Profit from Performance

Companies that achieve world-class performance in planning, performance management and business analysis (or enterprise performance management – EPM) can more than double their market equity and significantly lower their operating profit volatility. This is the empirically proven conclusion of a study of over 200 organisations by business consultant The Hackett Group.

Those organisations that achieve world-class EPM performance (top quartile against both efficiency metrics – such as cost and use of online tools, and effectiveness – such as accuracy of forecast and analysis, and percentage of managers describing the budget process as convenient and easy) generate 2.4 times the three-year total shareholder return of a typical company in their industry. In addition, these top companies outperform the equity returns seen by those companies in the Dow Jones industries.

According to Hackett's chief research officer, Richard T Roth, "Companies with world-class EPM performance make better decisions, identify opportunities quicker, respond faster to changes in their market and keep their eye focused on the critical issues of building shareholder value."

Although there is no secret formula for delivering superior shareholder returns, research does point to key EPM capabilities that enable the right information to reach the right people at the right time – thus optimising the likelihood of making timely market interventions that drive competitive advantage, and ultimately improve the prospects of delivering shareholder value.

HIRE THE BRIGHTEST AND BEST

Hiring the brightest and best finance talent is clearly one place to start, as recognised by world-class performers who report a 16% higher fully loaded labour rate than their peer group. But this does not tell the full story.

Although their staff are more expensive on a per-person basis, we find that world-class companies spend just 0.13% on EPM staffing costs as a percentage of revenue, compared with 0.25% for the peer group. This lower overall cost is achievable because the world-class group requires 57% fewer staff than their peers.

Roth added, "The simple truth is that top companies operate with a smaller cadre of high-performing planning and performance management staff. World-class EPM companies recognise that high-calibre, well-trained staff are much more likely to provide the analytics, plans and data that enable business-unit leaders to maintain a competitive advantage."

As measures of high performance, these higher-paid employees are able to produce an ad hoc report almost one business day quicker than their peers. The benefits of being able to fulfil this requirement a full day quicker should not be underestimated, given the potential competitive advantage that can be secured from rapid-fire situational analysis and report preparation – especially in today's 24/7 global economy.

DO MORE REPORTS EQUAL HIGHER QUALITY?

Interestingly, Hackett's research finds that both the world-class cpmpanies and peer groups generate about the same number of business performance reports per employee. Given that the world-class companies require far fewer staff, this means that they are producing substantially fewer reports. So, by this measure, the top performers might be seen as markedly less productive than the peers. Yet, when it comes to enabling better decision support, productivity is not always a useful gauge of performance.

An interesting conclusion is that the internal customers of world-class companies report higher levels of satisfaction with the output of their EPM staff than do their counterparts in peer organisations. The data and information that world-class EPM companies generate and distribute to managers is far more relevant for decision-making purposes.

Few would argue with the observation that today organisational leaders have more data to draw from than ever before. Despite this, leadership teams within many organisations are failing to make strategic or operational decisions that are markedly better, or dispatched with any more confidence, than was historically the norm. Most organisations are stymied in their decision-making activities, not despite, but because of, the floods of data that come their way.

While mining for golden nuggets of information buried or obscured within the deluge of data is nearly impossible for most, it is proving much less of a challenge for the staff of world-class EPM organisations.

TECHNOLOGY IS THE GREATEST ENABLER

The fact that world-class companies spend more on individual talent, yet less overall on labour, is underlined when we profile their use of technology. World-class performers have a higher technology-to-cost ratio than the peer group, (the percentage of process costs consumed by technology), yet report a substantially lower technology cost as a percentage of revenue (0.13% vs 0.26%.).

These companies recognise that when used judiciously, technology can be effectively swapped for labour costs. This is why, as a percentage of total staff numbers, the top performers require significantly fewer clerical staff than the rest. By the same token, they have an equally marked higher percentage of professional staff.

Unarguably, technology is the greatest enabler of fully leveraged EPM. The challenge for all organisations is to harness the power of technology so that it supports the decision-making process through better data access, improved analytic capabilities, and subsequent report generation and distribution.

Yet for many organisations it has been an onerous task to harness the power afforded by the significant advances in information technology. For the least able, the result has been the spawning of myriad disparate and fragmented systems. These have supported, or created, equally fractured decision-support processes.

Conversely, companies that have successfully absorbed IT innovation have reaped rich rewards through the creation of superior planning, reporting and business intelligence capabilities. According to Hackett research, that the world-class group excels in knowing where and when to deploy technological solutions without attendant increases in complexity. This results in better decision support at a lower cost.

IT BEST PRACTICES

Hackett research had found that world-class companies consistently show at least two key best practices in their use of IT.

Firstly, world-class companies are relentless in their efforts at complexity reduction – in IT as well as in processes. For instance, 62% of world-class companies' business performance reports are generated from a single database, 29% more than the rest. A single data repository reduces errors and allows managers to spend less time searching for data and more time on analysis.

Moreover, they have fewer secondary planning systems, and are less dependent on spreadsheets as the primary or secondary planning tool. A significantly less complex technology environment contributes enormously to reducing the cost of EPM; world-class costs are just 0.13% of revenue compared with 0.26% for the peer group. Fewer applications translate into lower user fees and licence costs and fewer support personnel.

Secondly, online budgeting and reporting tools are used much more pervasively. Operating managers at world-class companies are much more likely to enter budget data into an online budgeting tool than those within peer companies. This is essentially why these managers report that they find the budgeting process more convenient and easy than their peers in other companies.

Operating managers within world-class companies can access reports online to a significantly greater extent than the peer group. And there is a stunning differential when it comes to the extent to which business performance reports are available for viewing on web applications. This is fully 140% more likely within world-class companies than peers.

Enabling web-based report viewing leads to more real-time information exchange and may offer a marked competitive advantage in rapidly changing markets.

Web-enabled reporting tools are being used to provide executives with timely information, in many cases updated hourly, including order and revenue status, product margins, cash cycle, and profit and loss statements.

Additionally, these same web-enabled reports allow production managers to monitor throughput in conjunction with order receipt and shipment. The outcome is more satisfied customers, more robust customer information, better production and cost management and improved profitability.

The core function of EPM is enabling better decision support. Roth concluded, "The point of expending effort in reshaping processes and implementing technology as part of an EPM programme is so that business managers can make strategic and operational choices quicker, and do so with increased confidence."

"By better enabling the decision-making process, it is little wonder that companies with world-class EPM performance achieve greater returns for shareholders."