Analytics-based Enterprise Performance Management

Transcription

About Gary Cokins
Founder, Analytics-Based Performance Management LLC
Analytics-based Enterprise
Performance Management
B.S. Industrial Engineering & Operations Research;
Cornell University, 1971
M.B.A. Finance & Accounting; Northwestern University,
Kellogg Graduate School of Management, 1974
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com
919 720 2718
[email protected]
Previous Associations:
- FMC Corporation
- Consultant with: Deloitte,
KPMG Peat Marwick,
Electronic Data Systems [EDS, now HP]
- SAS
Corporater
September 18, 2015
Boston, MA
Copyright 2015 www.garycokins.com
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Who will benefit from this presentation?
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Key questions
Managers who have previously struggled at
promoting FP&A, enterprise performance
management (EPM), lean management, and
integrating business analytics (BA) into their
decision support systems.
What? So what? Then what?
Managers who intend to “champion” any or all EPM
and BA improvement techniques and need a
compelling call to action.
Copyright © 2010, SAS Institute Inc. All rights reserved.
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What is the life-span of big companies?
What Do These Companies Have in Common?
• Amdahl
• Cheesebrough-Ponds
• Data General
• Delta Airlines
• Digital Equipment
Of the Forbes 100 of 1917, how many were in the 2006 list?
• K-Mart
• Kodak
• Levi Strauss
• Raychem
• Revlon
• Wang Labs
Answer: 18 (and only 39 have survived)
Of the Standard & Poors (S&P) 500 in 1957, how many
were in the 2006 list?
Answer: 74, just 15% (and only 12 have outperformed the index)
e.g., Wang Labs, DEC, Borders, Blockbuster
They passed all the “hurdles” for 1961-80 in Tom
Peter’s book “In Search of Excellence”; p. 20-21
What can we conclude from these?
Source: Professor Gary Biddle. University of Hong Kong
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AGENDA
Drowning in data but starving for information.
 1a) Overview of Analytics-based Performance Management
 1b) The Emergence of Analytics to Support Decision Making
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 2)
Strategy Formulation and Execution
 3)
Risk Management
 4)
Strategic Managerial Accounting (historical / descriptive)
 5)
Operational Managerial Accounting to Optimize Process Costs
 6)
Predictive Accounting for Decision Support and Budgeting
 7)
Workshop exercise
 8)
The Shift in ROI’s source from Tangible to Intangible Assets
 9)
Why is the Adoption Rate for Analytics-based PM so Slow?

Summary, Discussion, Questions and Answers
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Confusion and Lack of Consensus about EPM
What is Enterprise Performance Management (EPM)?
Is it human resources PM?
Enterprise 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.
Is it scorecards, dashboards, KPIs and measures?
Is it alignment, such as strategic or resource allocation?
Is it process, productivity and quality improvement?
Or … is it all of the above? And even more?
The good news is this …..
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How Does It All Fit Together?
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ABPM’s three major components.
Strategy creation
and execution:
Strategy,
Mission
Customer
Loyalty
- Where do we want
to go?
- Strategy,
How will we get Customer
Mission
Loyalty
there?
ERP, etc.
Organization
Resources
(capacity)
Supplier
Inputs
How well are we:
Scorecards
- Achieving our
strategy (KPIs)?
- Performing our
processes (PIs)?
Shareholders
Supplier
Inputs
Performance:
ROI
$
Process:
How do we do it (now)?
How will we do it (future)?
CRM
CRM
Scorecards
ERP, etc.
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Organization
Resources
(capacity)
ROI
$
Shareholders
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Long-term Trends in Government
What has caused interest in EPM?
1 Executives frustrations with strategy failure.
A growing impatience by taxpayers and
governance boards with waste and inefficiency
is leading to demands for evidence of outputs,
outcomes, transparency and accountability.
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.
“more with less” …
“value for money” ...
“quality of life”
7 Dysfunctional supply chain management.
8 Unfulfilled ROI promises from IT systems – lack of integration.
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What has caused interest in EPM?
AGENDA
1 Executives frustrations with strategy failure.
2 Increased accountability.
 2)
3 More rapid decision making.
 3)
Risk Management
4 Mistrust of the managerial accounting system for transparency.
 4)
 5)
 6)
 7)
Workshop exercise
7 Dysfunctional supply chain management.
 8)
8 Unfulfilled ROI promises from IT systems – lack of integration.
 9)

5 Poor customer value management
6 Contentious budgeting – poor resource capacity planning.
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Why is business analytics needed?
Isn’t competition ultimately about cost
leadership, differentiation, or focus?*
How does an organization gain a competitive edge?
-- cost leadership strategy – via improving process efficiencies, unique
access to low cost inputs, vertical integration, avoiding certain costs, etc.
-- by first-to-market (via innovation)?
-- differentiation strategy – via developing products and/or services with
unique traits valued by customers.
-- by customer loyalty?
-- by low-cost and low-price provider?
-- focus strategy – via concentrating on a narrow segment with entrenched
customer loyalty.
-- Other?
But don’t each of these have risks today?
But how sustainable are these long-term?
* Source: Michael E. Porter’s three generic strategies.
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Confusion and lack of consensus about BA
Problem: Generic strategies are vulnerable !
Is business analytics (BA) a data warehouse?
Is it data mining with query and reporting?
-- cost leadership strategy – other firms lower their costs.
Is it business intelligence (BI) with enhancements?
-- differentiation strategy – imitation by competitors; changes in
customer tastes.
Is it the technology of data governance, management and
quality?
-- focus strategy – broad-market cost leaders or micro-segmenters invade
and erode your customers’ loyalty.
Is it probabilities and statistics, like regression and
correlation analysis?
Is it forecasting? Is it optimization equations?
The best defense is agility with quicker and
smarter decision making using statistics,
analytics, and operations research.
Or … is it all of the above? And even more?
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Work backwards with the end in mind.
Improving Performance by Unifying EPM and BA
Regardless of how “analytics” should be defined, there
should be no argument as to its purpose:
-- BI Reporting consumes stored information.
-- Analytics produces new information.
-- Enterprise Performance Management deploys Analytics.
Better decisions. Better Actions.
It is not about monitoring the dials on a dashboard,
but rather moving the dials.
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.
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Business Analytics – insights and actions
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Which X is most likely to Y?
Queries simply answer questions. Business analytics
creates questions.
Retail Merchandising
Which product in a retail store chain can generate the most profit without
carrying excess inventory but also not having periods of stock outs?
Further, analytics then stimulate more questions, more
complex questions, and more interesting questions.
Customer Profitability
Which customer will generate the most profit lift from our least effort?
Most importantly, business analytics also has the power to
answer the questions.
Employee Retention
Which of our employees will be the next most likely to resign and take a
job with another company?
These are the types of questions asked every
day. Business analytics fills in the X and Y.
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Examples of Analytics
What Pressures Cause Interest in Business Analytics?
-- Hollywood celebrities and the film industry
-- Complexity and variables are replacing “gut feel
Will Smith: Independence Day; Men in Black; I, Robot; I am Legend; Hancock
-- Exponential growth in data, users, searches
-- Sports teams
-- Volatility, uncertainty, risk and clock-speed
-- Crime prevention
-- Standardized processes (e.g. ERP, CRM systems)
-- music score analysis
-- Intuition of the potential value of unused structured and text data
But what about business analytics in
mainstream businesses?
-- Enormous IT processing power
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There are many Business Analytics Domains
Reactive
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(Descriptive)
STANDARD REPORTS
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]
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AD HOC REPORTS
2
QUERY DRILLDOWN (OR OLAP)
3
ALERTS
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Reactive
(Descriptive)
STANDARD REPORTS
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Proactive
How does forecasting and predictive modeling differ?
(Inferential)
STATISTICAL
ANALYSIS
Forecasts tell you how many ice cream cones will be sold in July,
so you can set expectations for planned costs, profits, supply
chain impacts and other considerations.
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AD HOC REPORTS
FORECASTING
2
Predictive models tell you the characteristics of ideal ice cream
customers, the flavors they will choose and coupon offers that will
entice them.
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QUERY DRILLDOWN (OR OLAP)
3
PREDICTIVE
MODELING
If your goal is to do a better job of buying raw materials for the ice
cream and to have them at the factory at the right time, your
company needs a forecasting solution.
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ALERTS
OPTIMIZATION
4
If the marketing department is trying to figure out how, where and
which most attractive customers to market the ice cream, it needs
predictive modeling.
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AGENDA
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1) Failure by executives to execute their well-formulated
strategy.
 2)
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

What has Caused Interest in EPM?
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When Dilbert Jokes About It, It is Mainstream
Executives are Most Concerned About Executing Strategy
"Using a 1-5 scale, please rate the level of interest / concern
you have in the following business issues at present.”
Executing the strategy
4.0
Regulatory, compliance, and risk management
3.8
Market trends
3.7
Customer service
3.7
Forecasting & reporting effectiveness
3.7
Growing the top line
3.7
IT capabilities
3.5
1
2
3
4
5
Source: 2006 Monitor Analysis. Survey of 354 executives; 49% of respondents are C-level
and 56% are from companies with revenue greater than $1 billion
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Vision and Mission Statements
A Vision statement answers
“where do we want to go?
Customer
Strategy maps and scorecards answer,
“How will we get there?”
Internal Process
Strategy
Mapping
Balanced
Scorecard
Learning
The strategy map and scorecard are mechanical.
They help realize the vision and mission.
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Generic Strategy Map Architecture
Financial
Vision
& Mission
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Financial
Maximize Shareholder Value
Customer
Internal
Processes
Learning &
Innovation
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Vision
& Mission
Vision
& Mission
Financial value
Exceed shareholder
expectations
Financial
Customer
Diversify income
stream
Increase sales
volume
Diversify
customer base
Increase sales to
existing customers
Exceed shareholder
expectations
Improve profit
margins
Financial
Customer
Test new
products
Internal
Process
Target profitable
market segments
develop new
products
Optimize internal
processes
Internal
Process
Attract new
customers
Develop
employee skills
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Who Does What?
Executive Team
leads to
develop new
internal
Process
excellence Optimize
products
processes
Target profitable
market segments
stimulates
employee
skills
systems
A learning
environment
Develop
Integrate
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How does everyone answer this single question:
Identify
Projects,
Initiatives,
or
Processes
KPI
Measure
KPI Target
X
Managers and
Employees
Test new
products
The Key to Scorecards
1st Quarter
Strategic
Objective
Improve profit
margins
volume
Increase sales to
Customer
intimacy
existing customers
Learning
& Growth
Integrate
systems
creating
Increase sales
Diversify
customer base
Attract new
customers
Learning
& Growth
Measurement
Period;
Diversify income
stream
KPI Actual
comments /
explanation
“How am I doing on what is important?”
their score
X
Strategy Maps and Scorecards provide this answer.
X
X
X
<----- period results ------->
The overriding purpose of a strategy map and
scorecard system is to make mission and
strategy everyone’s job.
A scorecard is more of a social tool than a technical tool.
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Scorecard Lessons Being Painfully Learned
What is the difference between KPIs and PIs?
Strategy
Diagram
Measurements
KPIs
 Scorecard or Report Card?
(strategic context)
 KPIs or PIs?
Scorecard
Must have
targets
(inter-related
measures with
cause-and-effect
correlations)
Frequency of
reporting
- drill-down analysis
- alert messages
quarterly
monthly
weekly
Without
targets
daily
hourly
Project-based
KPIs
Process-based
KPIs
PIs
Dashboard
$
$
real-time
(operational)
(measures in isolation)
Budget &
Resource
Planning
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With
targets
Without
targets
- Trends
- Upper / lower
thresholds
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What Measures Matter? KPI Correlation Analysis
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Thickness of the arrows reflects explanatory power
What are BSC’s Organizational Behavior Barriers?
Balanced Scorecard
Failure to start with the strategy map as the
determinant of what KPIs to measure.
Confusion between KPIs and PIs … resulting in too
many KPIs.
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AGENDA
What are BSC’s Organizational Behavior Barriers?
Balanced Scorecard
Executives’ biased overweight of their scorecard with
aggregate, lagging and financial measures.
Poor linkage of KPIs & PIs to bonus incentive schemes.
Confusion about how to ‘cascade’ strategic objectives
downward into operational projects and assigned
responsibilities with accountability.
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 2)
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

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Why integrate ERM and EPM? (1)
Why integrate ERM and EPM? (2)
“The biggest challenge in performance management today is the increased
attention that needs to be paid to the risk-reward trade-off. Companies have
been ignoring the risk side of performance measurement and monitoring for
too long.”
Combining the disciplines of enterprise risk with
performance management results in better business
decisions and actions.
“The recent financial and economic crisis has shown that a failure to
integrate enterprise performance and risk management can leave a
business struggling in the face of uncertainty. … companies’ efforts in the
area of performance and risk management focus far too much on
documentation and procedures to meet regulatory requirements and not
enough on how to obtain and integrate performance and risk information for
more effective decision making.”
Monitoring performance and risk as separate issues is
not adequate for driving shareholder value. Investors
expect returns that are in proportion to the risks that a
firm is taking. This entails understanding how risk
impacts corporate strategic direction and decision
making as well as processes such as planning,
forecasting and profitability analysis.
“One way to link (them) is through scenario planning and budgeting. .. That
way the board (can) “stress test” the strategic plan.”
“Integrating risk and performance reporting”; Financial Director;
Regine Slagmulder, Vlerick Leuven Gent Management School, Oct 14, 2011
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Three Categories of Risks
Strategy Risks (#2)
Preventable Risks – Unauthorized employee actions;
breakdowns in standard operating procedures.
Strategy Execution Risks – Taken to execute the Csuite’s strategy to generate superior returns.
Strategy Execution Risks – Taken to execute the Csuite’s strategy to generate superior returns.
Examples: credit risk, R&D programs, hazardous
environments.
External Risks – From uncertain, uncontrollable external
events that cannot easily be predicted or influenced.
These types of risk cannot be reduced to zero. Their
likelihood of occurring can be reduced or effectively
contained should they occur.
Source: Robert S. Kaplan
Austrian Controllers Conference
March 6, 2014 Vienna
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Risks can be identified for
each strategic objective
in the strategy map
Financial
Customer
Risks can be identified for
each strategic objective
in the strategy map
Vision
& Mission
Exceed shareholder
expectations
Diversify income
stream
Increase sales
volume
Diversify
customer base
Increase sales to
existing customers
Financial
Improve profit
margins
Customer
Test new
products
Internal
Process
Target profitable
market segments
develop new
products
Optimize internal
processes
Develop
employee skills
Integrate
systems
Internal
Process
Vision
& Mission
Examples
Macroeconomic factors
Exchange rate fluctuations
Political environments
Competitor actions
Concentration of Revenues in too few customers
Dysfunctional organizational structure
Inadequate controls
Attract new
customers
Learning,
Innovation,
& Growth
Learning,
Innovation,
& Growth
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Immigration regulations
Obsolescence of technologies
and products
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AGENDA
Risk Assessment Grid
High
2
7
8
Severity of impact on
event occurrence and
achievement
of objectives
10
6
3
4
5
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1
Budget
Low
Low
High
 2)
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

Do not budget
probability of an event occurring
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Six Eras of Managerial Accounting
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.
Alexander
Hamilton
Church;
standard cost
accounting (to
reflect
Frederick
Winslow
Taylor’s
manufacturing
scientific
methods, 1910)
Precious
metal and
paper money
piles,
ultimately
leading to
double-entry
bookkeeping
(Luca Pacioli,
1496).
Era
Of
Costing
Maturity
Rocks and
stone piles.
The USA’s
Great
Depression
resulted in
regulatory
reforms to
protect
investors
(1930s).
“Causal” cost
tracing of
increasingly
diverse types
of products,
services,
channels and
customers
Customer
Predictive
Accounting &
Analytics
A shift of
emphasis from
a historical to a
predictive view
of strategy and
operations
Regulatory
Compliance
Industrial
Medieval
Stone
Age
20,000 BC
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1492
1910
1930
1980
2015
Here is Part of the Problem.
Here is Part of the Problem.
Which managerial accounting system should we
use?
Which managerial accounting system should we
use?
Standard Costing, Project Accounting, Job Order Costing,
Economic Value Added TM, Balanced Scorecard, Activity Based
Costing, Intellectual Capital, Performance Pyramid, Business
Excellence Model, Customer Profitability, Strategic
Management Accounting, Strategic Cost Management, Supply
Chain Costing, Cash Flow Return on Investment, Business
Models, Target Costing, Kaizen Costing, Lean Accounting, Life
Cycle Costing, Value Added Analysis, Process Costing, Timebased Activity Based Costing, Value engineering, Stock
Options, Micro Profit Centres, Quality Costing, Non-value
Added Cost, Human capital, Resource Consumption
Accounting, Structural Capital, Relationship Capital, Brand
Value, Total Cost of Ownership, Throughput Accounting, Triple
Bottom Line, Beyond Budgeting, Risk-adjusted Return on
Capital at Risk ……
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Standard Costing, Project Accounting, Job Order Costing,
Economic Value Added TM, Balanced Scorecard, Activity Based
Costing, Intellectual Capital, Performance Pyramid, Business
Excellence Model, Customer Profitability, Strategic
Management Accounting, Strategic Cost Management, Supply
Chain Costing, Cash Flow Return on Investment, Business
Models, Target Costing, Kaizen Costing, Lean Accounting, Life
Cycle Costing, Value Added Analysis, Process Costing, Timebased Activity Based Costing, Value engineering, Stock
Options, Micro Profit Centres, Quality Costing, Non-value
Added Cost, Human capital, Resource Consumption
Accounting, Structural Capital, Relationship Capital, Brand
Value, Total Cost of Ownership, Throughput Accounting, Triple
Bottom Line, Beyond Budgeting, Risk-adjusted Return on
Capital at Risk ……
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Cokins’ IFAC.org
Taxonomy of
Accounting
Direct and Absorption Costing
Source data capture
(transactions /
bookkeeping)
ACCOUNTING
Ideally, all costs should be directly charged, but as variety, complexity, and
technology increases, more costs are indirect and shared.
Tax
Accounting
Financial
Accounting
Cost-Driver Table
Managerial
Accounting
Non-financial data
capture
1st Preference
2nd Preference
Resources
Cost Accounting
3rd Preference
Cost Measurement
Last Resort
Financial Reporting
regulatory compliance
•[e.g., GAAP, IFRS]
•Costs of goods sold
•Inventory valuation
Labor
Reporting
Cost Reporting &
Analysis
• Spending vs. budget variance
analysis
• Profitability reporting
• Process analysis (e.g., lean,
benchmarking, COQ)
• Performance measures
• Learning; corrective actions
The Domain of Costing
History
Low value-add
Decision Support/
Cost Planning
• Fully absorbed & incremental pricing
• Driver-based budgeting & rolling
financial forecasts
• What-if analysis
• Product, channel & customer
rationalization
• Outsourcing & make vs. buy analysis
Standard
costing
Final
Cost
Objects
ABC/M
Standard
Routing,
Bill of
material
Work
Order
Future
Modest value-add
Project
accounting
Activities
(feedback on performance)
Estimates
ALLOCATIONS
Activity
Driver
OUTPUTS, PROCESSES, PRODUCTS, SERVICE LINES, MARKETS, CHANNELS, ORDERS, CUSTOMERS
High value-add
Source: PABC IGPG “Evaluating and Improving Costing in Organizations” published by the International Federation of Accountants, 2009
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins
published by the International Federation of Accountants, 2010
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The Need for Tracing, not Allocating, Costs
Changes in Cost Structure
Broadly
averaged cost
allocation was
acceptable.
A simple explanation of ABC …
100%
Overhead
Direct
Cost
Components
that you can explain to your
spouse (or boss) tonight.
(indirect expenses)
Material
Cost errors
are large and
misleading.
Direct (recurring) Labor
1950
2000
0%
Old-fashioned
Hierarchical
Integrated
Stages in the Evolution of Businesses
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The General Ledger View is
The Primary View of Most Managers
Structurally Deficient for Decision Analysis.
inputs
Chart-of-Accounts View
Appropriations,
approved budget
spending levels
This is
known.
Resources
Insurance Claims Processing Department
Actual
$600,000
$(21,400)
161,200
150,000
(11,200)
Travel expense
58,000
60,000
2,000
Supplies
43,900
40,000
(3,900)
Equipment
But ?
Process Costs
Output &
Outcome Costs
Use and
occupancy
But ?
Total
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Each Activity Has Its Own Cost Driver
Activity-Based View
Chart-of-Accounts View
Claims Processing Dept
Claims Processing Department
Equipment
Plan
Favorable/
(unfavorable)
$621,400
$600,000
$(21,400)
161,200
150,000
(11,200)
Travel expense 58,000
60,000
2,000
Supplies
40,000
(3,900)
Use and
occupancy
Total
43,900
30,000
––
$880,000
$(34,500)
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Multiple-Stage Cost Flowing
To: ABC Data Base
From: General Ledger
Actual
30,000
$914,500
When managers get this kind of report, they are
either happy or sad, but they are rarely any smarter!
Customers and
Service-recipients
Salaries
Favorable/
(unfavorable)
Plan
$621,400
Salaries
Key/scan claims
$ 31,500
Analyze claims
121,000
Suspend claims
32,500
Receive provider inquiries
Resolve member problems
Process batches
30,000
30,000
––
$880,000
$(34,500)
83,400
45,000
Determine eligibility
119,000
Make copies
145,500
Write correspondence
$914,500
101,500
Attend training
Total
77,100
158,000
Activity
cost
drivers
Resources
Resources
#of
#of
#of
#of
#of
#of
#of
#of
#of
#of
Objects
Objects
$914,500
$914,500
Activities
Activities
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Simple
ABC
Expanded
ABC
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ABC/M Cost Assignment Network
ABC/M Cost Assignment Network
Salary, Fringe
Benefits
Direct
Material
Phone,
Travel
Supplies
Depreciation
Salary, Fringe
Resources
Rent,
Interest,
Tax
Benefits
(general ledger view)
(general ledger view)
Support
Activities
(verb-noun)
Final
Cost
Objects
Products,
Services
(1) Demands On Work
Costs (2)
“ Costs Measure the Effects”
Final
Cost
Objects
Business
Sustaining
Suppliers
Depreciation
Rent,
Interest,
Tax
People
Activities
“cost-to-serve”
paths
Equipment
Activities
“cost-to-serve”
paths
Equipment
Activities
Phone,
Travel
Supplies
Support
Activities
(1) Demands On Work
Costs (2)
(verb-noun)
Work
Activities
People
Activities
“ Costs Measure the Effects”
Work
Activities
Direct
Material
Direct costs
Resources
Products,
Services
Business
Sustaining
Suppliers
Customers
Customers
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ABC/M Cost Assignment Network (imputed CoC)
Expenditures
Resources
Salary, Fringe
Benefits
Direct
Material
Phone,
Travel
Supplies
More important than a better costing method are its results.
Balance Sheet
Depreciation
Rent,
Interest, Tax
Fixed Assets
Inventory
Receivables
Cost of Capital
$ 30 sales
- 28 expenses
= $ 2 profit
Activities
Support
Activities
Equipment
Activities
(1) Demands On Work
Costs (2)
Net
Revenues
Minus
ABC costs =
profit
Imputed
cost of
capital
Final Cost Objects
“Costs Measure the Effects”
70
Unrealized profit revealed by ABC
$ 2 profit
Business
Sustaining
Suppliers
Products
71
72
18
Activity Costs “pile up” into outputs.
More important than a better costing method are its results.
ABC provides insight for the product’s or service’s cost
drivers and driver quantities.
Sales
$ 31.0
- Expenses
31.5
= prof/(loss) $ (0.5)
Net
Revenues
Minus
ABC costs =
profit
Work
Activities
each activity’s
driver quantity
x
unit activity
driver cost
loss = $ (0.5)
(eg. # of registrations)
Price/Fee
(Revenue)
73
TwoAssigning
Views of Cost --The Cost Object View
The Vertical view of
Costs
$
Dept. 2
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Dept. 3
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Dept. 1
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Outputs
Dept. 2
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Dept. 3
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Process Measures
X = activities
= process
= cost drivers
Products
Products
Orders
Customers
Sustaining
Suppliers
Orders
Outputs
Process Measures
X = activities
= process
= cost drivers
Sustaining
Suppliers
74
Resources
Dept. 1
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
TwoSequencing
Views of Cost --- The
Process View
The Horizontal view of
Costs
Resources
$
Activity
Costs
Analytics-Based Performance Management
75 LLC
Customers
75
Analytics-Based Performance Management
76 LLC
76
19
Combined ABC and Project Accounting
Processes: Six Sigma, Lean Management,
and Value Stream Mapping
Project accounting
ABC/M
Direct
project cost
Indirect
expenses
(Resources)
Processes include activities that have high to
low value-adding content.
Project plan
$
Actual
work steps
(schedule)
$
VA
Business
Processes
$
Project
costs
$
NVA
#4
#3
#5
Business
sustaining
costs
$
Supplier
(direct material)
$
Customer
Costs
Process A
Enterprise
ABC also provides unit costs of outputs for
cost visibility and benchmarking.
Key:
Repeatability
of
Work
Cost
77
LOW
0%
% of costs
from
ABC
78
A black-eye reputation from failed implementations in
the 1990s … mostly from inexperienced consultants.
Lean accounting can co-exist with one or more other
costing methods. Be wary of its anti-ABC zealots.
Failure to initially secure buy-in and planned use from
both users and executives.
Resource consumption accounting (RCA) is justified
“if the higher climb is worth a better view.”
100 %
ABC
The accountants misplaced quest for precision, detail
and accuracy … leading to over-sized and complex
models … that are not understandable and are
unmanageable to maintain.
a
highly repetitive activities,
less interest in indirect expenses,
concerns about unused capacity costs.
Project
Acct.
Activity-based costing (1 of 2)
Time-Driven ABC (TDABC) is being over-promoted.
It is simply an alternative method for activity
drivers … and applies under special conditions:
HI
What are ABC’s Organizational Behavior
Barriers?
TDABC, Lean accounting, and RCA
•
•
•
Activity
costs
#2
$
$
#1
79
80
20
AGENDA
What are ABC’s Organizational Behavior Barriers?
Activity-based costing (2 of 2)
 2)
Dominance of financial accounting (for valuation and
compliance) over managerial accounting (for creating
value).
Inadequate training – “I feel like a dog watching
television; I do not know what I am looking at.”
Not realizing that line managers have less interest in
historical reporting and greater interest in predictive
outcomes.
81
What has Caused Interest in ABPM?
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

CEO Concerns Confirm this Understanding
Most
important
Mean scores
Attracting and retaining loyal customers
8.95
Increasing market share
5) Strategic – The shift from being product-centric to
customer centric. The emphasis will be more on
economics – measuring customer profitability.
8.39
Balancing short-term goals w/ long-term strategy
8.02
Improving productivity
Attracting and retaining skilled workers
Building a responsive, flexible organization
Using technology for competitive advantage
Managing risk on an enterprise basis
Moderately
important
83
Focusing on core competencies
#1
since
2002
7.93
Responding to regulatory changes
.
82
7.86
7.82
7.8
7.67
7.66
7.62
Source:
Gartner, 2011:
"Bank CEOs
Rate Business
& Technology
Concerns"
84
21
Value of Company = f(Value from Customers)
So what about the Other Below-the-line
“Calculated” Costs?
Products and standard service-lines are not the only
thing for which accountants should compute costs.
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.
What about costs that have nothing to do with products
and standard service-lines?
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.
The problem with traditional accounting’s gross product
profit margin reporting is you don’t see the bottom half of
the picture.
Source: Don Peppers and Martha Rogers, Peppers & Rogers Group (edited)
85
86
Costs from Sales & Marketing are not Products
What about Costs Below Product Costs ?
INCOME STATEMENT
Sales
$ 100
- Product direct costs
-20
- Overhead cost
-10
---------------------------------------------= Gross profit margin
$ 70
- 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).
Customer
+
Channel
+
Product
Direct material,
Direct labor &
Equipment
?
We have no visibility
of these costs by
customer (except in
total) !
Indirect expenses
Distribution, Sales & Marketing
General, Accounting, and Administration
87
87
88
22
Why Do Customer-related Costs Matter?
The Perfect Storm
Why Do Customer-related Costs Matter?
The Perfect Storm
# 1- Customer Retention – It is relatively much more
expensive to acquire a new customer than to retain
an existing one.
# 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.
# 2 – Sources of Competitive Advantage – As products
and standard service-lines become commodity-like,
then the shift is towards service-differentiation.
# 4 - Power Shift – The Internet is shifting power …
irreversibly … from sellers to buyers.
89
90
ABC/M Profit Contribution Margin Layering
SALARY &
FRINGE BENEFITS
DIRECT
MATERIAL
CAPITAL
(equipment-related)
NON-WAGE RELATED
(e.g., operating supplies)
SALES CALLS,
TRADE SHOWS,
RELATIONSHIP PURCHASES, •BRAND/PRODUCTMACHINES
IMAGE ADVERTISINGORDER HANDLING,
RELATEDWORK,
MANAGEMENT RECEIPTS
MAKE PRODUCT,
FREIGHT
•BRAND/PRODUCTMOVE PRODUCT,
RELATED
ADVERTISING
# POs
SET-UPS
# Sales
& MERCHANDISING,
#
calls
•FACILITIES COST
Receipts
# orders
# shipments
RESOURCES
WORK
ACTIVITIES
(examples)
FINAL
COST OBJECTS
Facility costs
UNIT &
BATCH
LEVEL
BRAND
SUSTAINING
#
Pounds
#
Gallons
# Meters
PRODUCT/SERVICE
LINE SUSTAINING
SUPPLIERS
SUPPLIER
RELATED
UNIT &
BATCH
LEVEL
PRODUCTS/SKUs
PRODUCT & SERVICE LINERELATED
91
Product-specific
# Advertisements
SUPPLIER
SUSTAINING
# Machine
hours
# Material
moves
# Set-ups
SENIOR OSHA IRS
DOT
MGT
Etc.
ARBITRARY
(for full
absorption)
UNUSED
CAPACITY
# Shows
#
Advertisements
Gvt
Regulators
R&D
BUSINESS
SUSTAINING
RELATED
CUSTOMER
SUSTAINING
UNIT &
BATCH
LEVEL
CUSTOMERS
ARBITRARY
(for full
absorption)
CUSTOMERRELATED
92
23
Migrating Customers to Higher Profitability
ABC Customer Profit & Loss Statement
CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)
Sales
$$$
Margin $
(Sales - Costs)
Product-Related
Supplier-Related costs (TCO) $ xxx
Margin
% of Sales
$ xxx
98%
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
50%
48%
46%
30%
Distribution-Related
Outbound Freight Type*
Order Type*
Channel Type*
xxx
xxx
xxx
xxx
xxx
xxx
28%
26%
24%
Customer-Related
Customer-Sustaining
Unit-Batch*
xxx
xxx
xxx
xxx
22%
10%
Business Sustaining
xxx
xxx
8%
xxx
8%
Direct Material
Brand Sustaining
Product Sustaining
Unit, Batch*
Operating Profit
Very
Profitable
Productrelated
costs
High
(Creamy)
Product Mix
Margin
Channel &
Customerrelated
costs
Low
(Low Fat)
High
Low
Cost-to-Serve
Very
unprofitable
Types of Customers
* Activity Cost Driver Assignments use measurable quantity volume of Activity Output
(Other ActvityAssignments traced based on informed (subjective) %s)
93
KPI Linkage of Customer Profits to the Scorecard
Very
Profitable
High
(Creamy)
Low
(Low Fat)
High
Very
unprofitable
Types of Customers
94
CINCINNATI, OH - Ward Group, an Aon Hewitt company and the
leading provider of benchmarking and best practices research
studies for the insurance industry, today released findings from
its study of cost allocation practices at life and annuity insurers. The
results show that companies tend to prefer using simplified
approaches for the basis of allocating costs throughout the
organization rather than complex, multi-driver formulas. To illustrate,
agent commission is commonly reported as a cost allocation driver
within the sales, marketing and distribution management
areas. Subsequent correlation of company responses with
financial performance revealed the top third of companies by
return on equity utilized activity-based costing. Conversely, the
bottom third of companies by performance did not. Similar high
versus low comparisons were made with other surveyed
financial practices.
Product Mix
Margin
Cost-to-Serve
Evidence of impact from ABC
KPI Target
Low
http://www.broadwayworld.com/bwwgeeks/article/Life-and-Annuity-Companies-PreferSimplified-Approach-to-Allocating-Costs-Ward-Group-Survey-Shows-but-Top-Performers-Showa-Different-Tendency-20151021
95
24
When costs less matter: What is Revenue
Management (RM)?
Rapid Prototyping with
Iterative Remodeling
 Maximize revenue by “selling the right product at
the right price to the right customer at the right
time”
Each iteration enhances the use of the ABC/M system.
 Industries with the following characteristics (e.g.,
hotels, airlines, cruise ships):
 Fixed capacity
ABC/M System
(repeatable, reliable, relevant)
ABC/M Models
 Perishable inventory
#0
 Segmentable demand
 Time-variable demand patterns
#1
 Relatively high fixed and relatively low variable costs
0
1
2
3
#2
#3
97
98
ABC Error has “Offsetting” Properties
Balancing Levels of Accuracy with Effort
With ABC, it is counter-intuitive that error does not compound. It dampens out.
The Two Path Views
Resource
+
-
100%
Accuracy
of
Final Cost
Objects
B
+
World Class
ABC System Design
Modest
Great
Level of Data Collection Effort
-
The “Dispersion of Error” contained
in upstream assignments offset as
each downstream paths aggregated
into each final cost object.
0%
Little
Activities
Final
Cost
Objects
A
99
Assignment
View
+
+
One-toMany
-
Contribution
View
Many-toOne
Assignment error has a “zero-sum”
property:
Under
Overcosted
costed
path $s
path $s
(-)
(+)
=
100
25
Final Cost Object Profiling
A key to initial ABC/M Rapid Prototyping is to identify major sources of
diversity.
Customer Profile Candidates
Influencers of
Diversity of Activity
Cost Consumption
Dominant
Influences
(Check 2 or 3)
Polar Extremes
Near
vs.
Far
Order Habits
Standard
vs.
Specials
Order Frequency
Infrequent
vs.
Frequent
Level of Demand
Light
vs.
Invasive
Technical Sophistication
Advanced
(E-commerce)
vs.
Archaic
(Manual)
Geography

B/

C > 1.00
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).
vs.
Etc.
Etc.
Senior Management’s
Benefits vs. Costs Test
vs.
101
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:
- Peer group: Pre-determining uses for the information
- Replacing misconceptions with reality.
- Getting ROI from earlier insights and decisions.
102
The CFO must now help Sales and
Marketing … to better target customers.
- Accelerated learning
- Solving the thorny “leveling” problem
- Preventing “over-engineering” ABC model size
A Shift in the CFO’s Emphasis
Benefits from ABC/M Rapid Prototyping
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?
103
104
26
Customer Value Management
Optimizing Customer Value --“Smart” Sales Growth
Who is more important to pursue with the scarce
resources of our marketing spend budget?
You can destroy shareholder wealth
creation by …
… over-spending uneccessarily on loyal
customers for what is needed to retain them.
Our most profitable customers?
Or our most valuable customers?
… under-spending on marginally loyal
customers and risk their defection to a
competitor.
What is the difference?
The “customer lifetime value” is intended to
answer this question.
Therefore, what is the optimum spending
level for differentiated services to different
micro-segments of customers?
105
Imagine you are pharmaceutical supplier.
106
Current vs. Long-Term Potential Value
Which Customer is more Important?
If you could measure past-period customer profitability but also
measure future potential customer economic value, then …
Dentist A
Sales = $750,000
profits = $100,000
Age 61
Dentist B
Sales = $375,000
profits = $40,000
Age 25
high
current
profit
contribution
(static)
low
Which is more profitable?
Which is more valuable?
… you’d view existing
customers in different
categories.
limited
substantial
future potential
(long-term)
107
108
27
Knowing Both Suggest What to Do.
Customer Value Management – Financial Definitions
Time = 0
(now)
Segmenting existing customers helps determine marketing actions.
There appear to be obvious customer strategies for each category.
Historical
high
current
profit
contribution
(static)
low
defend
& retain
most
favored
status
manage
up or out
maximize
limited
(trends, insights, inferences)
Past
(reactive)
Customer Profitability
The difference between the
revenues earned from, and the
total costs associated with, the
customer relationship during a
specified period.
substantial
future potential
(long-term)
109
Improve the value mix of customers
Customer Lifetime Value (CLV)
The net present value of the
future cash flows (both
inwards and outwards)
attributed to the customer
relationship during the
predicted lifetime of that
relationship
Future
(proactive)
Predictive
(uncertainty, risk mgmt.)
110
A financial view is not the only consideration.
Notes
Growth by increasing
number of customers
Number of customers
2
Growth by increasing
value of customers
1
3
MVC’s
LMC
Other factor variables are needed to evaluate sales
prospects and existing customers. They include:
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
- retention (loyalty)
- attrition (tenure)
- churn propensity
- RFM ( recency, frequency,
and monetary spend)
- their lifecycle stage
- their referrals potential
- their familial relationships
- their “social” networks
- their tastes and preferences
- their “social influence”
- socio-demographic
- psychological
- others ??
Customer actual value
Source: Managing Customer Relationships by Martha Rogers
111
112
28
Chain Management
Involves Linkages
Supply ChainValue
Trading
Partner Relationships
Tier 2
suppliers
Tier 1
suppliers
Tier 1
customers
1
2
Initial suppliers
THOMAS P.
KLAMMER
Professor of
Accounting
(retired)
University of North
Texas
TERRANCE L.
POHLEN
Associate
Professor of
Logistics
University of North
Texas
Tier 2
customers
1
2
n
1
1
n
1
n
2
2
1
n
1
2
3
n
Tier 3+ to
consumers
3
1
n
n
1
2
n
Consumers / end-customers
Tier 3+ to
Initial
suppliers
GARY COKINS
Principal, Global
Business Advisory
Services, SAS
n
1
n
1
n
Managed Process Links
Focal Company
Monitor Process Links
Members of the Focal Company’s Supply Chain
Not-Managed Process Links
Non-Member Process Links
Non-Members of the Focal Company’s Supply Chain
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.
113
Managing IT as a business is now an imperative. No longer can IT
be seen as a technology supplier – it must be seen to be adding
value to the organization and providing strategic capability. IT
performance management enables IT to become service oriented,
aligning itself with the organization to provide internal customerdriven solutions to problems.
Hardware
People
But … it is difficult to maximize returns from IT when the products
and services appear to be free to internal customers.
114
Two Types of IT expenses: Assets and People
Managing IT as a business
115
Fixed Costs (virtual)
IT assets become sunk costs immediately
at purchase. The objective to is maximize
capacity use.
Flexible / Variable Costs (physical)
People-related expenses (e.g.,
salaries) can be flexibly assigned to
different work. Headcount is adjustable.
The objective is to use people
efficiently.
116
29
IT ABC/M Cost Assignment Network
AGENDA
Usage-based Chargeback Costing
People
(Salary, Fringe
Benefits)
Resources
Hardware
Software
IT charge into
other ABC/M
models
Network
 2)
Work Activities
Resources
Support
Activities
Activities
equipment
R&D
“Costs Measure the Effects”
(1) Demands On
Work
Costs (2)
Final Cost Objects
Develop
New
systems
(future
value)
In later
years
Replace
IT cost
objects
Support
Final
cost objects
Operate
Business cost objects
IT Services,
Products
Current
systems /
facilities
(current
value)
Business
Sustaining
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

Customers
117
118
Activity Analysis for Process Improvement
An example of “unitized costs”
Type of Roadbed Costs
Target an activity
for improvement
Roadbed Types
Number Road
of lanes surface
Location total cost
four
interstate
asphalt
$270,137,078.40
number
of miles
work activity
bituminous
rural
$29,783,384.10 43,578
asphalt
county
$95,567,207.84 65,672
No
$220.00
$0.00
$65.00
$250.00
$112.20
$36.25
Eliminate
the activity to
reduce cost
Can activity
be
eliminated?
Yes
$1,455.22
cut grass
electronic signs
fill pot-holes
plow roads
paint stripes
replace signs
$120.00
$334.25
$150.00
$975.60
$450.50
$124.85
Is activity
required by
a customer?
Yes
$683.45
cut grass
electronic signs
fill pot-holes
plow roads
paint stripes
replace signs
four
Activity analysis judges work based on
need, efficiency, and value.
$2,155.20
125,342
cut grass
electronic signs
fill pot-holes
plow roads
paint stripes
replace signs
two
unit cost
per mile
etc.
etc.
etc.
etc.
etc.
etc.
No
Can the
driver
frequency be
reduced?
Yes
Reduce the activity
frequency to
reduce cost
119
No
Does
activity contain
low-value added
tasks?
No
All cost
reduction
opportunities
identified
Yes
Eliminate
low-value added
work to reduce cost
120
30
ABC/M’s Attributes Can Suggest Action
ABC Provides the Data for ABM
Value
Exceeds
expectations
Opportunity
Shareholder
Value
Strength
$
Operational ABC
(efficiency)
Leverage & create
leadership
Scale back.
Process
Profit
improvement management
Strategic ABC
(effectiveness)
$
Level of
Performance
Activity based management
Perhaps a third
$ party has a better
cost structure or
skill than you.
Outsource
Below
expectations
Postponable
Improve
performance
immediately
$
Level of
Importance
Process
costs
Risk
Intermediate
output
costs
Product &
Customer
costs
Activity based costing
(the “math”)
Critical
$
= activity
121
AGENDA
122
6) Contentious Budgeting – The budget is typically a fiscal
exercise by the accountants that is:
 2)
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

(1) disconnected from the executive team’s strategy, and
123
(2) not based on future driver volumes.
124
31
A Quiz. “Our budgeting exercise ... “
Spreadsheet Budgeting – It is Incremental !!
is invasive and time-consuming ... with few benefits.
takes 14 months from start-to-end.
a
1
requires two or more executive “tweaks” at the end.
2
is obsolete in two months due to events and re-organizations.
3
starves the departments with truly valid needs.
4
caves in to the “loudest voice” and “political muscle.”
5
6
rewards veteran sand-baggers who are experts at padding.
7
incorporates last year’s inefficiencies into this year’s budget.
8
Is over-stated from the prior year’s “Use-it-or-lose-it” spending.
b
c
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
Sheet 1
125
126
(1) Non-Recurring Expenses // Strategic Initiatives
Match the Budget Method to its Category
Demanddriven
Measurement
Period;
Integrated
Budget
1st Quarter
Strategic
Objective
(Rolling
Financial
Forecasts)
Executive Team
X
X
KPI Target
KPI Actual
comments /
explanation
their score
X
X
<----- period results ------->
Projectdriven
KPI
Measure
X
Managers and
Employees
Identify
Projects,
Initiatives,
or
Processes
Budgeting is typically disconnected from
the strategy. But this problem is solved if
management funds the managers’ projects.
127
128
32
(2) Recurring Expenses // Future Volume & Mix
Operational Resource Capacity Planning
inputs
ABC/M
ABP
Resources
Past
Now
Future
 Activity-Based Costing
 Activity-Based Planning
- Historical & Descriptive
-
Predictive
- Starts with known:
-
Requires capacity analysis
spending
-
Starts with estimated outputs
driver measures
-
Applies ABC/M rates
-
Solves for Resource “expenses”
Process Costs
Output &
Outcome Costs
Resource
expenses can
be calculated
with
“backwards
ABC/M”
output quantities
- Calculates “costs”
Customers and
Service-recipients
129
Predictive Accounting
ABC/M
ABC/M
ABP
Past
ABC/M
Start Here.
ABP
ABP
Now
Future
Past
ABC/M
Now
ABP
Known
resources
resources
? calculated
?
work
activities
work
activities
?
?
Provides consumption
rates
cost
objects
130
cost
objects
131
Future
Estimated
132
33
Accounting Treatments and Behavior of Capacity (expenses)
Marginal / Incremental Expense Analysis
Descriptive
Most savvy managers know that some expenses are
fixed short-term and variable long term.
Predictive
They want to know the financial impact of a decision.
Past
Now
unused
Decision examples:
• Adding / dropping products, channels, or customers
• Make versus buy
• Outsourcing or not
• Capital investment justification
• Budgeting / rolling financial forecasts
Traceable to
products,
channels,
customers,
sustaining
133
used
Future
sunk
unused
fixed
(unavoidable)
variable
(adjustable
capacity;
avoidable)
134
Match the Budget Method to its Category
(3) Risk Assessment Grid
… ERM is not just contingency planning
Budget method
2
7
10
6
expenses
volume & mix
of drivers
8
Severity of impact on
event occurrence and
achievement
of objectives
Recurring
Demanddriven
High
9
Integrated
Budget
3
(rolling
financial
forecasts)
4
5
production
and
ABP/B
Projectdriven
1
Budget
Low
Low
High
Do not budget
Non-recurring
expenses
strategy
map and
risk grid
Strategic & risk
mitigation projects
probability of an event occurring
135
136
34
Key Concepts and Definitions
Linking Strategy and Risk to the Budget
Strategy Modeling
Strategy methods
(e.g., SWOT)
(by executives)
Define and adjust
strategy and risk, and
create strategy map
Strategic
objectives
A target is what we would like to happen
which we achieve by producing …
Managerial
Accounting
(e.g., Activity-based
Costing)
knowledge
Identify and
manage strategic
initiatives
Forecast drivers
(e.g. sales) ;
develop production
plan
Driver consumption rates
Driver volumes
and mix
Traditional and
driver-based
budgeting (e.g. PBB)
e.g., hours,
Pounds,
# employees
Approve strategy
risk and capital
budget
= financial information (e.g. $)
Operational Modeling
(by employee teams)
KPI dashboard
feedback
Create balanced
scorecard
KPI
targets
Financial Modeling
priority projects and processes
(2) capital budget
(3) strategy budget
(4) risk budget
(1) Operational
budget
Manage and
improve core
processes
Changes and
responses
Capacity
resource plan
Derived budget
(and rolling
financial forecasts)
A set of plans is which is what we intend to do,
which we change to achieve our target
Revise
plan
No
OK
Acceptable?
Yes
A forecast which is what we think will happen
based on:
Results and
outcomes
137
Don’t treat forecasting as a “special event.”
138
Continuous refreshing the rolling financial forecast
More frequent forecast intervals assure better accuracy.
100%
accuracy
…
We haven’t forecasted in a while,
maybe we should try that again….
0%
time
Forecasting should be an on-going part of
monitoring the business.
139
140
35
Analytics: Probabilistic Planning Scenarios
What are the Organizational Behavior Barriers?
Which budget report would you prefer?
(measuring sales, expenses, profit, etc.)
Budgeting (and Rolling Financial Forecasts)
probability
$
$
Excess power of managers with the loudest voice or
strongest muscles and with sandbag padding expertise.
Excel Hell.
worst base best
$.5M
#1 / single point
#2 / three points
$10M
Tradition – incremental / decremental cost center lineitem without cost driver interdependencies.
#3 / multiple probabilistic
141
Costing Continuum / Levels of Maturity
International Federation of Accountants Report
(most companies are Level 5D and 1P)
(1) Descriptive Continuum
Most organizations are
typically at lower levels of
maturity in adopting
progressive managerial
accounting practices,
methods and systems.
Improved
Treatment
of Indirect
Costs
Output Visibility
1D
Process
Visibility
2D
process and
bookkeeping Lean accounting
DEMAND DRIVEN PLANNING
with CAPACITY SENSITIVITY
Customer
Demand
Sensitive
Unused
Capacity
Aware
8D
Resource
Consumption
Accounting
7D
Improved
Output
Information/
Approximate
Accuracy
Blind
(2) Predictive Continuum
EXPENSE TRACKING, COST
REPORTING
and CONSUMPTION RATES
Level #
Evaluating the Costing Journey:
A Costing Levels Continuum
Maturity Model
By Gary Cokins
142
3D
4D
Direct costs
without (3) and with
(4) support costs
to output groups
5D
Standard
costing to
individual
outputs;
Project acct;
Job order
costing
6D
Push
ActivityBased
costing
(ABC);
Product
costs
Unused
capacity
costs
Level 6D with (estimated)
Channel and
customer
profitability
Reporting;
Cost-to-serve
Pull
Activitybased
Resource
Planning
%
G/L acct.
Incrementa
l
1P
2P
(ABRP);
Forecast
driver
quantities
X unit
consumption
rates;
Driver based
budgeting
Timedriven
ABC
3P
(TDABC);
Forecast
driver
quantities
X time
consumption
rates;
4P
Simulation
5P
Ultimate in
consumption
rates;
(RCA);
Level 2P
with
proportional
costing at
direct and
support
depts.
Direct cost
focus;
Repetitive
work
conditions
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins published by the International Federation of Accountants, 2015
143
144
36
AGENDA
How Does It All Fit Together?
 2)
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

Strategy,
Mission
145
$
Customer
Satisfaction
146
ERP, etc.
Targeting
Order fulfillment
CRM
Shareholders
Managerial
Accounting,
analytics
needs
Risk Mgmt.,
Strategy map,
KPIs
Supplier
Inputs
ROI
Scorecards,
Dashboards
Shareholders
Strategy,
Mission
(capacity)
(capacity)
Shareholder Wealth Creation is not a goal. It is a result!
ERP, etc.
Organization
Resources
ROI
EPM is Circulatory and Simultaneous
CRM
Scorecards,
Dashboards
Supplier
Inputs
Organization
Resources
$
with good managerial accounting.
Customer
Satisfaction
ERP, etc.
CRM
Scorecards,
Dashboards
In Summary … first, we energize
Strategy,
Mission
Customer
Satisfaction
147
KPI
Scores
Feedback
Organization
Resources
(capacity)
Supplier
Inputs
ROI
$
Shareholders
148
37
EPM is Circulatory and Simultaneous
Two BA Views: Hindsight and Foresight
Time = 0
(now)
Shareholder Wealth Creation is not a goal. It is a result!
Strategy,
Mission
needs
Customer
Satisfaction
ERP, etc.
Order fulfillment
Supplier
Inputs
wasted resources
KPI
Scores
Feedback
Organization
Resources
Predictive
(uncertainty, risk mgmt.)
What happened? Where? And
why is this happening?
ROI
Shareholders
(capacity)
(proactive)
(reactive)
CRM
Scorecards,
Dashboards
Future
(trends, insights, inferences)
Past
Targeting
Risk Mgmt.,
Strategy map,
KPIs
Historical, Descriptive
$
leakage
(waste)
Less productivity reduces Shareholder Wealth
149
150
The Analytical Spectrum
The Intelligence Hierarchy
Descriptive
Prescriptive Analytics
/ Optimization
Power of
Information
What will happen next? What is
the best that can happen?
Diagnostic
Predictive
Prescriptive
$ROI
Predictive
Modeling
Descriptive
Modeling
(with analytics)
Raw
Data
How much did I sell
for each item by
channel and location?
Ad hoc
Reports &
Standard OLAP
Reports
Data
Information
Knowledge
Insights
Types of
Analytics
Decisions
151
How much inventory
did it require?
How will changing
interest rates affect
mortgage
prepayments?
What is the best
pricing and promotion
strategy to minimize
churn on wireless
phone contracts.
Machine Learning • Clustering • Spatial • Linear Regression • What-if
Modeling • Simulation • Forecasting • Text Mining • Optimization •
Exception Monitoring • Multidimensional • Segmentation • Time Series
152
38
AGENDA
The Buy-in to Performance Management
 2)
 3)
Risk Management
 4)
 5)
 6)
 7)
Workshop exercise
 8)
 9)

153
IT and Users have common goals
Why has the adoption rate for EPM’s
methodologies been so slow?
IT
154
Remove the wall between IT and Users
IT
• Make better decisions
• Optimize performance /
manage risk
• Achieve strategic
objectives
(a set of technologies)
(gatekeepers of data)
- Daily operations
- Keep the lights on
- Batch processing
- Data storage
- Data structures
- Data governance
Users
Business
(analytical sandbox)
(a set of capabilities)
- Discovery
- Investigation
- Analysis
But IT systems evolve organically and erratically.
(The user has an itch, and IT scratches it.)
155
156
39
Remove the wall between IT and Users
IT’s view of
Business
Why is the adoption rate so slow?
What are the barrier categories?
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
(1) Technical barriers include IT related issues.
- obstructionists
- controlling
- uncooperative
- bureaucrats
- less skilled than us
- just a service center
(2) Perception barriers are excess complexity
and affordability.
(3) Organizational behavior barriers involve
resistance to change, culture, and leadership.
BA provides IT the opportunity to drive value, but IT will
need to be more tolerant and flexible.
157
158
The Deeper Root Cause Barriers (2 of 4)
Insecurity and confidence deficiency – obsession to
know “who else has done it” rather than judge if it just
makes sense to do. (The ROI dilemma.)
Human nature’s resistance to change.
Fear of knowing the truth … or it is flawed truth.
Confirmation bias – starting with preconceptions to be
validated.
Not wanting to be measured and held accountable.
Stove-pipe rivalries.
Perceived loss of control. “If I’m automated, I’m not
needed.”
Misalignment of incentives. Poor KPI metrics and targets.
159
160
40
Not realizing that line managers have less interest in
historical reporting and greater interest in predictive
outcomes.
Excel Hell.
Inadequate training – “I feel like a dog watching
television; I do not know what I am looking at.”.
Inflated expectations that analytics is the magic pill …
to cure all problems.
Lack of leadership (which is not the same as
management).
Etc., etc. … there are many more !
161
Overcoming Resistance to Change
162
The Complete Vision of Performance Management
To create change, you need to create the need for change! How?
Change only occurs and continues only when:
the product of 3 factors
is greater than R
(D x V x F) > R
Dissatisfaction
with how
things are
V
ision of what
“better” would look like
esistance to change
F
irst
practical
steps
Make the RPM of the EPM and BA gears spin …
… better, faster, cheaper … safer and smarter
163
164
41
Baseball has received much attention
My pride and joy …. Redemption.
“Moneyball” tells the
story of how quantitative
analysis can overcome
perceptions of old
school thinking.
BBHOF
The Oakland As
lowered their salary
costs, but did not begin
winning until they
applied deep analytics.
165
166
Getting Started Actions and Resources
Action steps
 Get educated. Get buy-in.
 Rapid prototyping. Start small; think big.
 Improve incentives. (Motivational theory)
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.
167
168
42
Thank You
From Theory to Practice
Gary Cokins, CPIM
Your success depends
on how well and how fast
the right information and
intelligence gets to the
right people.
Cary, North Carolina USA
www.garycokins.com
919 720 2718
[email protected]
169
170
43

Analytics-based Enterprise Performance Management

Transcription

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