The Evolution of Information Systems

 

The natural evolution of computerized information systems in organizations has followed a predictable lifecycle. Systems initially evolved to monitor different areas within an organization. They then progressed to collecting data and in so doing, replaced paper-based systems. Computerized systems evolved as very specific applications for the areas they served. Different departments purchased different systems to manage their particular spheres of operations and this worked fine until someone decided it might be useful to have one system in one department “talk” to a system in another department. The plethora of different systems with different data formats, operating systems and user interfaces made this a huge challenge which continues to this day. The emergence of systems such as enterprise resource planning (ERP) that served multiple needs or areas has mitigated this problem to some extent.

 

  

Computer systems in organizations initially acted to keep track of information. To a large degree, the data was what it was and that was the end of it. However, the growing ability to bring data together from disparate parts of the organization and analyze it has spawned the growth of efforts to use the information to improve the overall performance of the corporation. This has been somewhat of a two-step process. Initially, the whole area of business intelligence (BI) emerged with applications that could slice or dice data in any way imaginable. However, the ability to analyze the data in so many different ways carried with it the price that BI systems were complex and difficult to use. In fact, they required business users to make requests of trained BI or IT experts to create the reports they desired. Modifications to these reports also required expert involvement. The creation and modification of reports has not, therefore, been a fast-response process.

 

BI and CPM as a Competitive Weapon

 

Shortly after the advent of BI, a new area emerged to take BI capabilities even further. This area has been variously referred to as corporate performance management (CPM) or business performance management (BPM). While this was certainly possible with BI, CPM specifically aims to use the data available to improve, as the term suggests, the performance of the organization. And ultimately, all performance improvements, even those in manufacturing production line efficiency, are aimed at making the corporation more profitable. Information systems in the form of BI or CPM have thus become competitive weapons in the organization’s arsenal for improving returns to shareholders.

 

The potential offered by BI and CPM systems to make a company more profitable is driving greater penetration of these applications within the organization. However, this penetration can be limited by the ease of use of the applications and their integration into key organizational processes. To increase the usefulness of BI applications and their adoption throughout the company, certain elements must be present. These include the use of metrics, which makes sense across departments, and also ease of use for business users.

 

Sales and Operations Planning: A Natural Target for Pervasive BI

 

As an example, consider sales and operations planning (S&OP), which is a key process in any organization and absolutely critical to maximizing financial performance. Because it is such an integral part of any company’s operations, S&OP is a natural target for pervasive BI. The process requires input from and output to different departments within the organization. It is a process which has generally been carried out over a period of time, rather than requiring real-time response. However, an ability to make this process more dynamic can result in the organization being much more responsive to changes in market conditions, the competitive landscape, costs or other external factors as they occur.

 

Consider one potential impediment to effective and timely S&OP. In a manufacturing company, the production department might consider product A “better” and thus probably more profitable than product B because it has a faster production velocity in the plant. Sales and marketing, on the other hand, might consider B better than A due to its higher margin. In order to solve the stalemate and heated discussions around the planning table, it makes sense to use a metric that combines both points of view. So instead of either margin or units per minute, it makes sense to use both and create a composite metric:

 

Margin (cash per unit) x Velocity (units per minute) = Cash per Minute

 

Not only will this cash or profit-per-minute metric align the sales and marketing and production groups, the finance folks will be thrilled too because this profit-per-time metric aligns perfectly with return on assets (ROA). Although reported as a percentage, ROA is basically the amount of profit generated by the company in the course of the fiscal year divided by the total value of the corporate assets. It is thus also a profit-per-time metric. So the use of a composite metric, such as profit-per-minute, aligns all departments, making the use of a BI application much more responsive in arriving at an agreed-upon sales and operating plan.

 

Apart from the benefit of aligning the different departments with an appropriate metric, it is extremely important to emphasize that the metric should align with the financial goals of the organization. There is no point in putting BI in the hands of business users if it used with a metric that doesn’t match the critical ROA goal of the CEO, CFO and shareholders. Pervasive BI will only be valuable if it uses a metric that matches the objectives of any CPM initiative. It goes without saying that whichever BI application is used, it must be capable of creating that metric.

 

Pervasive BI for the Business User

 

Assuming BI is used to create a metric that can yield the benefits possible with CPM, the next requirement is to make BI accessible to the business user. If employees such as product managers, financial analysts and pricing managers can easily use the application, adoption will be more widespread and responsiveness to changing market conditions or problems can be much more rapid. Furthermore, while executives may not necessarily want to delve into the details of specific situations, making a BI application easy to use without extensive training can further add to the ability of the company to respond quickly and make decisions and changes that will improve profitability.

 

Dashboards - A High-Level View for Executives and Managers

 

Dashboards, summary information presented in charts or tables, have become quite common in various applications, including CPM. They provide a powerful way for an executive or manager to have a constant high-level view of key areas within the company. For example, a VP of marketing or sales could track the top ten products or customers. The VP of manufacturing could view the performance of individual plants or production lines. An underperforming business unit, plant or product could be easily spotted by the executive or by a manager and investigation into the causes initiated right away.

 

 

There are two keys to making dashboard usage pervasive within the organization. First, the metrics used to measure performance must align the various departments. It’s no use if sales and marketing are using margin to measure the “best” products and production is using the number of units per minute or hour. As mentioned previously, there will be endless debates about which product is “better,” extending the planning process significantly and losing the ability to respond quickly. Secondly, there needs to be the ability to drill down into the details presented in a high-level report to determine what the causes are for a high- or low-performing product group, market, plant, etc. The ability to easily change the way data is viewed is essential if use of BI is to become pervasive among business users.

 

Ease of Use, Flexibility - Essential for the Business User

 

For planning (S&OP) and response to perceived performance problems, the business user needs to be able to quickly and easily delve into details from a high-level view. Consider the example in Figure 3.

 

 

This table shows the performance of five product groups for a chemical manufacturer. This table can easily be generated by the business user, including the selection of columns shown and their order. The Preparations product group seems to be performing quite poorly. By simply clicking on Preparations in the left-hand column, the user is taken to the table in Figure 4 which shows performance of the individual products within the Preparations product group.

 

 

Two of the grey products are seen to be particularly poor performers and aredragging down the performance of the Preparations product group. This data can also be viewed graphically as the business user can easily switch to a chart of choice - for example, a classic bar chart (but based on ranking by the collaborative metric profit-per-minute) or a unique profit topographical map, which generates contour lines of equal profit per minute and ROA.  

  Such graphics often make it much easier to spot high and low performing products, customers, plant, markets etc. when a company has hundreds or thousands of products or customers and several different manufacturing facilities. For BI to be pervasive, business users need to be able to create and modify such graphics themselves.

 

  “What-If” Modeling - The Killer App for Pervasive BI

 

Since BI is fundamentally about increasing profitability, it will become pervasive when business users have not only the ease-of-use described above, but also the ability to model changes that can potentially improve profitability. Sales and marketing managers will want to be able to see the effect of a change in volume for an individual product, a change in the mix of products, a price increase or a price decrease and an assumed concomitant increase in demand. The production team will want to know where best to target productivity improvement initiatives. Finance executives and managers may want to model decreases in various cost elements. Figure 7 shows such modeling capability for the Preparations example discussed earlier:

 

  The business user can easily investigate changing product mix by making less of a low-performing product and more of a more profitable one, as shown below. Favorable changes can then be saved into a new S&OP, one that will increase profits.

 

  BI is becoming more pervasive within organizations as applications become easier to use for business uses, including executives, and employ metrics that put all departments on the same page. BI is fulfilling its potential by proactively contributing to planning and decision-making so that corporate financial performance is optimized.

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