Understanding Analytics-Based Performance Management

Understanding Analytics-Based Performance Management Gary Cokins SAS gary.cokins@sas.com http://blogs.sas.com/cokins 919 531 2012 Cary, North Carolina USA BBRT Chicago, IL April 27, 2011 Copyright 2010 SAS Institute Inc. All rights reserved.

About Gary Cokins 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] 2

Who will benefit from this presentation? Managers who have previously struggled at promoting performance management (PM) and integrating business analytics (BA) into their decision support systems. Managers who intend to champion any or all PM and BA improvement techniques and need a compelling call to action. 3

Why is ABPM Important for Finance? The finance and accounting function is increasingly looked at as moving beyond reporting to be a trusted advisor and decision support role. Finance and accounting must expand from bean counters to bean growers. Their role should be to assist the executive team to make better decisions consistent with corporate strategies and to align the work and priorities of managers and employees to execute the strategies. 4

What is the life-span of big companies? Of the Forbes 100 of 1917, how many were in the 2006 list? Answer: 18 (and only 39 have survived) Of the Standard & Poors (S&P) 500 in 1957, how many were in the 2006 list? Answer: 74, just 15% (and only 12 have outperformed the index) What can we conclude from these? Source: Professor Gary Biddle. University of Hong Kong 5

Allow me to tell you a story A lesson in my career 6

SAS is the World s Largest Privately-Held Software Company (Prepackaged Software) 52 countries 11,115 employees $2.5 billion sales More than 400 offices 2010-2011 Best Company to Work for Fortune Magazine Hundreds of user groups 43,000+ customer sites in 112 countries 7

AGENDA What is Analytics-based Performance Management? ABPM and Porter s Theory of Competitive Advantage What is Business Analytics and Why Needed? Pressures and Forces that have caused interest in ABPM -- Strategy Management -- Product Profitability -- Customer profitability and value management -- Budgeting and Planning. APBM to Optimize Enterprise-wide Performance Barriers slowing the adoption rate of ABPM The call to action for ABPM 8

Confusion and Lack of Consensus about PM 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? 9

What s the Problem? Direction, traction, and speed. What s the Answer? Analytics-based Performance Management (ABPM) ABPM embraces methodologies, metrics, processes, software tools, and systems that manage an organization s performance. 10

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. 11

Long-term Trends in Government A growing impatience by taxpayers and governance boards with waste and inefficiency is leading to demands for evidence of outputs, outcomes, transparency and accountability. more with less value for money... quality of life 12

How Does It All Fit Together? Strategy, Mission Customer Loyalty ERP, etc. CRM Scorecards Organization Resources (capacity) ROI $ Supplier Inputs Shareholders 13

There are three major components. Strategy creation and execution: - Where do we want to go? Strategy, - Mission How will we get there? Customer Loyalty CRM ERP, etc. Process: How do we do it (now)? How will we do it (future)? Performance: How well are we: Scorecards - Achieving our strategy (KPIs)? - Performing our processes (PIs)? Organization Resources (capacity) ROI $ Supplier Inputs Shareholders 14

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? 16

Isn t competition ultimately about cost leadership, differentiation, or focus?* -- cost leadership strategy via improving process efficiencies, unique access to low cost inputs, vertical integration, avoiding certain costs, etc. -- differentiation strategy via developing products and/or services with unique traits valued by customers. -- focus strategy via concentrating on a narrow segment with entrenched customer loyalty. But don t each of these have risks today? * Source: Michael E. Porter s three generic strategies. 17

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 microsegmenters invade and erode your customers loyalty. The best defense is agility with quicker and smarter decision making using statistics, analytics, and operations research. 18

Disciplined versus Undisciplined Decisioning 40% of important decisions are not based on facts but rather on intuition, experience, and anecdotal evidence. --- Jeanne X. Harris, Accenture Do we know, or do we think we know? http://www.youtube.com/watch?v=8direo8v_r0 20

Will our young managers herald the BA era? http://www.youtube.com/watch?v=_cqgnzhb--q Your young generation of managers are already very clever. The next slides demonstrate examples of how they shrewdly answered university exam questions. 21

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? 22

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. 23

Improving Performance by Unifying PM and BA -- BI Reporting consumes stored information. -- Analytics produces new information. -- Corporate Performance Management deploys Analytics. It is not about monitoring the dials on a dashboard, but rather moving the dials. 24

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. 25

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. 26

Steering and controlling are basic priorities. Airplane cockpit analogy Pilots need: - dials for feedback; - buttons, switches, and levers to act on the information; - autopilot to adjust (business rules); - flight simulators to test and learn from. Decision management with BA can automate some decisions (autopilot with overrides) and allow testing and experimentation (simulation). 27

Modeling is foundational to BA Determining the value of a home (realtors) Available house data: - sale price - total square footage - # of bedrooms - # of bathrooms - size of basement - size of garage - type of construction - lot size - age of house - school district - per capita income of neighborhood - etc. Sale price = f (input data) Source: Joe Czyzyk, Central Michigan University Research Corporation. 28

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? 29

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] 30

Business Analytics is more than data mining. Statistics is more confirmatory than exploratory. It is not like finding diamonds in a coal mine. Experienced business people suspect and hypothesize that two or more things are related or that some underlying behavior is driving behavior seen in the data. Statisticians and business analysts then search for confirmation and understanding of the relationships. User s Requirements: (1) easy and flexible access to data and (2) the ability to manipulate it. 31

AGENDA What is Analytics-based Performance Management? ABPM and Porter s Theory of Competitive Advantage What is Business Analytics and Why Needed? Pressures and Forces that have caused interest in ABPM -- Strategy Management -- Product Profitability -- Customer profitability and value management -- Budgeting and Planning. Barriers slowing the adoption rate of ABPM The call to action for ABPM 32

What has caused interest in ABPM? 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. 33

What has Caused Interest in ABPM? 1) Failure by executives to execute their well-formulated strategy. Strategy Management Product Profitability Customer Value Management Budgeting and Planning 34

When Dilbert Jokes About It, It is Mainstream 35

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 36

Vision and Mission Statements Vision & Mission A Vision statement answers where do we want to go? Strategy Mapping 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. 37

Generic Strategy Map Architecture Financial Customer Internal Process Learning Financial Customer Internal Processes Learning & Innovation Maximize Shareholder Value 38

Financial Customer Internal Process Learning Citizen, Patient, Taxpayer, Warfighter Financial, stewardship Internal Processes Learning & Innovation Generic Strategy Map Architecture Maximize Community Value For public sector, the Customer perspective becomes Citizen, and it swaps with the Financial perspective. 39

Vision & Mission Exceed shareholder expectations Financial Diversify income stream Increase sales volume Improve profit margins Customer Diversify customer base Increase sales to existing customers Test new products Internal Process Target profitable market segments develop new products Optimize internal processes Attract new customers Learning & Growth Develop employee skills Integrate systems 40

Financial Diversify income stream Vision & Mission Financial value Exceed shareholder expectations creating Increase sales volume Improve profit margins Customer Diversify Increase sales to customer base Customer existing customers intimacy Test new products leads to Internal Process Target profitable develop new market segments Process products excellence Attract new customers stimulates Optimize internal processes Learning & Growth employee Develop skills Integrate A learning environment systems 41

Who Does What? Measurement Period; 1st Quarter Strategic Objective Identify Projects, Initiatives, or Processes KPI Measure KPI Target KPI Actual comments / explanation Executive Team X X Managers and Employees X X their score X <----- period results -------> A scorecard is more of a social tool than a technical tool. 42

The Key to Scorecards How does everyone answer this single question: How am I doing on what is important? Strategy Maps and Scorecards provide this answer. The overriding purpose of a strategy map and scorecard system is to make mission and strategy everyone s job. 43

Scorecard Lessons Being Painfully Learned Scorecard or Report Card? KPIs or PIs? 44

What is the difference between KPIs and Pis? Strategy Diagram Measurements Frequency of reporting Scorecard (inter-related measures with cause-and-effect correlations) Project-based KPIs Must have targets KPIs (strategic context) Process-based KPIs Without targets - drill-down analysis - alert messages quarterly monthly weekly daily hourly Dashboard (measures in isolation) $ $ Budget & Resource Planning With targets PIs (operational) Without targets - Trends - Upper / lower thresholds real-time 45

What Measures Matter? KPI Correlation Analysis 46 46

Thickness of the arrows reflects explanatory power 48 48

What has Caused Interest in ABPM? 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. Strategy Management Product Profitability Customer Value Management Budgeting and Planning 49

A simple explanation of ABM that you can explain to your spouse (or boss) tonight. 50

The Need for Tracing, not Allocating, Costs Broadly averaged cost allocation was acceptable. 100% Cost Components Direct Changes in Cost Structure Material Overhead (indirect expenses) Cost errors are large and misleading. Direct (recurring) Labor 0% 1950 2000 Old-fashioned Hierarchical Integrated Stages in the Evolution of Businesses 51

The Primary View of Most Managers inputs Appropriations, approved budget spending levels Resources This is known. Process Costs But? Output & Outcome Costs But? Customers and Service-recipients 52

The General Ledger View is Structurally Deficient for Decision Analysis. Chart-of-Accounts View Insurance Claims Processing Department Actual Salaries $621,400 Equipment 161,200 Travel expense 58,000 Supplies 43,900 Plan $600,000 150,000 60,000 40,000 Favorable/ (unfavorable) $(21,400) (11,200) 2,000 (3,900) Use and occupancy 30,000 30,000 Total $914,500 $880,000 $(34,500) When managers get this kind of report, they are either happy or sad, but they are rarely any smarter! 53

Each Activity Has Its Own Cost Driver From: General Ledger Salaries Equipment Travel expense Supplies Use and occupancy Total Chart-of-Accounts View Claims Processing Department Actual $621,400 161,200 58,000 43,900 30,000 $914,500 Plan $600,000 150,000 60,000 40,000 30,000 $880,000 Favorable/ (unfavorable) $(21,400) (11,200) 2,000 (3,900) $(34,500) To: ABC Data Base Activity-Based View Claims Processing Dept Key/scan claims $ 31,500 Analyze claims 121,000 Suspend claims 32,500 Receive provider inquiries 101,500 Resolve member problems 83,400 Process batches 45,000 Determine eligibility 119,000 Make copies 145,500 Write correspondence 77,100 Attend training 158,000 Total $914,500 Activity cost drivers #of #of #of #of #of #of #of #of #of #of $914,500 54

Multiple-Stage Cost Flowing Resources Resources Activities Activities Objects Objects Simple ABM Expanded ABM 55

Costs Measure the Effects (1) Demands On Work Costs (2) ABC/M Cost Assignment Network Resources (general ledger view) Salary, Fringe Benefits Direct Material Phone, Travel Supplies Depreciation Rent, Interest, Tax Work Activities (verb-noun) Support Activities Equipment Activities People Activities cost-to-serve paths Final Cost Objects Suppliers Products, Services Business Sustaining Customers 56

Resources Activities Products, Customers Demands on Workload Costs Measure the effect 57

Organizational shock from the truth Net Revenues Minus ABM costs = profit Unrealized profit revealed by ABM $ 30 sales - 28 expenses = $ 2 profit $ 2 profit 58

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) Activity Costs 59

Processes: Six Sigma, Lean Management, and Value Stream Mapping Processes include activities that have high to low value-adding content. $ $ $ Business Processes VA $ $ $ NVA Supplier (direct material) $ $ Process A Enterprise ABM also provides unit costs of outputs for cost visibility and benchmarking. Key: Cost 60

Managing IT as a business Managing IT as a business is now an imperative. No longer can IT be seen as just a technology supplier it must be seen to be adding value to the organization and providing strategic capability. But it is difficult to maximize returns from IT when the products and services appear to be free to internal customers. 61

Why a Fair Usage-based Chargeback System? Shared services and IT achieve maximum returns when it operates as a service provider with a catalog of products and services that are aligned with the citizen needs and strategic goals. This needs: - Accurate pricing for its services that reflects the cost to provide them. - An understanding of what drives both user demand and cost. - An equitable, repeatable and accurate method to track and invoice customers based on their usage of the services. (Service level agreements) - To provide transparency to its customers for self-induced behavior. - To encourage end-user accountability for the return on investments and highlight joint improvement opportunities. 62

Two Types of IT expenses: Assets and People Hardware People Fixed Costs (virtual) IT assets become sunk costs immediately at purchase. The objective to is maximize capacity use. Flexible / Variable Costs (physical) People-related expenses (e.g., salaries) can be flexibly assigned to different work. Headcount is adjustable. The objective is to use people efficiently. 63

IT Assets as a Visual Tile Chart An existing Tile Chart as seen through the SAS Information Delivery Portal 64 64

Asset Expenses are virtual (Fixed Costs) A tile chart illustrates how IT workloads can be analyzed and optimized. In this example, under-utlized servers (shaded blue) were removed and the existing workload was shifted to lower-cost, multi-core servers. After 10 months a fairly balanced workload was achieved (reds and oranges indicating workloads higher in processor utilization). The result: perpetual future cost avoidance or postponement. January Optimizing the Factory driven improvements October 65

Costs Measure the Effects (1) Demands On Work Costs (2) IT ABC/M Cost Assignment Network Usage-based Chargeback Costing Resources People (Salary, Fringe Benefits) Hardware Software Network IT charge into other ABC/M models Work Activities Resources equipment Support Activities Activities R&D Develop Replace Support Operate Final cost objects Final Cost Objects New systems (future value) In later years IT cost objects Current systems / facilities (current value) Business cost objects IT Services, Products Business Sustaining Customers 66

What has Caused Interest in ABPM? 5) 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). Strategy Management Product Profitability Customer Value Management Budgeting and Planning 67

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. 68

Costs from Sales & Marketing are not Products Customer + Channel + Product Direct material, Direct labor & Equipment Indirect expenses Distribution, Sales & Marketing Sales, general, and administration (S,G&A) 69

Why Do Customer-related Costs Matter? The Perfect Storm # 1- Customer Retention It is relatively much more expensive to acquire a new customer than to retain an existing one. # 2 Sources of Competitive Advantage As products and standard service-lines become commodity-like, then the shift is towards service-differentiation. 70

Why Do Customer-related Costs Matter? The Perfect Storm # 3 - CRM s One-to-One Marketing Pepper & Rodgers have hailed technology as the enabler to (1) identify customer segments, and (2) tailor marketing offers. # 4 - Power Shift The Internet is shifting power irreversibly from sellers to buyers. 71

ABM Customer Profit & Loss Statement CUSTOMER: XYZ CORPORATION (CUSTOMER #1270) Sales $$$ Margin $ Margin (Sales - Costs) % of Sales Product-Related Supplier-Related costs (TCO) $ xxx $ xxx 98% Direct Material xxx xxx 50% Brand Sustaining xxx xxx 48% Product Sustaining xxx xxx 46% Unit, Batch* xxx xxx 30% Distribution-Related Outbound Freight Type* xxx xxx 28% Order Type* xxx xxx 26% Channel Type* xxx xxx 24% Customer-Related Customer-Sustaining xxx xxx 22% Unit-Batch* xxx xxx 10% Productrelated costs Channel & Customerrelated costs Business Sustaining xxx xxx 8% Operating Profit xxx 8% * Activity Cost Driver Assignments use measurable quantity volume of Activity Output (Other ActvityAssignments traced based on informed (subjective) %s) 73

Migrating Customers to Higher Profitability Very Profitable High (Creamy) Product Mix Margin Low (Low Fat) Types of Customers Low Cost-to-Serve High Very unprofitable 74

KPI Linkage of Customer Profits to the Scorecard Very Profitable High (Creamy) KPI Target Product Mix Margin Low (Low Fat) Types of Customers Low Cost-to-Serve High Very unprofitable 75

Rapid Prototyping with Iterative Remodeling Each iteration enhances the use of the ABC/M system. ABC/M Models ABC/M System (repeatable, reliable, relevant) #0 #1 0 1 2 3 #2 #3 76

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 77

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 78

Value Chain Management Involves Linkages Supply Chain Trading Partner Relationships Initial suppliers Consumers / end-customers Tier 3+ to Initial suppliers Tier 2 suppliers Tier 1 suppliers Tier 1 customers Tier 2 customers Tier 3+ to consumers 1 1 2 2 n 1 1 n 1 n 1 2 2 1 n 2 3 1 n 1 3 n 2 n 1 n 1 n n n Managed Process Links Monitor Process Links Not-Managed Process Links Non-Member Process Links Focal Company Members of the Focal Company s Supply Chain 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. 79

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. 80

Imagine you are pharmaceutical supplier. Which Customer is more Important? Dentist A Sales = $750,000 profits = $100,000 Age 61 Dentist B Sales = $375,000 profits = $40,000 Age 25 Which is more profitable? Which is more valuable? Measuring CLV typically only applies to businessto-consumer (B2C) industries, but it is a evolving technique to be aware of. 81

Past (reactive) Customer Value Management Financial Definitions Historical (trends, insights, inferences) Customer Profitability The difference between the revenues earned from, and the total costs associated with, the customer relationship during a specified period. Time = 0 (now) Customer Life Time Value (CLV) The net present value of the future cash flows (both inwards and outwards) attributed to the customer relationship during the predicted lifetime of that relationship Future (proactive) Predictive (uncertainty, risk mgmt.) 82

Value Creation via CLV Customer Lifetime Value $ After a CLV (or CP) is calculated and rank-ordered highest to lowest customer, then Get more value from these Protect these Existing Customers Source: Customer Equity Marketing; European Mgmt. Journal; Vol 20, No. 3; June, 2002 retain develop, streamline 83

Actions for each customer produces Profit-lift Customer Lifetime Value $ Get more value from these What actions will lift the profit curve? Protect these; grow them Existing Customers* Source: Customer Equity Marketing; European Mgmt. Journal; Vol 20, No. 3; June, 2002 retain develop, streamline * Ranked most to least valuable 84

Value Creation via CLV Customer Lifetime Value $ also, be prudent attracting new customers. Be selective pursing these Get more value from these Protect these; grow them Existing Customers Possible New Customers Source: Customer Equity Marketing; European Mgmt. Journal; Vol 20, No. 3; June, 2002 retain develop, streamline acquire do not acquire 85

Here is a real company s CLV Formula CLV I 0 T t 0 ( R t N i 1 k it ) L (1 d) t t S t P t Net Present Value of the Relationship (CLV) Revenues (R) Cost of Product i ki) Sub. Maintenance - Retention (L) - Customer Care (S) Cost of Acquisition I Probability for period t (P) Discount Rate (d) Probability for Churn Cross/Up Sale Willingness to expend more 86

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 spend attracting, retaining, growing, or recovering each customer segment? 87

Optimizing Customer Value --- Smart Sales Growth You can destroy shareholder wealth creation by over-spending uneccessarily on loyal customers for what is needed to retain them. under-spending on marginally loyal customers and risk their defection to a competitor. Therefore, what is the optimum spending level for differentiated services to different micro-segments of customers? 88

A financial view is not the only consideration. Other factor variables to evaluate sales prospects and existing customers should include: - retention (loyalty) - attrition (tenure) - churn propensity - RFM ( recency, frequency, and monetary spend) - their lifecycle stage - their referrals potential - their familial relationships - their social networks - their tastes and preferences - socio-demographic - psychological - others?? 89

Actions to Make Customers More Profitable - Manage each customer s costs-to-serve to a lower level. - Improve and streamline customer facing processes, including adding selfservice models where possible - Establish a surcharge for or re-price expensive cost-to-serve activities. - Reduce services; focus first on labor intensive ones that add the least value yet cost the most. - Introduce new products and service lines. - Abandon old products or service-lines. - Raise prices. - Improve and streamline internal business processes. - Offer the customer profit-positive service level options with varying prices. - Increase investments on activities that a customer shows a preference for. - Up-sell or cross-sell the customer s purchase mix toward richer, highermargin products and service lines. - Discount prices to gain more business with low cost-to-serve customers. 90

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. 91

Why are some customers more profitable than others? 92

Recursive Partitioning / Decision Trees The single, largest factor for explaining the profit variation is Average Transaction Value Customers with lots of a small average transaction value are less profitable 93

What has Caused Interest in ABPM? 6) Contentious Budgeting The budget is a 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. Strategy Management Product Profitability Customer Value Management Budgeting and Planning 94

A Quiz. Our budgeting exercise... is invasive and time-consuming... with few benefits. takes 14 months from start-to-end. requires two or more executive tweaks at the end. is obsolete in two months due to events and re-organizations. starves the departments with truly valid needs. caves in to the loudest voice and political muscle. rewards veteran sand-baggers who are experts at padding. incorporates last year s inefficiencies into this year s budget. Is over-stated from the prior year s Use-it-or-lose-it spending. 95

Spreadsheet Budgeting It is Incremental!! 1 2 3 4 5 6 7 8 a 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 96

Match the Budget Method to its Category Demanddriven Integrated Budget (Rolling Financial Forecasts) Projectdriven 97

Operational Resource Capacity Planning inputs Resources Process Costs Output & Outcome Costs Resource expenses can be calculated with backwards ABC/M Customers and Service-recipients Start Here. 98

Accounting Treatments and Behavior of Capacity (expenses) Predictive Accounting Descriptive Predictive Past Now Future unused sunk unused Traceable to products, channels, customers, sustaining used fixed (unavoidable) variable (adjustable capacity; avoidable) 99

Risk Assessment Grid High 7 2 Impact on Achievement of objectives (significance) 6 10 8 3 5 9 4 1 Low Low High Likelihood of occurence 100

Match the Budget Method to its Category Budget method Demanddriven Recurring expenses volume & mix of drivers production and ABP/B Integrated Budget (rolling financial forecasts) Projectdriven Non-recurring expenses Strategic & risk mitigation projects strategy map and risk grid 101

Linking Strategy and Risk to the Budget Strategy Modeling (by executives) Strategy methods (e.g., SWOT) Strategic objectives Define and adjust strategy and risk, and create strategy map Identify and manage strategic initiatives KPI targets = financial information (e.g. $) knowledge Create balanced scorecard Managerial Accounting (e.g., Activity-based Costing) priority projects and processes Forecast drivers (e.g. sales) ; develop production plan KPI dashboard feedback Driver volumes and mix Approve strategy risk and capital budget (2) capital budget (3) strategy budget (4) risk budget e.g., hours, Pounds, # employees Traditional and driver-based budgeting (e.g. PBB) (1) Operational budget Financial Modeling Driver consumption rates Capacity resource plan Changes and responses Derived budget (and rolling financial forecasts) Operational Modeling (by employee teams) Manage and improve core processes Revise plan Acceptable? Results and outcomes No Yes OK 102

The Three Key Questions What? So what? Then what? 103

International Federation of Accountants Report Evaluating the Costing Journey: A Costing Levels Continuum Maturity Model By Gary Cokins, SAS Most organizations are typically at lower levels of maturity in adopting progressive managerial accounting practices, methods and systems. 104

ACCOUNTING Source data capture (transactions / bookkeeping) Tax Accounting Financial Accounting Managerial Accounting Non-financial data capture Cost Accounting Financial Reporting regulatory compliance Cost Measurement [e.g., GAAP, IFRS] Costs of goods sold Inventory valuation The Domain of Costing Cost Reporting & Analysis (feedback on performance) Spending vs. budget variance analysis Profitability reporting Process analysis (e.g., lean, benchmarking, COQ) Performance measures Learning; corrective actions Decision Support/ Cost Planning Fully absorbed & incremental pricing Driver-based budgeting & rolling financial forecasts What-if analysis Product, channel & customer rationalization Outsourcing & make vs. buy analysis History Future Low value-add Modest value-add High value-add 105 Source: A Costing Levels Continuum Maturity Model by Gary Cokins published by the International Federation of Accountants, 2010

Level # Costing Continuum / Levels of Maturity (most companies are Level 4D and 0P) Blind 1D bookkeeping Process Visibility 2D process and Lean accounting (1) Descriptive Continuum EXPENSE TRACKING, COST REPORTING and CONSUMPTION RATES Output Visibility 3D 4D Direct costs without (3) and with (4) support costs to output groups Improved Output Information/ Approximate Accuracy 5D Standard costing to individual outputs; Project acct; Job order costing Improved Treatment of Indirect Costs 6D Push Activity- Based costing (ABC); Product costs Customer Demand Sensitive 7D Level 6 with Channel and customer profitability Reporting; Cost-to-serve Unused Capacity Aware 8D Unused capacity costs (estimate d) % G/L acct. Incrementa l 0P (2) Predictive Continuum DEMAND DRIVEN PLANNING with CAPACITY SENSITIVITY Pull Activitybased Resource Planning 1P (ABRP); Forecast driver quantities X unit consumptio n rates; Driver based budgeting Timedriven ABC 2P (TDABC); Forecast driver quantities X time consumption rates; Direct cost focus; Repetitive work conditions Resource Consumptio n Accounting 3P (RCA); Level 9 with proportional costing at direct and support depts. Simulation 4P Ultimate in consumptio n rates; Source: A Costing Levels Continuum Maturity Model by Gary Cokins published by the International Federation of Accountants, 2010 Copyright 2010 SAS Institute Inc. All rights reserved. 106

Workforce Planning and Human Capital Management Number of Employees B Demand Supply Gap A A Attrition Replacement time B Incremental Growth 107

How Does It All Fit Together? Strategy, Mission Customer Loyalty ERP, etc. CRM Scorecards Organization Resources (capacity) ROI $ Supplier Inputs Shareholders 109

In Summary first, we energize with good managerial accounting. Strategy, Mission Customer Loyalty ERP, etc. CRM Scorecards Organization Resources (capacity) ROI $ Supplier Inputs Shareholders Managerial accounting 110

ABPM is Circulatory and Simultaneous Shareholder Wealth Creation is not a goal. It is a result! Strategy, Mission needs Customer Loyalty ERP, etc. Risk Mgmt., Strategy map, KPIs Targeting CRM Order fulfillment Scorecards KPI Scores Feedback Organization Resources (capacity) ROI $ Supplier Inputs Shareholders 111

ABPM is Circulatory and Simultaneous Shareholder Wealth Creation is not a goal. It is a result! Risk Mgmt., Strategy map, KPIs Strategy, Mission needs Targeting CRM Customer Loyalty ERP, etc. Order fulfillment Scorecards KPI Scores Feedback wasted resources Organization Resources (capacity) ROI $ Supplier Inputs Shareholders Less productivity reduces Shareholder Wealth leakage (waste) 112

Two BA Views: Hindsight and Foresight Time = 0 (now) Historical, Descriptive (trends, insights, inferences) Future (proactive) Past (reactive) What happened? Where? And why is this happening? Predictive (uncertainty, risk mgmt.) What will happen next? What is the best that can happen? 113

Drowning in data but starving for information. 114

The Intelligence Hierarchy Power of Information Predictive Modeling Optimization $ROI Raw Data Standard Reports Descriptive Modeling Ad hoc Reports & OLAP Two types of software are like a brain s two halves. Data Information Knowledge Intelligence Transactional systems (e.g., ERP) the reptilian brain stem (breathing, blinking, digesting) Business Intelligence and Performance Management the cerebral cortex (thinking and decision making) 115

The Buy-in to Performance Management Why has the adoption rate for ABPM s methodologies been so slow? 117

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. 118

Remove the wall between IT and Users IT (a set of technologies) (gatekeepers of data) - Daily operations - Batch processing - Data storage - Data structures - Data governance Business (analytical sandbox) (a set of capabilities) - Discovery - Investigation - Analysis BA provides IT the opportunity to drive value, but IT will need to be more tolerant and flexible. 119

Overcoming Resistance to Change To create change, you need to create the need for change! How? Change only occurs and continues only when: the product of 3 factors is greater than R (D x V x F) > R esistance to change Dissatisfaction with how things are Vision of what better would look like First practical steps 120

References and Collateral Gary Cokins 30 minute ABPM videos: Commercial: http://videoplayer.nlps.com/?fmn_sept09_seg2 Public sector: http://videoplayer.nlps.com/?gov3_seg2 SAS White Papers - Strategy Management: Putting It All Together (452095.0707) - Product and Service-line Profitability (SAS ABM): Institute of Management Accountants Statements of Management Accounting (SMA): Implementing Activity-Based Costing by Gary Cokins http://www.imanet.org/publications_statements.asp#c 121

References and Collateral p2 SAS White Papers - Customer Profitability: Are All of Your Customers Profitable to You? (100291US_218084.0103) How to Measure and Manage Customer Value and Customer Profitability (101716US_287672US_0704) Are You Customer-Focused or Customer Obsessed? (102449_411553.0906) How Profitable to You is Each Customer Today and Tomorrow? (102904_0307) [This white paper is about SAS Profitability Manager. - Budgeting and planning: Put Your Money Where Your Strategy Is : http://www.dmreview.com/article_sub.cfm?articleid=1072134 Also, contact Gary Cokins for pdf of Financial Executives Institute Magazine article on Performance Based Budgeting 122

All managers and employees can be analysts Analytics is no longer a back-office job of specialists. Like with using wizards, analytics are automated and convenient. Leadership with willpower can promote a culture of metrics and enterprise performance management with analytics. 124

Why strategic thinking for decision support? Make the RPM of the ABPM gears spin better, faster, cheaper and smarter 125

From Theory to Practice Your success depends on how well and how fast the right information and intelligence gets to the right people. 126

Thank You Visit our corporate Web Site: www.sas.com Or feel free to contact: Gary Cokins, CPIM SAS Performance Management www.sas.com 919 531 2012 gary.cokins@sas.com http://blogs.sas.com/cokins 127