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  • CompRef8 / IBM Cognos TM1: The Official Guide / Oehler & Gruenes / 569-7 / Chapter 1

    IIntroduction ChapTer 1

    Challenges to Meeting Enterprise Performance Management Requirements

    ChapTer 2The Promise of In-Memory Analytics with IBM Cognos TM1

    ChapTer 3Evolution of IBM Cognos TM1

    parT

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  • CompRef8 / IBM Cognos TM1: The Official Guide / Oehler & Gruenes / 569-7 / Chapter 1

    3

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  • CompRef8 / IBM Cognos TM1: The Official Guide / Oehler & Gruenes / 569-7 / Chapter 1

    1Challenges to Meeting

    enterprise performance Management requirements

    The goal of this chapter is to highlight the increased demands on planning, analysis, and performance management processes in organizations. In todays highly volatile business environment, organizations demand more accurate plans, forecasts, and analysis to meet and exceed market demands. These demands range from increased market pressures, investment demands, profitability, strategy validation, and regulatory requirements for decision transparency. These increased demands require a fusion of planning and analysis capabilities at every level of decision making across an organization to create a more agile organization to meet these diverse requirements. Over time we have seen how markets respond to corporations that fail to meet stockholder expectation with decreased market capitalization. This chapter will focus on the effects of these forces on the following:

    Increased forecasting and budget cycles Rise of scenario analytics Heightened Enterprise Resource Planning (ERP) requirements Rising demands on data warehouses

    Increased Forecasting and Budget CyclesLets start our review with causes of increased forecasting and budget cycles. There are a host of common problems that plague organizations. These problems include

    Long planning cycles Disconnected operational and financial plans Spreadsheet-based plans

    3

    ChapTer

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    Lack of ownership and accountability Lack of control, transparency, and governance

    Lets take a look at some of these key challenges in more detail.

    Long Planning CyclesThe increased volatility and collection of data planning, budgeting, and forecasting cycles need to be in sync with business cycles in order to reflect current business assumptions. Before we begin, lets review a number of key definitions:

    Strategic plan A disciplined effort to define fundamental decisions and actions that shape and guide an organizations future, addressing what the organization is, what it does, and why it does it

    Budget/ annual operating plan Projection of revenues, expenses, and cash for a specified period of time (first year of SP). Identifies targets, at the line of business, functional, or cost center level

    Forecast A period-by-period projection of either revenue or expense that considers actuals to date and any changes to market conditions

    Modeling Process of developing models that characterize an organization, allowing it to evaluate the impact of decisions so as to fully understand the financial impact

    Reporting Collection, analysis, summarization, and presentation of the financial performance of the business

    Table 1-1 specifies the primary use, frequency, and key participants for each of these key terms.

    Now that we have key terms defined, lets turn our attention to an example of a planning process. As noted in Figure 1-1, in this example the budgeting, planning, and forecasting processes typically require the collaboration of at least four management layers, which include corporate finance, business unit leaders, line of business leaders, and finally cost center managers. Each of these planning groups has different levels of data and analysis requirements to render an accurate plan for their areas of responsibility. This requires a highly coordinated process for the target definition through distribution, aggregations of plans, variance analysis, and revisions.

    This process is further complicated by an increasing number of people in the planning process and pressure to recast assumptions based on changing business conditions. The notion of a quarterly plan no longer meets business requirements.

    Disconnected Operational and Financial PlansCompanies that roll out plans from the top down in the organization will not only have a limited view but will also suffer from lack of commitment and buy-in from many or all levels, which will drive a disconnection between management and contributors. As noted in the simple case shown in Figure 1-2, disconnected planning processes will send inaccurate

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    C h a p t e r 1 : M e e t i n g e n t e r p r i s e p e r f o r m a n c e M a n a g e m e n t r e q u i r e m e n t s 5parT I

    demand signals across the organization. For example, a corporate planning process cannot be accurate without answers to the following questions:

    What are the pipeline revenue forecasts? What are the expense demand signals? What are the planned capital expenditures to drive both current and strategic plans? Based on pipeline projects, what are the demand signals for employee hiring?

    Key Term Primary Use Frequency Who Is Involved?

    Strategic plan Define vision, strengths, weaknesses, opportunities, and threat (SWOT), high-level corporate goals, and objectives and strategies for how to attain them

    Horizon: 3 to 5 years, sometimes 10Frequency: Once per year

    Corporate executives Senior management Strategy Finance Department

    Budget/annual operating plan

    Financial guide for the current year: Control expenses, evaluate performance, and determine bonus compensation

    Horizon: One year, across months, quarters, weeksFrequency: Once per year/Infrequently updated

    Corporate planning Line of Business managers Cost Center managers

    Forecast Provides the most current estimates for the balance of the year/horizon

    Horizon: Balance of the year or rolling week, month, quarter, annual.Frequency: Refreshed often

    Corporate planning Line of Business managers

    Modeling What if analysis Acquisition modeling Scenario analysis Define contingency

    plans

    Ad hoc Corporate planning Strategy Sales/HR/IT

    Reporting Comparison with actual

    Cause and effect analysis

    Horizon: VariousFrequency: Monthly, Qtrly, Annual, Ad hoc

    Corporate planning Reviewed at all levels

    Table 1-1 Key Terms

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    Figure 1-1 Planning cycle example

    CorporateFinance

    Business Unit/LOB Finance

    Line of BusinessLeaders

    Cost CenterManagers

    ?CreateTargets &Templates

    Complete/DistributeTemplates

    CompleteTemplates

    4 > Months

    DistributePlan

    Templates

    SubmitPlan

    RevisePlan

    RevisePlan

    RevisePlan

    RevisePlan

    RevisePlan

    SubmitPlan

    AggregatePlans

    AnalyzeTarget

    vs. plan

    FinalizePlan

    Q1Forecast

    AggregatePlans

    Budgeting, Planning and Forecasting Processes

    Figure 1-2 Disconnected planning processes

    Market DemandFinance Sales

    Reports Income statements balance sheet Cash flow Financial ratios

    SalesPlanning &Forecasting

    WorkforcePlanning

    Strategic FinancialPlanning &Forecasting

    ExpensePlanning &

    Control

    OperatingExpenses

    Operations,Marketing, etc.

    HumanResources

    Headcount& Compensation

    Expenses

    Revenue Plan

    DepreciationExpenses

    CapitalExpenditure

    Planning

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    These simple questions highlight the interrelationship of cross-departmental planning processes and the critical importance of connecting these processes for better decision making.

    Companies dont often have the complete picture of the impact of business drivers, the key metrics that steer their expenses and profits. These drivers, which are often interdependent and yet changeable given market realities, are buried in hundreds of spreadsheets and disparate databases spread throughout business functions. As a result, companies cannot command a single version of the truth and are hard pressed to produce reliable forecasts and plans, thus hindering growth and profitability.

    If the annual planning process takes several months to completewith time dedicated to reconciliation and reworkingit has long since been disconnected from the cycle that optimal performance requires. Similarly, by not forecasting frequently or as needed, a company cannot fully and expediently understand the demand for operating cash and thus make necessary reallocations of resources.

    Companies should seek to avoid disconnected planning processes where divisional or departmental objectives, goals, and targets do not align with those of finance. Such fragmented processes create silos that do not take departmental interdependencies into account. Additionally, plans for revenue, expenses, and capital expenses are often insular. Roll-ups to the profit and loss, cash flow, and balance sheet projections can therefore be slow and error-prone. This fragmentation leads to tedious reconciliation and reworking that drain productivity and hinder crucial, timely analysis.

    Spreadsheet-Based PlansMany companies carry out planning with spreadsheets that supplement inflexible planning systems or have gone to pure spreadsheet solutions for their annual budget and planning processes, which creates inaccuracies and miscommunication. Although spreadsheets are an excellent personal productivity tool, they are inherently unable to offer the control, security, and structured collaboration approach that enterprises require. Worse still, the manual overhead required in using spreadsheets lengthens the planning process.

    Not only are spreadsheets prone to data errors, but they also cannot handle the complex processes of business modeling, the aligning of data definitions, business assumptions, and financial and operations targets, and the complex business analytics required today, such as product or customer profitability. They also lack collaborative features such as workflow, metadata management, and version control for interdepartmental planning processes.

    In a volatile business climate, there is often no time to schedule scarce IT resources or explain evolving requirements. Users with varying software backgrounds, such as marketers or facility managers, want the applications they touch frequently for all aspects of the planning cycle to be easy to use and change. They want a measure of control without having to become programmers themselves. Moreover, when they cannot share spreadsheets and files easily with team members, their work will become isolated.

    Lack of Ownership and AccountabilityMost planning processes start from a top down approach from finance that imposes goals and targets without proper input from all lines of business. Worst of all, these plans do not have current actual information to provide context for planning decision processes.

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    Without bidirectional value from all stakeholders in the planning process, which fosters a collaborative process between both upper and lower layers of management, ownership and accountability will be elusive.

    Lack of Control, Transparency, and GovernanceOne major concern today as organizations seek to increase their planning cycles and expand their reach in organizations is lack of control, transparency, and governance. Planning and forecasting processes require a number of different source systems to create a baseline forecast for planners. For many companies, critical data, from internal financial and operational sources and from external systems such as vendors and benchmarks (external marketing reports), usually resides in numerous systems, in an array of dissimilar formats. In a typically ungoverned fashion, employees piece together data from the various systems and then analyze and report on it differently, which leads to conflicting data definitions and views of the companys performance. These errors are then compounded when used as a baseline for a planning process. Without a strategy to centrally define and manage the data that provides critical information to planning and forecasting, processes cannot accurately model crossbusiness-function activity, much less access the critical data. Moreover, resources are engaged in redundant, expensive work.

    A second area of concern is transparency and governance surrounding the planning process itself. Unlike actual data, which requires a snapshot of the transaction at a point in time, plans and forecasts evolve and mature over time as assumptions and business requirements change. Creating an audit trail of some of the following key data points surrounding the planning submission is not only challenging but extremely time-consuming for the finance department. These questions include:

    How mature is the current plan? When was a plan submitted? Who changed or reworked specific areas, and when? Who approved the plan and when? What was the soft data or rationalization for key decisions? Are there certain submissions that need to be re-forecasted, or is a new planning

    process required?

    Most organizations lose this key information during re-forecasting after an initial planning cycle and are required to start all over again, increasing the cycle time.

    Rise of Scenario AnalyticsNow lets turn our attention to increased business requirements for analysis. As mentioned earlier, given the rise of uncertainty and volatility in organizational assumptions and business models, there is an increased requirement for scenario analytics to manage this uncertainty. Scenario analytics is the ability to evaluate several outcomes of a potential strategy before making a final decision. Scenario analytics provides the ability to:

    Explore and test what if scenarios Reduce risk and create contingency plans

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    C h a p t e r 1 : M e e t...

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