Enterprise Performance Management

MANAGEMENT CONSULTING Enterprise Performance Management Providing leading services to business functions that directly support and influence the company s core competencies kpmg.co.uk

2 Enterprise Performance Management Enterprise Performance Management Foreword The topic of Enterprise Performance Management is increasingly relevant and important to today s Chief Financial Officer (CFO), where the economic backdrop of recent years, along with the latest research on the role of finance in supporting their respective organisations, is driving many CFOs towards investing in building strong capabilities and skills for planning, analytics and reporting. This is determined by a need to demonstrate tangible value and position the function as a true business partner to the organisation. Enterprise Performance Management, when developed and deployed well, should inform and enable a company s commercial and strategic goals and objectives. This capability requires strong financial analysis and insight to help the business to make better decisions. This capability should include the ability to carry out fast and accurate analysis of, and commentary on, key business issues and parameters that impact future profit and revenue growth. The function should be able to challenge and validate assumptions made, and provide scenario-type analysis on all proposed commercial decisions. KPMG can help organisations to achieve this capability. Our approach is initially focused on developing both a strategic vision and a pragmatic implementation approach. This is expedited through the use of industry-specific solutions tailored to each client s requirements and circumstances. Through our investment in the development of new thinking in this area and drawing on client deployment experience, we believe we have developed an approach which is both compelling and practical to both current and prospective clients. Introduction Increasingly, we are seeing the need for the finance function to provide more robust, timely and relevant insights to the organisation that they support. This is being driven in part by the changes in the dynamics of modern business operating models, where competitive barriers to entry have been lowered through the exploitation of technology and outsourcing service providers. This has resulted in highly efficient, flexible organisations offering intense competition to traditional market players. This has meant that a much stronger internal and external awareness is required into underlying and future financial performance, with a view to enabling faster fact-based decision making. Organisations that have done this successfully, can be more competitive and better able to drive underlying financial performance. Enterprise Performance Management can help to secure a clear competitive advantage. Steps to achieving such capabilities include: 1. Recognising the need to develop a clear vision for the performance management framework, by formally recognising and agreeing the current status, future aspirations and the journey to get there which in turn has been encapsulated in a cohesive case for change. 2. Developing a common performance management framework, which is flexible, aligned and relevant to all parts of the organisation. 3. Ensuring that senior executives, from the CEO down, have this as a key area of focus and act as resilient advocates from such an investment. 4. Investing in defining, deploying and maintaining clear and consistent data models. 5. Having personal incentive plans integrated with a common performance management framework. 6. Making decision support requirements part of key review events. 7. Placing an emphasis on achieving timely, accurate and forward looking insight. 8. Focusing on analytical insight using a clearly defined understanding of the drivers of performance by dimension. Based on our experience, we have explicitly encapsulated these key elements in the development of our client propositions. We believe that it is imperative that each organisation has a clear articulation of their performance framework journey and that enablement can be summarised into three key elements, which we define as: planning, budgeting and forecasting performance reporting dimensional profitability.

Source: Source: EIU/KPMG survey Forecasting with confidence Source: Source: EIU/KPMG survey Forecasting with confidence Enterprise Performance Management 3 Our service proposition Planning, Budgeting and Forecasting What is it? Leading planning, budgeting and forecasting techniques are used to enable an organisation s decisions and actions to be focused on attaining their strategic goals. When used effectively these techniques help ensure resources are deployed appropriately; accountabilities are clear, behaviours to execute strategy are encouraged, resource deployment is aligned and appropriate actions and initiatives are delivered to adjust quickly to changing conditions. Planning, budgeting and forecasting is an integral component of a performance management framework. This framework links top-down, strategic targets to integrated financial and operational bottomup robust forecasts. As a consequence, the budget cycle focuses on articulating how business units will close the gap between targets and pre-budget forecasts and trends. Our point of view Planning budgeting and forecasting can be an effective organisation-wide process to translate strategy into delivery. Organisations should be focused on optimising resource deployment through coherent budgets, embedding robust forecasting processes to provide early insight and reducing budget and forecasting cycle times to change the perception of the process often seen as an administrative burden due to the volume of the effort required to provide detailed budgets and forecasts. Potential We believe embedding a leading practice approach will: Reduced cycle times leading to both lower cost and effort to delivery. Optimise and align resource deployment. Improved agility, allowing responsiveness to changes in business environment. Greater accuracy building greater market confidence. Challenges Data Clear ownership and robust governance and controls are required to ensure quality, consistency and inclusion of all relevant information. Execution Embedding an enterprisewide robust operational forecasting capability, which in turn is monetised by finance. Sponsorship Leadership and vision from the top is vital to success. Alignment of personal objectives to the planning process is critical to early adoption. 4 Planning, Budgeting and Forecasting Planning, Budgeting and Forecasting 5 Leading practice approach An integrated process focused on driving actions to deliver targets and unlock value High-level integrated process Cascade top-down targets Strategic plan by year Agreed initiatives to close gaps ANNUAL BUDGET Enterprise-wide rolling forecasts Consolidate forecast This (rolling forecast) is not a finance driven game at all. Country managers help with the process. You can t underestimate the importance of that side of it Steve Roder, CFO of Life Operations Asia Pacific, AIG The role of the budget is to determine where resources should be deployed, and ensure people are aligned to deliver strategy through an integrated plan. The role of the forecast is to review performance and agree actions to get back on track to ensure targets are delivered. At the core of leading practice planning, budgeting and forecasting is an integrated performance management framework focused on required business decisions. The key objective of this framework is to seamlessly link topdown, strategic targets to financial and operational bottom-up forecasts. This focuses the budget cycle on demonstrating how business units will close the gap between these targets and the consolidated forecasts. The proposed initiatives that will close the gap will then be reviewed, prioritised and agreed with business units before inclusion in the annual budget. This allows the subsequent forecasts to be more focused reviews with accelerated cycle times, and also a tool to drive performance by monitoring progress against initiatives and agreeing actions to bridge the gap to the budget. Value drivers focus on controllable elements of operations, while key performance indicators (KPIs) measure how successfully value is created, maintained and enhanced. Another key feature of the approach is a model built around key business Key value drivers. The value drivers that are Value tree Financial metrics Value drivers performance clearly identified as material, volatile indicators and controllable are owned by business managers to drive the focus across the entire organisation on actions that will Net operating Revenue Market share Total market share% deliver the agreed plan. profit after tax Segment market share % (NOPAT) Service and This should reduce complexity in the products Progress in budgeting and forecasting process (existing/new/ mix) development of by eliminating non-value-add detail service offerings Customer and enabling the business to focus on (channels, TCV factors that managers can influence segments, service) Number of baseline to drive the decisions to optimise contracts Market growth business performance. (contract life cycle) Backlog contacts on hand % revenue with strategic accounts Contracts due We believe the leading for renewal practice approach to planning, Number of billable budgeting and forecasting assets will deliver: Progress in development Reduced timescales, cost and effort. service offerings Product age Improved responsiveness and agility. Customer segment mix Improved accuracy. Customer satisfaction Competitors actions People need to think through what actually drives value. A lot of the time this has nothing to do with standard budgeting items Paul Rogan, Group CFO, Challenger Financial Services Our methodology KPMG s methodology is underpinned by diagnostic analysis completed at the start of the engagement. A client and industryspecific view will be produced which can identify areas of opportunity and culminates in advice to the client on their route to attaining defined and agreed aspiration around the planning, budgeting and forecasting process. 1 2 3 4 5 6 Anaylsis of current environment Assessment against the KPMG 12 point leading practice framework One-to-one interviews Improvement opportunities identified Review challenge and prioritise the opportunities Develop case for change and high level roll out plan

4 Enterprise Performance Management Dimensional Profitability What is it? Dimensional profitability utilises a combination of value-driver analysis and activity-based management (ABM) principles to enable organisations to truly understand where profit and ultimately value is derived from. Dimensional profitability uses value drivers to allocate costs and revenues to dimensions (for example: product, geography and sales channel) providing a pan-organisation view of value creation rather than focussing on the usual organisational structure and business units. The result is a line of sight, where value is created or eroded and can therefore inform tactical decisions in the short term regarding performance, and strategically regarding maximising return from investment in resources. Potential We believe dimensional profitability can deliver visibility and insight into how value is created within an organisation which can help: Drive profit by targeting specific products to specific customers. Utilise the most efficient sales channels for a product or customer. Provide insight into how to grow business and market share. Identify and stop activities that destroy value. Provide strategic insight into how to optimise areas such as product portfolio or sales channels. Deliver an organisation-wide view of profitability. Challenges Data Investment in defining and maintaining a robust data model to ensure high quality, consistent and complete information. Sustainability Defining requirements and embedding processes and technology is critical to ensuring that such an analytical capability remains sustainable. Adoption Integrating dimensional analytics capability within an overall performance management framework as a means of identifying the root cause of performance issues. 2 Dimensional Profitability Dimensional Profitability 3 Our point of view Dimensional profitability can offer leadership holistic, business-critical information where insights can quickly be turned into actions. With the investment of time and capital, it can transform the analytical capability and organisational agility of businesses which in turn drives shareholder value and creates competitive advantage. What is Dimensional Profitability? Dimensional Profitability moves beyond What are the benefits of Dimensional Profitability? traditional costing approaches (abc and unlike costing methodologies, Dimensional Profitability equips the whole organisation standard costing) to provide a better with the insight to understand and challenge their business to positively impact value. understanding of profitability across this is provided by: the organisation. transparent and action-orientated information on profitability linked to to provide true insight into value, defining operational performance. the dimensions is critical. a dimension is a key element within an organisation, consistent information and understanding across the entire organisation. where having a better insight into Faster profitability reporting and the ability to review multiple scenarios. profitability could better support decision making. For many organisations, the Reduced user input and time spent manually creating figures. reliance on organisational structures and boundaries drives local decision making and value rather than overall value. Dimensions should be organisationalagnostic. For example these should be products, geographies, sales channels and customers rather than business units. as can be seen in Figure 1, Dimensional Profitability provides line of sight on how dimensions add value through allocating revenues and costs to value drivers (as opposed to traditional cost drivers). Dimensional Profitability analysis can be held in a data cube within a system. the system draws on information to provide the organisation with a powerful insight capability and predictive analysis by viewing and analysing profit by a user defined selection of these dimensions/attributes. an example of how the system could be used: a user can see the profitability of a Product a or go deeper by understanding profitability of Product X in country Y using sales channel Z or perform what-if analysis such as what is the impact on the global profitability of Product a if exiting country B. Figure 1: Dimensional Profitability overview Geography Channel Key Account Brand Pack Dimensions are enabled for P&L and KPi reporting BY DIMENSIONS Cost assigned to dimension through value driver link + = Revenue assigned to dimension through value driver link Regional sales reporting with detail by channel, customer, brand and pack channel P&L to net margin with drill-down to customer and/or brand Brand P&L for consistent reporting to group Local brand KPi report with analysis of pack mix variances within the brand analysis of returnable package gross margin at hub level Dimension Profitability This is the heart of Dimensional Profitability. linked through value drivers* additional insight from Dimensional Profitability KPMg Point of VieW Value drivers provide real business insight as they enable operational performance to be linked to the enterprise s strategy. *Value Drivers are controllable elements such as activities processes, initiatives that must be executed well to deliver the financial goals that ultimately drive value. For example, consumer footfall, hotel occupancy, customer segmentation. it is important to link revenues and costs to these value drivers rather than aligning to the organisation chart. Our methodology The design and implementation of a fully operational model can be achieved using our six-step methodology, each of the steps consists of several essential tasks which require careful planning and suitable expertise to execute. 1 2 3 4 5 6 Define value drivers for the business Define dimensions that are critical to the business Agree depth of information required Ensure date is consistent and accurate Enable the agreed solution by employing the appropriate systems and tools Align the performance management framework

sources (1) http://www.emc.com/collateral/about/news/idc-emc-digital-universe-2011-infographic.pdf (2) James taylor and neil Rayden (2008) smart (e) systems How to Deliver Competitive Advantage by Automating Hidden Decisions source: KPMg uk Enterprise Performance Management 5 Performance Reporting What is it? Leading practice performance reporting enables an organisation to manage data and turn it into insightful, relevant and timely information which is relied on to drive action-orientated decision making. Such capabilities rely on defining a common reporting hierarchy based on the key drivers of value and deployed consistently using metrics which drive goal-oriented behaviours. In addition, performance reporting needs to be forward-looking and have the ability to formulate strategy, understand scenarios and use information related to both the past and the future to derive actionable insight. Potential We believe effective performance reporting can: Align performance consistently across the organisation. Focus on the true drivers of value and controllable elements of performance. Integrate seamlessly with the budgeting and forecasting process. Utilise scenario planning to validate possible outcomes based on past performance. Deliver forward-looking information to allow timely interventions to get performance on track. 2 Performance Reporting Challenges Data Clear ownership and robust governance and controls are required to ensure high quality, consistent and complete information. Technology Investment in technology should only occur once business requirements are fully defined. Change management A change of mindset is needed to embed new ways of working through education, people management and senior sponsorship. Performance Reporting 3 Our point of view We believe organisations must resist the temptation to continue to produce vast amounts of low-value data. It is vital to step back and consider what constitutes insightful information. In the future, we believe that many organisations competitive advantage will be their predictive and pre-packaging dexterity the ability to pre-empt competitors with superior intelligence will be what sets them apart. Introduction the amount of data being collected However, an effective Performance and stored is exploding. During the Reporting Framework must also be next decade the number of servers is forward looking and action orientated. expected to grow worldwide by 10 times, organisations that succeed in developing the amount of information managed an effective Performance Reporting by enterprise data centres to grow by Framework have the ability to strategise, 50 times and the number of files by understand scenarios, and use 75 times (1). information related to both the past and the future to derive actionable insight. organisations now have access to new sources of data, such as Big Data that We define predictive analytics as the can be used to drive improved metrics process whereby an organisation takes incorporating unstructured data brought a look at its past performance, learns about by the evolution of the web, social from its cumulative experience and takes media and the cloud. action to apply what has been learned to the future. therefore, predictive analytics With data growing at an exponential rate, becomes a powerful tool for bringing the organisations need to determine what past and future together and underpins information they need. organisations the Performance Reporting Framework. should ensure that their Performance Reporting Framework provides a link between the information produced, the organisation s strategic objectives and operational decision making. technology is merely an enabler for an organisation to achieve its goals. standard performance reporting methods provide value in their capacity to analyse the past. Business reporting techniques, including scorecards, dashboards, KPi metrics, online analytical processing, and ad hoc queries deliver a retrospective analysis that remains an important component of decision making. Value comes only when the insights gained from analysis are put into action to drive improved decisions. Best practice is to embed predictive analytic models in (2) operational systems. Components of an effective performance reporting framework We believe organisations that do succeed in making sense of their data and turn it into insightful information establish a Performance Reporting Framework that contains the following components: Focus on value drivers and controllable elements of performance: the business has a greater understanding of what drives performance (and what is beyond their control), which improves the ability to intervene at the right point and explain performance externally. Reporting is rich in graphs, trends and visualisations and is exceptions or issues based: focus on the issues requiring action or intervention through impactful presentation. Emphasis on competitive perspective: sets out performance and suitability of targets against the competitive environment. Monitors the external environment: there is clarity around assumptions and expectations from the external environment in which the business operates. Reporting allows for follow up: reports are a key part of the operational reviews in the business and actions are assigned and progress reviewed at each meeting. Reports are viewed as a single version of the truth. Use of scenario planning and what-if questions: using predictive analytics techniques, organisations can validate different future outcomes against past performance. Reporting is forward looking: purpose of the reports is to determine timely interventions to get performance back on track. Insightful commentary: complements the use of graphs and explains what is needed to get back on track, not past performance. Integrates the budgeting and forecasting process: reports focus on progress in delivering the key performance metrics agreed at each level of the organisation as part of the planning process. Enables business partnering: Finance can better support operations and lead conversations around options and targeted outcomes, rather than explaining the numbers. Performance metrics cascaded from Group Division Group Business Units Customers and Marketing Sales and Service Manufacturing and Supply Chain Functional Support Performance metrics drive functional excellence KPMg Point of VieW We believe that organisations that report effectively are able to adapt their Performance Reporting Framework and metrics to quickly and efficiently focus and drill into different facets of the organisation depending on their priorities and business imperatives. traditionally, in a matrix environment, two parallel reporting streams support the business unit structure (group, Divisions, Bu) the functional organisations. We have supported clients in developing a single Performance Reporting Framework to enable reporting that fits both business unit and functional requirements. Our methodology Too many performance reporting implementations fail because of an unnecessary emphasis on technology. KPMG s methodology aligns people, processes and systems to deliver an overall methodology tailored to an organisation. Improvement plans will have the ability to be scaled into smaller projects depending on resource availability and current priorities. 1 2 3 4 5 6 Anaylsis of current environment Define reporting requirements Define the delivery model Recommend actions Review and challenge Relisation and rollout

6 Enterprise Performance Management Case study and credentials Real Estate and Hospitality KPMG advised this client on designing a value driver framework in response to a fundamental change in business strategy and organisation. The new framework was used to identify reporting requirements and KPIs to produce a new reporting landscape including a new Board Report. Telecommunications We advised on the design of a re-engineering global financial performance model for a large multinational telecoms provider, required as a result of a re-design of the intra company trading models. Chemicals and Pharmaceuticals We supported a global pharmaceutical organisation in the design, development and implementation of a benefits tracking tool for defined and agreed initiatives and projects which were identified as part of a group-wide procurement efficiency programme targeting 300 million of efficiency gains. FMCG KPMG developed the global operational costing and dimensional profitability process and methodology blueprint for a large global brewing organisation as part of their enterprisewide business change programme. Media Working collaboratively with the client, we developed a redesigned performance management reporting model required to support the configuration of a leading financial reporting suite. Mining Anglo American wanted to redesign their board and management reporting so that its content had a clearer link back to driving business performance. Using a value-driver based approach, KPMG worked with Anglo American to redesign the KPIs, structure and format of their reporting. In addition, we defined and developed the planning, budgeting and forecasting processes which culminated in the design and implementation of a scenario planning tool.

Contact us Patrick Fenton Partner T: +44 (0)7717 577172 E: patrick.fenton@kpmg.co.uk John O Mahony Head of EPM T: +44 (0)7768 542078 E: john.o mahony@kpmg.co.uk Paul Coffey Performance Reporting T: +44 (0)7767 671416 E: paul.coffey@kpmg.co.uk Hayley Rocks Planning, Budgeting and Forecasting T: +44 (0)7795 222062 E: hayley.rocks@kpmg.co.uk Simon Ferriter Dimensional Profitability T: +44 (0)7500 097785 E: simon.ferriter@kpmg.co.uk Gerard Harris Technology T: +44 (0)7770 348908 E: gerard.harris@kpmg.co.uk www.kpmg.co.uk The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Printed in the UK May 2015 CRT039159