Fueled by a surging stock market, M&A activity in 2006 hit a record $4 trillion, altering the competitive landscape at an accelerating pace. Meanwhile, as regulatory mandates continue to evolve, businesses across the globe are facing new pressures to improve financial transparency.Consequently, today's corporate managers can no longer afford to operate in the dark. Having a complete, up-to-date picture of corporate performance integrated with the ability to simultaneously drive future performance is no longer a luxury.
The challenge is that financial reporting, planning and analysis have typically been treated as siloed tasks, relying on separate, often standalone systems. At the end of each reporting period, financial consolidation systems have the truth about actual performance and are used to generated the reports for submission to regulators and stockholders, while business intelligence (BI) tools are used for management to dissect performance beyond just finance. In recent years, both classes of tools have converged, with the result that financial reporting tools have added valuable analytic capabilities and vice versa.
Yet, the convergence of corporate financial reporting and BI left several missing pieces. Although linking both functions yielded valuable new insights as byproducts of the financial reporting process, the early result was a static snapshot of past performance up to the present, at best.
To navigate today's rapidly changing markets, where the rules of competition can change without notice, financial players and line managers require dynamic, closed-loop solutions enabling them to combine insights on current performance, drill down to past performance, test-drive new strategies and track performance against goals, using terminology, KPIs and tools that are familiar to them and, most importantly, set forward-looking targets and forecasts based on all this readily available information. These solutions must be capable of fully supporting regulatory compliance initiatives.
An emerging generation of performance management practices and solutions are picking up where traditional BI and financial reporting tools left off. Providing dynamic approaches that help companies understand historical performance, these solutions work against a single source of the truth to provide the degree of transparency and self-corrective capabilities that enterprises require to set forward-looking targets and forecasts that not only navigate but help them drive success in today's fast-moving marketplaces.
Why is Performance Management Confused with BI?
With its roots in financial reporting and analysis, it's not surprising that the terms "performance management" and "BI" have often been used interchangeably. Because both BI and performance management systems can analyze historical data through the present, many believe that performance management systems are simply BI on steroids. In actuality, BI tools cover only a fraction of the capabilities required for robust, proactive performance management.
Why is this important? In most cases, companies that implement BI tools to analyze their performance will eventually discover they have only acquired a partial solution.
BI technologies emerged over the past decade to provide new tools for gaining insights on all aspects of corporate operations and strategy. Supplementing transaction systems that answered questions such as "how" a process or business activity is performing, BI systems offered the ability to not only aggregate and transform data, but also provide a variety of reporting and analytic tools that could answer the question "why."
In recent years, financial reporting systems and BI tools have converged, extending analytics to end-of-period reporting and budgeting, creating the impression that BI systems can now be used to manage performance. However, BI is only about monitoring and observing, not implementing. Designed to summarize or analyze data, BI tools were never intended to support execution of decisions that might be made as a result of analyzing past performance trends. There are no closed-loop feedback or feed-forward mechanisms for shaping, simulating, applying and tracking execution of revised strategies or against revised goals. Instead, actions must be informally communicated outside the tool via emails, memos, PowerPoint presentations and/or spreadsheets. All improvements or changes must be conducted offline.
Nonetheless, BI tools have made valuable contributions to making hidden data and trends more accessible. But by their nature they are largely limited to observing current and past history, under market conditions that may - or may not - reflect current conditions. For instance, should two of your key rivals suddenly announce a definitive merger agreement, much of the analysis from the BI system would suddenly become outdated.
Too often, BI analysis can be interpreted out of context. When viewed without reference to planning assumptions, the results can be deceptive. While a BI dashboard might show a 30 percent sales increase over the previous year, those results might not look so impressive if targets were set at 50 percent.
Finally, BI technologies are not performance solutions. They consist of horizontal toolsets designed to aggregate, transform, analyze and report data that may or may not be performance-related.
At the end of the day, BI capabilities are becoming commoditized. No longer the sole domain of toolsets or frameworks, analytic and reporting capabilities are increasingly being incorporated into enterprise solutions, ranging from enterprise resource planning (ERP) and customer relationship management (CRM) to supply chain optimization, performance management and others. Consequently, BI as a product category is likely to disappear.
The Fruition of Performance Management
Until recently, Performance Management was largely an afterthought in the enterprise software market. Although processes such as financial consolidation, budgeting, forecasting and reporting are by necessity core for any large company, the technology has been fragmented across an array of spreadsheets and homegrown legacy applications.
The dilemma is, if a manager wants to see financial results, he or she needs to see exactly what has been reported externally. And if a manager wants to drill down on the actuals, the data must ultimately reconcile with what's been made public. And when a manager looks at a pro forma, he or she wants to see exactly what the company's performance would have been in the chosen scenario or against the original plans or the latest reforecast.
Given the fragmentation of tools and traditional reliance on manual, often ad hoc processes, getting a consistent picture for reporting and planning has been easier said than done.
Today's performance management solutions are evolving well beyond BI and specialized financial consolidation and reporting systems. In place of restricting analysis to past performance, performance management solutions have advanced beyond BI's limitations to offer a complete solution that analyzes the past, dissects the present and provides planning tools for targeting the future course. In place of BI's read-only analysis, performance management makes intelligence actionable by supporting read and write capabilities. With the analytic input, you move on to simulating, modeling and actually changing future plans by setting new targets plans and forecasts. In effect, it provides the closed-loop planning and analysis capability long missing from BI. These capabilities can leverage internal and external data, providing the ability to benchmark with external organizations as well.
For instance, in place of data warehouses that can provide multiple, often localized views of the current performance and historic trends, performance management relies on a single source of the truth that spans from past to present and has the latest forecasts and actions plans for the future. All performance data is reconciled using an integrated data model, enabling the entire organization to work from a common baseline. All processes, from audited financial reporting to planning, analysis and forecasting, rest on that body of common data.
From a single application, performance management provides both read and write access to all detailed financial and nonfinancial performance data, a single place to report, enter and analyze data, and the ability to quickly update and test key business assumptions. Using the power of BI, performance management applications provide the familiar dashboards, KPI visualizations and reports - but with the ability to seamlessly go from analysis to action.
While the impetus for an integrated, enterprise-level approach to performance management stemmed from the need for companies to comply with regulations such as Sarbanes-Oxley or Basel II, the ultimate payoff will come from the ability for organizations to see the big picture and transform performance management into a truly collaborative process.
The results could transform not only the way a company reports data but also the way that it can drive and optimize tactical and strategic options going forward. Planners can analyze everything from changes to operating targets to prospective acquisitions or spinoffs. Freed from the legwork of compiling data and poring over disparate spreadsheets, corporate planners can spend their time analyzing strategy rather than collecting or validating data. They can conduct their test drives with the assurance that they are working from the "golden copy" of data.
With direct access to actuals and detailed operating data, companies can more rapidly update business assumptions, change plans and respond to external changes to the competitive playing field. These changes are then reflected in real time across all dimensions, input schedules, reports, analysis views and dashboards to every user across the organization without the need to batch load new data.
More importantly, next-generation systems are expanding to new audiences across the enterprise, with far broader coverage of data. By providing a common front end for planning, reporting and analysis, users are not forced to learn different applications for analyzing and entering data. By supporting the ability for users to drill down from high-level target values to operational details, performance management can be made real and more meaningful to users outside corporate finance departments. Line-of-business managers can now visualize their contributions to overall performance and understand how changes in strategies or goals impact their activities.
New technologies on the horizon promise to further expand the reach of performance management. For instance, incorporating external feeds, such as data from EDGAR Online, businesses can now effectively benchmark their performance against similar public companies alongside their own past and current performance. Relying on emerging Web standards, such as XBRL, the standard for reporting languages; and Web services standards such as SOAP, WSDL, UDDI and BPEL, performance management processes can be exposed to operational applications and vice versa.
Not Your Father's Performance Management
Today's emerging performance management solutions are a far cry from the BI tools and financial consolidation systems from which they were rooted. While increased regulatory burdens may have driven the need for a new generation of performance management solutions, the benefits extend well beyond compliance.
With a clearer window on actual performance, companies are in a better position to understand how well they have executed compared to plan. With enhanced capabilities to plan and test-drive different course corrective measures, business analysts gain a better understanding of the ramifications of changing policies or goals. Driven by a single source of the truth, accessed from a common front end and offering new drill-down capabilities, use of performance management can broaden beyond a select group of power users in corporate finance or strategic planning. With the new generation of performance management solutions, business planning can finally become a truly collaborative process.
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