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IIntroduction ChapTer 1
Challenges to Meeting Enterprise Performance Management Requirements
ChapTer 2The Promise of In-Memory Analytics with IBM Cognos TM1
ChapTer 3Evolution of IBM Cognos TM1
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1Challenges to Meeting
enterprise performance Management requirements
The goal of this chapter is to highlight the increased demands on planning, analysis, and performance management processes in organizations. In todays highly volatile business environment, organizations demand more accurate plans, forecasts, and analysis to meet and exceed market demands. These demands range from increased market pressures, investment demands, profitability, strategy validation, and regulatory requirements for decision transparency. These increased demands require a fusion of planning and analysis capabilities at every level of decision making across an organization to create a more agile organization to meet these diverse requirements. Over time we have seen how markets respond to corporations that fail to meet stockholder expectation with decreased market capitalization. This chapter will focus on the effects of these forces on the following:
Increased forecasting and budget cycles Rise of scenario analytics Heightened Enterprise Resource Planning (ERP) requirements Rising demands on data warehouses
Increased Forecasting and Budget CyclesLets start our review with causes of increased forecasting and budget cycles. There are a host of common problems that plague organizations. These problems include
Long planning cycles Disconnected operational and financial plans Spreadsheet-based plans
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Lack of ownership and accountability Lack of control, transparency, and governance
Lets take a look at some of these key challenges in more detail.
Long Planning CyclesThe increased volatility and collection of data planning, budgeting, and forecasting cycles need to be in sync with business cycles in order to reflect current business assumptions. Before we begin, lets review a number of key definitions:
Strategic plan A disciplined effort to define fundamental decisions and actions that shape and guide an organizations future, addressing what the organization is, what it does, and why it does it
Budget/ annual operating plan Projection of revenues, expenses, and cash for a specified period of time (first year of SP). Identifies targets, at the line of business, functional, or cost center level
Forecast A period-by-period projection of either revenue or expense that considers actuals to date and any changes to market conditions
Modeling Process of developing models that characterize an organization, allowing it to evaluate the impact of decisions so as to fully understand the financial impact
Reporting Collection, analysis, summarization, and presentation of the financial performance of the business
Table 1-1 specifies the primary use, frequency, and key participants for each of these key terms.
Now that we have key terms defined, lets turn our attention to an example of a planning process. As noted in Figure 1-1, in this example the budgeting, planning, and forecasting processes typically require the collaboration of at least four management layers, which include corporate finance, business unit leaders, line of business leaders, and finally cost center managers. Each of these planning groups has different levels of data and analysis requirements to render an accurate plan for their areas of responsibility. This requires a highly coordinated process for the target definition through distribution, aggregations of plans, variance analysis, and revisions.
This process is further complicated by an increasing number of people in the planning process and pressure to recast assumptions based on changing business conditions. The notion of a quarterly plan no longer meets business requirements.
Disconnected Operational and Financial PlansCompanies that roll out plans from the top down in the organization will not only have a limited view but will also suffer from lack of commitment and buy-in from many or all levels, which will drive a disconnection between management and contributors. As noted in the simple case shown in Figure 1-2, disconnected planning processes will send inaccurate
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demand signals across the organization. For example, a corporate planning process cannot be accurate without answers to the following questions:
What are the pipeline revenue forecasts? What are the expense demand signals? What are the planned capital expenditures to drive both current and strategic plans? Based on pipeline projects, what are the demand signals for employee hiring?
Key Term Primary Use Frequency Who Is Involved?
Strategic plan Define vision, strengths, weaknesses, opportunities, and threat (SWOT), high-level corporate goals, and objectives and strategies for how to attain them
Horizon: 3 to 5 years, sometimes 10Frequency: Once per year
Corporate executives Senior management Strategy Finance Department
Budget/annual operating plan
Financial guide for the current year: Control expenses, evaluate performance, and determine bonus compensation
Horizon: One year, across months, quarters, weeksFrequency: Once per year/Infrequently updated
Corporate planning Line of Business managers Cost Center managers
Forecast Provides the most current estimates for the balance of the year/horizon
Horizon: Balance of the year or rolling week, month, quarter, annual.Frequency: Refreshed often
Corporate planning Line of Business managers
Modeling What if analysis Acquisition modeling Scenario analysis Define contingency
plans
Ad hoc Corporate planning Strategy Sales/HR/IT
Reporting Comparison with actual
Cause and effect analysis
Horizon: VariousFrequency: Monthly, Qtrly, Annual, Ad hoc
Corporate planning Reviewed at all levels
Table 1-1 Key Terms
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Figure 1-1 Planning cycle example
CorporateFinance
Business Unit/LOB Finance
Line of BusinessLeaders
Cost CenterManagers
?CreateTargets &Templates
Complete/DistributeTemplates
CompleteTemplates
4 > Months
DistributePlan
Templates
SubmitPlan
RevisePlan
RevisePlan
RevisePlan
RevisePlan
RevisePlan
SubmitPlan
AggregatePlans
AnalyzeTarget
vs. plan
FinalizePlan
Q1Forecast
AggregatePlans
Budgeting, Planning and Forecasting Processes
Figure 1-2 Disconnected planning processes
Market DemandFinance Sales
Reports Income statements balance sheet Cash flow Financial ratios
SalesPlanning &Forecasting
WorkforcePlanning
Strategic FinancialPlanning &Forecasting
ExpensePlanning &
Control
OperatingExpenses
Operations,Marketing, etc.
HumanResources
Headcount& Compensation
Expenses
Revenue Plan
DepreciationExpenses
CapitalExpenditure
Planning
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These simple questions highlight the interrelationship of cross-departmental planning processes and the critical importance of connecting these processes for better decision making.
Companies dont often have the complete picture of the impact of business drivers, the key metrics that steer their expenses and profits. These drivers, which are often interdependent and yet changeable given market realities, are buried in hundreds of spreadsheets and disparate databases spread throughout business functions. As a result, companies cannot command a single version of the truth and are hard pressed to produce reliable forecasts and plans, thus hindering growth and profitability.
If the annual planning process takes several months to completewith time dedicated to reconciliation and reworkingit has long since been disconnected from the cycle that optimal performance requires. Similarly, by not forecasting frequently or as needed, a company cannot fully and expediently understand the demand for operating cash and thus make necessary reallocati
