Cokins Asheville NC March 28 2014
Content
Analytics-Based Enterprise
Performance Management –
Making it Work
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com
919 720 2718
[email protected]
Catawba Valley Accounting Conference
Asheville, NC
March 28, 2014
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About Gary Cokins
Founder, Analytics-Based Performance Management LLC
B.S. Industrial Engineering & Operations Research; Cornell
University, 1971
M.B.A. Finance & Accounting; Northwestern University,
Kellogg Graduate School of Management, 1974
Previous Associations:
- FMC Corporation
- Consultant with: Deloitte,
KPMG Peat Marwick,
Electronic Data Systems [EDS, now HP]
- SAS
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Who will benefit from this presentation?
Managers who have previously struggled at
promoting FP&A, enterprise performance
management (EPM) and integrating business
analytics (BA) into their decision support systems.
Managers who intend to “champion” any or all EPM
and BA improvement techniques and need a
compelling call to action.
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Key questions
What? So what? Then what?
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AGENDA
What is Enterprise Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
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Drowning in data but starving for information.
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Confusion and Lack of Consensus about EPM
Is it human resources PM?
Is it scorecards, dashboards, KPIs and measures?
Is it alignment, such as strategic or resource allocation?
Is it process, productivity and quality improvement?
Or … is it all of the above? And even more?
The good news is this …..
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What is Analytics-based Performance Management?
Analytics-based Performance Management
is the integration of multiple methodologies
with each embedded with business analytics,
such as segmentation analysis, and
especially predictive analytics … to achieve
the strategy and to make better decisions.
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AGENDA
What is Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
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Why is business analytics needed?
How does an organization gain a competitive edge?
-- by first-to-market (via innovation)?
-- by customer loyalty?
-- by low-cost and low-price provider?
-- Other?
But how sustainable are these long-term?
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Problem: Generic strategies are vulnerable !
-- cost leadership strategy – other firms lower their costs.
-- differentiation strategy – imitation by competitors; changes in
customer tastes.
-- focus strategy – broad-market cost leaders or micro-segmenters invade
and erode your customers’ loyalty.
The best defense is agility with quicker and
smarter decision making using statistics,
analytics, and operations research.
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Confusion and lack of consensus about BA
Is business analytics (BA) a data warehouse?
Is it data mining with query and reporting?
Is it business intelligence (BI) with enhancements?
Is it the technology of data governance, management and
quality?
Is it probabilities and statistics, like regression and
correlation analysis?
Is it forecasting? Is it optimization equations?
Is it to solve customer or stakeholder issues?
Or … is it all of the above? And even more?
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Work backwards with the end in mind.
Regardless of how “analytics” should be defined, there
should be no argument as to its purpose:
Better decisions. Better Actions.
Analytics’ goal should be to gain insights and solve
problems, to make better and quicker decisions with
more accurate and fact-based data, and to take actions.
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Improving Performance by Unifying EPM and BA
-- BI Reporting consumes stored information.
-- Analytics produces new information.
-- Enterprise Performance Management deploys Analytics.
It is not about monitoring the dials on a dashboard,
but rather moving the dials.
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Business Analytics – insights and actions
Queries simply answer questions. Business analytics
creates questions.
Further, analytics then stimulate more questions, more
complex questions, and more interesting questions.
Most importantly, business analytics also has the power to
answer the questions.
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Which X is most likely to Y?
Retail Merchandising
Which product in a retail store chain can generate the most profit
without carrying excess inventory but also not having periods of
stock outs?
Customer Profitability
Which customer will generate the most profit lift from our least effort?
Employee Retention
Which of our employees will be the next most likely to resign and
take a job with another company?
These are the types of questions asked every day.
Business analytics fills in the X and Y.
More intelligent and systematically tested decisions.
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Examples of Analytics
-- Hollywood celebrities and the film industry
Will Smith: Independence Day; Men in Black; I, Robot; I am Legend; Hancock
-- Sports teams
-- Crime prevention
-- music score analysis
But what about business analytics in
mainstream businesses?
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There are many Business Analytics Domains
Retail sales and merchandising analytics [markdown and assortment planning]
Financial services analytics [risk and loan credit scoring]
Pharmaceutical analytics [drug development and clinical trials]
Marketing analytics [CRM, segmentation, and churn analysis]
Text analytics [sentiment analysis]
Financial control analytics [customer payment collections]
Fraud analytics [insurance and medical claims]
Pricing analytics [price sensitivity analysis]
Telecommunications analytics [customer behavior]
Supply chain and transportation analytics [route optimization]
Manufacturing analytics [warranty claims]
Hospital analytics [patient scheduling]
Human resources analytics [workforce planning]
Banking analytics [anti-money laundering]
Police analytics [crime pattern analytics]
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Reactive
(Descriptive)
STANDARD REPORTS
1
AD HOC REPORTS
2
QUERY DRILLDOWN (OR OLAP)
3
ALERTS
4
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Reactive
(Descriptive)
STANDARD REPORTS
1
AD HOC REPORTS
2
QUERY DRILLDOWN (OR OLAP)
3
ALERTS
4
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Proactive
(Inferential)
STATISTICAL
ANALYSIS
5
FORECASTING
6
PREDICTIVE
MODELING
7
OPTIMIZATION
8
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A hot topic
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AGENDA
What is Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
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What has caused interest in EPM?
1 Executives frustrations with strategy failure.
2 Increased accountability.
3 More rapid decision making.
4 Mistrust of the managerial accounting system for transparency.
5 Poor customer value management
6 Contentious budgeting – poor resource capacity planning.
7 Dysfunctional supply chain management.
8 Unfulfilled ROI promises from IT systems – lack of integration.
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What has caused interest in EPM?
1 Executives frustrations with strategy failure.
2 Increased accountability.
3 More rapid decision making.
4 Mistrust of the managerial accounting system for transparency.
5 Poor customer value management
6 Contentious budgeting – poor resource capacity planning.
7 Dysfunctional supply chain management.
8 Unfulfilled ROI promises from IT systems – lack of integration.
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What has Caused Interest in EPM?
1) Failure by executives to execute their well-formulated
strategy.
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When Dilbert Jokes About It, It is Mainstream
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Executives are Most Concerned About Executing Strategy
"Using a 1-5 scale, please rate the level of interest / concern
you have in the following business issues at present.”
Executing the strategy
4.0
Regulatory, compliance, and risk management
3.8
Market trends
3.7
Customer service
3.7
Forecasting & reporting effectiveness
3.7
Growing the top line
3.7
IT capabilities
3.5
1
2
3
4
5
Source: 2006 Monitor Analysis. Survey of 354 executives; 49% of respondents are C-level
and 56% are from companies with revenue greater than $1 billion
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Vision and Mission Statements
Vision
& Mission
Strategy
Mapping
A Vision statement answers
“where do we want to go?
Balanced
Scorecard
Strategy maps and scorecards answer,
“How will we get there?”
The strategy map and scorecard are mechanical.
They help realize the vision and mission.
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Generic Strategy Map Architecture
Financial
Financial
Maximize Shareholder Value
Customer
Customer
Internal Process
Internal
Processes
Learning
Learning &
Innovation
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Vision
& Mission
Exceed shareholder
expectations
Financial
Customer
Diversify income
stream
Increase sales
volume
Diversify
customer base
Increase sales to
existing customers
Improve profit
margins
Test new
products
Internal
Process
Target profitable
market segments
develop new
products
Optimize internal
processes
Develop
employee skills
Integrate
systems
Attract new
customers
Learning
& Growth
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Vision
& Mission
Financial value
Exceed shareholder
expectations
Financial
Customer
Internal
Process
Diversify income
stream
creating
Increase sales
Improve profit
margins
volume
Diversify
customer base
Increase sales to
Customer
intimacy
existing customers
Test new
products
leads to
develop new
internal
Process
excellence Optimize
products
processes
Target profitable
market segments
Attract new
customers
Learning
& Growth
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stimulates
employee
skills
systems
A learning
environment
Develop
Integrate
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Scorecard Lessons Being Painfully Learned
Scorecard or Report Card?
KPIs or PIs?
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What is the difference between KPIs and PIs?
Strategy
Diagram
Measurements
KPIs
(strategic context)
Scorecard
Must have
targets
(inter-related
measures with
cause-and-effect
correlations)
Frequency of
reporting
- drill-down analysis
- alert messages
quarterly
monthly
weekly
Without
targets
daily
hourly
Project-based
KPIs
Process-based
KPIs
PIs
Dashboard
$
$
real-time
(operational)
(measures in isolation)
Budget &
Resource
Planning
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With
targets
Without
targets
- Trends
- Upper / lower
thresholds
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What has Caused Interest in EPM?
4) Mistrust of the managerial accounting system and its
flawed cost allocations and misleading cost reporting of
outputs, products, standard service-lines, channels,
customers and outcomes.
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A simple explanation of ABM …
that you can explain to your
spouse (or boss) tonight.
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The General Ledger View is
Structurally Deficient for Decision Analysis.
Chart-of-Accounts View
Insurance Claims Processing Department
Actual
Plan
Favorable/
(unfavorable)
$621,400
$600,000
$(21,400)
161,200
150,000
(11,200)
Travel expense
58,000
60,000
2,000
Supplies
43,900
40,000
(3,900)
Use and
occupancy
30,000
30,000
––
$914,500
$880,000
$(34,500)
Salaries
Equipment
Total
When managers get this kind of report, they are
either happy or sad, but they are rarely any smarter!
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Each Activity Has Its Own Cost Driver
To: ABC Data Base
From: General Ledger
Activity-Based View
Chart-of-Accounts View
Claims Processing Dept
Claims Processing Department
Actual
Plan
Favorable/
(unfavorable)
$621,400
$600,000
$(21,400)
161,200
150,000
(11,200)
Travel expense 58,000
60,000
2,000
Supplies
40,000
(3,900)
Salaries
Equipment
Use and
occupancy
Total
43,900
Key/scan claims
$ 31,500
Analyze claims
121,000
Suspend claims
32,500
Receive provider inquiries
Resolve member problems
83,400
Process batches
45,000
Determine eligibility
119,000
Make copies
145,500
Write correspondence
30,000
30,000
––
$914,500
$880,000
$(34,500)
101,500
Attend training
Total
77,100
158,000
Activity
cost
drivers
#of
#of
#of
#of
#of
#of
#of
#of
#of
#of
$914,500
$914,500
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Multiple-Stage Cost Flowing
Resources
Resources
Activities
Activities
Objects
Objects
Simple
ABM
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Expanded
ABM
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ABC/M Cost Assignment Network
Salary, Fringe
Resources
Benefits
Direct
Material
Phone,
Travel
Supplies
Depreciation
Rent,
Interest,
Tax
(general ledger view)
Work
Activities
People
Activities
Support
Activities
(verb-noun)
“cost-to-serve”
paths
(1) Demands On Work
Costs (2)
Final
Cost
Objects
“Costs Measure the Effects”
Equipment
Activities
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Products,
Services
Business
Sustaining
Suppliers
Customers
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ABC/M Cost Assignment Network
Salary, Fringe
Resources
Benefits
Phone,
Travel
Supplies
Depreciation
Rent,
Interest,
Tax
Direct costs
(general ledger view)
Direct
Material
Work
Activities
People
Activities
Support
Activities
(verb-noun)
“cost-to-serve”
paths
(1) Demands On Work
Costs (2)
Final
Cost
Objects
“Costs Measure the Effects”
Equipment
Activities
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Products,
Services
Business
Sustaining
Suppliers
Customers
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More important than a better costing method are its results.
$ 30 sales
- 28 expenses
= $ 2 profit
Net
Revenues
Minus
ABM costs =
profit
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Unrealized profit revealed by ABM
$ 2 profit
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Activity Costs “pile up” into outputs.
ABM provides insight for the product’s or service’s cost
drivers and driver quantities.
Work
Activities
each activity’s
driver quantity
x
unit activity
driver cost
(eg. # of registrations)
Price/Fee
(Revenue)
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Activity
Costs
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Processes: Six Sigma, Lean Management,
and Value Stream Mapping
Processes include activities that have high to
low value-adding content.
$
$
VA
Business
Processes
$
$
$
$
Supplier
(direct material)
NVA
$
$
Process A
Enterprise
ABM also provides unit costs of outputs for
cost visibility and benchmarking.
Key:
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Cost
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What has Caused Interest in ABPM?
5) Strategic – The shift from being product-centric to
customer centric. The emphasis will be more on
economics – measuring customer profitability and
customer lifetime value (for B2C).
Operational – The need for productivity improvements and
cost management.
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But what about the Other Below-the-line
“Calculated” Costs?
Products and standard service-lines are not the only
thing for which accountants should compute costs.
What about costs that have nothing to do with products
and standard service-lines?
The problem with traditional accounting’s gross margin
reporting is you don’t see the bottom half of the picture.
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Costs from Sales & Marketing are not Products
Customer
+
Channel
+
Product
Direct material,
Direct labor &
Equipment
Indirect expenses
Distribution
Sales, Marketing, General and admin (S,G&A)
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Why Do Customer-related Costs Matter?
The Perfect Storm
# 1- Customer retention versus acquisition costs.
# 2 – Sources of Competitive Advantage –
Commoditization leading to service-differentiation.
# 3 – From mass selling to one-to-one customer
relationships.
# 4 – The internet’s irreversible shift of power from
sellers to buyers.
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ABM Customer Profit & Loss Statement
CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)
Sales
$$$
Product-Related
Supplier-Related costs (TCO) $ xxx
Margin $
(Sales - Costs)
Margin
% of Sales
$ xxx
98%
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
50%
48%
46%
30%
Distribution-Related
Outbound Freight Type*
Order Type*
Channel Type*
xxx
xxx
xxx
xxx
xxx
xxx
28%
26%
24%
Customer-Related
Customer-Sustaining
Unit-Batch*
xxx
xxx
xxx
xxx
22%
10%
Business Sustaining
xxx
xxx
8%
xxx
8%
Direct Material
Brand Sustaining
Product Sustaining
Unit, Batch*
Operating Profit
Productrelated
costs
Channel &
Customerrelated
costs
* Activity Cost Driver Assignments use measurable quantity volume of Activity Output
(Other ActvityAssignments traced based on informed (subjective) %s)
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Migrating Customers to Higher Profitability
Very
Profitable
High
(Creamy)
Product Mix
Margin
Low
(Low Fat)
High
Low
Cost-to-Serve
Very
unprofitable
Types of Customers
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Rapid Prototyping with
Iterative Remodeling
Each iteration enhances the use of the ABC/M system.
ABC/M System
(repeatable, reliable, relevant)
ABC/M Models
#0
#1
0
1
2
3
#2
#3
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Balancing Levels of Accuracy with Effort
100%
Accuracy
of
Final Cost
Objects
A
B
World Class
ABC System Design
0%
Little
Modest
Great
Level of Data Collection Effort
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Customer Value Management
Who is more important to pursue with the scarce
resources of our marketing spend budget?
Our most profitable customers?
Or our most valuable customers?
What is the difference?
The “customer lifetime value” is intended to
answer this question.
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My “which-type how-much” Hypothesis
The spending budget for sales and marketing is critical …
but it should be treated as a preciously scarce resource to
be aimed at generating the highest long-term profits.
This means answering questions like:
Which type of customer is attractive to newly acquire,
retain, grow, or win back? And which types are not?
How much should we optimally spend attracting, retaining,
growing, or recovering each customer micro-segment?
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A Shift in the CFO’s Emphasis
The CFO must now help Sales and
Marketing … to better target customers.
Segmentation, predictability, churn, offers, deals,
risk and uncertainty must be understood in the
language of money.
Analysts must overcome “hunches and gut-feel
guesses by others, and prove which actions yield
the highest financial returns.
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GARY COKINS
Principal, Global
Business Advisory
Services, SAS
THOMAS P.
KLAMMER
Professor of
Accounting
(retired)
University of North
Texas
TERRANCE L.
POHLEN
Associate
Professor of
Logistics
University of North
Texas
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Chain Management
Involves Linkages
Supply ChainValue
Trading
Partner Relationships
Tier 2
Tier 1
suppliers suppliers
Tier 1
customers
Initial suppliers
1
2
Tier 2
customers
Tier 3+ to
consumers
1
2
n
1
1
n
1
n
2
2
1
n
n
1
2
n
1
2
3
n
3
1
n
Consumers / end-customers
Tier 3+ to
Initial
suppliers
n
1
n
1
n
Managed Process Links
Focal Company
Monitor Process Links
Members of the Focal Company’s Supply Chain
Not-Managed Process Links
Non-Member Process Links
Non-Members of the Focal Company’s Supply Chain
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, James D. Pugh, “Supply Chain Management: Implementation Issues and
Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 2.
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What has Caused Interest in EPM?
6) Contentious Budgeting – The budget is typically a fiscal
exercise by the accountants that is:
(1) disconnected from the executive team’s strategy, and
(2) not based on future driver volumes.
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Spreadsheet Budgeting – It is Incremental !!
a
1
2
3
4
5
6
7
8
b
c
Current Year Budget Year
Wages
$ 400,000.00 Formula = Column B * 1.05
Supplies $ 50,000.00
Rent
$ 20,000.00 Copy down
Computer $ 40,000.00
Travel
$ 30,000.00
Phone
$ 20,000.00
Total
$ 560,000.00
Sheet 1
Source: John Antos, The Value Creation Group
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Match the Budget Method to its Category
Demanddriven
Integrated
Budget
(Rolling
Financial
Forecasts)
Projectdriven
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(1) Non-Recurring Expenses // Strategic Initiatives
Measurement
Period;
1st Quarter
Strategic
Objective
Executive Team
Identify
Projects,
Initiatives,
or
Processes
KPI
Measure
X
Managers and
Employees
KPI Target
KPI Actual
comments /
explanation
their score
X
X
X
X
<----- period results ------->
Budgeting is typically disconnected from
the strategy. But this problem is solved if
management funds the managers’ projects.
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(2) Recurring Expenses // Future Volume & Mix
ABC/M
ABP
Past
Now
Future
Activity-Based Costing
Activity-Based Planning
- Historical & Descriptive
-
Predictive
- Starts with known:
-
Requires capacity analysis
spending
-
Starts with estimated outputs
driver measures
-
Applies ABC/M rates
-
Solves for Resource “expenses”
output quantities
- Calculates “costs”
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Operational Resource Capacity Planning
inputs
Resources
Process Costs
Output &
Outcome Costs
Customers and
Service-recipients
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Resource
expenses can
be calculated
with
“backwards
ABC/M”
Start Here.
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Predictive Accounting
ABC/M
ABP
Past
ABC/M
Known
resources
?
work
activities
?
cost
objects
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ABP
Now
Future
Provides consumption
rates
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Predictive Accounting
ABC/M
ABP
Past
ABC/M
resources
?
work
activities
?
cost
objects
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ABP
Now
Future
Estimated
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Accounting Treatments and Behavior of Capacity (expenses)
Predictive Accounting
Descriptive
Predictive
Past
Now
unused
Traceable to
products,
channels,
customers,
sustaining
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used
Future
sunk
unused
fixed
(unavoidable)
variable
(adjustable
capacity;
avoidable)
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(3) Risk Assessment Grid
… ERM is not just contingency planning
High
2
7
8
Severity of impact on
event occurrence and
achievement
of objectives
10
6
3
4
5
9
1
Budget
Low
Low
High
Do not budget
probability of an event occurring
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Match the Budget Method to its Category
Budget method
Recurring
Demanddriven
expenses
volume & mix
of drivers
production
and
ABP/B
Integrated
Budget
(rolling
financial
forecasts)
Projectdriven
Non-recurring
expenses
strategy
map and
risk grid
Strategic & risk
mitigation projects
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Linking Strategy and Risk to the Budget
Strategy Modeling
Strategy methods
(e.g., SWOT)
(by executives)
Define and adjust
strategy and risk, and
create strategy map
Strategic
objectives
Managerial
Accounting
(e.g., Activity-based
Costing)
knowledge
Identify and
manage strategic
initiatives
Driver consumption rates
KPI dashboard
feedback
Forecast drivers
(e.g. sales) ;
develop production
plan
Driver volumes
and mix
(2) capital budget
(3) strategy budget
Copyright 2012 www.garycokins.com
Traditional and
driver-based
budgeting (e.g. PBB)
e.g., hours,
Pounds,
# employees
Approve strategy
risk and capital
budget
= financial information (e.g. $)
(4) risk budget
Operational Modeling
(by employee teams)
priority projects and processes
Create balanced
scorecard
KPI
targets
Financial Modeling
(1) Operational
budget
Changes and
responses
Capacity
resource plan
Derived budget
(and rolling
financial forecasts)
Manage and
improve core
processes
Results and
outcomes
Revise
plan
No
OK
Acceptable?
Yes
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Continuous refreshing the rolling financial forecast
More frequent forecast intervals assure better accuracy.
100%
accuracy
…
0%
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Source data capture
(transactions /
bookkeeping)
ACCOUNTING
Tax
Accounting
Financial
Accounting
Managerial
Accounting
Cost Accounting
Non-financial data
capture
Cost Measurement
Financial Reporting
regulatory compliance
•[e.g., GAAP, IFRS]
•Costs of goods sold
•Inventory valuation
Cost Reporting &
Analysis
Decision Support/
Cost Planning
(feedback on performance)
• Spending vs. budget variance
analysis
• Profitability reporting
• Process analysis (e.g., lean,
benchmarking, COQ)
• Performance measures
• Learning; corrective actions
The Domain of Costing
History
Low value-add
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins
Copyright 2012 www.garycokins.com
published by the International Federation of Accountants, 2010
• Fully absorbed & incremental pricing
• Driver-based budgeting & rolling
financial forecasts
• What-if analysis
• Product, channel & customer
rationalization
• Outsourcing & make vs. buy analysis
Future
Modest value-add
High value-add
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International Federation of Accountants Report
Evaluating the Costing Journey:
A Costing Levels Continuum
Maturity Model
By Gary Cokins
Copyright 2012 www.garycokins.com
Most organizations are
typically at lower levels of
maturity in adopting
progressive managerial
accounting practices,
methods and systems.
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Costing Continuum / Levels of Maturity
(most companies are Level 4D and 1P)
(1) Descriptive Continuum
(2) Predictive Continuum
EXPENSE TRACKING, COST
REPORTING
and CONSUMPTION RATES
Improved
Treatment
of Indirect
Costs
DEMAND DRIVEN PLANNING
with CAPACITY SENSITIVITY
Customer
Demand
Sensitive
Unused
Capacity
Aware
8D
Resource
Consumption
Accounting
Level #
7D
Improved
Output
Information/
Approximate
Push
Accuracy
ActivityBased
costing
(ABC);
6D
Output Visibility
Blind
1D
Process
Visibility
2D
process and
bookkeeping Lean accounting
3D
4D
Direct costs
without (3) and with
(4) support costs
to output groups
5D
Standard
costing to
individual
outputs;
Product
costs
Unused
capacity
costs
Level 6D with (estimate
Channel and d)
customer
profitability
Reporting;
Cost-to-serve
Pull
Activitybased
Resource
Planning
%
G/L acct.
Incrementa
l
1P
Project acct;
Job order
costing
2P
(ABRP);
Forecast
driver
quantities
X unit
consumptio
n rates;
Driver
based
budgeting
Timedriven
ABC
3P
(TDABC);
Forecast
driver
quantities
X time
consumption
rates;
4P
Simulation
5P
Ultimate in
consumptio
n rates;
(RCA);
Level 2P
with
proportional
costing at
direct and
support
depts.
Direct cost
focus;
Repetitive
work
conditions
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins published by the International Federation of Accountants, 2012
84
AGENDA
What is Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
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How Does It All Fit Together?
Strategy,
Mission
Customer
Satisfaction
ERP, etc.
CRM
Scorecards
Organization
Resources
Supplier
Inputs
ROI
(capacity)
$
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Shareholders
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In Summary … first, we energize
with good managerial accounting.
Strategy,
Mission
Customer
Satisfaction
ERP, etc.
CRM
Scorecards
Organization
Resources
(capacity)
Supplier
Inputs
ROI
$
Shareholders
Managerial
accounting
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EPM is Circulatory and Simultaneous
Shareholder Wealth Creation is not a goal. It is a result!
Strategy,
Mission
needs
ERP, etc.
Targeting
Risk Mgmt.,
Strategy map,
KPIs
Scorecards
Customer
Satisfaction
Order fulfillment
CRM
KPI
Scores
Feedback
Copyright 2012 www.garycokins.com
Organization
Resources
(capacity)
Supplier
Inputs
ROI
$
Shareholders
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EPM is Circulatory and Simultaneous
Shareholder Wealth Creation is not a goal. It is a result!
Strategy,
Mission
needs
Customer
Satisfaction
ERP, etc.
Targeting
Risk Mgmt.,
Strategy map,
KPIs
Order fulfillment
CRM
Supplier
Inputs
wasted resources
Scorecards
KPI
Scores
Feedback
Organization
Resources
Shareholders
(capacity)
Less productivity reduces Shareholder Wealth
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ROI
$
leakage
(waste)
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The Intelligence Hierarchy
Optimization
Power of
Information
$ROI
Predictive
Modeling
Descriptive
Modeling
(with analytics)
Raw
Data
Two types of
software are
like a brain’s
two halves.
Ad hoc
Reports &
Standard OLAP
Reports
Data
Information
Transactional systems (e.g., ERP)
“the reptilian brain stem”
(breathing, blinking, digesting)
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Knowledge
Intelligence
Business Analytics and Performance Management
“the cerebral cortex”
(thinking and decision making)
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The Buy-in to Performance Management
Why has the adoption rate for
analytics-based EPM’s
methodologies been so slow?
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Why is the adoption rate so slow?
What are the barrier categories?
(1) Technical barriers include IT related issues.
(2) Perception barriers are excess complexity
and affordability.
(3) Design deficiencies include poor
measurements or their calculations and weak
models and assumptions.
(4) Organizational behavior barriers involve
resistance to change, culture, and leadership.
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The Complete Vision of Performance Management
Make the RPM of the EPM and BA gears spin …
… better, faster, cheaper … safer and smarter
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From Theory to Practice
Your success depends
on how well and how fast
the right information and
intelligence gets to the
right people.
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Thank You
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com
919 720 2718
[email protected]
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Performance Management –
Making it Work
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com
919 720 2718
[email protected]
Catawba Valley Accounting Conference
Asheville, NC
March 28, 2014
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Analytics-Based Performance Management LLC
1
About Gary Cokins
Founder, Analytics-Based Performance Management LLC
B.S. Industrial Engineering & Operations Research; Cornell
University, 1971
M.B.A. Finance & Accounting; Northwestern University,
Kellogg Graduate School of Management, 1974
Previous Associations:
- FMC Corporation
- Consultant with: Deloitte,
KPMG Peat Marwick,
Electronic Data Systems [EDS, now HP]
- SAS
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Analytics-Based Performance Management LLC
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Who will benefit from this presentation?
Managers who have previously struggled at
promoting FP&A, enterprise performance
management (EPM) and integrating business
analytics (BA) into their decision support systems.
Managers who intend to “champion” any or all EPM
and BA improvement techniques and need a
compelling call to action.
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Key questions
What? So what? Then what?
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AGENDA
What is Enterprise Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
Copyright 2012 www.garycokins.com
Analytics-Based Performance Management LLC
5
Drowning in data but starving for information.
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Confusion and Lack of Consensus about EPM
Is it human resources PM?
Is it scorecards, dashboards, KPIs and measures?
Is it alignment, such as strategic or resource allocation?
Is it process, productivity and quality improvement?
Or … is it all of the above? And even more?
The good news is this …..
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What is Analytics-based Performance Management?
Analytics-based Performance Management
is the integration of multiple methodologies
with each embedded with business analytics,
such as segmentation analysis, and
especially predictive analytics … to achieve
the strategy and to make better decisions.
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AGENDA
What is Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
Copyright 2012 www.garycokins.com
Analytics-Based Performance Management LLC
9
Why is business analytics needed?
How does an organization gain a competitive edge?
-- by first-to-market (via innovation)?
-- by customer loyalty?
-- by low-cost and low-price provider?
-- Other?
But how sustainable are these long-term?
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Problem: Generic strategies are vulnerable !
-- cost leadership strategy – other firms lower their costs.
-- differentiation strategy – imitation by competitors; changes in
customer tastes.
-- focus strategy – broad-market cost leaders or micro-segmenters invade
and erode your customers’ loyalty.
The best defense is agility with quicker and
smarter decision making using statistics,
analytics, and operations research.
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11
Confusion and lack of consensus about BA
Is business analytics (BA) a data warehouse?
Is it data mining with query and reporting?
Is it business intelligence (BI) with enhancements?
Is it the technology of data governance, management and
quality?
Is it probabilities and statistics, like regression and
correlation analysis?
Is it forecasting? Is it optimization equations?
Is it to solve customer or stakeholder issues?
Or … is it all of the above? And even more?
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12
Work backwards with the end in mind.
Regardless of how “analytics” should be defined, there
should be no argument as to its purpose:
Better decisions. Better Actions.
Analytics’ goal should be to gain insights and solve
problems, to make better and quicker decisions with
more accurate and fact-based data, and to take actions.
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Improving Performance by Unifying EPM and BA
-- BI Reporting consumes stored information.
-- Analytics produces new information.
-- Enterprise Performance Management deploys Analytics.
It is not about monitoring the dials on a dashboard,
but rather moving the dials.
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Business Analytics – insights and actions
Queries simply answer questions. Business analytics
creates questions.
Further, analytics then stimulate more questions, more
complex questions, and more interesting questions.
Most importantly, business analytics also has the power to
answer the questions.
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15
Which X is most likely to Y?
Retail Merchandising
Which product in a retail store chain can generate the most profit
without carrying excess inventory but also not having periods of
stock outs?
Customer Profitability
Which customer will generate the most profit lift from our least effort?
Employee Retention
Which of our employees will be the next most likely to resign and
take a job with another company?
These are the types of questions asked every day.
Business analytics fills in the X and Y.
More intelligent and systematically tested decisions.
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Examples of Analytics
-- Hollywood celebrities and the film industry
Will Smith: Independence Day; Men in Black; I, Robot; I am Legend; Hancock
-- Sports teams
-- Crime prevention
-- music score analysis
But what about business analytics in
mainstream businesses?
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There are many Business Analytics Domains
Retail sales and merchandising analytics [markdown and assortment planning]
Financial services analytics [risk and loan credit scoring]
Pharmaceutical analytics [drug development and clinical trials]
Marketing analytics [CRM, segmentation, and churn analysis]
Text analytics [sentiment analysis]
Financial control analytics [customer payment collections]
Fraud analytics [insurance and medical claims]
Pricing analytics [price sensitivity analysis]
Telecommunications analytics [customer behavior]
Supply chain and transportation analytics [route optimization]
Manufacturing analytics [warranty claims]
Hospital analytics [patient scheduling]
Human resources analytics [workforce planning]
Banking analytics [anti-money laundering]
Police analytics [crime pattern analytics]
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Reactive
(Descriptive)
STANDARD REPORTS
1
AD HOC REPORTS
2
QUERY DRILLDOWN (OR OLAP)
3
ALERTS
4
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Reactive
(Descriptive)
STANDARD REPORTS
1
AD HOC REPORTS
2
QUERY DRILLDOWN (OR OLAP)
3
ALERTS
4
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Proactive
(Inferential)
STATISTICAL
ANALYSIS
5
FORECASTING
6
PREDICTIVE
MODELING
7
OPTIMIZATION
8
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A hot topic
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AGENDA
What is Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
Copyright 2012 www.garycokins.com
Analytics-Based Performance Management LLC
22
What has caused interest in EPM?
1 Executives frustrations with strategy failure.
2 Increased accountability.
3 More rapid decision making.
4 Mistrust of the managerial accounting system for transparency.
5 Poor customer value management
6 Contentious budgeting – poor resource capacity planning.
7 Dysfunctional supply chain management.
8 Unfulfilled ROI promises from IT systems – lack of integration.
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What has caused interest in EPM?
1 Executives frustrations with strategy failure.
2 Increased accountability.
3 More rapid decision making.
4 Mistrust of the managerial accounting system for transparency.
5 Poor customer value management
6 Contentious budgeting – poor resource capacity planning.
7 Dysfunctional supply chain management.
8 Unfulfilled ROI promises from IT systems – lack of integration.
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24
What has Caused Interest in EPM?
1) Failure by executives to execute their well-formulated
strategy.
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When Dilbert Jokes About It, It is Mainstream
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Executives are Most Concerned About Executing Strategy
"Using a 1-5 scale, please rate the level of interest / concern
you have in the following business issues at present.”
Executing the strategy
4.0
Regulatory, compliance, and risk management
3.8
Market trends
3.7
Customer service
3.7
Forecasting & reporting effectiveness
3.7
Growing the top line
3.7
IT capabilities
3.5
1
2
3
4
5
Source: 2006 Monitor Analysis. Survey of 354 executives; 49% of respondents are C-level
and 56% are from companies with revenue greater than $1 billion
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27
Vision and Mission Statements
Vision
& Mission
Strategy
Mapping
A Vision statement answers
“where do we want to go?
Balanced
Scorecard
Strategy maps and scorecards answer,
“How will we get there?”
The strategy map and scorecard are mechanical.
They help realize the vision and mission.
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Generic Strategy Map Architecture
Financial
Financial
Maximize Shareholder Value
Customer
Customer
Internal Process
Internal
Processes
Learning
Learning &
Innovation
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Vision
& Mission
Exceed shareholder
expectations
Financial
Customer
Diversify income
stream
Increase sales
volume
Diversify
customer base
Increase sales to
existing customers
Improve profit
margins
Test new
products
Internal
Process
Target profitable
market segments
develop new
products
Optimize internal
processes
Develop
employee skills
Integrate
systems
Attract new
customers
Learning
& Growth
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Vision
& Mission
Financial value
Exceed shareholder
expectations
Financial
Customer
Internal
Process
Diversify income
stream
creating
Increase sales
Improve profit
margins
volume
Diversify
customer base
Increase sales to
Customer
intimacy
existing customers
Test new
products
leads to
develop new
internal
Process
excellence Optimize
products
processes
Target profitable
market segments
Attract new
customers
Learning
& Growth
Copyright 2012 www.garycokins.com
stimulates
employee
skills
systems
A learning
environment
Develop
Integrate
Analytics-Based Performance Management LLC
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Scorecard Lessons Being Painfully Learned
Scorecard or Report Card?
KPIs or PIs?
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Analytics-Based Performance Management LLC
32
What is the difference between KPIs and PIs?
Strategy
Diagram
Measurements
KPIs
(strategic context)
Scorecard
Must have
targets
(inter-related
measures with
cause-and-effect
correlations)
Frequency of
reporting
- drill-down analysis
- alert messages
quarterly
monthly
weekly
Without
targets
daily
hourly
Project-based
KPIs
Process-based
KPIs
PIs
Dashboard
$
$
real-time
(operational)
(measures in isolation)
Budget &
Resource
Planning
Copyright 2012 www.garycokins.com
With
targets
Without
targets
- Trends
- Upper / lower
thresholds
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What has Caused Interest in EPM?
4) Mistrust of the managerial accounting system and its
flawed cost allocations and misleading cost reporting of
outputs, products, standard service-lines, channels,
customers and outcomes.
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A simple explanation of ABM …
that you can explain to your
spouse (or boss) tonight.
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38
The General Ledger View is
Structurally Deficient for Decision Analysis.
Chart-of-Accounts View
Insurance Claims Processing Department
Actual
Plan
Favorable/
(unfavorable)
$621,400
$600,000
$(21,400)
161,200
150,000
(11,200)
Travel expense
58,000
60,000
2,000
Supplies
43,900
40,000
(3,900)
Use and
occupancy
30,000
30,000
––
$914,500
$880,000
$(34,500)
Salaries
Equipment
Total
When managers get this kind of report, they are
either happy or sad, but they are rarely any smarter!
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Each Activity Has Its Own Cost Driver
To: ABC Data Base
From: General Ledger
Activity-Based View
Chart-of-Accounts View
Claims Processing Dept
Claims Processing Department
Actual
Plan
Favorable/
(unfavorable)
$621,400
$600,000
$(21,400)
161,200
150,000
(11,200)
Travel expense 58,000
60,000
2,000
Supplies
40,000
(3,900)
Salaries
Equipment
Use and
occupancy
Total
43,900
Key/scan claims
$ 31,500
Analyze claims
121,000
Suspend claims
32,500
Receive provider inquiries
Resolve member problems
83,400
Process batches
45,000
Determine eligibility
119,000
Make copies
145,500
Write correspondence
30,000
30,000
––
$914,500
$880,000
$(34,500)
101,500
Attend training
Total
77,100
158,000
Activity
cost
drivers
#of
#of
#of
#of
#of
#of
#of
#of
#of
#of
$914,500
$914,500
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40
Multiple-Stage Cost Flowing
Resources
Resources
Activities
Activities
Objects
Objects
Simple
ABM
Copyright 2012 www.garycokins.com
Expanded
ABM
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ABC/M Cost Assignment Network
Salary, Fringe
Resources
Benefits
Direct
Material
Phone,
Travel
Supplies
Depreciation
Rent,
Interest,
Tax
(general ledger view)
Work
Activities
People
Activities
Support
Activities
(verb-noun)
“cost-to-serve”
paths
(1) Demands On Work
Costs (2)
Final
Cost
Objects
“Costs Measure the Effects”
Equipment
Activities
Copyright 2012 www.garycokins.com
Products,
Services
Business
Sustaining
Suppliers
Customers
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ABC/M Cost Assignment Network
Salary, Fringe
Resources
Benefits
Phone,
Travel
Supplies
Depreciation
Rent,
Interest,
Tax
Direct costs
(general ledger view)
Direct
Material
Work
Activities
People
Activities
Support
Activities
(verb-noun)
“cost-to-serve”
paths
(1) Demands On Work
Costs (2)
Final
Cost
Objects
“Costs Measure the Effects”
Equipment
Activities
Copyright 2012 www.garycokins.com
Products,
Services
Business
Sustaining
Suppliers
Customers
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More important than a better costing method are its results.
$ 30 sales
- 28 expenses
= $ 2 profit
Net
Revenues
Minus
ABM costs =
profit
Copyright 2012 www.garycokins.com
Unrealized profit revealed by ABM
$ 2 profit
Analytics-Based Performance Management LLC
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Activity Costs “pile up” into outputs.
ABM provides insight for the product’s or service’s cost
drivers and driver quantities.
Work
Activities
each activity’s
driver quantity
x
unit activity
driver cost
(eg. # of registrations)
Price/Fee
(Revenue)
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Activity
Costs
Analytics-Based Performance Management LLC
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Processes: Six Sigma, Lean Management,
and Value Stream Mapping
Processes include activities that have high to
low value-adding content.
$
$
VA
Business
Processes
$
$
$
$
Supplier
(direct material)
NVA
$
$
Process A
Enterprise
ABM also provides unit costs of outputs for
cost visibility and benchmarking.
Key:
Copyright 2012 www.garycokins.com
Cost
Analytics-Based Performance Management LLC
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What has Caused Interest in ABPM?
5) Strategic – The shift from being product-centric to
customer centric. The emphasis will be more on
economics – measuring customer profitability and
customer lifetime value (for B2C).
Operational – The need for productivity improvements and
cost management.
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But what about the Other Below-the-line
“Calculated” Costs?
Products and standard service-lines are not the only
thing for which accountants should compute costs.
What about costs that have nothing to do with products
and standard service-lines?
The problem with traditional accounting’s gross margin
reporting is you don’t see the bottom half of the picture.
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48
Costs from Sales & Marketing are not Products
Customer
+
Channel
+
Product
Direct material,
Direct labor &
Equipment
Indirect expenses
Distribution
Sales, Marketing, General and admin (S,G&A)
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Why Do Customer-related Costs Matter?
The Perfect Storm
# 1- Customer retention versus acquisition costs.
# 2 – Sources of Competitive Advantage –
Commoditization leading to service-differentiation.
# 3 – From mass selling to one-to-one customer
relationships.
# 4 – The internet’s irreversible shift of power from
sellers to buyers.
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ABM Customer Profit & Loss Statement
CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)
Sales
$$$
Product-Related
Supplier-Related costs (TCO) $ xxx
Margin $
(Sales - Costs)
Margin
% of Sales
$ xxx
98%
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
50%
48%
46%
30%
Distribution-Related
Outbound Freight Type*
Order Type*
Channel Type*
xxx
xxx
xxx
xxx
xxx
xxx
28%
26%
24%
Customer-Related
Customer-Sustaining
Unit-Batch*
xxx
xxx
xxx
xxx
22%
10%
Business Sustaining
xxx
xxx
8%
xxx
8%
Direct Material
Brand Sustaining
Product Sustaining
Unit, Batch*
Operating Profit
Productrelated
costs
Channel &
Customerrelated
costs
* Activity Cost Driver Assignments use measurable quantity volume of Activity Output
(Other ActvityAssignments traced based on informed (subjective) %s)
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Migrating Customers to Higher Profitability
Very
Profitable
High
(Creamy)
Product Mix
Margin
Low
(Low Fat)
High
Low
Cost-to-Serve
Very
unprofitable
Types of Customers
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Rapid Prototyping with
Iterative Remodeling
Each iteration enhances the use of the ABC/M system.
ABC/M System
(repeatable, reliable, relevant)
ABC/M Models
#0
#1
0
1
2
3
#2
#3
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Balancing Levels of Accuracy with Effort
100%
Accuracy
of
Final Cost
Objects
A
B
World Class
ABC System Design
0%
Little
Modest
Great
Level of Data Collection Effort
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Customer Value Management
Who is more important to pursue with the scarce
resources of our marketing spend budget?
Our most profitable customers?
Or our most valuable customers?
What is the difference?
The “customer lifetime value” is intended to
answer this question.
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My “which-type how-much” Hypothesis
The spending budget for sales and marketing is critical …
but it should be treated as a preciously scarce resource to
be aimed at generating the highest long-term profits.
This means answering questions like:
Which type of customer is attractive to newly acquire,
retain, grow, or win back? And which types are not?
How much should we optimally spend attracting, retaining,
growing, or recovering each customer micro-segment?
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A Shift in the CFO’s Emphasis
The CFO must now help Sales and
Marketing … to better target customers.
Segmentation, predictability, churn, offers, deals,
risk and uncertainty must be understood in the
language of money.
Analysts must overcome “hunches and gut-feel
guesses by others, and prove which actions yield
the highest financial returns.
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GARY COKINS
Principal, Global
Business Advisory
Services, SAS
THOMAS P.
KLAMMER
Professor of
Accounting
(retired)
University of North
Texas
TERRANCE L.
POHLEN
Associate
Professor of
Logistics
University of North
Texas
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Chain Management
Involves Linkages
Supply ChainValue
Trading
Partner Relationships
Tier 2
Tier 1
suppliers suppliers
Tier 1
customers
Initial suppliers
1
2
Tier 2
customers
Tier 3+ to
consumers
1
2
n
1
1
n
1
n
2
2
1
n
n
1
2
n
1
2
3
n
3
1
n
Consumers / end-customers
Tier 3+ to
Initial
suppliers
n
1
n
1
n
Managed Process Links
Focal Company
Monitor Process Links
Members of the Focal Company’s Supply Chain
Not-Managed Process Links
Non-Member Process Links
Non-Members of the Focal Company’s Supply Chain
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, James D. Pugh, “Supply Chain Management: Implementation Issues and
Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 2.
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What has Caused Interest in EPM?
6) Contentious Budgeting – The budget is typically a fiscal
exercise by the accountants that is:
(1) disconnected from the executive team’s strategy, and
(2) not based on future driver volumes.
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Spreadsheet Budgeting – It is Incremental !!
a
1
2
3
4
5
6
7
8
b
c
Current Year Budget Year
Wages
$ 400,000.00 Formula = Column B * 1.05
Supplies $ 50,000.00
Rent
$ 20,000.00 Copy down
Computer $ 40,000.00
Travel
$ 30,000.00
Phone
$ 20,000.00
Total
$ 560,000.00
Sheet 1
Source: John Antos, The Value Creation Group
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Match the Budget Method to its Category
Demanddriven
Integrated
Budget
(Rolling
Financial
Forecasts)
Projectdriven
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(1) Non-Recurring Expenses // Strategic Initiatives
Measurement
Period;
1st Quarter
Strategic
Objective
Executive Team
Identify
Projects,
Initiatives,
or
Processes
KPI
Measure
X
Managers and
Employees
KPI Target
KPI Actual
comments /
explanation
their score
X
X
X
X
<----- period results ------->
Budgeting is typically disconnected from
the strategy. But this problem is solved if
management funds the managers’ projects.
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(2) Recurring Expenses // Future Volume & Mix
ABC/M
ABP
Past
Now
Future
Activity-Based Costing
Activity-Based Planning
- Historical & Descriptive
-
Predictive
- Starts with known:
-
Requires capacity analysis
spending
-
Starts with estimated outputs
driver measures
-
Applies ABC/M rates
-
Solves for Resource “expenses”
output quantities
- Calculates “costs”
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Operational Resource Capacity Planning
inputs
Resources
Process Costs
Output &
Outcome Costs
Customers and
Service-recipients
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Resource
expenses can
be calculated
with
“backwards
ABC/M”
Start Here.
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Predictive Accounting
ABC/M
ABP
Past
ABC/M
Known
resources
?
work
activities
?
cost
objects
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ABP
Now
Future
Provides consumption
rates
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Predictive Accounting
ABC/M
ABP
Past
ABC/M
resources
?
work
activities
?
cost
objects
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ABP
Now
Future
Estimated
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Accounting Treatments and Behavior of Capacity (expenses)
Predictive Accounting
Descriptive
Predictive
Past
Now
unused
Traceable to
products,
channels,
customers,
sustaining
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used
Future
sunk
unused
fixed
(unavoidable)
variable
(adjustable
capacity;
avoidable)
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(3) Risk Assessment Grid
… ERM is not just contingency planning
High
2
7
8
Severity of impact on
event occurrence and
achievement
of objectives
10
6
3
4
5
9
1
Budget
Low
Low
High
Do not budget
probability of an event occurring
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Match the Budget Method to its Category
Budget method
Recurring
Demanddriven
expenses
volume & mix
of drivers
production
and
ABP/B
Integrated
Budget
(rolling
financial
forecasts)
Projectdriven
Non-recurring
expenses
strategy
map and
risk grid
Strategic & risk
mitigation projects
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Linking Strategy and Risk to the Budget
Strategy Modeling
Strategy methods
(e.g., SWOT)
(by executives)
Define and adjust
strategy and risk, and
create strategy map
Strategic
objectives
Managerial
Accounting
(e.g., Activity-based
Costing)
knowledge
Identify and
manage strategic
initiatives
Driver consumption rates
KPI dashboard
feedback
Forecast drivers
(e.g. sales) ;
develop production
plan
Driver volumes
and mix
(2) capital budget
(3) strategy budget
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Traditional and
driver-based
budgeting (e.g. PBB)
e.g., hours,
Pounds,
# employees
Approve strategy
risk and capital
budget
= financial information (e.g. $)
(4) risk budget
Operational Modeling
(by employee teams)
priority projects and processes
Create balanced
scorecard
KPI
targets
Financial Modeling
(1) Operational
budget
Changes and
responses
Capacity
resource plan
Derived budget
(and rolling
financial forecasts)
Manage and
improve core
processes
Results and
outcomes
Revise
plan
No
OK
Acceptable?
Yes
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Continuous refreshing the rolling financial forecast
More frequent forecast intervals assure better accuracy.
100%
accuracy
…
0%
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Source data capture
(transactions /
bookkeeping)
ACCOUNTING
Tax
Accounting
Financial
Accounting
Managerial
Accounting
Cost Accounting
Non-financial data
capture
Cost Measurement
Financial Reporting
regulatory compliance
•[e.g., GAAP, IFRS]
•Costs of goods sold
•Inventory valuation
Cost Reporting &
Analysis
Decision Support/
Cost Planning
(feedback on performance)
• Spending vs. budget variance
analysis
• Profitability reporting
• Process analysis (e.g., lean,
benchmarking, COQ)
• Performance measures
• Learning; corrective actions
The Domain of Costing
History
Low value-add
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins
Copyright 2012 www.garycokins.com
published by the International Federation of Accountants, 2010
• Fully absorbed & incremental pricing
• Driver-based budgeting & rolling
financial forecasts
• What-if analysis
• Product, channel & customer
rationalization
• Outsourcing & make vs. buy analysis
Future
Modest value-add
High value-add
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International Federation of Accountants Report
Evaluating the Costing Journey:
A Costing Levels Continuum
Maturity Model
By Gary Cokins
Copyright 2012 www.garycokins.com
Most organizations are
typically at lower levels of
maturity in adopting
progressive managerial
accounting practices,
methods and systems.
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Costing Continuum / Levels of Maturity
(most companies are Level 4D and 1P)
(1) Descriptive Continuum
(2) Predictive Continuum
EXPENSE TRACKING, COST
REPORTING
and CONSUMPTION RATES
Improved
Treatment
of Indirect
Costs
DEMAND DRIVEN PLANNING
with CAPACITY SENSITIVITY
Customer
Demand
Sensitive
Unused
Capacity
Aware
8D
Resource
Consumption
Accounting
Level #
7D
Improved
Output
Information/
Approximate
Push
Accuracy
ActivityBased
costing
(ABC);
6D
Output Visibility
Blind
1D
Process
Visibility
2D
process and
bookkeeping Lean accounting
3D
4D
Direct costs
without (3) and with
(4) support costs
to output groups
5D
Standard
costing to
individual
outputs;
Product
costs
Unused
capacity
costs
Level 6D with (estimate
Channel and d)
customer
profitability
Reporting;
Cost-to-serve
Pull
Activitybased
Resource
Planning
%
G/L acct.
Incrementa
l
1P
Project acct;
Job order
costing
2P
(ABRP);
Forecast
driver
quantities
X unit
consumptio
n rates;
Driver
based
budgeting
Timedriven
ABC
3P
(TDABC);
Forecast
driver
quantities
X time
consumption
rates;
4P
Simulation
5P
Ultimate in
consumptio
n rates;
(RCA);
Level 2P
with
proportional
costing at
direct and
support
depts.
Direct cost
focus;
Repetitive
work
conditions
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins published by the International Federation of Accountants, 2012
84
AGENDA
What is Performance Management?
What is Business Analytics?
Eight Pressures that have caused interest in EPM
EPM as a Value Multiplier through Integration
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How Does It All Fit Together?
Strategy,
Mission
Customer
Satisfaction
ERP, etc.
CRM
Scorecards
Organization
Resources
Supplier
Inputs
ROI
(capacity)
$
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Shareholders
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In Summary … first, we energize
with good managerial accounting.
Strategy,
Mission
Customer
Satisfaction
ERP, etc.
CRM
Scorecards
Organization
Resources
(capacity)
Supplier
Inputs
ROI
$
Shareholders
Managerial
accounting
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EPM is Circulatory and Simultaneous
Shareholder Wealth Creation is not a goal. It is a result!
Strategy,
Mission
needs
ERP, etc.
Targeting
Risk Mgmt.,
Strategy map,
KPIs
Scorecards
Customer
Satisfaction
Order fulfillment
CRM
KPI
Scores
Feedback
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Organization
Resources
(capacity)
Supplier
Inputs
ROI
$
Shareholders
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EPM is Circulatory and Simultaneous
Shareholder Wealth Creation is not a goal. It is a result!
Strategy,
Mission
needs
Customer
Satisfaction
ERP, etc.
Targeting
Risk Mgmt.,
Strategy map,
KPIs
Order fulfillment
CRM
Supplier
Inputs
wasted resources
Scorecards
KPI
Scores
Feedback
Organization
Resources
Shareholders
(capacity)
Less productivity reduces Shareholder Wealth
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ROI
$
leakage
(waste)
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The Intelligence Hierarchy
Optimization
Power of
Information
$ROI
Predictive
Modeling
Descriptive
Modeling
(with analytics)
Raw
Data
Two types of
software are
like a brain’s
two halves.
Ad hoc
Reports &
Standard OLAP
Reports
Data
Information
Transactional systems (e.g., ERP)
“the reptilian brain stem”
(breathing, blinking, digesting)
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Knowledge
Intelligence
Business Analytics and Performance Management
“the cerebral cortex”
(thinking and decision making)
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The Buy-in to Performance Management
Why has the adoption rate for
analytics-based EPM’s
methodologies been so slow?
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Why is the adoption rate so slow?
What are the barrier categories?
(1) Technical barriers include IT related issues.
(2) Perception barriers are excess complexity
and affordability.
(3) Design deficiencies include poor
measurements or their calculations and weak
models and assumptions.
(4) Organizational behavior barriers involve
resistance to change, culture, and leadership.
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The Complete Vision of Performance Management
Make the RPM of the EPM and BA gears spin …
… better, faster, cheaper … safer and smarter
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From Theory to Practice
Your success depends
on how well and how fast
the right information and
intelligence gets to the
right people.
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Thank You
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com
919 720 2718
[email protected]
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