Management Excellence Framework: Analyse to Adjust · Oracle White Paper— Management Excellence Framework: Analyze to Adjust 3 Introduction – Management Excellence Framework In

An Oracle Thought Leadership White Paper

October 2009

Management Excellence Framework: Analyze to Adjust

Oracle White Paper— Management Excellence Framework: Analyze to Adjust

Introduction – Management Excellence Framework........................... 3

Step by Step ...................................................................................... 7

Key Metrics........................................................................................ 8

Techniques and Technologies ........................................................... 9

Call to action.................................................................................... 12


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Introduction – Management Excellence Framework In the era of operational excellence, operational processes became well defined. Order to

Cash, Procure to Pay, Invest to Retire, and Develop to Release, among others, became

reliable, uniform, and predictable ways to get the job done. In time, the management

processes will be defined with the same degree of clarity. At the moment, however, the

term means many things to many people.

When asked to define their management process, managers answer with either silence

or a flurry of different activities and partial processes, such as budgeting, financial

reporting, resource management, and variance analysis. The closest traditional model

that people suggest is the PDCA-cycle (Plan, Do, Check, Adjust) - sometimes called the

planning and control cycle, or management cycle. But this approach falls short because

of its inside-out approach.

The Management Excellence Framework offers a process by which companies can

achieve Management Excellence by linking strategy to success. The Management

Excellence Framework expands the scope of traditional performance management to

offer a framework by which companies can deliver Management Excellence. Enterprise

Performance Management Systems (EPMS) then enable companies to realize their

management process goals by connecting disparate management activities and bringing

together strategy formulation, execution, and feedback.

The Management Excellence framework consists of six steps, in which the output from

one becomes the input for the next. These steps are depicted in Figure 1 below.

Figure 1: Management Excellence: The Management Process Value Chain

AGILE

ALIGNED

Plan to Act

Analyze to Adjust

Record to Report

Traditional Performance Management

Gain to

Sustain

Investigate

to Invest

Design

to Decide

SMART

High Impact Performance Management


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The Management Excellence Framework combines several principles that are critical in

driving management excellence.

First, it balances an outside-in and inside-out approach in managing performance—

explicitly including external views of the business by understanding stakeholder

contributions and requirements as well as market dynamics. In contrast, traditional

approaches to performance management are primarily focused on understanding internal

business performance only.

Second, because management processes are of strategic, financial, and operational

nature, the key to success is aligning these processes across various levels as well as

across business functions. Sound business results come only from the perfect execution

of plans, making it imperative to connect the entire set of management processes.

Traditional performance management often treats management activities such as

planning, budgeting, forecasting, reporting, and analysis in isolation.

Third, the Management Excellence Framework drives management excellence by

recognizing that, to create a learning organization that is agile, feedback loops between

management processes are critical. This feedback allows companies to detect changes

immediately, assess the impact on their plans, and quickly find alternative ways to reach

their goals. These feedback loops should consist of the right key performance indicators

on the operational, financial, and strategic management levels.

Last, the Management Excellence Framework organizes the various performance

management processes to be aligned. Each management process has its own focus.

In this white paper, we focus on the Analyze to Adjust management process.


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Analyze to Adjust

Business strategies live and die based on how well a company executes them. Insight, strategies

and plans remain theoretical until someone puts them into action - and watches closely to see

how they perform. But performance management needs to do more than monitor individual

processes. It must overlay the various business domains and create insight into causal

relationships.

Figure 2: Causal relationships

For example, consider a furniture retail company. The customer places an order and a delivery

date is fixed, typically a calendar week. Payment is due at delivery and becomes part of the

retailer’s cash flow forecast. However, if the furniture manufacturer isn’t able to deliver as

promised, customer satisfaction will likely decrease and the retailer’s actual cash flow will not

meet its forecast. In addition, the customer might not buy again from this retailer and choose to

buy from a competitor next time. The retailer may have to offer a discount to the customer to

compensate for the delayed shipment, which further decreases the profit margin.

These types of causal relationships take place every day and generally lead to no-win situations.

An integrated approach across different functions and lines of business can help manage such

situations proactively and minimize the potential negative impact.

A recent Economist Intelligence Unit (EIU) study1 found that disparate information presents

one of the primary hurdles to performance management success. To overcome this problem,

leaders in performance management are implementing master data management strategies, so

that all domains use the same product, customer, organization, and other reference tables. Many

1 ‘Business intelligence: Putting enterprise data to work’, The Economist Intelligence Unit, 2007


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operational measures can be standardized, as companies do not derive competitive differentiation

from a unique definition of absenteeism or DSO. Standards allow them to benchmark their

operational excellence.

A manufacturing company learned this lesson first hand when it increased customer

responsiveness and improved retention by implementing business intelligence applications that

empower customer-facing employees with the information they need. And a utility company

gained better visibility into business processes and the ability to proactively track and manage key

drivers of revenue, cost and shareholder value.

Analyze to Adjust

Analyze to Adjust is the management process for analyzing deviations from a

company’s goals in order to take corrective actions. The purpose of this process

is to detect variances between execution and plans, analyze the causes and trends

of these variations, and determine the best possible responses. This process

involves actions ranging from immediate tactical responses, such as changing a

customer’s credit status, to adjusting the business plan or even reevaluating the

strategy, depending on the magnitude of the impact.

The Analyze to Adjust process provides answers to these crucial questions:

• Does your company understand profitability by customer, product, service, division,

channel, etc.?

• How do you handle proactive alerts for critical issues?

• Does your company have a standard set of KPIs by which to measure and manage

performance? Are the KPIs in use leading or lagging indicators?

• How effective have your investments in methodologies, such as the balanced scorecard,

been?

• Does your company have a common data model or master data repository? Are all

systems using consistent definitions?


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Step by Step

The Analyze to Adjust management process deals with the detection and analysis of deviation

from the plan and supporting decisions on the response(s) that the organization should make.

Table 1 below describes inputs, best practice and outputs for the Analyse to Adjust management

process.

TABLE 1. ANALYZE TO ADJUST INPUTS, PROCESS STEPS AND OUTPUT

INPUT BEST PRACTICE STEPS OUTPUT

• Short-term targets

• Drivers

• Constraint

• Assumption

• Actual and historic

performance.

1. Continuously monitor variances.

2. Perform root-cause analysis across

business domains

3. Benchmark performance against external

and internal peer groups

4. Identify opportunities for improvement

5. Adjust forecast and resource alignment

• New forecast.

• Improvement activities

Using the analytical models an organization has developed, management must monitor variances

continuously, performing root-cause analysis to understand the underlying driver of the variance.

The team can then choose to identify opportunities to improve the situation or adjust the current

forecast.

Depending on the significance of the deviation, managers might need to realign budgets or

reallocate resources. It is also possible that a tactical change could address the variance. In that

case, a tight integration between management processes and operational processes can help the

organization switch quickly from analysis to action.

The Analyze to Adjust process is crucial to ensuring continuous vertical and horizontal alignment

across the organization. All of its current operational activities need to be compared to the

previously committed plans, budgets, goals, and targets. Typically, tactical forecasts are used as an

intermediary layer for these adjustments. Leading companies establish this alignment by

integrating different analytical processes with each other.

Root-cause analysis and improvement activities often involve more than one part of the

organization. Consider, for example, the finance department detecting an increase in days sales

outstanding. At the same time, the marketing department might see a spike in customer

complaints. Perhaps the root cause is the procurement department trying to improve working

capital by paying out certain suppliers later, leading to product and service delivery issues. The

improvement activity would consist of introducing working capital management that is integrated

across the enterprise.


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Root-cause analysis requires alignment across different functions of the extended enterprise so

that management can understand how deviations in one process are related to issues in other

processes.

Key Metrics

Management excellence means that organizations create competitive advantage by having

superior management processes, making the organization smart, agile, and aligned. Management

processes should be managed using performance indicators much as operational processes are.

Table 2 below describes performance indicators that can be used for the Analyze to Adjust

management process.

TABLE 2: ANALYZE TO ADJUST PERFORMANCE INDICATORS

BUSINESS RESULTS (LAGGING) BUSINESS DRIVERS (LEADING)

Financial • Order to cash cycle time • Delivery efficiency

Sales • Revenue • Pipeline conversion rate

Marketing • Leads • Campaign effectiveness

Delivery • Service level • Backorder time

HR • Absenteeism, tenure • Employer attractiveness

IT • Business performance • Development/operations cost mix

Traditionally, management information has always been financial in nature. However,

understanding operational drivers improves the predictability of financial outcomes2. In the Plan

to Act process, we already described the need for each business function to run an efficient shop.

Every functional domain has and needs its own specific management information. Table 2

provides an indicative example for a number of business domains.

The key question that many organizations struggle with is whether to adopt ‘best practice’

metrics and reports as part of a packaged application, or to develop their own specific metrics.

2 “Integrating Operations and Finance: A Two-Way Street,” An Oracle Thought Leadership White Paper, August 2008, http://www.oracle.com/solutions/business_intelligence/index.html (under “White Papers).


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It should be said that even if companies operate in the same industry or have the same core

strategy, they will still need different metrics. Most likely, the two companies are in a different

maturity phase, have different skills and competencies, and have different strategic initiatives to

differentiate from their competition. Specific organizations will each have their own, unique

strategic performance indicators. And so they should. Copying best practices does not lead to

strategic differentiation.

However, in managing day-to-day operations on a more tactical and operational level, there is no

added value in reinventing the wheel. What is the point of having your own definition of

absenteeism, or days sales outstanding? And next to these standard performance indicators, every

industry has its own specific metrics reflecting the specifics of that industry. For those generic

and industry-specific performance indicators, organizations should simply use the metrics and

reports that come with their business applications and their business intelligence systems.

Oracle’s BI Applications comprise 26 different areas across multiple industries and offer over

5,000 metrics out of the box. The time saved implementing these standard metrics can better be

spent on crafting the right strategic metrics.

Where in the Plan to Act process managers focus on identifying value drivers across the value

chain, in the Analyze to Adjust process variances between actuals, plans, and forecasts are

analyzed, and linked to the identified value drivers. Horizontal alignment means that

organizations should have a single version of the truth in their metadata and master data, in order

to track variances across the cause-and-effect chain.

Key framework: Oracle Business Intelligence Applications3

Techniques and Technologies

In support of the Analyze to Adjust process, an EPM system needs to enable the tracking of

performance against strategic goals and initiatives as well as continuous monitoring of KPIs and

operating results. Also important are periodic reporting of actual performance versus plans and

forecasts, cost and profitability analysis by product line and customer segment, reforecasting and

adjustment of business models, and integration with transactional and operational systems to

drive analytical insight and action.

In terms of delivering results to different end-user groups, the EPM system needs to support

interactive dashboards and reports with drill-down capabilities to understand root causes of

3 http://www.oracle.com/appserver/business-intelligence/bi-applications.html.


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variances, integration with MicroSoft Office productivity tools, and ad hoc query and analysis

capabilities for analysts and other power users.

Key capabilities and techniques to support the Analyze to Adjust process are:

• Variance and root cause analysis. Using traditional reports or dashboards, this technique

is the most commonly used approach to evaluating performance. It involves comparing

actual revenue or expense results to a budget, plan, or forecast to compute a variance.

Drill-down capabilities are needed to find root causes for variances.

• Causality analysis. This technique focuses on cross-functional cause and effect in an

organization. A variance or negative performance metric in one function or business unit

can be caused by activities in other areas. So in addition to the drill-down technique, the

ability to drill across the organization based on these linkages and dependencies can be a

very powerful tool for analysis and decision-making.

• Profitability analysis. Simple line-of-business reporting can include a profit and loss

statement or a gross margin based on direct revenues and costs. Profitability reporting and

analysis typically includes the allocation of indirect costs to gain a comprehensive view of

the profitability of the particular line of business and an understanding of the value added

to the business.

• Performance scorecards. Metrics or KPIs are usually collected and reported on a

quarterly or monthly basis to track progress against goals and objectives. Key deviations

from goals and targets are analyzed and discussed and can trigger immediate action, more-

frequent monitoring, reallocation of resources, or resetting of the goal.

• Internal and external benchmarking. The financial results for a particular product line

or service offering are compared to other products or services within the portfolio to gain

insight into its comparative performance. This concept can be extended to external

benchmarking as well. Here, senior management is able to compare the performance of

their own company to competitors or peers in the industry. This shows whether the

organization is executing their strategy better or worse than other organizations of similar

size and scope.

Table 3 highlights the specific modules of Oracle’s EPM system that support the Analyze to

Adjust process.


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TABLE 3: ORACLE’S EPM SOLUTIONS FOR ANALYZE TO ADJUST

PRODUCT ALLOWS MANAGERS TO

Oracle Hyperion Planning • Monitor execution of plan by comparing budget and plans to actual results

• Analyze trends and continuously forecast to understand the impact of market

changes on the budget and plan

• Perform what-if analysis to understand what adjustments to plan are required

to achieve targets and reallocate resources

Oracle Integrated

Operational Planning

• Continuously collaborate on plan revisions across business functions to

understand their businesswide impact and strive toward a consensus plan

• Test financial forecasts and plan changes for feasibility

• Update the financial plan with the correct operational assumptions to create

accurate forecasts

Oracle Hyperion

Profitability and Cost

Management

• Model and analyze profitability and cost drivers for customers, products, and

channels

• Make costs transparent by analyzing how much each sales or service activity

costs

• Understand the root causes of profit or loss by tracing revenues, costs, and

resource consumption

• Prioritize adjustments to products and activities

Oracle Hyperion

Performance Scorecard

• Periodically monitor strategic initiatives and KPIs by comparing actual results

to strategic targets

• Take corrective actions by adjusting plans and initiatives or by re-evaluating

strategy

Oracle Business

Intelligence applications

• Quickly identify and respond to critical problems and opportunities by

comparing results to plans in real time

• Deliver visibility and actionable insight in each business function

• Align decisions and execution across business functions by connecting the

front office to the back office

• Use guided analytics and best practice workflows to drive the best actions

Oracle Business

Intelligence foundation

• Access a complete set of end-user reporting and analysis tools, including

interactive dashboards, ad hoc query and reporting, financial and production

reporting, multidimensional (OLAP) analysis, MicroSoft Office integration,

Google-type search, alerts, and support for mobile devices

• Access an enterprise information model that drives pervasive access to

multiple datasources via a business-oriented semantic model

Output from the Analyze to Adjust process becomes key input to all the other processes and can

result in new forecasts, revised goals, reallocation of resources, and other improvement activities.


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Call to action

Management processes should not be viewed in isolation. Oracle’s Management Excellence

Framework describes a set of six management processes that lead organizations to become

smarter, more agile, and better aligned - the key attributes of management excellence. Companies

implementing the framework apply a systematic approach to management activities to increase

both managerial and operational effectiveness. They can visualize the impact of business

decisions and understand the levers that can be adjusted to affect outcomes. However,

management processes differ from operational or transactional processes, and the techniques and

technologies required to support and integrate each type are different.

By unifying performance management and BI, Oracle’s EPM system supports the strategic,

financial, and operational management processes described in the Management Excellence

Framework. Oracle provides a complete and integrated system for managing and optimizing

enterprise wide performance and supporting all of the best practices and techniques associated

with the management processes. This combination of processes, techniques, and technologies

allows organizations to leverage operational investments, achieve management excellence, and

create competitive advantage.

Thousands of companies around the world are benefiting from Oracle’s comprehensive

approach to EPM. With lower costs and less complexity than with nonintegrated point solutions,

companies using Oracle’s EPM system are able to align decisions with strategic goals, reduce

financial reporting and planning cycles, compare operational results to plans in real time, and

drive management excellence.4

4 For more information on Oracle’s approach to enterprise performance management, please visit oracle.com/epm.

Management Excellence Framework:

Analyze to Adjust

October 2009

Author: Frank Buytendijk, Thomas Oestreich,

John O’Rourke, Toby Hatch, Nigel Youell

Oracle Corporation

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Redwood Shores, CA 94065

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Worldwide Inquiries:

Phone: +1.650.506.7000

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oracle.com

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Management Excellence Framework: Analyse to Adjust · Oracle White Paper— Management Excellence Framework: Analyze to Adjust 3 Introduction – Management Excellence Framework In