on the concepts of measuring and reporting profitability, but may be less familiar the concept of Customer Lifetime Value. Gary defined it for us this way: “Customers and consumers pass through life cycle stages. For example, teenage girls become young adults, then mothers, and so on. At each stage, their consumer needs change. Each type of consumer’s future profit potential needs to be understood based on which stage in their life-cycle they are. The marketing and sales functions have begun exploring what is basically a math equation that calculates Customer Lifetime Value in monetary terms. The equation is intended to measure the future potential level of profitability of a customer or consumer to a supplier.” In essence, Customer Lifetime Value is a forward-looking view of shareholder wealth creation possibilities.



So how are these calculations different from customer profitability calculations, such as from last month or last year? Gary explained that most profitability measures are historical and do not consider the products’ and customers’ prospective profit contribution. Customer Lifetime Value math is trickier, because it also considers the probability of losing some customers (or churn). In addition, the calculation of future streams of revenue and their associated costs, which would include the net present value of discounted cash flows, are taken into consideration. This involves time value of money principles and math that considers both the timing of future cash inflows and outflows, as well as the weighted average cost of capital. A lot to think about when considering Customer Lifetime Value!

Customer classifications come into play as well. Some customers are high maintenance types with substantial demands on a supplier and some are low maintenance - often referred to as demon customers and angel customers., The substantial costs-to-serve incurred below the product gross profit margin line (i.e., channel, marketing, sales, and customer service costs) for high maintenance customers obviously erodes profits. But Gary explained that understanding the amount of the cost-to-serve for each customer is very important. A shift is needed from being product-centric to customer-centric. Suppliers need to understand the unique preferences of and differentiated services for each customer, as well as different distribution channel expenses to service their existing customers, and desirable, prospective customers to acquire.

So how does this affect spend by the suppliers? According to Gary, the key is to spend “the next dollar” on consumers who will most likely generate a relatively higher incremental increase in sales relative to the incremental expense to “lift” those sales. And this analysis should focus only on the impact of interventions with consumers independent of how the consumer might increase their volume of purchases from a supplier simply due to their progression through their life cycle.

I highly recommend listening to the entire podcast as we covered a lot more content in the interview. But the long and short of it is that suppliers must consider Customer Lifetime Value when understanding profitability to get a complete picture and determine which best actions to retain and grow profits from consumers. They must view customers as an investment – the financial return on customer – and not just a short term gain.

To listen to the entire podcast, click here.

To learn about Hyperion Profitability and Cost Management, click here.

Wednesday Feb 12, 2014

Strategic P&L Statements and Opportunities for Improvement in Retail

Do you have strategic profit and loss statements for your customers, stores, and stock keeping units (SKUs) or products? Having little experience with this type of statement before, I was very fortunate to have two experts join me for a discussion about how strategic profit and loss statements can make a significant bottom line impact for Retail companies. Mark Wright, Principal Sales Consultant for Oracle EPM Applications and Bart Stoehr, Senior Director of Product Strategy Development, both specialize in the Oracle Hyperion Profitability and Cost Management Product. Both have an amazing depth of experience to share on all matters pertaining to profitability and cost management practices.

To start, I asked Mark to describe shortcomings he has seen in Retail company management practices. Mark explained that for decades retailers have been tasked to improve shareholder value by making decisions based on statutory financial statements and rarely do these mandated statements represent strategic views that embody the business.  Marketing, sales and operations often have to recreate their financials to better serve their decision needs.  Mark offered that “financial” profit and loss statements are generated from ERP systems designed to meet statutory reporting requirements, not the needs of strategic executives. Transactions are recorded in accounting structures by division, department and account with little linkage to profit dimensions such as customer, product, and vendor. When a customer pays for a product, key hidden expenses such as labor, warehouse, transportation, vendor, etc., are recorded in unrelated and separate accounting formats. This lack of linkage and transparency can lead to incomplete, inefficient and sometimes bad decisions.

Mark told us about a company that he had worked with that completely changed their product strategic direction by switching from product and SKU gross margin management to strategic profit and loss statements. This change resulted in driving .5% to 2.5 % profit points to the bottom line!

Diving deeper into this subject area, Mark relayed that marketing executives want to know where to make money so they can plan advertising budgets.  Sales organizations focus more on who is buying so they can set sales targets and quotas. Operational managers focus on what and how so they can balance supply to demand. Merchandisers focus on store floors and aisles so they can plan.  Corporate level executives just want to know when so they can set profit expectations.  Everyone wants different views of profitability.



Mark offered a good example of how a mistake can be made from too little information. Merchandisers want to turn over high volume products but likely don’t understand the hidden costs associated with them such as import fees and distribution costs.  Sales may want to push high revenue products to high volume customers even though the customer may be unprofitable because they tend to buy massive loss-leading products. These are very conflicting agendas and objectives and will not lead to profitability.

Bart provided good insight as to how Hyperion Profitability and Cost Management can transform traditional profitability information into strategic profit and loss reporting, giving execs and others the information they need to make good decisions. “Imagine an executive in your company pulling up a dashboard that has four different points of view into the same profit number”, Bart said. Views such as customer, product, channel (i.e. store), and warehouse all tying to the same bottom line with each view showing a color coded profit graph with the most and least profitable members. Continuing the story, the executive then clicks on the negative portion of the product graph and it displays an independent strategic profit and loss statement showing revenue, discounts, rebates, vendor costs, warehouse costs, transportation costs, store activity costs, cogs and negative income - all fully loaded with transparency and linkage to profit drivers such as quantity, activities, allocations, and other inter-dependencies.  

That sounded like utopia for executives, but Bart kept going…Now imagine further drilling into the strategic profit and loss  report and getting details on the store, SKU, vendor, customer, sales person, zip code, store isle and other profit measures important to decision making. I was hooked!

Bart told our listeners that this is just the tip of the iceberg.  This type of tool can also address:

SKU rationalization
Inventory reduction
Vendor negotiations
Bulk & benchmarking
Customer targeted marketing
Market basket & behaviors; sales incentives
Pricing & policy
Cost plus margin and minimum orders
Capital expense alignment
Return on Investment (ROI) alignment
Operating Expense resource alignment
Capacity and process improvements

I was amazed at the power of strategic profit and loss statements for executives. So you really need to ask yourself, “Can my profit and loss statements do all this?"

To listen to the entire podcast, click here.
To learn more about Hyperion Profitability and Cost Management, click here.

Friday Jan 10, 2014

The Deeper Realities of Implementing Shared Service Costing with Hyperion Profitability and Cost Management

You may have heard this one before, but it remains true. Many companies around the world are still fighting to understand what their true costs and profitability are – by region, by customer, by product etc. I caught up with Stuart Croucher, Senior Associate at Marsh & McLennan Companies, and Mike Killeen, Vice President of Technology with Edgewater Ranzal, an Oracle Platinum Consulting partner, to talk about Mercer, a Marsh McLennan Company and their understanding of cost and profitability. Until recently – they too were struggling with this business issue.

Marsh & McLennan Companies are the premier global professional services firms providing advice and solutions for risk management, strategy and human capital management.  They are comprised of four companies:

+ Marsh- a global leader in insurance brokering and risk management  
+ Guy Carpenter- a global leader in risk and reinsurance intermediary services  
+ Oliver Wyman- a global leader in management consulting and
+ Mercer - a global consulting leader in talent, health, retirement, and investments

Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people.  Over the last several years, Marsh & McLennan Companies has seen transformational change with the establishment of a new shared service center to support the finance and information technology functions.  However that did not come easily.



Stuart shared with our listeners that two years ago, Mercer’s senior leadership changed overnight. In the new CEO’s  first town hall to the company, he spoke of the urgent need for Profit and Loss statements  by line of business and by country level.  He could not believe if he asked a business leader in Brazil what his profit was, that he didn’t know the answer.

How were they measuring cost? Previously, all Mercer measurements had been performed on a contribution margin basis; this simply meant that each LOB was judged on how much it contributed to Mercer’s central costs. Function costs were all held centrally and not allocated to the businesses. This was simply unacceptable to the new leadership team because it did not allow them to understand which businesses and countries were truly profitable.

As you might expect, under new management, finance was given the immediate task of implementing business/country level profit and loss statements, as the new CEO had made it one of his top priorities. This meant developing a rapid (like yesterday) solution using Excel. Eventually, with extraordinary effort, they were able to build and deliver a successful solution using many, extremely large MicroSoft Excel workbooks and MicroSoft Access - but they ran into all the usual Excel model based issues, after go live: 


+ It was very difficult to answer questions from the business -  in other words,  why did I get this allocation 
+ It was impossible to keep track of changes to the model 
+ It was difficult to re run the model for a different scenario --  for example,  running it for Budget and now wanting to run it for Prior Year Restated.

What Mercer wanted for the future was to deliver an allocation solution that combined the Oracle Hyperion Planning and Hyperion Profitability and Cost Management approach providing a platform for future growth and the ability to easily run multiple versions. Also key was low IT involvement when running the model -- they wanted Finance to completely own the day-to-day running of the model.

Mike further explained that Marsh & McLennan Companies needed to put together a new shared service center to support the controllership and Financial Planning & Administration within all of their operating companies. A key component of that shared service center was the selection and standardization of a performance management platform to create a consistent user experience for their users, and to lower the firm’s Total Cost of Ownership. For this reason, Hyperion Profitability and Cost Management was evaluated and selected as a tool that could meet the needs of this solution for the F-A-S-T requirements - specifically Flexibility, Audit and Control, Shared Methodology, and Transparency. For most of Mike’s clients, the F & T tend to be the most important.

The flexibility of Hyperion Profitability and Cost Management (HPCM) was critical to Mercer in the development process, because it allowed the business users to see the impact of an allocation methodology or attribution change. Mercer couldn’t have done that with a traditional “take the requirements and build it via a calc script” type approach. Additionally, the traceabilty maps in HPCM were helpful in getting sign off on the allocations, and additionally answering questions that came back from the Planners regarding where a charge came from. Finally, by moving the older model in Excel to an Oracle EPM packaged application, they were able to offer the audit and control needed to ensure confidence in the numbers, and additionally, provide an ability to run the models via shared methodologies for budgets, actuals, and forecast scenarios. Mercer took advantage of features that allowed them to run 2013 budget data through 2012 methodologies and 2013 methodologies, and seeing the impact of methodology change alone on results.

It became apparent quickly that there were deeper realities of implementing Shared Service costing with Hyperion Profitability and Cost Management. To hear more, click here to listen to the entire podcast.

To learn more about Hyperion Profitability and Cost Management, click here.

Friday Dec 20, 2013

Déjà Vu? Oracle EPM in 2013


As the year winds down, I wanted to share some of the highlights from EPM in 2013 and give a sneak peak about where we’re going next year. 2013 was a busy year with new product developments, new research studies, as well as customer events like Oracle OpenWorld. Let’s look back at some of these happenings and their associated blog posts.


New Product Developments 

Early in 2013, we announced a new release of Oracle Enterprise Performance Management with new integrations and product capabilities and updates to user experience that help companies to Unlock Business Potential – by unlocking business potential, companies are able to drive to the desired business outcomes of Aligned Objectives, Accurate Forecasts, Confident Close and a more Accountable Enterprise.

We also released new product modules, including Oracle Hyperion Tax Provision to help with aligning tax information and financial reporting, and Oracle Data Relationship Governance for improving financial master data governance and managing change.  In addition, we certified Oracle Hyperion Planning and Oracle Hyperion Profitability and Cost Management on Oracle Exalytics In-Memory Machine to help organizations Plan at the Speed of Business.  

For the sixth consecutive year, Gartner recognized Oracle as a Market Leader in its 2013 Magic Quadrant for Corporate Performance Management Suites report.  In this year’s report, among the market leaders, Oracle is positioned with the highest ability to execute and the strongest in completeness of vision.

New  Research

We conducted several interesting research studies in 2013.  Over the past several years, as we have gone through and emerged from the Great Recession, the role of the CFO has transitioned to one of catalyst for change.  New technologies and shifts in skill sets are also contributing to this changing role.  To understand these issues more deeply, we partnered with Accenture and released new research about the CFO’s changing role from financial overseer to corporate strategist and change agent.

To learn more about how Oracle customers perform Business Analytics processes (which includes Enterprise Performance Management, Business Intelligence and more), we launched the Oracle Business Analytics Customer Value Index (CVI) program in 2011, through which we collect valuable business process information from our customers.  The EPM Blog featured some compelling results from the CVI around Enterprise Planning, Budgeting and Forecasting Processes.

Customer Events and Videos 

One of the highlights of the year was Oracle OpenWorld, and winning the America’s Cup during that week certainly added to the excitement!  The Business Analytics program this year was our strongest ever, with over 200 EPM, BI, Analytics, Big Data and Exalytics sessions delivered by Oracle, our customers and partners.   We had the opportunity to catch up with a number of these customers and partners after their sessions, and you can view the interviews here

In one of our blogs about Scorecards, we featured forward-looking DC Courts and their process for managing strategy and KPIs.  DC Courts are making some great strides in setting strategy and executing on it, and are really setting the bar for other US Courts. 
On the topic of Profitability and Cost Management, we interviewed Ida Quamina of Oracle about the great strides being made in mastering the cost of Higher Education, and how these institutions can now address the issues of low or no visibility into individual programs, degrees and course costs, or the cost per student.
Next up – Cloud and Mobile!

As we head into 2014, there are many exciting developments in store, and you can expect to see us talk a lot about Cloud and Mobile technologies next year. Our blog called, “Taking your Business Scorecard Golfing” is just a preview.  

Wishing you a very Happy Holiday and New Year!




Wednesday Nov 20, 2013

Alignment of Ever Shrinking Budgets in Federal, State and Local Government

According to Josh Kahn, the Federal, State and Local government agencies are facing austerity, uncertainty and the need for accountability and transparency now more than ever. Josh Kahn, a Solution Specialist  Director at Oracle, and James Antisdel, Manager with Deloitte Consulting, joined me for a podcast to discuss using Oracle Hyperion Profitability and Cost Management to align the ever shrinking budgets in government. Both James and Josh have a deep knowledge of and practical experience with the US Public Sector, particularly in government agencies.

We started off talking about the issues that government agencies are currently facing. Josh indicated that the agencies are facing many similar issues as the private sector in that transparency and efficiency are needed to help combat uncertainty and austerity. He felt that creating and using shared service centers enables organizations to provide a common product or service to a number of other organizations, thus increases efficiency and reducing effort. But without robust cost models to capture, analyze, and report on costs, it is difficult to measure and account for the new efficiencies, and equally difficult to explain the shared service charges.

So, I asked Josh what the barriers or limitations were to accomplishing this challenge. Josh explained that there are really three categories of limitations:

1) Legacy cost models are generally spreadsheet based. They rely on highly manual processes, lack transparency, lack a robust reporting solution and generally make analysis very difficult.
2) Data governance and quality. Many solutions rely on data that is sourced from disparate systems and commonly rely on data requests that require labor intensive processes and error prone manual transformation.
3) Cost models are generally kept simple.  Simple models limit analysis such as transaction level costing and commonly require a delay in producing results -- reducing the usefulness of data because it is likely old and irrelevant due to the delay

According to Josh, a good enterprise-level costing system like Hyperion Profitability and Cost Management can address all three of these limitations.

Next, James and I discussed how he had seen Hyperion Profitability and Cost Management used by his Federal, State and Local government customers. He told our listeners that he had seen it used for:

+ Cost allocations
+ Customer bill calculation/generation
+ Service center performance management
+ Assisting with planning and budgeting
+ Financial and operational analysis
+ Decision making

I was very impressed with the versatility of this application.

Digging deeper into a costing model for government, I asked James to tell us what an agency could hope to gain from implementing a costing system. James told our audience  that “development and management of the cost model can provide greater insight into the full cost of services provided to an agency’s customers, and can enable more informed decisions aimed at optimizing resources, increasing value, improving performance, gaining efficiencies, and reducing costs."  Furthermore he explained that Deloitte’s customers, armed with this new information, can begin taking next steps to improve business processes and work to refine their model to gain more insight into particular areas that offer opportunities for savings and improvements.  As a result, an agency will have the capability to accurately identify current and projected costs, formulate and justify budgets, and support operational process improvement and managerial decision making.

James emphasized that an enterprise costing solution can enable an agency to more readily pinpoint cost variances at a detailed-level and be far more responsive to requests for information from customers and other stakeholders.  It is a powerful analytical tool that can be used to support an agency in becoming transparent, efficient, and a Shared Services Center of Excellence.

So it seems that a powerful, versatile,  enterprise-level costing system can go a long way in helping to align the ever shrinking budgets in Federal, State and Local Government.

To listen to the entire podcast, click here
To learn more about Hyperion Profitability and Cost Management solution, click here

Tuesday Sep 10, 2013

Mastering the Cost of Higher Education with Hyperion Profitability and Cost Management


There is a perfect storm going on in the world of Higher Education right now. Over the last few years, the cost of higher education has been outpacing the consumer price index. To learn more about this important and disturbing phenomenon, I had the pleasure of interviewing Ida Quamina, Principal Solutions Consultant for EPM products at Oracle for our AppCast Series. She has a deep knowledge of and practical experience with Oracle’s Education and Research customers.

Parents are starting to ask how and why this perfect storm is happening. Well, both US college endowments and state appropriations are decreasing, while university expenses and enrollments are increasing. Yet universities are being forced to keep tuition costs flat. Ida also told us that Federal and State Governments are now starting to take a look at costs at institutions. President Obama, during his State of the Union address in February 2013, asked Congress to include affordability and value as a factor in determining which colleges receive federal aid. States are starting to require cost containment measures as part of their performance based funding models.

So how can Higher Education intuitions better understand and manage these issues? Ida told our listeners that Higher Education institutions already have good visibility into total operational costs and total revenue collected, but little or no visibility into individual program, degree and course costs, or the cost per student. Currently, colleges and universities have not implemented activity-based costing which is used in many commercial enterprises. Activity-based costing goes beyond the traditional allocation of overhead and provides institutions with better insight into information needed to make strategic decisions about cost containment and allocation of resources. With governing and regulatory bodies currently recommending (and likely soon requiring) this type of analysis and reporting, it is becoming critical for higher education institutions to have this type of insight for both long term and short term planning and reporting.

So which institutional processes benefit the most from understanding costs more? Ida explained that budget and spending decisions need to be based on data and not assumptions. Financial ERP systems and the current structure of institutions’ charts of accounts are not set up to support the type of analysis needed. Using activity-based cost and revenue modeling enables academic institutions to answer crucial questions and, more importantly, analyze many business scenarios to determine their best courses of action.

Ida further explained that for this type of process to be successful, collaboration between the academic and administrative teams in institutions is foundational and critical. These two groups need to start the discussion about how, and to what level, costs and revenues are to be allocated and which drivers are going to be used. This is the starting point to begin a good model. It is an iterative process and institutions will build upon this and create additional model scenarios as economic and academic conditions change.

So how can Oracle help? Ida told us that to survive, Higher Education institutions need to either make programs financial sustainable, or ensure there are other programs that have enough surplus to make up for the deficit of programs. Oracle can help with:

+ Transparency that enables institutions to ensure resources are aligned correctly based on actual measurable information
+ Understanding the true cost to implement new programs and the ability to make pricing decisions based on those costs
+ A thorough understanding of costs at a more granular level and the root cause of the costs. This information enables institutions to make informed decisions
+ Creating accountability that enables departments to understand the resources they consume as it relates to the revenue that they generating
+  Addressing concerns and questions from various stakeholders, e.g. CFO, Provost, Board of Trustees, State and other governing boards and accreditation bodies.

To stave off this perfect storm, it is imperative that our institutions now master the cost of Higher Education.

To listen to the entire interview, click here
To learn more about Oracle Hyperion Profitability and Cost Management in Higher Education click here
To learn more about Oracle Hyperion Profitability and Cost Management, click here


Tuesday Sep 03, 2013

Align Cost with Revenue for Profitable Growth in Diversified Industries

Historically, growing revenue typically equated to increased profitability for most organizations, but in this economy this statement is no longer true. On this subject, I was very fortunate to interview Ralph Canter, Managing Director, and part of KPMG’s Diversified Industries Practice (an Oracle Platinum Partner) and Bart Stoehr, Senior Director of Product Management for Oracle in an Oracle AppCast podcast. 

According to Ralph, diversified industries – which includes global manufacturing – has had a roller coaster ride in terms of profitability over the last 20 years. Post 2008, many experienced slowed, stalled or even reversed growth so much so that companies had to focus on how to stop the bleeding and reduce/control costs rather than focusing on increasing revenue. Growth for growth’s sake was no longer sustainable so companies had to adopt what KPMG calls ‘profitable growth’. This is growth with a lens or focus on serving many market segments and many demands on product, supply chain, and customer satisfaction.

I asked Ralph to tell us about the biggest hurdles to profitable growth and being able to measure it. He told us, “The biggest hurdle has been that the game has kind of changed. Systems have been developed over time to support the measurement of how growth used to be – which was more regional and stable and long term – and you had a timeframe in which to build the system to address a certain growth period. Today, in a global environment, the global view is segmented by customer, by product, by channel, by region, by market, by sales channel – all kinds of dimensions. And what’s happened since 2008 is that the revenue picture has become a very, very sophisticated analysis that is very aligned to tell you where you’re growing. What’s been left behind is the cost view of that growth. So while I have really good aligned OLAP cubes analyzing my revenue growth, I do not have an associated, detailed cost model that can align with that revenue to create a profitability analysis of the revenue growth view. What we see is a limitation in the maturity of cost to keep up with the maturity of how you are analyzing your revenue and your profitable growth.”

So what became clear was, in this economy, profitability is no longer as simple as subtracting cost from revenue!


Once we were clear on the issues, I asked Ralph to tell us more about how Oracle Hyperion Profitability and Cost Management and KPMG can help organizations with profitable growth.  Ralph told our listeners, “Our point of view starts with revenue and not cost. We help customers understand how they want to measure their growth and then help them design their cost information ‘content’ to make sure we can answer the profitable growth question. In most cases this means reconstructing a cost view that matches up to the profitable growth questions. This is where the functionality of Hyperion Profitability and Cost management is leveraged to not only support the reconstruction, but also keep cost and revenue aligned and reportable”.

I asked Bart if he could talk about some Oracle Customers that are practicing profitable growth and he specifically mentioned Leggett and Platt (invented the bed spring in 1885) who are now quantifying the cost of delivering special services to their customers, assessing the value of those services, improving product portfolio management, attacking cost reduction opportunities and streamlining operations (to mention a few objectives). Bart told our listeners that Leggett and Platt are using a combination of Oracle Hyperion Planning and Hyperion Profitability and Cost Management to push GL costs to align them with revenues by pooling the costs, moving them to activities where they are consumed by the various products, customers and customer segments, and then driving them down based on product consumption characteristics. Leggett and Platt are using some of the costs derived by Oracle Hyperion Profitability and Cost Management to perform driver based planning in Hyperion  Planning - the power of the two working together are simply unmatched.

To help the listeners understand how Hyperion Profitability and Cost Management specifically helps with profitable growth, Bart and Ralph emphasized some key features used for this purpose. There are many of them, but their favorites are:

+ Any costing method or combination of methods that represent an organization well can be used. Nothing is prescribed but practicality is recommended
+The traceability map enables you to understand where costs come from, how they are consumed and where they go. This is important to help all members of the value chain understand what is going on
+The pre-configured ability to deal with excess capacity (Provides fully loaded view and incremental views of cost to help support current and future decision making)

There is much more to the interview, but it was certainly clear that many kinds of diversified and product-focused industries can benefit from using this method of growing profitably, and Ralph and Bart provided very interesting insight into the practicalities of growing profitably by aligning cost with revenue.

To listen to the entire podcast, click here.

For more information about Oracle Hyperion Profitability and Cost Management, click here.


Tuesday Apr 02, 2013

Shared Service Costs: Are They Adding or Destroying Company Value?

Recently, Oracle published a very interesting podcast on shared service costs and whether shared services were adding or destroying company value. The information provided was extremely enlightening.

I had the pleasure of interviewing Bart Stoehr, Senior Product Management Director for Oracle Hyperion Profitability and Cost Management (HPCM), and Tom Gargas, a Principal Solutions Manager from Edgewater-Ranzal, an Oracle Partner. Here, I will summarize a few of the key points from the interview. 

According to Bart, shared services are really a concentration of company resources performing like activities, but they are spread out across the organization to service multiple, internal partners at a lower cost and providing higher levels of service. Most organizations have shared services, but often do not understand the value that they add to a company or the value that they can destroy. What are the goals for shared service centers? Bart explained that the goals are “To delight external customers and enhance corporate value”. These centers provide economies of scale and act much like centers of excellence. Examples of shared service centers mentioned by Bart include IT, Human Resources, Finance, Legal Services, Facilities and Communications.

We also discussed why it was so difficult to understand shared service costing. Bart revealed that it was really an aggregation issue. Organizations can see the total cost of a service that is shared, but not necessarily what the business units are consuming and therefore how they relate to products and customers. Understanding how each service is consumed by each part of the business will enable organizations to account for the services and charge back accordingly. But it is not only the financial aspects we are worried about. Understanding the costs of each shared service can help the company see how the costs of the service compare with the value of the service. If a service does not add value, then the company needs to take a hard look at why they are still performing it.

Tom gave us excellent information about a practical implementation approach for shared service costing which includes the FAST characteristics:


Flexibility  (in analysis and cost methods as shared services change)

Audit and Control (ensuring compliance and approved regulatory controls)

Shared Methodology (everyone uses consistent allocation methods which ensures accurate comparisons)

Transparency (details of allocations are provided to all)


Other details in the conversation covered how better understanding shared service costs can lead to organizational and management changes; becoming aligned on allocation methods and improving internal customer service levels. It can lead to excellence in business practices -- finding and exploiting core competencies, partnering with the strategic business units to help them increase their ability to create revenue, and adding value to the organization instead of destroying it through duplication of efforts and misalignment.

Tom indicated that Oracle Hyperion Profitability and Cost Management is an excellent tool for calculating shared service costs, and that these calculations can help in the financial planning process as well.  Shared service centers must plan both for the consumption of services (which services SHOULD they provide, volume of services, cost of services, etc.) and the supply side (workflow, accountability and what actually transpires). Being able to properly calculate service center costs and report against chargebacks by business unit just makes good sense. Being able to calculate and include service charges during budgeting and forecasting cycles makes forecasting more accurate.

“Using Hyperion Profitability and Cost Management with Oracle Hyperion Planning (and possibly Oracle Hyperion Workforce Planning) to manage the supply and consumption of shared services helps ensure that organizations are right-sized”, said Tom.

Bart and Tom convinced me that having well run shared service centers, understanding true shared service costs, and using those costs to plan for the future adds tremendous value to a company. Understanding these costs and using them to make sound business decisions can certainly make the difference between company financial profitability and loss.

To listen to the entire podcast, click here.

For more information about Hyperion Profitability and Cost Management, click here.

Tuesday Mar 26, 2013

Best Practices in Profitability and Cost Management

I recently had the opportunity to run some roundtable discussions on best practices in profitability and cost management with financial executives attending the CFO CPM Conference in Philadelphia and CFO Rising East Conference in Orlando. The attendees represented companies in different industries ranging from manufacturing, to transportation, real estate, insurance, telecommunications and healthcare.

The premise for the roundtable discussion was this; For most organizations, aggressive cost-cutting and management were critical to remaining profitable while top line revenue was flat or shrinking during the recession. However, now many organizations taking a more “surgical” approach to profitability and cost management, by understanding which products, services, customers and channels are truly profitable and which ones are draining value from the business. In these roundtable sessions we discussed best practices in profitability and cost management, including how to accurately allocate revenue and costs to individual product lines, services, customer segments, locations, channels and other lines of business in order to improve decision-making. Here’s a summary of the feedback I received from attendees at these sessions:

At what level does your organization analyze and manage profitability? The answers to this question varied by industry and company: Insurance - region, state and products.  For example:


+ Real Estate Brokerage - offices, products
+ Healthcare Providers – hospitals, business units, departments, services, patients
+ Healthcare Insurance – products, markets, customers
+ Transportation/Freight – ship level, market (car rentals), customers
+ Manufacturing – location/site, products, major customers, projects
+ Retail – store level, regions
+ Telecommunications – business units, products


Are there any regulatory requirements driving detailed allocations of revenue and costs in your industry or organization? Based on the roundtables, the primary industries where there is a regulatory driver behind cost allocations and profitability analysis are Telecommunications, and Healthcare. (The latter as a result of the Healthcare Reform legislation and need to report on Medical Loss Ratios)

How are allocations performed to distribute revenue and costs down to the appropriate level in the business? What allocation techniques is your organization using? Here the participants indicated they are using a variety of techniques ranging from standard costing based on headcount, square footage, and revenue contribution to activity-based cost drivers and allocations for certain areas, such as customer service.

How frequently are detailed cost allocations performed? The frequency of allocations varied across individual companies. Some are performing this task on a quarterly basis, some semi-annually, one bi-weekly, and most of the participants are doing detailed allocations monthly. One company, in Transportation, mentioned they were doing this on a daily basis, running detailed P&Ls for each of their ships (pretty impressive).

What tools are used to perform the allocations and report on profitability at the line of business level? The tools used to perform detailed allocations, cost and profitability analysis included spreadsheets, ABC tools, multidimensional OLAP tools (i.e. Oracle Essbase), and in some cases, the general ledger system.

Who consumes the profitability reporting in your organization? The consumers of this information varied by industry and company, for example:


+ Insurance – product line managers, actuaries, regulators
+ Real Estate Brokerage – branch managers (with compensation linked)
+ Healthcare Providers – doctors, marketing campaign managers
+ Manufacturing – senior management, controllers, sales managers, business unit leaders, operations managers
+ Telecommunications – finance, business unit leaders


Is profitability reporting and management linked to the annual budgeting process? The answers to this question were more varied across the participants. Some leverage this information in their long-term strategic planning process, some link to their annual financial budget, and some are just starting to create a link to their planning processes.

Overall I was impressed with the feedback I received from participants in these sessions. Every company who participated was performing cost allocations and analyzing profitability at some level other than the corporate summary. Some were doing this at a very detailed level (i.e. daily ship P&L), and others at a more summarized level but looking to get more granular over time. I was also impressed with the frequency of profitability reporting, with most of the participants doing this on a monthly basis, some less frequently. And it was clear that the information being generated was actively shared and utilized beyond the finance organization to business unit leads, product managers, sales managers and other line of business decision-makers.

Areas for improvement that most participants identified included moving this process from spreadsheets to analytic tools and applications designed to automate and support detailed allocations and costing on a more frequent and repeatable basis. The good news here is that there are a number of packaged applications available in the market designed to support detailed allocations of revenue and costs. These applications include powerful reporting and analysis tools to provide insights and support improved decision-making regarding resource allocations, product/service mix, pricing, customer service and campaign strategies. Some of these are available as standalone solutions, while others are delivered within Enterprise Performance Management (EPM) application suites and provide seamless integration with EPM planning and reporting applications.

For more information about the profitability and cost management applications offered as part of Oracle’s EPM solutions please go to www.oracle.com/epm.


 

Thursday Jan 31, 2013

Profitability – the Proof is Deep Inside the Pudding

Recently, Oracle published a very interesting podcast on how the ability to view and analyze detailed costing is enabling us to better see the impact of costing on organizational success. To listen to the podcast, click here.

Bart Stoehr, Senior Product Management Director for Oracle Hyperion Profitability and Cost Management (HPCM), was interviewed by Nigel Youell, Director of Product Marketing for Oracle Performance Management Applications. Here I will summarize some of the key points. 

Bart started off by explaining why detailed costing is more important now than it has been in the past. More and more organizations have the need to understand costing and/or profitability on a granular level due to extreme competition, or due to inflexible regulation by governing bodies. For example:

- Financial institutions such as banks have to compete on a daily basis to keep a customer. For this reason they need to understand cost and profitability by customer for each of the products and services they consume: checking accounts, savings accounts, mortgages, loans, etc.

- Healthcare providers need to better understand the cost for each patient by the treatments they receive (DRGs) and types of services they consume.

- Transportation organizations (e.g., airlines, trains, etc.) have to understand costs by route, segment, seating class, etc. Without this crucial information, companies in these types of industries might not survive. Competition and regulation prevent them from jacking up price, so they instead must understand costs, how they are consumed, and therefore which products, services and customers are profitable and which are not. The ultimate business goal of detailed costing is to be able to manage the profit creating and profit destroying customers and parts of your business.

Applications like Oracle Hyperion Profitability and Cost Management enable our customers to analyze their customers, patients and subscribers (often counted in the millions) and to differentiate themselves through their sales, service and marketing functions.   These tools help managers find the “proof in the pudding” , and figure out what and who work(s) well and what and who does not.

When asked how most organizations currently perform this type of detailed analysis, Bart explained that most companies don’t attempt to do it because it is SUCH a daunting task despite the unprecedented insight into profit creation and profit destruction. Bart went on to explain that Oracle Hyperion Profitability and Cost Management has introduced detailed costing (available to the business user) to enable analysis and reporting at granular level, and to potentially enable 100’s of millions of allocations in a reasonable timeframe.

The podcast closed with the following thought – given the economic climate of today, is it enough to understand the average unit costs for an average customer, patient or subscriber? To stay competitive, or to convince a governing body that a service rate is unfair or unrealistic – you need to understand highly financially accurate and detailed records reflective of specific consumption. In other words, what each customer, patient or subscriber is REALLY costing you.

To replay this podcast, click here.

Friday Jun 17, 2011

Independent Research on 1500 Companies Reveals Challenges in Performance Visibility – Part 1

At the end of May I was joined by Professor Andy Neely of Cambridge University on a webinar, with an audience of over 700, to discuss the results of this extensive study which covered 13 countries and nearly every commercial and industrial sector.  What stunned both of us was not so much the number listening but the 100 questions they asked in just 1 hour.  This certainly represents a record in my experience and for those that organized the webinar.

So what was all the fuss about?  Well, to begin with this was a pretty big sample and it represented organizations with over $100m sales across the USA, Europe, Africa and the Middle East. It also delivered some pretty interesting results across a wide range of EPM subjects such as profitability, planning and reporting.  Let’s look at some of those findings.

We kicked off with profitability, one of the key factors in driving performance, or that is what you would think, but in fact 82% of our respondents said they did not have complete visibility into the profitability of their organization. 91% of these went further to say that, not surprisingly, this lack of knowledge into the profitability has implications with over half citing 3 or more implications.  Implications cited included misallocated resources, revenue opportunities not maximized, erroneous decisions made and impaired financial performance.  Quite a list of implications, especially given the difficult economic circumstances many organizations are operating in at this time.

So why is this?  Well other results in the study point to some of the potential reasons.  Firstly 59% of respondents that use spreadsheets use them for monitoring profitability and 93% of all managers responding to the study use spreadsheets to gather and analyze information.  This is an enormous proportion given the problems with using spreadsheets based performance management systems that have been widely talked about for many years.  For profitability analysis this is particularly important when you consider the typical requirement will be to allocate cost and revenue across 6+ dimensions based on many different allocation methods.  Not something that can be done easily in spreadsheets plus it gets to be a nightmare once you want to change allocations, run different scenarios and then change the basis of your planning and budgeting!

It is no wonder so many organizations have challenges in performance visibility.

My next blog will look at the fragmented nature of many organizations’ planning.  In the meantime if you want to read the complete report on the research go to:

http://www.oracle.com/webapps/dialogue/ns/dlgwelcome.jsp?p_ext=Y&p_dlg_id=10077790&src=7038701&Act=29

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This blog will highlight key EPM market trends, recent events and other news of interest to our field, customers and partners.

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