Performance management has achieved significant traction and success in the core areas of budgeting, consolidation, reporting and dashboards. However, these core capabilities alone don't address the full range of potential business performance management (BPM) benefits. While companies now have consistent financial data that leads to a single version of the truth and a streamlined budgeting and reporting process, are they really able to make better decisions? They can make decisions based on relatively clean data, but is it the best data set? Are decision-makers looking at all the key elements that matter the most? Are they getting the different perspectives they need to put performance in the right context? Probably not, and that's where I see the potential for the next round of BPM adoption.
Three areas in particular should help companies make the right decisions: predictive analytics, profitability analysis and external benchmarking. Each of these can provide a new perspective on the company's performance that may lead to better decisions.
This capability has been around for a while, but recently there is increased interest. For a few years, predictive analytics was either marketing hype with little substance or complex mathematical models that required sophisticated users and lacked a clear pathway back to improved business performance. That has started to change. Some vendors are using terms such as enhanced forecasting to better connect with business users leery of the complex math behind predictive analytics. Some products allow the entry of English language questions such as, "Which factors can most impact my revenues going forward?" The goal of all of this is to forecast and impact future results with a greater degree of accuracy. To accomplish this, a product needs to analyze root causes, extrapolate trends and incorporate the impact of external factors such as seasonality and economic conditions. As with any hot, new capability, the challenge is separating truth from fiction. Marketing aside, which products really have the most complete predictive feature set? If the vendor of the best predictive analytics capabilities is not also the provider of your core BPM functionality, there is the added complexity of data and application integration.
As companies look to maximize the return on their investments, they need to identify their most profitable businesses, products and customers. Clearly, they want to put their limited dollars and resources on the projects with the greatest potential returns. If they need to scale back, they want to drop the underperforming components of the business. To make this type of decision, they need to collect all of the associated revenues and costs for each product, customer or business being analyzed. BPM on its own can help with this analysis, but there is a missing piece. To truly understand the full cost of all of the activities tied to a customer or product, you need to take an activity-based costing (ABC) approach. ABC is a significant undertaking for a company, but it is made easier by using a product with built-in ABC capabilities. Fortunately, today many of the leading BPM vendors have an ABC module (usually through acquisition, which implies less-than-stellar integration) or have partnered with an ABC provider. As the vendors have modified the message from a pure focus on ABC (thought of as a tedious, labor-intensive process to collect the detailed costing data) to one of maximizing profitability, business interest has picked up.
The most typical performance analysis that companies do in their BPM systems is variance analysis: comparing actual results to the budget. While this is very useful to see how expenses, revenues and other items stacked up against the original plan, it does not really tell the company how it is performing compared to the world at large. For example, if the budget had targeted a 12 percent margin and the company achieved a 13 percent margin, should everyone be patting themselves on the back? Yes, unless everyone else in their industry is achieving 15 percent margins or better. That's where external benchmarking comes in. Companies really need to measure their performance against two targets for their key measures: budget and industry average. External benchmarking has been slow to take off because while everyone agrees it is a good idea, it is difficult to accomplish. You need access to industry data that is both readily available and consistent in definition with your data, and you need a way to map it into your BPM system. Very few vendors so far have lined up the appropriate data providers and means to access and load the data into their BPM systems. If the few do see increased business because of it, I'm sure others will follow suit.
What do you think is most important for true BPM and better decision-making? Is it one of the areas discussed in this column or something else? Let your voice be heard. Cast your vote and get to see what your peers think by following this case-sensitive link: www.bpmpartners.com/BPMSurveyCentral.shtml. The results will be published in a future issue of DM Review.
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