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;
- Inconsistency of data based in part on the cumbersome, time consuming and manual process needed to download data from the ERP system
- Lack of transparency due to an inability to “drill-through” from summarized reports to more detail
- Static views of data, rather than dynamic
- Performance issues when using large volumes of data; requiring IT to prepare the data for users
- Inability to run multiple scenarios with a complex model using live data
- Despite the flexibility of spreadsheets, planning and reporting solutions are only high level and disconnected from financial and operational data sources