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An Oracle Thought Leadership White Paper
October 2009
Management Excellence Framework: Analyze to Adjust
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
Introduction – Management Excellence Framework........................... 3
Step by Step ...................................................................................... 7
Key Metrics........................................................................................ 8
Techniques and Technologies ........................................................... 9
Call to action.................................................................................... 12
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
3
Introduction – Management Excellence Framework In the era of operational excellence, operational processes became well defined. Order to
Cash, Procure to Pay, Invest to Retire, and Develop to Release, among others, became
reliable, uniform, and predictable ways to get the job done. In time, the management
processes will be defined with the same degree of clarity. At the moment, however, the
term means many things to many people.
When asked to define their management process, managers answer with either silence
or a flurry of different activities and partial processes, such as budgeting, financial
reporting, resource management, and variance analysis. The closest traditional model
that people suggest is the PDCA-cycle (Plan, Do, Check, Adjust) - sometimes called the
planning and control cycle, or management cycle. But this approach falls short because
of its inside-out approach.
The Management Excellence Framework offers a process by which companies can
achieve Management Excellence by linking strategy to success. The Management
Excellence Framework expands the scope of traditional performance management to
offer a framework by which companies can deliver Management Excellence. Enterprise
Performance Management Systems (EPMS) then enable companies to realize their
management process goals by connecting disparate management activities and bringing
together strategy formulation, execution, and feedback.
The Management Excellence framework consists of six steps, in which the output from
one becomes the input for the next. These steps are depicted in Figure 1 below.
Figure 1: Management Excellence: The Management Process Value Chain
AGILE
ALIGNED
Plan to Act
Analyze to Adjust
Record to Report
Traditional Performance Management
Gain to
Sustain
Investigate
to Invest
Design
to Decide
SMART
High Impact Performance Management
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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The Management Excellence Framework combines several principles that are critical in
driving management excellence.
First, it balances an outside-in and inside-out approach in managing performance—
explicitly including external views of the business by understanding stakeholder
contributions and requirements as well as market dynamics. In contrast, traditional
approaches to performance management are primarily focused on understanding internal
business performance only.
Second, because management processes are of strategic, financial, and operational
nature, the key to success is aligning these processes across various levels as well as
across business functions. Sound business results come only from the perfect execution
of plans, making it imperative to connect the entire set of management processes.
Traditional performance management often treats management activities such as
planning, budgeting, forecasting, reporting, and analysis in isolation.
Third, the Management Excellence Framework drives management excellence by
recognizing that, to create a learning organization that is agile, feedback loops between
management processes are critical. This feedback allows companies to detect changes
immediately, assess the impact on their plans, and quickly find alternative ways to reach
their goals. These feedback loops should consist of the right key performance indicators
on the operational, financial, and strategic management levels.
Last, the Management Excellence Framework organizes the various performance
management processes to be aligned. Each management process has its own focus.
In this white paper, we focus on the Analyze to Adjust management process.
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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Analyze to Adjust
Business strategies live and die based on how well a company executes them. Insight, strategies
and plans remain theoretical until someone puts them into action - and watches closely to see
how they perform. But performance management needs to do more than monitor individual
processes. It must overlay the various business domains and create insight into causal
relationships.
Figure 2: Causal relationships
For example, consider a furniture retail company. The customer places an order and a delivery
date is fixed, typically a calendar week. Payment is due at delivery and becomes part of the
retailer’s cash flow forecast. However, if the furniture manufacturer isn’t able to deliver as
promised, customer satisfaction will likely decrease and the retailer’s actual cash flow will not
meet its forecast. In addition, the customer might not buy again from this retailer and choose to
buy from a competitor next time. The retailer may have to offer a discount to the customer to
compensate for the delayed shipment, which further decreases the profit margin.
These types of causal relationships take place every day and generally lead to no-win situations.
An integrated approach across different functions and lines of business can help manage such
situations proactively and minimize the potential negative impact.
A recent Economist Intelligence Unit (EIU) study1 found that disparate information presents
one of the primary hurdles to performance management success. To overcome this problem,
leaders in performance management are implementing master data management strategies, so
that all domains use the same product, customer, organization, and other reference tables. Many
1 ‘Business intelligence: Putting enterprise data to work’, The Economist Intelligence Unit, 2007
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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operational measures can be standardized, as companies do not derive competitive differentiation
from a unique definition of absenteeism or DSO. Standards allow them to benchmark their
operational excellence.
A manufacturing company learned this lesson first hand when it increased customer
responsiveness and improved retention by implementing business intelligence applications that
empower customer-facing employees with the information they need. And a utility company
gained better visibility into business processes and the ability to proactively track and manage key
drivers of revenue, cost and shareholder value.
Analyze to Adjust
Analyze to Adjust is the management process for analyzing deviations from a
company’s goals in order to take corrective actions. The purpose of this process
is to detect variances between execution and plans, analyze the causes and trends
of these variations, and determine the best possible responses. This process
involves actions ranging from immediate tactical responses, such as changing a
customer’s credit status, to adjusting the business plan or even reevaluating the
strategy, depending on the magnitude of the impact.
The Analyze to Adjust process provides answers to these crucial questions:
• Does your company understand profitability by customer, product, service, division,
channel, etc.?
• How do you handle proactive alerts for critical issues?
• Does your company have a standard set of KPIs by which to measure and manage
performance? Are the KPIs in use leading or lagging indicators?
• How effective have your investments in methodologies, such as the balanced scorecard,
been?
• Does your company have a common data model or master data repository? Are all
systems using consistent definitions?
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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Step by Step
The Analyze to Adjust management process deals with the detection and analysis of deviation
from the plan and supporting decisions on the response(s) that the organization should make.
Table 1 below describes inputs, best practice and outputs for the Analyse to Adjust management
process.
TABLE 1. ANALYZE TO ADJUST INPUTS, PROCESS STEPS AND OUTPUT
INPUT BEST PRACTICE STEPS OUTPUT
• Short-term targets
• Drivers
• Constraint
• Assumption
• Actual and historic
performance.
1. Continuously monitor variances.
2. Perform root-cause analysis across
business domains
3. Benchmark performance against external
and internal peer groups
4. Identify opportunities for improvement
5. Adjust forecast and resource alignment
• New forecast.
• Improvement activities
Using the analytical models an organization has developed, management must monitor variances
continuously, performing root-cause analysis to understand the underlying driver of the variance.
The team can then choose to identify opportunities to improve the situation or adjust the current
forecast.
Depending on the significance of the deviation, managers might need to realign budgets or
reallocate resources. It is also possible that a tactical change could address the variance. In that
case, a tight integration between management processes and operational processes can help the
organization switch quickly from analysis to action.
The Analyze to Adjust process is crucial to ensuring continuous vertical and horizontal alignment
across the organization. All of its current operational activities need to be compared to the
previously committed plans, budgets, goals, and targets. Typically, tactical forecasts are used as an
intermediary layer for these adjustments. Leading companies establish this alignment by
integrating different analytical processes with each other.
Root-cause analysis and improvement activities often involve more than one part of the
organization. Consider, for example, the finance department detecting an increase in days sales
outstanding. At the same time, the marketing department might see a spike in customer
complaints. Perhaps the root cause is the procurement department trying to improve working
capital by paying out certain suppliers later, leading to product and service delivery issues. The
improvement activity would consist of introducing working capital management that is integrated
across the enterprise.
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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Root-cause analysis requires alignment across different functions of the extended enterprise so
that management can understand how deviations in one process are related to issues in other
processes.
Key Metrics
Management excellence means that organizations create competitive advantage by having
superior management processes, making the organization smart, agile, and aligned. Management
processes should be managed using performance indicators much as operational processes are.
Table 2 below describes performance indicators that can be used for the Analyze to Adjust
management process.
TABLE 2: ANALYZE TO ADJUST PERFORMANCE INDICATORS
BUSINESS RESULTS (LAGGING) BUSINESS DRIVERS (LEADING)
Financial • Order to cash cycle time • Delivery efficiency
Sales • Revenue • Pipeline conversion rate
Marketing • Leads • Campaign effectiveness
Delivery • Service level • Backorder time
HR • Absenteeism, tenure • Employer attractiveness
IT • Business performance • Development/operations cost mix
Traditionally, management information has always been financial in nature. However,
understanding operational drivers improves the predictability of financial outcomes2. In the Plan
to Act process, we already described the need for each business function to run an efficient shop.
Every functional domain has and needs its own specific management information. Table 2
provides an indicative example for a number of business domains.
The key question that many organizations struggle with is whether to adopt ‘best practice’
metrics and reports as part of a packaged application, or to develop their own specific metrics.
2 “Integrating Operations and Finance: A Two-Way Street,” An Oracle Thought Leadership White Paper, August 2008, http://www.oracle.com/solutions/business_intelligence/index.html (under “White Papers).
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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It should be said that even if companies operate in the same industry or have the same core
strategy, they will still need different metrics. Most likely, the two companies are in a different
maturity phase, have different skills and competencies, and have different strategic initiatives to
differentiate from their competition. Specific organizations will each have their own, unique
strategic performance indicators. And so they should. Copying best practices does not lead to
strategic differentiation.
However, in managing day-to-day operations on a more tactical and operational level, there is no
added value in reinventing the wheel. What is the point of having your own definition of
absenteeism, or days sales outstanding? And next to these standard performance indicators, every
industry has its own specific metrics reflecting the specifics of that industry. For those generic
and industry-specific performance indicators, organizations should simply use the metrics and
reports that come with their business applications and their business intelligence systems.
Oracle’s BI Applications comprise 26 different areas across multiple industries and offer over
5,000 metrics out of the box. The time saved implementing these standard metrics can better be
spent on crafting the right strategic metrics.
Where in the Plan to Act process managers focus on identifying value drivers across the value
chain, in the Analyze to Adjust process variances between actuals, plans, and forecasts are
analyzed, and linked to the identified value drivers. Horizontal alignment means that
organizations should have a single version of the truth in their metadata and master data, in order
to track variances across the cause-and-effect chain.
Key framework: Oracle Business Intelligence Applications3
Techniques and Technologies
In support of the Analyze to Adjust process, an EPM system needs to enable the tracking of
performance against strategic goals and initiatives as well as continuous monitoring of KPIs and
operating results. Also important are periodic reporting of actual performance versus plans and
forecasts, cost and profitability analysis by product line and customer segment, reforecasting and
adjustment of business models, and integration with transactional and operational systems to
drive analytical insight and action.
In terms of delivering results to different end-user groups, the EPM system needs to support
interactive dashboards and reports with drill-down capabilities to understand root causes of
3 http://www.oracle.com/appserver/business-intelligence/bi-applications.html.
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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variances, integration with MicroSoft Office productivity tools, and ad hoc query and analysis
capabilities for analysts and other power users.
Key capabilities and techniques to support the Analyze to Adjust process are:
• Variance and root cause analysis. Using traditional reports or dashboards, this technique
is the most commonly used approach to evaluating performance. It involves comparing
actual revenue or expense results to a budget, plan, or forecast to compute a variance.
Drill-down capabilities are needed to find root causes for variances.
• Causality analysis. This technique focuses on cross-functional cause and effect in an
organization. A variance or negative performance metric in one function or business unit
can be caused by activities in other areas. So in addition to the drill-down technique, the
ability to drill across the organization based on these linkages and dependencies can be a
very powerful tool for analysis and decision-making.
• Profitability analysis. Simple line-of-business reporting can include a profit and loss
statement or a gross margin based on direct revenues and costs. Profitability reporting and
analysis typically includes the allocation of indirect costs to gain a comprehensive view of
the profitability of the particular line of business and an understanding of the value added
to the business.
• Performance scorecards. Metrics or KPIs are usually collected and reported on a
quarterly or monthly basis to track progress against goals and objectives. Key deviations
from goals and targets are analyzed and discussed and can trigger immediate action, more-
frequent monitoring, reallocation of resources, or resetting of the goal.
• Internal and external benchmarking. The financial results for a particular product line
or service offering are compared to other products or services within the portfolio to gain
insight into its comparative performance. This concept can be extended to external
benchmarking as well. Here, senior management is able to compare the performance of
their own company to competitors or peers in the industry. This shows whether the
organization is executing their strategy better or worse than other organizations of similar
size and scope.
Table 3 highlights the specific modules of Oracle’s EPM system that support the Analyze to
Adjust process.
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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TABLE 3: ORACLE’S EPM SOLUTIONS FOR ANALYZE TO ADJUST
PRODUCT ALLOWS MANAGERS TO
Oracle Hyperion Planning • Monitor execution of plan by comparing budget and plans to actual results
• Analyze trends and continuously forecast to understand the impact of market
changes on the budget and plan
• Perform what-if analysis to understand what adjustments to plan are required
to achieve targets and reallocate resources
Oracle Integrated
Operational Planning
• Continuously collaborate on plan revisions across business functions to
understand their businesswide impact and strive toward a consensus plan
• Test financial forecasts and plan changes for feasibility
• Update the financial plan with the correct operational assumptions to create
accurate forecasts
Oracle Hyperion
Profitability and Cost
Management
• Model and analyze profitability and cost drivers for customers, products, and
channels
• Make costs transparent by analyzing how much each sales or service activity
costs
• Understand the root causes of profit or loss by tracing revenues, costs, and
resource consumption
• Prioritize adjustments to products and activities
Oracle Hyperion
Performance Scorecard
• Periodically monitor strategic initiatives and KPIs by comparing actual results
to strategic targets
• Take corrective actions by adjusting plans and initiatives or by re-evaluating
strategy
Oracle Business
Intelligence applications
• Quickly identify and respond to critical problems and opportunities by
comparing results to plans in real time
• Deliver visibility and actionable insight in each business function
• Align decisions and execution across business functions by connecting the
front office to the back office
• Use guided analytics and best practice workflows to drive the best actions
Oracle Business
Intelligence foundation
• Access a complete set of end-user reporting and analysis tools, including
interactive dashboards, ad hoc query and reporting, financial and production
reporting, multidimensional (OLAP) analysis, MicroSoft Office integration,
Google-type search, alerts, and support for mobile devices
• Access an enterprise information model that drives pervasive access to
multiple datasources via a business-oriented semantic model
Output from the Analyze to Adjust process becomes key input to all the other processes and can
result in new forecasts, revised goals, reallocation of resources, and other improvement activities.
Oracle White Paper— Management Excellence Framework: Analyze to Adjust
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Call to action
Management processes should not be viewed in isolation. Oracle’s Management Excellence
Framework describes a set of six management processes that lead organizations to become
smarter, more agile, and better aligned - the key attributes of management excellence. Companies
implementing the framework apply a systematic approach to management activities to increase
both managerial and operational effectiveness. They can visualize the impact of business
decisions and understand the levers that can be adjusted to affect outcomes. However,
management processes differ from operational or transactional processes, and the techniques and
technologies required to support and integrate each type are different.
By unifying performance management and BI, Oracle’s EPM system supports the strategic,
financial, and operational management processes described in the Management Excellence
Framework. Oracle provides a complete and integrated system for managing and optimizing
enterprise wide performance and supporting all of the best practices and techniques associated
with the management processes. This combination of processes, techniques, and technologies
allows organizations to leverage operational investments, achieve management excellence, and
create competitive advantage.
Thousands of companies around the world are benefiting from Oracle’s comprehensive
approach to EPM. With lower costs and less complexity than with nonintegrated point solutions,
companies using Oracle’s EPM system are able to align decisions with strategic goals, reduce
financial reporting and planning cycles, compare operational results to plans in real time, and
drive management excellence.4
4 For more information on Oracle’s approach to enterprise performance management, please visit oracle.com/epm.
Management Excellence Framework:
Analyze to Adjust
October 2009
Author: Frank Buytendijk, Thomas Oestreich,
John O’Rourke, Toby Hatch, Nigel Youell
Oracle Corporation
World Headquarters
500 Oracle Parkway
Redwood Shores, CA 94065
U.S.A.
Worldwide Inquiries:
Phone: +1.650.506.7000
Fax: +1.650.506.7200
oracle.com
Copyright © 2009, Oracle and/or its affiliates. All rights reserved. This document is provided for information purposes only and
the contents hereof are subject to change without notice. This document is not warranted to be error-free, nor subject to any other
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