Are Package Deals Better Value?

The market landscape for corporate performance management (CPM) suites has changed dramatically during the past two years as a result of vendor consolidation and, more recently, portfolio rationalisation. The market is dominated, in terms of market share, by the three megavendors: Oracle, SAP and IBM. And, although they all have strong product portfolios, there is still some uncertainty among users about how the acquisitions will affect product road maps. This makes it difficult for many organisations to make strategic decisions. Consequently, IT organisations must weigh up the tactical benefits of specialist solutions against more strategic, but still not fully realised, integrated solutions from the big three.

CPM includes the processes used to manage corporate performance, such as strategy formulation, budgeting and forecasting; the methodologies that support these processes, including the balanced scorecard, or value-based management; and the metrics used to measure performance against strategic and operational performance goals. However, CPM also comprises a series of analytic applications, such as budgeting, planning and forecasting (BP&F), financial consolidation, and financial reporting solutions. These provide the functionality to support these processes, methodologies and metrics, targeted at the CFO, finance team, senior executives and corporate-level decision makers.

The market for CPM suites continues to rapidly grow and mature, topping $1.8bn in licence and maintenance revenue in 2007, representing 19% year-on-year growth. The primary driver for this growth is that users continue to replace spreadsheet-based applications with more-robust analytic applications that add work flow and collaboration/control processes. CPM is relevant to every organisation, regardless of industry sector, because all organisations need analytics, as well as the management information to support the CFO and finance team, and to deliver management information to the leadership team, which is one of the main areas of focus for CPM.

Much of this adoption of CPM has been sponsored, purchased and implemented by finance. However, Gartner increasingly sees CPM being adopted as an enterprise-wide initiative; part of a broader business intelligence (BI) and performance management (PM) strategy.

Recently, the US Securities and Exchange Commission announced a proposed move to International Financial Reporting Standards (IFRS) adoption by US issuers. IFRS is the adopted financial reporting standard used by more than 100 countries worldwide, including all of Europe. We anticipate that this move will provide another driver for organisations to adopt CPM suites to provide their financial consolidation and reporting in support of these standards.

Budgeting, planning and forecasting

The CPM market is populated with many vendors, some offering a broad range of solutions, while others have limited or specific applications. The main application components of a CPM suite include the development of BP&F. In CPM, the core of the process is a financial modelling engine that has an integrated profit-and-loss, balance sheet and cashflow forecasting capability. This is the key feature that distinguishes CPM from other analytic applications that also create budgets, plans and forecasts, such as sales and operations planning or marketing campaign planning applications.

CPM applications support the creation of financially focused budgets and plans, and should support the complete budget creation and approval process with appropriate workflow that enables users to define and control the flow of budgets, plans and forecasts for review and approval. These applications should also keep an audit trail of changes to budgets, plans and forecasts.

CPM BP&F should support the two forms of financial planning that dominate most organisations: short-term financial budgeting, usually with a one-year time horizon, and longer-term planning, commonly with a three to five-year time horizon. The financial budget is used to set financial targets for revenue, expenditures and cash generation, and typically uses financial classifications found in the general ledger. The long-term financial plan is used by executives to evaluate the effects of alternative strategies, such as merger-and-acquisition activity, and represents a high-level perspective of revenue, expenses, balance sheet items and cashflows.

BP&F applications should also support other aspects of strategic planning, such as initiative management, and should provide links to strategy maps in scorecard applications. BP&F applications may also provide other detailed planning, such as salary or head count planning, revenue planning, capital planning or expense planning. CPM BP&F applications should support sophisticated forecasting and modelling, which involve extrapolating new versions of plans and budgets based on the analysis of historical data. They should also offer more sophisticated capabilities that extend beyond financially focused budgets, supporting the creation of models based on a network of business drivers that enable users to model financial outcomes by varying the business driver assumptions. This capability helps link CPM to other areas of PM.

As easy as ABC?

Profitability modelling and optimisation includes activity-based costing (ABC) applications that determine and allocate costs at a highly granular level to, for example, determine the cost of each activity that an agent may perform across all channels in a customer service contact centre. This information can be applied to products, customers or customer segments, to help determine product and customer profitability. Activity-based management applications take this approach one stage further and provide modelling capabilities to enable users to model the impact on profitability of different cost and resource allocation strategies.

More sophisticated applications have moved beyond the traditional ABC focus to enable revenue to be allocated in a similar manner, which, in industries where there are complex sales models, can be as complex as the costing model. This approach can help model optimal product and service offerings in packaging, bundling and pricing, as well as optimise channel strategies. Increasingly, profitability modelling applications are focusing on profit optimisation capabilities that enable executives to see the impact of different strategies on profitability from different perspectives, such as customer or product.

Strategy management applications provide a packaged approach to support strategic planning, modelling and monitoring to improve corporate performance, accelerate management decision making and facilitate collaboration. These solutions are usually tied to strategy maps or methodologies, such as the balanced scorecard. Strategy management comprises:

• Strategic planning – the creation of high-level business plans to evaluate the impact of different strategic alternatives. This includes creating strategic plans on a ‘base case plus’ or initiative-based approach, along with scenario modelling to compare the financial outcomes of various strategies. Strategic planning includes long-term financial planning, which creates a high-level perspective of revenue, expenses, balance sheet items and cashflows to show the financial impact of different strategic alternatives.
• Initiative/goal management – project-management-like tools to enable responsible managers to execute specific tasks related to a strategy.
• Scorecards and strategy maps – used to record strategies, objectives and tasks, measure performance and provide a collaborative environment for effective, enterprise-wide communication.
• Dashboards – to aggregate and display metrics and key performance indicators (KPIs), enabling them to be examined at a glance before further exploration via additional BI tools. CPM suites should, at the very least, provide dashboard capabilities to help display performance information in a way that is easily understood by users. However, more sophisticated organisations are implementing strategy maps (linked frameworks of KPIs) using scorecard software to link CPM to other aspects of PM. Strategy management is, therefore, becoming an increasingly important aspect of CPM suites.

This type of application lets organisations reconcile, consolidate, summarise and aggregate financial data based on different accounting standards and federal regulations. These applications require complex transaction-processing rules to automate intercompany eliminations, and must maintain a detailed audit trail of all transactions processed to arrive at the consolidated capabilities, including the ability to support complex translation and revaluation processing. They are a fundamental part of CPM, because they create the audited, enterprise-level view of financial information that must be shared with other CPM applications to analyse variance from targets.

Financial-consolidation applications are increasingly being deployed more widely in a federated fashion to provide financial and management consolidations at local, regional or business unit subconsolidations by linking directly to the general ledgers at this level. Financial-consolidation applications should be scalable enough to support this deployment model and should provide a group consolidation using shared dimensions (such as legal entity and account) across the federated models. Financial-consolidation solutions are increasingly linked with financial governance initiatives, and many solutions incorporate additional process controls to support financial-close management.

There are many generic query and reporting applications available as part of BI platforms. Although these capabilities add value to a CPM implementation, CPM has some specific additional reporting requirements that require specialised reporting tools. CPM applications, such as financial consolidation and BP&F, require some of their output to be formatted as structured financial statements, and thus, reporting tools need additional logic and presentation capabilities to handle these requirements (for example, calculation rules for creating a cashflow statement from profit-and-loss and balance sheet data). They should support specific generally accepted accounting principles (GAAP) accounting presentation rules, such as US GAAP or IFRS, to enable preparation of statutory financial statements with appropriate commentary and supplementary notes. Increasingly, financial-reporting solutions incorporate templates, business rules, workflow and audit trails to better meet regulatory, compliance and governance programs.

In addition, they should support financial reporting technologies, such as Extensible Business Reporting Language (XBRL), as regulators increasingly require the submission of financial statements in XBRL format. CPM applications should also provide management reporting capabilities. These are specifically required to produce the management reports used by executives at corporate and business unit levels to manage and explain financial performance. This requires a financial-statement presentation format, but also requires additional functionality, primarily budget/variance analysis.

CPM applications should also enable the creation of ‘management packs,’ which enables groups of reports to be produced electronically or in printed form, with the ability to add annotations and commentary. Finally, these applications include visualisation techniques specifically designed to support analysis of variance from budgets or targets and comparisons with historical performance. This can include integration with dashboard and scorecard applications, as well as specific visualisation techniques, such as decision trees, heat maps, and hyperbolic trees.

Vendor survey

Gartner conducted a customer survey (comprising nominated CPM references by the vendors) and asked 20 specific questions about customers’ experiences in working with their chosen vendors. The results were used in support of the assessment of the CPM suites market. For 2008, the company obtained 131 full responses (up from 83 in 2007), representing companies in 27 countries with revenues ranging from $50m to $100bn, and CPM deployments from ten to more than 3,000 users.

The average results across key questions showed some variation, ranging from 1.42 to 2.64, where one is excellent and five is very poor, with an average score of 1.91 and a standard deviation of 0.34. This shows that there are some discrepancies among CPM suite vendors in benefits realised and quality of support and services; which is why reference calls are an important part of the vendor evaluation.

Furthermore, these results showed a striking similarity to 2007 in the way that CPM is used – primarily by finance and senior management to report on financial performance – but with a slight increase in enterprise-wide deployments. There is also a marked increase in CPM used tactically at department or business function levels as a short-term replacement for spreadsheet solutions.

The survey also revealed that CPM is still mainly sponsored by finance, although there was also a pronounced increase in sponsorship outside finance, indicating that CPM is becoming more integrated into wider BI and PM strategies. BP&F remains the most popular use for CPM, followed by financial reporting and financial consolidation. Strategy management and profitability modeling remain less widely adopted, with no clear increase in use year to year from the references provided. However, responses show that these additions are still high on the list for inclusion within the next 12 to 24 months.