Analytics-Based Enterprise Performance Management

1

Analytics-Based Enterprise Performance Management

Gary Cokins, CPIM Analytics-Based Performance Management LLC

Cary, North Carolina USA

www.garycokins.com

919 720 2718

[email protected]

Copyright 2016 www.garycokins.com Analytics-Based Performance Management LLC

http://www.garycokins.com/

mailto:[email protected]


2

About Gary Cokins Founder, Analytics-Based Performance Management LLC

B.S. Industrial Engineering & Operations Research;

Cornell University, 1971

M.B.A. Finance & Accounting; Northwestern University,

Kellogg Graduate School of Management, 1974

Previous Associations:

- FMC Corporation

- Consultant with: Deloitte,

KPMG Peat Marwick,

Electronic Data Systems [EDS, now HP]

- SAS Copyright 2016 www.garycokins.com Analytics-Based Performance Management LLC


3 Copyright 2016 www.garycokins.com Analytics-Based Performance Management LLC

Gary Cokins’ part time role as the IMA Executive in Residence

IMA Strategic

Finance magazine;

December 2013,

January 2016;

Trend #1

“Measuring and

Managing Customer

Profitability”; IMA

Strategic Finance;

February 2016.

http://www.imanet.org/

docs/default-

source/sf/2016_02/02

_2016_cokins.pdf?sfvr

sn=2


http://www.imanet.org/docs/default-source/sf/2015_02/02_2015_cokins.pdf?sfvrsn=2






4

Managers who have previously struggled at

promoting FP&A, enterprise performance

management (EPM) and integrating business

analytics (BA) into their decision support systems.

Who will benefit from this presentation?

Managers who intend to “champion” any or all EPM

and BA improvement techniques and need a

compelling call to action.



5

AGENDA

1) Compelling Needs for Enterprise Performance Management (EPM)

2) Overview of EPM

3) The Rise of Business Intelligence (BI) and Analytics

4) Strategy Formulation and Strategy Management

5) Fact-based Managerial Accounting (with ABC/M)

6) Customer Profitability and Value Management

7) The Shift in ROI’s Source from Tangible to Intangible Assets

8) Accelerating the Rate of Adoption for Implementing EPM

Summary, Discussion, Questions and Answers



6

Key questions

What? So what? Then what?



7

Drowning in data but starving for information.



8

AGENDA


2) Overview of EPM










9

Confusion and Lack of Consensus about EPM

Is it human resources PM?

Is it alignment, such as strategic or resource allocation?

Is it process, productivity and quality improvement?

Is it scorecards, dashboards, KPIs and measures?

Or … is it all of the above? And even more?


The good news is this …..


10

What is Analytics-based Performance Management?

Analytics-based Performance Management

is the integration of multiple methodologies

with each embedded with business analytics,

such as segmentation analysis, and

especially predictive analytics … to achieve

the strategy and to make better decisions.



11

Long-term Trends in Government

A growing impatience by taxpayers and

governance boards with waste and inefficiency

is leading to demands for evidence of outputs,

outcomes, transparency and accountability.

“more with less” …

“value for money” ...

“quality of life”



12

What has caused interest in EPM?

1 Executives frustrations with strategy failure. 2 Increased accountability. 3 More rapid decision making. 4 Mistrust of the managerial accounting system for transparency.

5 Poor customer value management 6 Contentious budgeting – poor resource capacity planning. 7 Dysfunctional supply chain management. 8 Unfulfilled ROI promises from IT systems – lack of integration.



13

AGENDA


2) Overview of EPM










14

Why is business analytics needed?

-- by first-to-market (via innovation)?

-- by customer loyalty?

But how sustainable are these long-term?

-- by low-cost and low-price provider?

-- Other?

How does an organization gain a competitive edge?



15

Isn’t competition ultimately about cost leadership, differentiation, or focus?*

-- cost leadership strategy – via improving process efficiencies, unique access to low cost inputs, vertical integration, avoiding certain costs, etc.

-- differentiation strategy – via developing products and/or services with unique traits valued by customers.

But don’t each of these have risks today?

-- focus strategy – via concentrating on a narrow segment with entrenched customer loyalty.

* Source: Michael E. Porter’s three generic strategies.



16

Problem: Generic strategies are vulnerable !

-- cost leadership strategy – other firms lower their costs.

-- differentiation strategy – imitation by competitors; changes in customer tastes.

The best defense is agility with quicker and smarter decision making using statistics, analytics, and operations research.

-- focus strategy – broad-market cost leaders or micro-segmenters invade and erode your customers’ loyalty.



17

Confusion and lack of consensus about BA

Is it business intelligence (BI) with enhancements?

Is it probabilities and statistics, like regression and

correlation analysis?

Is it the technology of data governance, management and

quality?

Is it forecasting? Is it optimization equations?

Or … is it all of the above? And even more?

Is business analytics (BA) a data warehouse?

Is it data mining with query and reporting?



18

Work backwards with the end in mind.

Regardless of how “analytics” should be defined, there

should be no argument as to its purpose:

Better decisions. Better Actions.

Analytics’ goal should be to gain insights and solve

problems, to make better and quicker decisions with

more accurate and fact-based data, and to take actions.



19

Improving Performance by Unifying EPM and BA

-- BI Reporting consumes stored information.

-- Business Analytics produces new information.

-- Enterprise Performance Management deploys Analytics.

It is not about monitoring the dials on a dashboard,

but rather moving the dials.



20

Queries simply answer questions. Business analytics

creates questions.

Business Analytics – insights and actions

Further, analytics then stimulate more questions, more

complex questions, and more interesting questions.

Most importantly, business analytics also has the power to

answer the questions.



21

What Pressures Cause Interest in Business Analytics?

-- Volatility, uncertainty, risk and clock-speed

-- Standardized processes (e.g. ERP, CRM systems)

-- Intuition of the potential value of unused structured and text data

-- Enormous IT processing power

-- Exponential growth in data, users, searches

-- Complexity and variables are replacing “gut feel



22

Examples of Analytics

-- Hollywood celebrities and the film industry

-- Sports teams

But what about business analytics in mainstream businesses?

-- Crime prevention

-- music score analysis

Will Smith: Independence Day; Men in Black; I, Robot; I am Legend; Hancock



23

Retail sales and merchandising analytics [markdown and assortment planning]

Financial services analytics [risk and loan credit scoring]

Pharmaceutical analytics [drug development and clinical trials]

Marketing analytics [CRM, segmentation, and churn analysis]

Text analytics [sentiment analysis]

Financial control analytics [customer payment collections]

Fraud analytics [insurance and medical claims]

Pricing analytics [price sensitivity analysis]

Telecommunications analytics [customer behavior]

Supply chain and transportation analytics [route optimization]

Manufacturing analytics [warranty claims]

Hospital analytics [patient scheduling]

Human resources analytics [workforce planning]

Banking analytics [anti-money laundering]

Police analytics [crime pattern analytics]

There are many Business Analytics Domains



24

STANDARD REPORTS

AD HOC REPORTS

QUERY DRILLDOWN (OR OLAP)

ALERTS

1

2

3

4

Reactive (Descriptive)



25

STANDARD REPORTS

AD HOC REPORTS

QUERY DRILLDOWN (OR OLAP)

ALERTS

1

2

3

4

5

6

7

8

FORECASTING

STATISTICAL

ANALYSIS

PREDICTIVE

MODELING

OPTIMIZATION

Reactive Proactive (Descriptive) (Inferential)



26

AGENDA


2) Overview of EPM










27

What has Caused Interest in EPM?

1) Failure by executives to execute their well-formulated

strategy.



28

Vision and Mission Statements

Vision & Mission

Balanced Scorecard

Strategy Mapping

A Vision statement answers

“where do we want to go?

Strategy maps and scorecards answer,

“How will we get there?”

The strategy map and scorecard are mechanical.

They help realize the vision and mission.



29

Fin

an

cia

l Cu

sto

me

r Inte

rna

l Pro

ce

ss

Lea

rnin

g

Maximize Shareholder Value

Generic Strategy Map Architecture

Financial

Customer

Internal

Processes

Learning &

Innovation



30

Vision & Mission

Exceed shareholder expectations

Improve profit margins

Increase sales volume

Diversify income stream

Increase sales to existing customers

Diversify customer base

Test new products

Target profitable market segments

develop new products

Optimize internal processes

Attract new customers

Develop employee skills

Integrate systems

Learning

& Growth

Internal

Process

Customer

Financial



31

Vision & Mission

Exceed shareholder expectations

Improve profit margins

Increase sales volume

Diversify income stream

Increase sales to existing customers

Diversify customer base

Test new products

Target profitable market segments

develop new products

Optimize internal processes

Attract new customers

Develop employee skills

Integrate systems

Learning

& Growth

Internal

Process

Customer

Financial

A learning environment

stimulates

Process excellence

Customer intimacy

Financial value

leads to

creating



32

A scorecard is more of a social tool than a technical tool.

Measurement

Period; 1st Quarter

Strategic

Objective

Identify

Projects,

Initiatives,

or

Processes

KPI

Measure KPI Target KPI Actual

comments /

explanation

Executive Team X X

Managers and

Employees X X their score X

<----- period results ------->

Who Does What?



33

The Key to Scorecards

How does everyone answer this single question:

“How am I doing on what is important?”

The overriding purpose of a strategy map and scorecard system is to make mission and strategy everyone’s job.

Strategy Maps and Scorecards provide this answer.



34

Scorecard Lessons Being Painfully Learned

Scorecard or Report Card?

KPIs or PIs?



35

KPIs (strategic context)

Must have

targets

PIs (operational)

With

targets

Without

targets

- Trends

- Upper / lower

thresholds

Project-based

KPIs

Process-based

KPIs

Scorecard

(inter-related

measures with

cause-and-effect

correlations)

Dashboard

(measures in isolation)

Budget &

Resource

Planning

Strategy

Diagram Measurements

$ $

Frequency of

reporting

quarterly

monthly

weekly

daily

hourly

real-time

Without

targets

- drill-down analysis

- alert messages

What is the difference between KPIs and PIs?



36

AGENDA


2) Overview of EPM










37


4) Mistrust of the managerial accounting system and its flawed cost allocations and misleading cost reporting of outputs, products, standard service-lines, channels, customers and outcomes.



38

Direct and Absorption Costing

38

Ideally, all costs should be directly charged, but as variety, complexity, and

technology increases, more costs are indirect and shared.

Activities

Resources

Final

Cost

Objects

Project

accounting ABC/M ALLOCATIONS

Labor

Reporting Estimates

OUTPUTS, PROCESSES, PRODUCTS, SERVICE LINES, MARKETS, CHANNELS, ORDERS, CUSTOMERS

1st Preference

2nd Preference

3rd Preference

Last Resort

Cost-Driver Table

Work

Order

Standard

Routing,

Bill of

material

Standard

costing

Activity

Driver

39

A simple explanation of ABC … that you can explain to your spouse (or boss) tonight.



40

Cost

Components

Stages in the Evolution of Businesses

Integrated Old-fashioned Hierarchical

Changes in Cost Structure

100%

Overhead (indirect expenses)

Direct (recurring) Labor

Material

1950 2020

Direct

0%

Broadly averaged cost allocation was acceptable.

Cost errors are large and misleading.

The Need for Tracing, not Allocating, Costs



41

Customers and Service-recipients

Resources

Process Costs

Output & Outcome Costs

inputs

This is known.

Appropriations, approved budget spending levels

But ?

But ?

The Primary View of Most Managers



42

Insurance Claims Processing Department

The General Ledger View is Structurally Deficient for Decision Analysis.

Salaries Equipment Travel expense Supplies Use and occupancy Total

$621,400

161,200

58,000

43,900

30,000

$914,500

$600,000

150,000

60,000

40,000

30,000

$880,000

$(21,400)

(11,200)

2,000

(3,900)

––

$(34,500)

Plan Actual Favorable/

(unfavorable)

Chart-of-Accounts View

When managers get this kind of report, they are

either happy or sad, but they are rarely any smarter!



43

#of

Activity-Based View

To: ABC Data Base

Key/scan claims

Analyze claims

Suspend claims

Receive provider inquiries

Resolve member problems

Process batches

Determine eligibility

Make copies

Write correspondence

Attend training

Total

$ 31,500

121,000

32,500

101,500

83,400

45,000

119,000

145,500

77,100

158,000

$914,500

Claims Processing Dept

Salaries Equipment Travel expense Supplies Use and occupancy Total

$621,400

161,200

58,000

43,900

30,000

$914,500

$600,000

150,000

60,000

40,000

30,000

$880,000

$(21,400)

(11,200)

2,000

(3,900)

––

$(34,500)

Plan Actual Favorable/

(unfavorable)

Claims Processing Department

Chart-of-Accounts View

From: General Ledger Activity

cost

drivers

#of #of #of #of #of #of #of #of

#of

$914,500

Each Activity Has Its Own Cost Driver



44

The ABC/M Cross - What Questions are Answered?

Cost Assignment View (ABC)

Process View

(ABCM)

Resources

Resource Cost

Assignment

Activities

Activity Cost

Assignment

Resource

Drivers

Activity

Drivers

© CAM-I 1990 (adapted)

Source: The Consortium of Advanced Manufacturing International (CAM-I).

Cost

Drivers

Cost Objects

(outputs)

What do we

spend?

Why do we

spend what we

spend?

What do we do?

Why do we do

what we do?

And how much?

Who or what do

we do it for?

45

Multiple-Stage Cost Flowing

Simple ABC

Expanded ABC

Resources

Resources

Activities

Objects

Objects

Activities



46

Multilevel Cost Flowing - the Math

Support activities

$30

Material

$10 Product/service

activities $15

Products

$25

Customer

activities $20 Infrastructure

sustaining $25

Resource Costs ($70)

External Customer/Orders + Sustaining

$70

ABC as a total system in this example begins with $70. It then reassigns and accumulates the costs into the final cost objects (outputs) without double-counting.

Price

data

Resources

Activities

$10 $10

$10

$10

$10 $10

$5

$15

$25 $45

$25

$15

$30

Cost-driver Table

*intermediate activity drivers

reassign each activity's

cumulative input costs plus its

own cost.

*Inter-

mediate Resource

drivers

Final

activity

drivers

Final cost

objects



47

ABC/M Cost Assignment Network

Salary, Fringe Benefits

Direct Material

Phone, Travel

Supplies Depreciation

Rent, Interest,

Tax

Customers

Business

Sustaining

Products,

Services

Resources (general ledger view)

Work Activities (verb-noun)

Final Cost

Objects Suppliers

(1)

Dem

and

s O

n W

ork

C

ost

s (2

)

“C

ost

s M

easu

re t

he

Eff

ects

”

Support

Activities

Equipment

Activities

People Activities

“cost-to-serve” paths



48

ABC/M Cost Assignment Network

Salary, Fringe Benefits

Direct Material

Phone, Travel

Supplies Depreciation

Rent, Interest,

Tax

Customers

Business

Sustaining

Products,

Services

Resources (general ledger view)

Work Activities

(verb-noun)

Final Cost

Objects Suppliers

(1)

Dem

and

s O

n W

ork

C

ost

s (2

)

“C

ost

s M

easu

re t

he

Eff

ects

”

Support

Activities

Equipment

Activities

People Activities

“cost-to-serve” paths

Dire

ct c

osts



49

$ 30 sales

- 28 expenses

= $ 2 profit

$ 2 profit

Unrealized profit revealed by ABC

Net Revenues

Minus ABC costs =

profit

More important than a better costing method are its results.



50

Sales $ 31.0

- Expenses 31.5

= prof/(loss) $ (0.5)

loss = $ (0.5)

More important than a better costing method are its results.

Net Revenues

Minus ABC costs =

profit



51

Activity Costs

each activity’s driver quantity

unit activity driver cost

x

(eg. # of registrations)

Price/Fee (Revenue)

ABC provides insight for the product’s or service’s cost drivers and driver quantities.

Work Activities

Activity Costs “pile up” into outputs.



52 52

Two Views of Cost --- The Cost Object View

Dept. 1

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 2

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 3

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Outputs

Reso

urces

Suppliers

Products

Orders

Customers

Sustaining

Process Measures

X = activities

= process

= cost drivers

$

The Vertical view of Assigning Costs



53 53

Dept. 3

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 2

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 1

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Outputs

Reso

urces

Suppliers

Products

Orders

Customers

Sustaining

Process Measures

X = activities

= process

= cost drivers

$

Two Views of Cost --- The Process View The Horizontal view of Sequencing Costs



54

Supplier (direct material)

Key:

Enterprise

Cost

Business Processes

Process A

Processes include activities that have high to low value-adding content.

VA

NVA

Processes: Six Sigma, Lean Management, and Value Stream Mapping

$

$

$

$

$ $

$

$

ABM also provides unit costs of outputs for cost visibility and benchmarking.



55

AGENDA


2) Overview of EPM










56

What has Caused Interest in ABPM?

5) Strategic – The shift from being product-centric to

customer centric.



57

Value of Company = f(Value from Customers)

The only value a company will ever create is the value that comes from its customers – the current ones and the

new ones acquired in the future.

To remain competitive, one must determine how to keep customers longer, grow them into bigger customers, make

them more profitable, serve them more efficiently, and acquire relatively more profitable customers.

Source: Don Peppers and Martha Rogers, Peppers & Rogers Group (edited)



58

CEO Concerns Confirm this Understanding

Most important

Moderately important

Balancing short-term goals w/ long-term strategy

Focusing on core competencies

Managing risk on an enterprise basis

Using technology for competitive advantage

Building a responsive, flexible organization

Attracting and retaining skilled workers

Responding to regulatory changes

Improving productivity

Increasing market share

Attracting and retaining loyal customers

Mean scores

7.62

7.66

7.67

7.8

7.82

7.86

7.93

8.02

8.39

8.95

Source:

Gartner, 2011:

"Bank CEOs

Rate Business

& Technology

Concerns"

#1

since

2002



59

Products and standard service-lines are not the only

thing for which accountants should compute costs.

What about costs that have nothing to do with making

products and delivering standard service-lines?

The problem with traditional accounting’s product gross

profit margin reporting is you don’t see the bottom half of

the picture.

So what about the Other Below-the-line “Calculated” Costs?



60

60

INCOME STATEMENT

Sales $ 100

- Product direct costs -20

- Overhead cost -10

----------------------------------------------

= Gross profit margin $ 70

What about Costs Below Product Costs ?

- selling costs -20

- distribution costs -10

- marketing costs -20

- administrative costs -10

----------------------------------------------

= Total Profit $ 10

The accountants

report these by

each product (but

they are wrong

without ABC).

? We have no visibility

of these costs by

customer (except in

total) !



61

Indirect expenses

Distribution, Sales & Marketing

General, Accounting, and Administration

Customer +

Direct material,

Direct labor &

Equipment

Costs from Sales & Marketing are not Products

Channel + Product



62

# 1- Customer Retention – It is relatively much more

expensive to acquire a new customer than to retain

an existing one.

# 2 – Sources of Competitive Advantage – As products

and standard service-lines become commodity-like,

then the shift is towards service-differentiation.

Why Do Customer-related Costs Matter? The Perfect Storm



63

# 4 - Power Shift – The Internet is shifting power …

irreversibly … from sellers to buyers.

# 3 - CRM’s “One-to-One” Marketing – Pepper &

Rodgers have hailed technology as the enabler to (1)

identify customer segments, and (2) tailor marketing

offers.

Why Do Customer-related Costs Matter? The Perfect Storm



64 Copyright 2016 www.garycokins.com Analytics-Based Performance Management LLC


65

WORK

ACTIVITIES

(examples)

SUPPLIER

SUSTAINING

UNIT &

BATCH

LEVEL

BRAND

SUSTAINING

PRODUCT/SERVICE

LINE SUSTAINING

UNIT &

BATCH

LEVEL

CUSTOMER

SUSTAINING

UNIT &

BATCH

LEVEL

SENIOR

MGT

UNUSED

CAPACITY R&D

OSHA DOT

RESOURCES

FINAL

COST OBJECTS

# Advertisements

SUPPLIERS

SUPPLIER

-

RELATED

PRODUCTS/SKUs

SALARY &

FRINGE BENEFITS

DIRECT

MATERIAL

CAPITAL

(equipment-related)

NON-WAGE RELATED

(e.g., operating supplies)

# Machine

hours

# Material

moves

# Set-ups

# Shows

#

Advertisements

RELATIONSHIP

MANAGEMENT

PURCHASES,

RECEIPTS

•BRAND/PRODUCT-

RELATEDWORK,

•BRAND/PRODUCT-

RELATED ADVERTISING

& MERCHANDISING,

•FACILITIES COST

MACHINES

MAKE PRODUCT,

MOVE PRODUCT,

SET-UPS

TRADE SHOWS,

IMAGE ADVERTISING

SALES CALLS,

ORDER HANDLING,

FREIGHT

# POs

#

Receipts

# Sales

calls

# orders

# shipments

CUSTOMERS

Gvt

Regulators ARBITRARY

(for full

absorption)

ARBITRARY

(for full

absorption)

BUSINESS

SUSTAINING

RELATED

PRODUCT & SERVICE LINE-

RELATED CUSTOMER-

RELATED

IRS

ABC/M Profit Contribution Margin Layering

Etc.

#

Pounds

#

Gallons

# Meters

Facility costs

Pro

duct

-spec

ific



66

CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)

Sales $$$ Margin $ Margin

(Sales - Costs) % of Sales

Product-Related

Supplier-Related costs (TCO) $ xxx $ xxx 98%

Direct Material xxx xxx 50%

Brand Sustaining xxx xxx 48%

Product Sustaining xxx xxx 46%

Unit, Batch* xxx xxx 30%

Distribution-Related

Outbound Freight Type* xxx xxx 28%

Order Type* xxx xxx 26%

Channel Type* xxx xxx 24%

Customer-Related

Customer-Sustaining xxx xxx 22%

Unit-Batch* xxx xxx 10%

Business Sustaining xxx xxx 8%

Operating Profit xxx 8%

* Activity Cost Driver Assignments use measurable quantity volume of Activity Output

(Other ActvityAssignments traced based on informed (subjective) %s)

Product-

related

costs

Channel &

Customer-

related

costs

ABC Customer Profit & Loss Statement



67

High (Creamy)

Low (Low Fat)

Low High

Cost-to-Serve

Product Mix Margin

Very

Profitable

Very

unprofitable

Types of Customers

Migrating Customers to Higher Profitability



68

High (Creamy)

Low (Low Fat)

Low High

Cost-to-Serve

Product Mix Margin

Very

Profitable

Very

unprofitable

Types of Customers

KPI Target

KPI Linkage of Customer Profits to the Scorecard



69

Customer Sales Volume Versus Profits

Sales Volume (logarithmic scale)

Profitability

$ 0

$ (unprofitable)

$ profitable

Customers tend to cluster. Medium-volume customers can be

much more profitable than large-volume customers!

These losers

drag down

profits

$ small $ large



70

GARY COKINS

Principal, Global

Business Advisory

Services, SAS

THOMAS P.

KLAMMER

Professor of

Accounting

(retired)

University of North

Texas

TERRANCE L.

POHLEN

Associate

Professor of

Logistics

University of North

Texas



71

1

2

n

1

n

1

2

3

n

1

n

1

2

3

n

1

2

n

1

n

1

2

n

1

2

n 1

n

1

Con

su

mers

/ e

nd

-cu

sto

mers

Initia

l su

pp

liers

n

Tier 3+ to

Initial

suppliers

Tier 2

suppliers

Tier 1

suppliers

Tier 1

customers

Tier 2

customers

Tier 3+ to

consumers

Focal Company

Members of the Focal Company’s Supply Chain

Non-Members of the Focal Company’s Supply Chain

Managed Process Links

Monitor Process Links

Not-Managed Process Links

Non-Member Process Links

Source: Adapted from Douglas M. Lambert, Martha C. Cooper, James D. Pugh, “Supply Chain Management: Implementation Issues and

Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 2.

Value Chain Management Involves Linkages Supply Chain Trading Partner Relationships



72

Rapid Prototyping with Iterative Remodeling

Each iteration enhances the use of the ABC/M system.

ABC/M Models

3

ABC/M System

(repeatable, reliable, relevant)

#0

#1

#2

#3

2 1 0



73

Balancing Levels of Accuracy with Effort

Accuracy of Final Cost Objects

100%

0%

World Class

ABC System Design

Little

Level of Data Collection Effort

Great Modest

A

B



74

B / C > 1.00

Senior Management’s

Benefits vs. Costs Test

The objective is to raise the executive

team’s perception of B (the benefits) while

driving down C (the administative effort to

collect and report).



75

Benefits from ABC Rapid Prototyping

- Accelerated learning

- Solving the thorny “leveling” problem

- Preventing “over-engineering” ABC model size

- Peer group: Pre-determining uses for the information

- Replacing misconceptions with reality.

- Getting ROI from earlier insights and decisions.



76

The spending budget for sales and marketing is critical …

but it should be treated as a preciously scarce resource to

be aimed at generating the highest long-term profits.

This means answering questions like:

Which type of customer is attractive to newly acquire,

retain, grow, or win back? And which types are not?

How much should we optimally spend attracting, retaining,

growing, or recovering each customer micro-segment?


The CFO must now help Sales and

Marketing … to better target customers.

A Shift in the CFO’s Emphasis


77

… over-spending uneccessarily on loyal

customers for what is needed to retain them.

… under-spending on marginally loyal

customers and risk their defection to a

competitor.

Therefore, what is the optimum spending

level for differentiated services to different

micro-segments of customers?

Optimizing Customer Value --- “Smart” Sales Growth

You can destroy shareholder wealth

creation by …



78

The CFO must now help Sales and

Marketing … to better target customers.

Segmentation, predictability, churn, offers, deals,

risk and uncertainty must be understood in the

language of money.

A Shift in the CFO’s Emphasis



79

Improve the value mix of customers

Source: Managing Customer Relationships by Martha Rogers

LMC MVC’s

Growth by increasing

value of customers

Num

be

r o

f cu

sto

me

rs

Customer actual value

2

1

3

Growth by increasing

number of customers

Notes

1. Only focusing on

the number of

customers

acquired results in

a degraded mix as

low-value

customers by

definition are

easier to acquire

2. A customer centric

strategy will not

acquire any

customer; only

higher-value ones



80

Acquire more customers

Acquire customers likely to have a higher CLV

Improve new customer acquisition conversion rates

Reduce cost-to-serve per customer

Cross- and up-sell additional products and services

Retain customers longer; reduce the churn rate

Increase customers’ propensity to refer customers

Actions to increase customer total CLV



81

AGENDA // What about Budgeting?


2) Overview of EPM










82


6) Contentious Budgeting – The budget is typically a fiscal

exercise by the accountants that is:

(1) disconnected from the executive team’s strategy, and

(2) not based on future driver volumes.



83

is invasive and time-consuming ... with few benefits.

takes 14 months from start-to-end.

requires two or more executive “tweaks” at the end.

is obsolete in two months due to events and re-organizations.

starves the departments with truly valid needs.

caves in to the “loudest voice” and “political muscle.”

rewards veteran sand-baggers who are experts at padding.

incorporates last year’s inefficiencies into this year’s budget.

Is over-stated from the prior year’s “Use-it-or-lose-it” spending.

A Quiz. “Our budgeting exercise ... “



84

Current Year Budget Year

Wages 400,000.00$ Formula = Column B * 1.05

Supplies 50,000.00$

Rent 20,000.00$ Copy down

Computer 40,000.00$

Travel 30,000.00$

Phone 20,000.00$

Total 560,000.00$

a b c

1

2

3

4

5

6

7

8

Sheet 1

Spreadsheet Budgeting – It is Incremental !!



85

Match the Budget Method to its Category

Demand-

driven

Project-

driven

Integrated

Budget (Rolling

Financial Forecasts)



86

Budgeting is typically disconnected from

the strategy. But this problem is solved if

management funds the managers’ projects.

(1) Non-Recurring Expenses // Strategic Initiatives

Measurement

Period; 1st Quarter

Strategic

Objective

Identify

Projects,

Initiatives,

or

Processes

KPI

Measure KPI Target KPI Actual

comments /

explanation

Executive Team X X

Managers and

Employees X X their score X

<----- period results ------->



87

Activity-Based Costing

- Historical & Descriptive

- Starts with known:

spending

driver measures

output quantities

- Calculates “costs”

Activity-Based Planning

- Predictive

- Requires capacity analysis

- Starts with estimated outputs

- Applies ABC/M rates

- Solves for Resource “expenses”

Now Past Future

ABC/M

ABP

(2) Recurring Expenses // Future Volume & Mix



88

Customers and Service-recipients

Resources

Process Costs

Output & Outcome Costs

inputs

Resource

expenses can

be calculated

with

“backwards

ABC/M”

Operational Resource Capacity Planning

Start Here.



89

ABC/M ABP

Known

?

?

resources

work

activities

cost

objects

Provides consumption rates

Now Past Future

ABC/M

ABP

Predictive Accounting



90

ABC/M ABP

? calculated

?

Estimated

resources

work

activities

cost

objects

Now Past Future

ABC/M

ABP




91

Long-term Short-term Planning time

Horizon

difficult manageable

easy

In the very short term, you would not fire employees on Tuesday due to low work load, but hire them back on Wednesday. But in the future you may replace full-time employees with contractors, or lease assets you might have purchased. In this way, so-called fixed costs behave variably.

Effort level to

adjust capacities

Capacity only Exists as Resources



92

Accounting Treatments and Behavior of Capacity (expenses)

Now Past Future

Descriptive

Predictive

unused

used

sunk

fixed (unavoidable)

variable (adjustable

capacity;

avoidable)

Traceable to

products,

channels,

customers,

sustaining

unused




93

High

Low

Low High

Severity of impact on

event occurrence and

achievement

of objectives

probability of an event occurring

(3) Risk Assessment Grid … ERM is not just contingency planning

8

10 3

4

5

6

7

1 9

2

Do not budget

Budget



94

Recurring expenses

Non-recurring expenses

Demand- driven

Project- driven

volume & mix

of drivers

production and

ABP/B

strategy map and risk grid

Integrated Budget

(rolling financial

forecasts)

Budget method

Strategic & risk

mitigation projects

Match the Budget Method to its Category



95

Define and adjust

strategy and risk, and

create strategy map

Create balanced

scorecard

Identify and

manage strategic

initiatives

Approve strategy

risk and capital

budget

Managerial

Accounting (e.g., Activity-based

Costing)

Derived budget

(and rolling

financial forecasts)

Strategy methods

(e.g., SWOT)

Manage and

improve core

processes

Financial Modeling

KPI dashboard

feedback

(2) capital budget

(3) strategy budget

(4) risk budget

Operational Modeling (by employee teams) Strategic

objectives

knowledge

= financial information (e.g. $)

Strategy Modeling (by executives)

priority projects and processes

Forecast drivers (e.g. sales) ;

develop production plan

Traditional and

driver-based

budgeting (e.g. PBB)

Capacity

resource plan

Driver volumes and mix

Results and outcomes

Changes and responses

e.g., hours, Pounds,

# employees

(1) Operational budget

KPI targets

Driver consumption rates

Acceptable?

Revise

plan

OK

No

Yes

Linking Strategy and Risk to the Budget



96

Key concepts and definitions

A target is what we would like to happen

which we achieve by producing

A forecast - what we think will happen

based on:

A set of plans: what we intend to do,

which we change to achieve our target



97

Don’t treat forecasting as a “special event.”

We haven’t forecasted in a while,

maybe we should try that again….

Forecasting should be an on-going part of

monitoring the business.



98

Continuous refreshing the rolling financial forecast

… accuracy

100%

0%

More frequent forecast intervals assure better accuracy.


time


99

ACCOUNTING

Financial

Accounting

Cost Measurement

Managerial

Accounting

Cost Accounting Financial Reporting

regulatory compliance

Cost Reporting &

Analysis (feedback on performance)

Decision Support/

Cost Planning

•[e.g., GAAP, IFRS]

•Costs of goods sold

•Inventory valuation

• Spending vs. budget variance

analysis

• Profitability reporting

• Process analysis (e.g., lean,

benchmarking, COQ)

• Performance measures

• Learning; corrective actions

• Fully absorbed & incremental pricing

• Driver-based budgeting & rolling

financial forecasts

• What-if analysis

• Product, channel & customer

rationalization

• Outsourcing & make vs. buy analysis

History Future Low value-add Modest value-add High value-add

Source data capture

(transactions /

bookkeeping)

Non-financial data

capture

The Domain of Costing

Tax

Accounting

Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins

published by the International Federation of Accountants, 2010 Copyright 2016 www.garycokins.com Analytics-Based Performance Management LLC

Source: PABC IGPG “Evaluating and Improving Costing in Organizations” published by the International Federation of Accountants, 2009

Cokins’ IFAC.org

Taxonomy of

Accounting

GAAP,

rules


100

Evaluating the Costing

Journey:

A Costing Levels Continuum

Maturity Model

By Gary Cokins

Most organizations are

typically at lower levels of

maturity in adopting

progressive managerial

accounting practices,

methods and systems.

International Federation of Accountants Report


http://www.garycokins.com/images/pd

fs/20131105-

IFAC_Evaluating_the_Costing_Journ

ey_by_Gary_Cokins.pdf


http://www.garycokins.com/images/pdfs/20131105-IFAC_Evaluating_the_Costing_Journey_by_Gary_Cokins.pdf





101

1D

Lev

el #

2D 3D 4D

5D

6D

7D

8D

Blind

Process Visibility

Output Visibility

Improved Output

Information/ Approximate

Accuracy

Improved Treatment of Indirect

Costs

Customer Demand Sensitive

Unused Capacity

Aware

(1) Descriptive Continuum EXPENSE TRACKING, COST

REPORTING

and CONSUMPTION RATES

(2) Predictive Continuum DEMAND DRIVEN PLANNING

with CAPACITY SENSITIVITY

bookkeeping process and

Lean accounting

Direct costs without (3) and with

(4) support costs to output groups

Push Activity- Based costing (ABC);

Product costs

Standard costing to individual outputs;

Project acct;

Job order costing

Level 6D with Channel and

customer profitability Reporting;

Cost-to-serve

Unused capacity

costs (estimated)

Costing Continuum / Levels of Maturity (most companies are Level 5D and 1P)

Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins published by the International Federation of Accountants, 2016

2P

3P

4P

5P Pull

Activity- based

Resource Planning

Time-driven ABC

Resource Consumption Accounting

Simulation

(ABRP); Forecast

driver quantities

X unit consumption

rates;

Driver based budgeting

(TDABC); Forecast

driver quantities

X time consumption

rates;

Direct cost focus;

Repetitive

work conditions

(RCA); Level 2P

with proportional costing at direct and support depts.

Ultimate in consumption

rates;

1P

% G/L acct.

Incremental

102

STRATEGY

REALIZATION

CUSTOMERS,

MARKETS

SUPPLY CHAIN

MANAGEMENT

PRODUCTS,

CHANNELS &

CUSTOMERS

ACTIVITIES

(ABC/M)

RESOURCES

SHAREHOLDER

WEALTH

PERFORMANCE

MEASUREMENT

SCORECARDS

PROCESS

MANAGEMENT

General

ledger

PROJECT

ACCOUNTING,

PROGRAM MANAGEMENT

KEY PERFORMANCE INDICATORS (KPIs) versus ACTUALS

PROFITABILITY

ANALYSIS

DEMAND STRATEGY

Expenses

TIME

SUPPLY / INVEST

STRATEGY

PRODUCT &

SERVICES

DEMAND

VOLUME & MIX

FORECAST

MAXIMIZE

MINIMIZE

OPERATIONAL PERFORMANCE - PRODUCTIVITY & EFFICIENCY

- BENCHMARKING

- UTILIZATION/YIELD

- TOTAL QUALITY MANAGEMENT

(Cost of Quality)

UNUSED

(AVAILABLE)

CAPACITY

Asset

management

ACTIVITY

DRIVERS

REVENUES

$$s hours

Performance Management

MAXIMIZE

Alignment of cost

structure to strategy

What-if Planning?

Source: ABC/M: An Executive

Guide; Gary Cokins


CAM-I ABC Cross - Expanded


103

AGENDA


2) Overview of EPM










104

Organization

Resources (capacity)

Strategy, Mission

How Does It All Fit Together?

ERP, etc. Customer

Satisfaction

Scorecards,

Dashboards

CRM

ROI

$ Shareholders

Supplier Inputs



105

Organization


Strategy, Mission

In Summary … first, we energize with good managerial accounting.

ERP, etc. Customer

Satisfaction

Scorecards,

Dashboards

CRM

ROI

$ Shareholders

Supplier Inputs

Managerial

Accounting;

Analytics



106

Organization


CRM

ROI

$

ERP, etc.

Risk Mgmt., Strategy map,

KPIs

KPI Scores

Feedback

Order fulfillment

Strategy, Mission

Customer Satisfaction

EPM is Circulatory and Simultaneous

Supplier Inputs

Scorecards,

Dashboards

Targeting

needs

Shareholder Wealth Creation is not a goal. It is a result!

Shareholders



107

Organization


CRM

ROI

$

ERP, etc.

Risk Mgmt., Strategy map,

KPIs

KPI Scores

Feedback

Order fulfillment

Strategy, Mission

Customer Satisfaction

Shareholders

EPM is Circulatory and Simultaneous

Supplier Inputs

Scorecards,

Dashboards

Targeting

Shareholder Wealth Creation is not a goal. It is a result!

leakage (waste)

wasted resources

needs

Less productivity reduces Shareholder Wealth



108

Historical, Descriptive (trends, insights, inferences)

Time = 0 (now)

Predictive (uncertainty, risk mgmt.)

Past (reactive)

Future (proactive)

Two BA Views: Hindsight and Foresight

What happened? Where? And

why is this happening? What will happen next? What is

the best that can happen?



109

Power of Information

$ROI

Raw

Data

Standard

Reports

Ad hoc

Reports &

OLAP

Descriptive

Modeling (with analytics)

Predictive

Modeling

Data Information Knowledge Decisions

Prescriptive Analytics

/ Optimization

The Intelligence Hierarchy

Insights



110

AGENDA


2) Overview of EPM










111

Why has the adoption rate for

analytics-based EPM’s

methodologies been so slow?

The Buy-in to Performance Management



112

IT and Users have common goals

IT Users

• Make better decisions

• Optimize performance /

manage risk

• Achieve strategic

objectives

But IT systems evolve organically and erratically. (The user has an itch, and IT scratches it.)



113

Remove the wall between IT and Users

IT (a set of technologies)

(gatekeepers of data)

Business (analytical sandbox) (a set of capabilities)

- Daily operations

- Keep the lights on

- Batch processing

- Data storage

- Data structures

- Data governance

- Discovery

- Investigation

- Analysis



114

IT’s view of

Business Business’ view of

IT

- competitor

- solve but don’t operate

- IT resource intensive

- risky; low concern for

governance and control

- a mystery of what they do

- obstructionists

- controlling

- uncooperative

- bureaucrats

- less skilled than us

- just a service center

BA provides IT the opportunity to drive value, but IT will

need to be more tolerant and flexible.

Remove the wall between IT and Users



115

Why is the adoption rate so slow? What are the barrier categories?

(1) Technical barriers include IT related issues.

(3) Design deficiencies include poor

measurements or their calculations and weak

models and assumptions.

(4) Organizational behavior barriers involve

resistance to change, culture, and leadership.

(2) Perception barriers are excess complexity

and affordability.



116

To create change, you need to create the need for change! How?

Change only occurs and continues only when:

(D x V x F) > R

the product of 3 factors

is greater than R

esistance to change

Dissatisfaction

with how

things are

Vision of what

“better” would look like

First

practical

steps

Overcoming Resistance to Change



117

The Complete Vision of Performance Management

Make the RPM of the EPM and BA gears spin …

… better, faster, cheaper … safer and smarter



118

Action steps Get educated. Get buy-in.

Rapid prototyping. Start small; think big.

Improve incentives. (Motivational theory)

Getting Started Actions and Resources


Resources:

http://www.epmchannel.com/2013/04/09/exceptional-epm-cpm-systems-are-an-exception/

http://www.blog.corpeum.com/strategyexperts/gary-cockins/gary-cokins-strategy-essential

A suggestion: Have your management team read either or both of these

educational pieces. Then schedule a meeting for discussion. Have each

manager answer, “What did I learn? What issues and concerns do I

have about EPM?” This will stimulate needed conversations.
























119

From Theory to Practice

Your success depends

on how well and how fast

the right information and

intelligence gets to the

right people.



120

Thank You

Gary Cokins, CPIM

Analytics-Based Performance Management LLC

Cary, North Carolina USA

www.garycokins.com

919 720 2718

[email protected]



mailto:[email protected]


Economy & Finance

Analytics-Based Enterprise Performance Management