Key concepts
Importance of Performance Management and its impact to value creation
Misuse of technology leads to unsatisfactory Performance Management solutions
The majority of the so called Performance Management solutions are actually just Profit & Loss Reporting systems and fail to integrate strategic, financial and operational planning into one coherent loop. Missing out on Cash flow metrics and value creation
Functional databases are much better suited to perform the task of Integrated planning than relational database systems and common Performance Management solutions offered by most vendors
The key enabler for a successful roll out is the know-how to properly build a fully integrated business model into a functional database
Key concepts
Importance of Performance Management and its impact to value creation
Misuse of technology leads to unsatisfactory Performance Management solutions
The majority of the so called Performance Management solutions are actually just Profit & Loss Reporting systems and fail to integrate strategic, financial and operational planning into one coherent loop. Missing out on Cash flow metrics and value creation
Functional databases are much better suited to perform the task of Integrated planning than relational database systems and common Performance Management solutions offered by most vendors
The key enabler for a successful roll out is the know-how to properly build a fully integrated business model into a functional database
Hand on heart, do you believe that your current Performance Management process, system or solution is actually supporting the execution of your organization’s strategy throughout the value chain? If you can answer this question positively than you are one of the few that has achieved what is commonly known as “Unified Performance Management”. If not, like almost everyone, you are still stuck in what I call the “age of performance darkness”. I would even argue that few people really understand the concept of Performance Management over and above Financial Performance, which is why many companies have a very narrow view of their organization’s performance.
Why is it so hard to actually achieve what the software industry and many consulting companies have been advertising for years? The new buzz word being “Big Data Solutions” – these shall now apparently solve our problems – but most of the companies are still at square one in the Performance Management process, trying to get data out of their ERP systems and building soon-to-break reports in Excel.
In this White Paper I want to shed some light on how to actually achieve Unified Performance Management (UPM) based on best-practices and my experiences over the last 15 years as a CFO of multi-national companies and a Corporate Finance specialist (Senior Equity Analyst in Investment Banking). Having started my career in finance as Investment Banker I have a strong Corporate Finance background with extensive experience in business modeling, corporate strategy and valuation as well as capital markets.
As CFO, I successfully rolled out SAP ERP in multiple companies and entities and have been exposed to almost every aspect of operational planning and management (demand and supply planning and execution) throughout the value chain. I have also been heavily exposed to a vast number of mergers and acquisitions, not to mention disposal transactions which gave me great insight into Performance Management, due diligence processes, business modeling and analytics.
Together with the respective board of directors I have led the strategy development process of several companies and implemented their Unified Performance Management processes as well as the supporting Business Analytics and Intelligence Solutions.
This experience throughout my career has turned me into a strong advocate for “Unified Performance Management” backed by strong Functional Database technology that allows for complex modeling capabilities.
I hope that my passion for integrated business and financial modeling will help convince you to take a fresh look at Performance Management and help you take a step towards achieving the full integration of entire value chain in your organization.
Hand on heart, do you believe that your current Performance Management process, system or solution is actually supporting the execution of your organization’s strategy throughout the value chain? If you can answer this question positively than you are one of the few that has achieved what is commonly known as “Unified Performance Management”. If not, like almost everyone, you are still stuck in what I call the “age of performance darkness”. I would even argue that few people really understand the concept of Performance Management over and above Financial Performance, which is why many companies have a very narrow view of their organization’s performance.
Why is it so hard to actually achieve what the software industry and many consulting companies have been advertising for years? The new buzz word being “Big Data Solutions” – these shall now apparently solve our problems – but most of the companies are still at square one in the Performance Management process, trying to get data out of their ERP systems and building soon-to-break reports in Excel.
In this White Paper I want to shed some light on how to actually achieve Unified Performance Management (UPM) based on best-practices and my experiences over the last 15 years as a CFO of multi-national companies and a Corporate Finance specialist (Senior Equity Analyst in Investment Banking). Having started my career in finance as Investment Banker I have a strong Corporate Finance background with extensive experience in business modeling, corporate strategy and valuation as well as capital markets.
As CFO, I successfully rolled out SAP ERP in multiple companies and entities and have been exposed to almost every aspect of operational planning and management (demand and supply planning and execution) throughout the value chain. I have also been heavily exposed to a vast number of mergers and acquisitions, not to mention disposal transactions which gave me great insight into Performance Management, due diligence processes, business modeling and analytics.
Together with the respective board of directors I have led the strategy development process of several companies and implemented their Unified Performance Management processes as well as the supporting Business Analytics and Intelligence Solutions.
This experience throughout my career has turned me into a strong advocate for “Unified Performance Management” backed by strong Functional Database technology that allows for complex modeling capabilities.
I hope that my passion for integrated business and financial modeling will help convince you to take a fresh look at Performance Management and help you take a step towards achieving the full integration of entire value chain in your organization.
The theory
of Unified Performance Management
—
Performance Management is something organizations must do to become more successful and stay ahead of their competitors. In fact, managing performance is THE most critical task of any executive or manager, whether it is in small, medium or large organizations. If organizations get it right, their Performance Management processes allow them to define and communicate their strategies, as well as measure, report and monitor progress in order to manage and improve business performance.
Performance Management can basically be defined as a set of management processes, often supported by information technology, that help to improve the strategic decisions people make every day. In the end, it is the quality of those decisions that will separate successful companies from the rest. Performance Management is therefore a term for a set of management approaches that enable organizations to define and execute their strategy, as well as measure and monitor performance in order to inform strategic decision making and learning.
The basic Performance Management model integrates processes for defining strategic objectives, measuring performance, analyzing performance and reporting and reviewing performance – not to mention aligning people and culture. All of these are focused on performance improvement which is the central premise of Performance Management (see Figure below).
Unified Performance Management
The Concept
—
Organizations that are serious about managing performance will move beyond the basic model shown in the figure above and integrate it with other key business processes (see Figure 2 – Unified Performance Management framework). In order to gain maximum benefits from performance management initiatives, organizations need to ensure they align and integrate processes including financial planning and budgeting, resource planning (capital, people, equipment), operational planning (value chain: customer acquisition/retention, sales, supply and manufacturing, logistics) and risk and value planning (risk management, value based management) as well as business intelligence and analytics.
Unified Performance Management
The Basics
—
Using the basic strategic Performance Management model, organizations start with defining their strategy, then move on to measuring performance, then use these indicators to analyze performance in order to extract insights and make better informed decisions. This leads to actions which enable performance improvements (see Figure 1 – Performance Management model).
The following steps are generally applied;
The ability to answer the key questions of an organization around specific business problems is core in driving better insight and thus better outcomes.
The ability to analyze historical data to answer what is happening and why it is happening are crucial in order to be able to develop flexible scenarios that can derive what is likely going to happen (what-if, predictive analytics, scenario analysis). Powerful and flexible business analytics and modeling solutions can help organizations to get deeper insight and drive better outcomes.
The theory
of Unified Performance Management
—
Performance Management is something organizations must do to become more successful and stay ahead of their competitors. In fact, managing performance is THE most critical task of any executive or manager, whether it is in small, medium or large organizations. If organizations get it right, their Performance Management processes allow them to define and communicate their strategies, as well as measure, report and monitor progress in order to manage and improve business performance.
Performance Management can basically be defined as a set of management processes, often supported by information technology, that help to improve the strategic decisions people make every day. In the end, it is the quality of those decisions that will separate successful companies from the rest. Performance Management is therefore a term for a set of management approaches that enable organizations to define and execute their strategy, as well as measure and monitor performance in order to inform strategic decision making and learning.
The basic Performance Management model integrates processes for defining strategic objectives, measuring performance, analyzing performance and reporting and reviewing performance – not to mention aligning people and culture. All of these are focused on performance improvement which is the central premise of Performance Management (see Figure below).
Unified Performance Management
The Concept
—
Organizations that are serious about managing performance will move beyond the basic model shown in the figure above and integrate it with other key business processes (see Figure 2 – Unified Performance Management framework). In order to gain maximum benefits from performance management initiatives, organizations need to ensure they align and integrate processes including financial planning and budgeting, resource planning (capital, people, equipment), operational planning (value chain: customer acquisition/retention, sales, supply and manufacturing, logistics) and risk and value planning (risk management, value based management) as well as business intelligence and analytics.
Unified Performance Management
The Basics
—
Using the basic strategic Performance Management model, organizations start with defining their strategy, then move on to measuring performance, then use these indicators to analyze performance in order to extract insights and make better informed decisions. This leads to actions which enable performance improvements (see Figure 1 – Performance Management model).
The following steps are generally applied;
The ability to answer the key questions of an organization around specific business problems is core in driving better insight and thus better outcomes.
The ability to analyze historical data to answer what is happening and why it is happening are crucial in order to be able to develop flexible scenarios that can derive what is likely going to happen (what-if, predictive analytics, scenario analysis). Powerful and flexible business analytics and modeling solutions can help organizations to get deeper insight and drive better outcomes.
Why SAP and other ERP vendors
can’t do Performance Management
—
Many executives are convinced that implementing SAP or equivalent ERP systems will enable their organization to build a Performance Management system that will drive an integrated planning process throughout the organization. After all this is the sales pitch of the ERP vendors with “integrated” BI and PM. However, the reality is that Relational Database orientated OLTP systems are not designed for these kinds of tasks as OLTP systems fundamentally lack modeling capabilities and further, they typically provide too much unproductive detail which is not helpful for supporting integrated planning. Additionally, ERP systems (especially SAP) require a high level of IT knowledge and thus the involvement of IT consultancies and / or internal IT resources in order to deploy even simple reports. Users in functional departments typically have to explain to these IT people how their business works and what their needs are and still rarely receive what they have requested, generating lots of frustration and the need for self-service reporting. Ultimately, most users give up and start building their reporting and analytics solutions in spreadsheets in order to avoid this crippling dependence on IT.
Michael Hammer, an early thought leader of the 1990s business process re-engineering (BPR) movement, provides evidence of these problems of gaps and misalignment of goals with actions:
“In the real world, a company’s measurement systems (often ERPs) typically deliver a blizzard of nearly meaningless data that quantifies practically everything in sight, no matter how unimportant; that is devoid of any particular rhyme or reason; that is so voluminous as to be unusable; that is delivered so late as to be virtually useless; and that then languishes in printouts and briefing books without being put to any significant purpose…In short, measurement is a mess.”
Software vendors such as SAP, SAS, Oracle and IBM are focused on selling software licenses by advertising their capabilities around Business Analytics and Business Intelligence that are intended to solve the organizations’ Performance Management process problems. All vendors are using the same buzz words and acronyms such as Business Intelligence, Business Analytics, Performance Management (BPM, PM or PM) making it hard for companies to distinguish these solutions. In reality, companies are simply buying technology from these software vendors, which can be valuable and is even quite mature (as these tools have evolved substantially in the last 20 years), but the technology is not solving the core issue which is how to build a SYSTEM that aligns strategy to financial and operational management by aligning all internal resources.
Often software vendors and consultancies will advertise and offer colorful dashboards and scorecards with useless charts such as “gauge charts” as the key benefit delivered to organizations, which have dubious value at best and certainly do not address the key issues of Performance Management. Unless an organization has the ability to replicate it’s business model as a whole – throughout the whole value chain – and run sensitivity analysis on all aspects of the business and review, analyze and plan accordingly, it will ultimately fail at delivering a Performance Management system that will work. They may succeed in building performance MEASUREMENT system but not performance MANAGEMENT system. Real Performance Management goes beyond budgeting and measurement vs. budget and needs to include scenario analysis and driver based sensitivity analysis.
Companies focus on financial performance
rather on corporate performance
—
In many organizations Performance Management processes and projects are led by Finance departments. CFOs, Controllers and Financial Managers often pursue a standard career path coming from Accounting or Financial Controlling where they mostly focus on profitability analysis, sales performance and expense management. Often their planning and forecasting capabilities are limited to profitability and thus the finance department is not able to answer critical questions around future development and the sensitivity of the balance sheet and cash flow. The reason for this is not a lack of understanding, but a lack of integrated planning capabilities (stemming from an inability of ERP systems to support the process) that would help these organizations to have an integrated view of their corporate performance – from Profitability (Profit & Loss), to Financial Position (Balance Sheet) over to Solvency and Liquidity (Cash Flow).
Pure Financial Performance Management reporting solutions capture General Ledger information, but they often lack modeling capabilities that capture the main value drivers of a company.
Therefore they miss out on capturing a clear view of the value chain in addition to internal and external factors (i.e. currency exchanges, competitive landscape, price elasticity, macro-economic indicators, supply chain, etc.). Forecasting a company’s profitability, supply and demand requirements, cash generation or capital requirements, distribution of profits to shareholders as well value generation (market value and economic value added) from a corporate aggregated perspective cannot be achieved with such a system.
This often leads to the situation where Performance Management systems are used solely by Finance departments which produce reports and analysis that are shared within the organization – reporting mostly historical information which generates little value to the business and poorly links the Performance Management process to the execution of strategy.
Companies are trapped in Excel hell
—
Disjointed spreadsheets have been a well-documented issue for a long time. Excelitis is a serious problem, not only because it involves cumbersome and untimely reporting, but because it denies people a single, unified view of vital data – one version of the truth.
Driven by ERP’s inability to deliver a Performance Management solution, most companies still develop their own planning and reporting solutions based on Microsoft Excel.
Users generally build their most complex models in Excel and upload large data volumes from source systems into these spreadsheets to feed custom-made reports and planning applications. Spreadsheets are fantastic, but they simply were not designed to deliver company-wide financial and operational modeling functionalities supported by underlying data coming from ERP systems.
Users are faced with the common frustrations most spreadsheet jockeys must grapple with such as;
Why SAP and other ERP vendors
can’t do Performance Management
—
Many executives are convinced that implementing SAP or equivalent ERP systems will enable their organization to build a Performance Management system that will drive an integrated planning process throughout the organization. After all this is the sales pitch of the ERP vendors with “integrated” BI and PM. However, the reality is that Relational Database orientated OLTP systems are not designed for these kinds of tasks as OLTP systems fundamentally lack modeling capabilities and further, they typically provide too much unproductive detail which is not helpful for supporting integrated planning. Additionally, ERP systems (especially SAP) require a high level of IT knowledge and thus the involvement of IT consultancies and / or internal IT resources in order to deploy even simple reports. Users in functional departments typically have to explain to these IT people how their business works and what their needs are and still rarely receive what they have requested, generating lots of frustration and the need for self-service reporting. Ultimately, most users give up and start building their reporting and analytics solutions in spreadsheets in order to avoid this crippling dependence on IT.
Michael Hammer, an early thought leader of the 1990s business process re-engineering (BPR) movement, provides evidence of these problems of gaps and misalignment of goals with actions:
“In the real world, a company’s measurement systems (often ERPs) typically deliver a blizzard of nearly meaningless data that quantifies practically everything in sight, no matter how unimportant; that is devoid of any particular rhyme or reason; that is so voluminous as to be unusable; that is delivered so late as to be virtually useless; and that then languishes in printouts and briefing books without being put to any significant purpose…In short, measurement is a mess.”
Software vendors such as SAP, SAS, Oracle and IBM are focused on selling software licenses by advertising their capabilities around Business Analytics and Business Intelligence that are intended to solve the organizations’ Performance Management process problems. All vendors are using the same buzz words and acronyms such as Business Intelligence, Business Analytics, Performance Management (BPM, PM or PM) making it hard for companies to distinguish these solutions. In reality, companies are simply buying technology from these software vendors, which can be valuable and is even quite mature (as these tools have evolved substantially in the last 20 years), but the technology is not solving the core issue which is how to build a SYSTEM that aligns strategy to financial and operational management by aligning all internal resources.
Often software vendors and consultancies will advertise and offer colorful dashboards and scorecards with useless charts such as “gauge charts” as the key benefit delivered to organizations, which have dubious value at best and certainly do not address the key issues of Performance Management. Unless an organization has the ability to replicate it’s business model as a whole – throughout the whole value chain – and run sensitivity analysis on all aspects of the business and review, analyze and plan accordingly, it will ultimately fail at delivering a Performance Management system that will work. They may succeed in building performance MEASUREMENT system but not performance MANAGEMENT system. Real Performance Management goes beyond budgeting and measurement vs. budget and needs to include scenario analysis and driver based sensitivity analysis.
Companies focus on financial performance
rather on corporate performance
—
In many organizations Performance Management processes and projects are led by Finance departments. CFOs, Controllers and Financial Managers often pursue a standard career path coming from Accounting or Financial Controlling where they mostly focus on profitability analysis, sales performance and expense management. Often their planning and forecasting capabilities are limited to profitability and thus the finance department is not able to answer critical questions around future development and the sensitivity of the balance sheet and cash flow. The reason for this is not a lack of understanding, but a lack of integrated planning capabilities (stemming from an inability of ERP systems to support the process) that would help these organizations to have an integrated view of their corporate performance – from Profitability (Profit & Loss), to Financial Position (Balance Sheet) over to Solvency and Liquidity (Cash Flow).
Pure Financial Performance Management reporting solutions capture General Ledger information, but they often lack modeling capabilities that capture the main value drivers of a company.
Therefore they miss out on capturing a clear view of the value chain in addition to internal and external factors (i.e. currency exchanges, competitive landscape, price elasticity, macro-economic indicators, supply chain, etc.). Forecasting a company’s profitability, supply and demand requirements, cash generation or capital requirements, distribution of profits to shareholders as well value generation (market value and economic value added) from a corporate aggregated perspective cannot be achieved with such a system.
This often leads to the situation where Performance Management systems are used solely by Finance departments which produce reports and analysis that are shared within the organization – reporting mostly historical information which generates little value to the business and poorly links the Performance Management process to the execution of strategy.
Companies are trapped in Excel hell
—
Disjointed spreadsheets have been a well-documented issue for a long time. Excelitis is a serious problem, not only because it involves cumbersome and untimely reporting, but because it denies people a single, unified view of vital data – one version of the truth.
Driven by ERP’s inability to deliver a Performance Management solution, most companies still develop their own planning and reporting solutions based on Microsoft Excel.
Users generally build their most complex models in Excel and upload large data volumes from source systems into these spreadsheets to feed custom-made reports and planning applications. Spreadsheets are fantastic, but they simply were not designed to deliver company-wide financial and operational modeling functionalities supported by underlying data coming from ERP systems.
Users are faced with the common frustrations most spreadsheet jockeys must grapple with such as;
Get in touch today about how UPM can improve FP&A in your company.
We’re proud to have helped these companies plan better.
Get in touch today about how UPM can improve FP&A in your company.
We’re proud to have helped these companies plan better.
At Apliqo, we pride ourselves on building partnerships with companies that not only share our goal of transforming the landscape of financial planning and analytics
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