About Gary Cokins Analytics-based Enterprise Performance ...€¦ · Text analytics [sentiment...

Copyright © 2010, SAS Institute Inc. All rights reserved. 1

1

Analytics-based EnterprisePerformance Management

Gary Cokins, CPIMAnalytics-Based Performance Management LLC

Cary, North Carolina USA

www.garycokins.com

919 720 2718

[email protected]

Copyright 2015 www.garycokins.com Analytics-Based Performance Management LLC

Corporater

September 18, 2015

Boston, MA

2

About Gary CokinsFounder, 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]

- SASCopyright 2015 www.garycokins.com Analytics-Based Performance Management LLC

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Managers who have previously struggled at

promoting FP&A, enterprise performance

management (EPM), lean management, and

integrating business analytics (BA) into their

decision support systems.

Who will benefit from this presentation?

Managers who intend to “champion” any or all EPM

and BA improvement techniques and need a

compelling call to action.

Copyright 2015 www.garycokins.com Analytics-Based Performance Management LLC4

Key questions

What? So what? Then what?


http://www.garycokins.com/

mailto:[email protected]






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What Do These Companies Have in Common?

• Amdahl

• Cheesebrough-Ponds

• Data General

• Delta Airlines

• Digital Equipment

• K-Mart

• Kodak

• Levi Strauss

• Raychem

• Revlon

• Wang Labs

They passed all the “hurdles” for 1961-80 in Tom

Peter’s book “In Search of Excellence”; p. 20-21


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 is the life-span of big companies?

Source: Professor Gary Biddle. University of Hong Kong

What can we conclude from these?


e.g., Wang Labs, DEC, Borders, Blockbuster

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Drowning in data but starving for information.


AGENDA

1a) Overview of Analytics-based Performance Management

1b) The Emergence of Analytics to Support Decision Making

2) Strategy Formulation and Execution

3) Risk Management

4) Strategic Managerial Accounting (historical / descriptive)

5) Operational Managerial Accounting to Optimize Process Costs

6) Predictive Accounting for Decision Support and Budgeting

7) Workshop exercise

8) The Shift in ROI’s source from Tangible to Intangible Assets

9) Why is the Adoption Rate for Analytics-based PM so Slow?

Summary, Discussion, Questions and Answers







9

Confusion and Lack of Consensus about EPM

Is it human resources PM?

Is it alignment, such as strategic or resource allocation?

Is it process, productivity and quality improvement?

Is it scorecards, dashboards, KPIs and measures?

Or … is it all of the above? And even more?


The good news is this …..

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What is Enterprise Performance Management (EPM)?

Enterprise 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

Organization

Resources(capacity)

Strategy,Mission

How Does It All Fit Together?

ERP, etc.Customer

Loyalty

Scorecards

CRM

ROI

$Shareholders

SupplierInputs


Organization

Resources(capacity)

CRM

ROI

$

Strategy,Mission

Shareholders

ABPM’s three major components.

ERP, etc.Customer

Loyalty

Scorecards

SupplierInputs

Process:

How do we do it (now)?

How will we do it (future)?

Strategy creation

and execution:

- Where do we want

to go?

- How will we get

there?

Performance:

How well are we:

- Achieving our

strategy (KPIs)?

- Performing our

processes (PIs)?







13

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”


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.


AGENDA




3) Risk Management














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Why is business analytics needed?

-- by first-to-market (via innovation)?

-- by customer loyalty?

But how sustainable are these long-term?

-- by low-cost and low-price provider?

-- Other?

How does an organization gain a competitive edge?


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.

But don’t each of these have risks today?

-- focus strategy – via concentrating on a narrow segment with entrenched customer loyalty.

* Source: Michael E. Porter’s three generic strategies.


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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.

The best defense is agility with quicker and smarter decision making using statistics, analytics, and operations research.

-- focus strategy – broad-market cost leaders or micro-segmenters invade and erode your customers’ loyalty.


Confusion and lack of consensus about BA

Is it business intelligence (BI) with enhancements?

Is it probabilities and statistics, like regression and

correlation analysis?

Is it the technology of data governance, management and

quality?

Is it forecasting? Is it optimization equations?

Or … is it all of the above? And even more?

Is business analytics (BA) a data warehouse?

Is it data mining with query and reporting?







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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.


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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Queries simply answer questions. Business analytics

creates questions.

Business Analytics – insights and actions

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.


Which X is most likely to Y?

Customer Profitability

Which customer will generate the most profit lift from our least effort?

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?

These are the types of questions asked everyday. Business analytics fills in the X and Y.

Employee Retention

Which of our employees will be the next most likely to resign and take a

job with another company?







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What Pressures Cause Interest in Business Analytics?

-- Volatility, uncertainty, risk and clock-speed

-- Standardized processes (e.g. ERP, CRM systems)

-- Intuition of the potential value of unused structured and text data

-- Enormous IT processing power

-- Exponential growth in data, users, searches

-- Complexity and variables are replacing “gut feel


Examples of Analytics

-- Hollywood celebrities and the film industry

-- Sports teams

But what about business analytics in mainstream businesses?

-- Crime prevention

-- music score analysis

Will Smith: Independence Day; Men in Black; I, Robot; I am Legend; Hancock


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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]

There are many Business Analytics Domains


STANDARD REPORTS

AD HOC REPORTS

QUERY DRILLDOWN (OR OLAP)

ALERTS

1

2

3

4

Reactive (Descriptive)







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STANDARD REPORTS

AD HOC REPORTS

QUERY DRILLDOWN (OR OLAP)

ALERTS

1

2

3

4

5

6

7

8

FORECASTING

STATISTICAL

ANALYSIS

PREDICTIVE

MODELING

OPTIMIZATION

Reactive Proactive(Descriptive) (Inferential)


How does forecasting and predictive modeling differ?

Forecasts tell you how many ice cream cones will be sold in July,

so you can set expectations for planned costs, profits, supply

chain impacts and other considerations.

Predictive models tell you the characteristics of ideal ice cream

customers, the flavors they will choose and coupon offers that will

entice them.

If your goal is to do a better job of buying raw materials for the ice

cream and to have them at the factory at the right time, your

company needs a forecasting solution.

If the marketing department is trying to figure out how, where and

which most attractive customers to market the ice cream, it needs

predictive modeling.


31

AGENDA




3) Risk Management









What has Caused Interest in EPM?

1) Failure by executives to execute their well-formulated

strategy.







33

When Dilbert Jokes About It, It is Mainstream


Executives are Most Concerned About Executing Strategy

3.5

3.7

3.7

3.7

3.7

3.8

4.0

1 2 3 4 5

IT capabilities

Growing the top line

Forecasting & reporting effectiveness

Customer service

Market trends

Regulatory, compliance, and risk management

Executing the strategy

"Using a 1-5 scale, please rate the level of interest / concern

you have in the following business issues at present.”

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

BalancedScorecard

StrategyMapping

A Vision statement answers

“where do we want to go?

Strategy maps and scorecards answer,

“How will we get there?”

The strategy map and scorecard are mechanical.

They help realize the vision and mission.


Fin

an

cia

l Cu

sto

mer In

tern

al P

rocess L

earn

ing

Maximize Shareholder Value

Generic Strategy Map Architecture

Financial

Customer

Internal

Processes

Learning &

Innovation







37

Vision& Mission

Exceed shareholderexpectations

Improve profitmargins

Increase salesvolume

Diversify incomestream

Increase sales toexisting customers

Diversify customer base

Test newproducts

Target profitablemarket segments

develop newproducts

Optimize internalprocesses

Attract newcustomers

Developemployee skills

Integratesystems

Learning

& Growth

Internal

Process

Customer

Financial


Vision& Mission







Test newproducts


develop newproducts




Integratesystems

Learning

& Growth

Internal

Process

Customer

Financial

A learning environment

stimulates

Process excellence

Customer intimacy

Financial value

leads to

creating


39

A scorecard is more of a social tool than a technical tool.

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 ------->

Who Does What?


The Key to Scorecards

How does everyone answer this single question:

“How am I doing on what is important?”

The overriding purpose of a strategy map and scorecard system is to make mission and strategy everyone’s job.

Strategy Maps and Scorecards provide this answer.







41

Scorecard Lessons Being Painfully Learned

Scorecard or Report Card?

KPIs or PIs?


KPIs(strategic context)

Must have

targets

PIs(operational)

With

targets

Without

targets

- Trends

- Upper / lower thresholds

Project-based

KPIs

Process-based

KPIs

Scorecard

(inter-related

measures with

cause-and-effect

correlations)

Dashboard

(measures in isolation)

Budget &

Resource

Planning

Strategy

Diagram Measurements

$ $

Frequency of

reporting

quarterly

monthly

weekly

daily

hourly

real-time

Without

targets

- drill-down analysis

- alert messages

What is the difference between KPIs and PIs?


43

What Measures Matter? KPI Correlation Analysis

43Copyright 2015 www.garycokins.com Analytics-Based Performance Management LLC

44







45

Thickness of the arrows reflects explanatory power


46

What are BSC’s Organizational Behavior Barriers?

Balanced Scorecard

Confusion between KPIs and PIs … resulting in too

many KPIs.

Failure to start with the strategy map as the

determinant of what KPIs to measure.


47

What are BSC’s Organizational Behavior Barriers?

Balanced Scorecard

Executives’ biased overweight of their scorecard with

aggregate, lagging and financial measures.

Poor linkage of KPIs & PIs to bonus incentive schemes.

Confusion about how to ‘cascade’ strategic objectives

downward into operational projects and assigned

responsibilities with accountability.


AGENDA




3) Risk Management














49

Why integrate ERM and EPM? (1)

“The biggest challenge in performance management today is the increased

attention that needs to be paid to the risk-reward trade-off. Companies have

been ignoring the risk side of performance measurement and monitoring for

too long.”

“The recent financial and economic crisis has shown that a failure to

integrate enterprise performance and risk management can leave a

business struggling in the face of uncertainty. … companies’ efforts in the

area of performance and risk management focus far too much on

documentation and procedures to meet regulatory requirements and not

enough on how to obtain and integrate performance and risk information for

more effective decision making.”

“One way to link (them) is through scenario planning and budgeting. .. That

way the board (can) “stress test” the strategic plan.”

“Integrating risk and performance reporting”; Financial Director;

Regine Slagmulder, Vlerick Leuven Gent Management School, Oct 14, 2011


Why integrate ERM and EPM? (2)

Combining the disciplines of enterprise risk with

performance management results in better business

decisions and actions.

Monitoring performance and risk as separate issues is

not adequate for driving shareholder value. Investors

expect returns that are in proportion to the risks that a

firm is taking. This entails understanding how risk

impacts corporate strategic direction and decision

making as well as processes such as planning,

forecasting and profitability analysis.


51

Three Categories of Risks

Preventable Risks – Unauthorized employee actions;

breakdowns in standard operating procedures.

Strategy Execution Risks – Taken to execute the C-

suite’s strategy to generate superior returns.

External Risks – From uncertain, uncontrollable external

events that cannot easily be predicted or influenced.

Source: Robert S. Kaplan

Austrian Controllers Conference

March 6, 2014 Vienna


Strategy Risks (#2)

Strategy Execution Risks – Taken to execute the C-

suite’s strategy to generate superior returns.

Examples: credit risk, R&D programs, hazardous

environments.

These types of risk cannot be reduced to zero. Their

likelihood of occurring can be reduced or effectively

contained should they occur.


Austrian Controllers Conference

March 6, 2014 Vienna







53

Vision& Mission







Test newproducts


develop newproducts




Integratesystems

Learning,

Innovation,

& Growth

Internal

Process

Customer

Financial


Risks can be identified for

each strategic objective

in the strategy map

54

Vision& Mission

Learning,

Innovation,

& Growth

Internal

Process

Customer

Financial


Risks can be identified for

each strategic objective

in the strategy map

Macroeconomic factors

Exchange rate fluctuations

Political environments

Competitor actions

Concentration of Revenues in too few customers

Dysfunctional organizational structure

Inadequate controls

Immigration regulations

Obsolescence of technologies

and products

Examples


Austrian Controllers ConferenceMarch 6, 2014 Vienna

55

High

Low

Low High

Severity of impact on

event occurrence and

achievement

of objectives

probability of an event occurring

Risk Assessment Grid

8

10 3

4

5

6

7

19

2

Do not budget

Budget


AGENDA




3) Risk Management














57


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.


Six Eras of Managerial Accounting

20,000 BC 1492 1910 1930 1980 2015

Stone

Age

Medieval

Industrial

Regulatory

Compliance

Customer

Predictive

Accounting &

Analytics

Era

Of

Costing

Maturity

A shift of

emphasis from a historical to a

predictive view

of strategy and

operations

Precious

metal and paper money

piles,

ultimately

leading to

double-entry bookkeeping

(Luca Pacioli,

1496).

Alexander

Hamilton Church;

standard cost

accounting (to

reflect

Frederick Winslow

Taylor’s

manufacturing

scientific

methods, 1910)

The USA’s

Great Depression

resulted in

regulatory

reforms to

protect investors

(1930s).

“Causal” cost

tracing of increasingly

diverse types

of products,

services,

channels and customers

Rocks and

stone piles.


59

Standard Costing, Project Accounting, Job Order Costing,

Economic Value Added TM, Balanced Scorecard, Activity Based

Costing, Intellectual Capital, Performance Pyramid, Business

Excellence Model, Customer Profitability, Strategic

Management Accounting, Strategic Cost Management, Supply

Chain Costing, Cash Flow Return on Investment, Business

Models, Target Costing, Kaizen Costing, Lean Accounting, Life

Cycle Costing, Value Added Analysis, Process Costing, Time-

based Activity Based Costing, Value engineering, Stock

Options, Micro Profit Centres, Quality Costing, Non-value

Added Cost, Human capital, Resource Consumption

Accounting, Structural Capital, Relationship Capital, Brand

Value, Total Cost of Ownership, Throughput Accounting, Triple

Bottom Line, Beyond Budgeting, Risk-adjusted Return on

Capital at Risk ……

Here is Part of the Problem.Which managerial accounting system should we

use?


Standard Costing, Project Accounting, Job Order Costing,

Economic Value Added TM, Balanced Scorecard, Activity Based

Costing, Intellectual Capital, Performance Pyramid, Business

Excellence Model, Customer Profitability, Strategic

Management Accounting, Strategic Cost Management, Supply

Chain Costing, Cash Flow Return on Investment, Business

Models, Target Costing, Kaizen Costing, Lean Accounting, Life

Cycle Costing, Value Added Analysis, Process Costing, Time-

based Activity Based Costing, Value engineering, Stock

Options, Micro Profit Centres, Quality Costing, Non-value

Added Cost, Human capital, Resource Consumption

Accounting, Structural Capital, Relationship Capital, Brand

Value, Total Cost of Ownership, Throughput Accounting, Triple

Bottom Line, Beyond Budgeting, Risk-adjusted Return on

Capital at Risk ……

Here is Part of the Problem.Which managerial accounting system should we

use?







61

ACCOUNTING

Financial

Accounting

Cost Measurement

Managerial

Accounting

Cost AccountingFinancial Reporting

regulatory compliance

Cost Reporting &

Analysis(feedback on performance)

Decision Support/

Cost Planning•[e.g., GAAP, IFRS]•Costs of goods sold

•Inventory valuation

• Spending vs. budget variance

analysis • Profitability reporting

• Process analysis (e.g., lean,

benchmarking, COQ)• Performance measures

• Learning; corrective actions

• Fully absorbed & incremental pricing

• Driver-based budgeting & rolling financial forecasts

• What-if analysis

• Product, channel & customer rationalization

• Outsourcing & make vs. buy analysis

History FutureLow value-add Modest value-add High value-add

Source data capture

(transactions /bookkeeping)

Non-financial data

capture

The Domain of Costing

Tax

Accounting

Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins

published by the International Federation of Accountants, 2010Copyright 2015 www.garycokins.com Analytics-Based Performance Management LLC

Source: PABC IGPG “Evaluating and Improving Costing in Organizations” published by the International Federation of Accountants, 2009

Cokins’ IFAC.org

Taxonomy of

Accounting

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Direct and Absorption Costing

Ideally, all costs should be directly charged, but as variety, complexity, and

technology increases, more costs are indirect and shared.

Activities

Resources

Final

Cost

Objects

Project

accounting ABC/M ALLOCATIONS

Labor

ReportingEstimates

OUTPUTS, PROCESSES, PRODUCTS, SERVICE LINES, MARKETS, CHANNELS, ORDERS, CUSTOMERS

1st Preference

2nd Preference

3rd Preference

Last Resort

Cost-Driver Table

Work

Order

Standard

Routing,

Bill of

material

Standard

costing

Activity

Driver


63

A simple explanation of ABC …that you can explain to yourspouse (or boss) tonight.


Cost

Components

Stages in the Evolution of Businesses

IntegratedOld-fashioned Hierarchical

Changes in Cost Structure

100%

Overhead(indirect expenses)

Direct (recurring) Labor

Material

1950 2000

Direct

0%

Broadly averaged cost allocation was acceptable.

Cost errors are large and misleading.

The Need for Tracing, not Allocating, Costs







65

Customers andService-recipients

Resources

Process Costs

Output & Outcome Costs

inputs

This is known.

Appropriations,approved budgetspending levels

But ?

But ?

The Primary View of Most Managers


Insurance Claims Processing Department

The General Ledger View is Structurally Deficient for Decision Analysis.

Salaries

Equipment

Travel expense

Supplies

Use andoccupancy

Total

$621,400

161,200

58,000

43,900

30,000

$914,500

$600,000

150,000

60,000

40,000

30,000

$880,000

$(21,400)

(11,200)

2,000

(3,900)

––

$(34,500)

PlanActualFavorable/

(unfavorable)

Chart-of-Accounts View

When managers get this kind of report, they are

either happy or sad, but they are rarely any smarter!


67

#of

Activity-Based View

To: ABC Data Base

Key/scan claims

Analyze claims

Suspend claims

Receive provider inquiries

Resolve member problems

Process batches

Determine eligibility

Make copies

Write correspondence

Attend training

Total

$ 31,500

121,000

32,500

101,500

83,400

45,000

119,000

145,500

77,100

158,000

$914,500

Claims Processing Dept

Salaries

Equipment

Travel expense

Supplies

Use andoccupancy

Total

$621,400

161,200

58,000

43,900

30,000

$914,500

$600,000

150,000

60,000

40,000

30,000

$880,000

$(21,400)

(11,200)

2,000

(3,900)

––

$(34,500)

PlanActualFavorable/

(unfavorable)

Claims Processing Department

Chart-of-Accounts View

From: General LedgerActivity

cost

drivers

#of#of#of#of#of#of#of#of

#of

$914,500

Each Activity Has Its Own Cost Driver


Multiple-Stage Cost Flowing

SimpleABC

ExpandedABC

Resources

Resources

Activities

Objects

Objects

Activities







69

ABC/M Cost Assignment Network

Salary, FringeBenefits

DirectMaterial

Phone,Travel

SuppliesDepreciation

Rent, Interest,

Tax

Customers

Business

Sustaining

Products,

Services

Resources(general ledger view)

Work Activities(verb-noun)

FinalCost

ObjectsSuppliers

(1)

Dem

and

s O

n W

ork C

ost

s (2

)

“C

ost

s M

easu

re t

he

Eff

ects

”

Support

Activities

Equipment

Activities

PeopleActivities

“cost-to-serve”paths


ABC/M Cost Assignment Network

Salary, FringeBenefits

DirectMaterial

Phone,Travel

SuppliesDepreciation

Rent, Interest,

Tax

Customers

Business

Sustaining

Products,

Services

Resources(general ledger view)

Work Activities

(verb-noun)

FinalCost

ObjectsSuppliers

(1)

Dem

and

s O

n W

ork C

ost

s (2

)

“C

ost

s M

easu

re t

he

Eff

ects

”

Support

Activities

Equipment

Activities

PeopleActivities

“cost-to-serve”paths

Dire

ct c

osts


71

Salary, Fringe

Benefits

Direct

Material

Phone,

Travel

Supplies

DepreciationRent,

Interest, Tax

Business

Sustaining

Products

Resources

Activities

Final Cost Objects

(1)

Dem

and

s O

n W

ork C

ost

s (2

)

“Co

sts

Mea

sure

th

e E

ffec

ts”

Support

Activities

Equipment

Activities

Suppliers

Balance SheetExpenditures

Fixed Assets Inventory Receivables

Cost of Capital

Imputed

cost of

capital

ABC/M Cost Assignment Network (imputed CoC)


$ 30 sales

- 28 expenses

= $ 2 profit

$ 2 profit

Unrealized profit revealed by ABC

Net Revenues

MinusABC costs =

profit

More important than a better costing method are its results.







73

Sales $ 31.0

- Expenses 31.5

= prof/(loss) $ (0.5)

loss = $ (0.5)

More important than a better costing method are its results.

Net Revenues

MinusABC costs =

profit


ActivityCosts

each activity’s driver quantity

unit activity driver cost

x

(eg. # of registrations)

Price/Fee(Revenue)

ABC provides insight for the product’s or service’s cost drivers and driver quantities.

WorkActivities

Activity Costs “pile up” into outputs.


7575

Two Views of Cost --- The Cost Object View

Dept. 1

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 2

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 3

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Outputs

Reso

urc

es

Suppliers

Products

Orders

Customers

Sustaining

Process Measures

X = activities

= process

= cost drivers

$

The Vertical view of Assigning Costs


Dept. 3

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 2

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Dept. 1

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

xxxxxxx

Outputs

Reso

urc

es

Suppliers

Products

Orders

Customers

Sustaining

Process Measures

X = activities

= process

= cost drivers

$

Two Views of Cost --- The Process ViewThe Horizontal view of Sequencing Costs







77

Supplier(direct material)

aa

Key:

Enterprise

Cost

BusinessProcesses

Process A

Processes include activities that have high to low value-adding content.

VA

NVA

Processes: Six Sigma, Lean Management, and Value Stream Mapping

$

$

$

$

$$

$

$

ABC also provides unit costs of outputs for cost visibility and benchmarking.


Project accountingABC/M

Direct

project cost

Actual

work steps

Project

costs

Indirect

expenses

(Resources)

Activity

costs

Business

sustaining

costs

Customer

Costs

Project plan(schedule)

#1

#2

#3

#4

#5

Repeatability

of

Work

HI

LOW

% of costs

from

ABC

100 %

0 %

Project

Acct. ABC

Combined ABC and Project Accounting


79

Time-Driven ABC (TDABC) is being over-promoted.

It is simply an alternative method for activity

drivers … and applies under special conditions: • highly repetitive activities,

• less interest in indirect expenses,

• concerns about unused capacity costs.

Lean accounting can co-exist with one or more other

costing methods. Be wary of its anti-ABC zealots.

Resource consumption accounting (RCA) is justified

“if the higher climb is worth a better view.”

TDABC, Lean accounting, and RCA


What are ABC’s Organizational Behavior Barriers?

Activity-based costing (1 of 2)

A black-eye reputation from failed implementations in

the 1990s … mostly from inexperienced consultants.

The accountants misplaced quest for precision, detail

and accuracy … leading to over-sized and complex

models … that are not understandable and are

unmanageable to maintain.

Failure to initially secure buy-in and planned use from

both users and executives.







81

What are ABC’s Organizational Behavior Barriers?

Activity-based costing (2 of 2)

Dominance of financial accounting (for valuation and

compliance) over managerial accounting (for creating

value).

Not realizing that line managers have less interest in

historical reporting and greater interest in predictive

outcomes.

Inadequate training – “I feel like a dog watching

television; I do not know what I am looking at.”


AGENDA




3) Risk Management









83

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.

.


CEO Concerns Confirm this Understanding

Most important

Moderatelyimportant

Balancing short-term goals w/ long-term strategy

Focusing on core competencies

Managing risk on an enterprise basis

Using technology for competitive advantage

Building a responsive, flexible organization

Attracting and retaining skilled workers

Responding to regulatory changes

Improving productivity

Increasing market share

Attracting and retaining loyal customers

Mean scores

7.62

7.66

7.67

7.8

7.82

7.86

7.93

8.02

8.39

8.95

Source:

Gartner, 2011:

"Bank CEOs

Rate Business

& Technology Concerns"

#1

since

2002







85

Value of Company = f(Value from Customers)

The only value a company will ever create is the valuethat comes from its customers – the current ones and the

new ones acquired in the future.

To remain competitive, one must determine how to keep customers longer, grow them into bigger customers, make

them more profitable , serve them more efficiently, and acquire relatively more profitable customers.

Source: Don Peppers and Martha Rogers, Peppers & Rogers Group (edited)


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 product

profit margin reporting is you don’t see the bottom half of

the picture.

So what about the Other Below-the-line “Calculated” Costs?


87

87

INCOME STATEMENT

Sales $ 100

- Product direct costs -20

- Overhead cost -10

----------------------------------------------

= Gross profit margin $ 70

What about Costs Below Product Costs ?

- selling costs -20

- distribution costs -10

- marketing costs -20

- administrative costs -10

----------------------------------------------

= Total Profit $ 10

The accountants

report these by

each product (but

they are wrong

without ABC).

?We have no visibility

of these costs by

customer (except in

total) !


Indirect expenses

Distribution, Sales & Marketing

General, Accounting, and Administration

Customer+

Direct material,

Direct labor &

Equipment

Costs from Sales & Marketing are not Products

Channel+

Product







89

# 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.

Why Do Customer-related Costs Matter?The Perfect Storm


# 4 - Power Shift – The Internet is shifting power …

irreversibly … from sellers to buyers.

# 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.

Why Do Customer-related Costs Matter?The Perfect Storm



92

WORK

ACTIVITIES

(examples)

SUPPLIER

SUSTAINING

UNIT &

BATCH

LEVEL

BRAND

SUSTAINING

PRODUCT/SERVICE

LINE SUSTAINING

UNIT &

BATCH

LEVEL

CUSTOMER

SUSTAINING

UNIT &

BATCH

LEVEL

SENIOR

MGT

UNUSED

CAPACITYR&D

OSHADOT

RESOURCES

FINAL

COST OBJECTS

# Advertisements

SUPPLIERS

SUPPLIER

-

RELATED

PRODUCTS/SKUs

SALARY &FRINGE BENEFITS

DIRECT

MATERIAL

CAPITAL

(equipment-related)

NON-WAGE RELATED

(e.g., operating supplies)

# Machine

hours# Material

moves

# Set-ups

# Shows

# Advertisements

RELATIONSHIP

MANAGEMENT

PURCHASES,

RECEIPTS

•BRAND/PRODUCT-

RELATEDWORK,•BRAND/PRODUCT-

RELATED ADVERTISING

& MERCHANDISING,•FACILITIES COST

MACHINES

MAKE PRODUCT,MOVE PRODUCT,

SET-UPS

TRADE SHOWS,

IMAGE ADVERTISING

SALES CALLS,

ORDER HANDLING,FREIGHT

# POs

# Receipts

# Sales

calls# orders

# shipments

CUSTOMERS

Gvt

RegulatorsARBITRARY

(for full absorption)

ARBITRARY

(for full absorption)

BUSINESS

SUSTAINING

RELATED

PRODUCT & SERVICE LINE-

RELATEDCUSTOMER-

RELATED

IRS

ABC/M Profit Contribution Margin Layering

Etc.

#

Pounds#

Gallons

# Meters

Facility costs

Pro

duct

-spec

ific







93

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%

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)

Product-

related

costs

Channel &

Customer-

related

costs

ABC Customer Profit & Loss Statement


High(Creamy)

Low(Low Fat)

Low High

Cost-to-Serve

Product MixMargin

Very

Profitable

Very

unprofitable

Types of Customers

Migrating Customers to Higher Profitability


95

High(Creamy)

Low(Low Fat)

Low High

Cost-to-Serve

Product MixMargin

Very

Profitable

Very

unprofitable

Types of Customers

KPI Target

KPI Linkage of Customer Profits to the Scorecard


CINCINNATI, OH - Ward Group, an Aon Hewitt company and the

leading provider of benchmarking and best practices research

studies for the insurance industry, today released findings from

its study of cost allocation practices at life and annuity insurers. The

results show that companies tend to prefer using simplified

approaches for the basis of allocating costs throughout the

organization rather than complex, multi-driver formulas. To illustrate,

agent commission is commonly reported as a cost allocation driver

within the sales, marketing and distribution management

areas. Subsequent correlation of company responses with

financial performance revealed the top third of companies by

return on equity utilized activity-based costing. Conversely, the

bottom third of companies by performance did not. Similar high

versus low comparisons were made with other surveyed

financial practices.

Evidence of impact from ABC


http://www.broadwayworld.com/bwwgeeks/article/Life-and-Annuity-Companies-Prefer-

Simplified-Approach-to-Allocating-Costs-Ward-Group-Survey-Shows-but-Top-Performers-Show-

a-Different-Tendency-20151021




http://ctt.marketwire.com/?release=1152691&id=4830697&type=1&url=http%3a%2f%2fwww.wardinc.com%2f

http://ctt.marketwire.com/?release=1152691&id=4830700&type=1&url=http%3a%2f%2fwww.aon.com%2fhuman-capital-consulting%2fdefault.jsp


http://www.broadwayworld.com/bwwgeeks/article/Life-and-Annuity-Companies-Prefer-Simplified-Approach-to-Allocating-Costs-Ward-Group-Survey-Shows-but-Top-Performers-Show-a-Different-Tendency-20141021


97

When costs less matter: What is Revenue Management (RM)?

Maximize revenue by “selling the right product at the right price to the right customer at the right time”

Industries with the following characteristics (e.g., hotels, airlines, cruise ships):

Fixed capacity

Perishable inventory

Segmentable demand

Time-variable demand patterns

Relatively high fixed and relatively low variable costs


Rapid Prototyping withIterative Remodeling

Each iteration enhances the use of the ABC/M system.

ABC/M Models

3

ABC/M System

(repeatable, reliable, relevant)

#0

#1

#2

#3

210


99

Balancing Levels of Accuracy with Effort

AccuracyofFinal CostObjects

100%

0%

World Class

ABC System Design

Little

Level of Data Collection Effort

GreatModest

A

B


ABC Error has “Offsetting” PropertiesWith ABC, it is counter-intuitive that error does not compound. It dampens out.

The “Dispersion of Error” contained

in upstream assignments offset as

each downstream paths aggregated

into each final cost object.

Assignment error has a “zero-sum”

property:

Over-

costed

path $s

(+)

Under

costed

path $s

(-)

=

+ -

+ -

Resource

Activities

Final

Cost

Objects

Assignment

View

+ + -Contribution

View

Many-to-

One

One-to-

Many

The Two Path Views







101

Final Cost Object ProfilingA key to initial ABC/M Rapid Prototyping is to identify major sources of

diversity.

Influencers of

Diversity of Activity

Cost Consumption

Geography

Order Habits

Order Frequency

Level of Demand

Technical Sophistication

Etc.

Etc.

Customer Profile Candidates

Dominant

Influences

(Check 2 or 3)

Polar Extremes

Near

Standard

Infrequent

Light

Advanced

(E-commerce)

vs. Far

vs.

vs.

vs.

vs.

vs.

vs.

Specials

Frequent

Invasive

Archaic

(Manual)


B / C > 1.00

Senior Management’s

Benefits vs. Costs Test

The objective is to raise the executive

team’s perception of B (the benefits) while

driving down C (the administative effort to

collect and report).


103

Benefits from ABC/M Rapid Prototyping

- Accelerated learning

- Solving the thorny “leveling” problem

- Preventing “over-engineering” ABC model size

- Peer group: Pre-determining uses for the information

- Replacing misconceptions with reality.

- Getting ROI from earlier insights and decisions.


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?


The CFO must now help Sales and

Marketing … to better target customers.

A Shift in the CFO’s Emphasis






105

… 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?

Optimizing Customer Value ---“Smart” Sales Growth

You can destroy shareholder wealth

creation by …


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.

Customer Value Management


107

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?

Imagine you are pharmaceutical supplier.Which Customer is more Important?


current

profit

contribution(static)

high

lowlimited substantial

If you could measure past-period customer profitability but also

measure future potential customer economic value, then …

… you’d view existing

customers in different

categories.

future potential(long-term)

Current vs. Long-Term Potential Value







109

high

low

future potential(long-term)

defend& retain

manage up or out

Segmenting existing customers helps determine marketing actions.

There appear to be obvious customer strategies for each category.

current

profit

contribution(static)

Knowing Both Suggest What to Do.

limited substantial

most favoredstatus

maximize


Historical (trends, insights, inferences)

Time = 0(now)

Predictive(uncertainty, risk mgmt.)

Past(reactive)

Future(proactive)

Customer Value Management – Financial Definitions

Customer Profitability

The difference between the

revenues earned from, and the

total costs associated with, the

customer relationship during a

specified period.

Customer Lifetime 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


111

Improve the value mix of customers

Source: Managing Customer Relationships by Martha Rogers

LMC MVC’s

Growth by increasing

value of customers

Num

ber

of

custo

mers

Customer actual value

2

1

3

Growth by increasing

number of customers

Notes

1. Only focusing on

the number of

customers

acquired results in

a degraded mix as

low-value

customers by

definition are

easier to acquire

2. A customer centric

strategy will not

acquire any

customer; only

higher-value ones


Other factor variables are needed to evaluate sales

prospects and existing customers. They 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

- their “social influence”

- socio-demographic

- psychological

- others ??

A financial view is not the only consideration.







113

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


1

2

n

1

n

1

2

3

n

1

n

1

2

3

n

1

2

n

1

n

1

2

n

1

2

n1

n

1

Consum

ers

/ e

nd-c

usto

mers

Initia

l supplie

rs

n

Tier 3+ to

Initial suppliers

Tier 2

suppliers

Tier 1

suppliers

Tier 1

customers

Tier 2

customers

Tier 3+ to

consumers

Focal Company

Members of the Focal Company’s Supply Chain

Non-Members of the Focal Company’s Supply Chain

Managed Process Links

Monitor Process Links

Not-Managed Process Links

Non-Member Process Links

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.

Value Chain Management Involves LinkagesSupply Chain Trading Partner Relationships


115

Managing IT as a business is now an imperative. No longer can IT

be seen as a technology supplier – it must be seen to be adding

value to the organization and providing strategic capability. IT

performance management enables IT to become service oriented,

aligning itself with the organization to provide internal customer-

driven solutions to problems.

Managing IT as a business

But … it is difficult to maximize returns from IT when the products

and services appear to be free to internal customers.


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.







117

IT ABC/M Cost Assignment Network

People

(Salary, Fringe

Benefits)Hardware

Software Network

Customers

Business

Sustaining

IT Services,

Products

Resources

Work Activities

Final Cost Objects

In later

years

(1)

De

ma

nds O

n

Wo

rkC

osts

(2)

“Co

sts

Me

asu

re th

e E

ffe

cts

”

Support

Activities

Business cost objectsNew

systems

(future

value)Current

systems /

facilities

(current

value)

IT cost

objects

R&D Develop Replace Support Operate

equipment

Resources

Activities

Final

cost objects

IT charge into

other ABC/M

models

Usage-based Chargeback Costing


AGENDA




3) Risk Management









119

Type of Roadbed Costs

Roadbed Types

Number Road number unit cost

of lanes surface Location total cost of miles work activity per mile

four asphalt interstate $270,137,078.40 125,342 $2,155.20cut grass $120.00

electronic signs $334.25

fill pot-holes $150.00

plow roads $975.60

paint stripes $450.50

replace signs $124.85

two bituminous rural $29,783,384.10 43,578 $683.45cut grass $220.00

electronic signs $0.00

fill pot-holes $65.00

plow roads $250.00

paint stripes $112.20

replace signs $36.25

four asphalt county $95,567,207.84 65,672 $1,455.22cut grass etc.

electronic signs etc.

fill pot-holes etc.

plow roads etc.

paint stripes etc.

replace signs etc.

An example of “unitized costs”


Activity Analysis for Process Improvement

Eliminate

the activity to

reduce cost

Can activity

be

eliminated?

Does

activity contain

low-value added

tasks?

Is activity

required by

a customer?

Can the

driver

frequency be

reduced?

All cost

reduction

opportunities

identified

Eliminate

low-value added

work to reduce cost

Reduce the activity

frequency to

reduce cost

Target an activity

for improvement

YesYes

NoNoNo

No Yes

Yes

Activity analysis judges work based on

need, efficiency, and value.







121

Level of

Performance

Level of

Importance

CriticalPostponable

Below

expectations

Exceeds

expectations

Opportunity

Outsource Risk

Strength

Perhaps a third

party has a better

cost structure or

skill than you.

Scale back.Leverage & create

leadership

Improve

performance

immediately

$

$

$

$

$ = activity

ABC/M’s Attributes Can Suggest Action


Process

costs

Intermediate

output

costs

Product &

Customer

costs

Activity based costing(the “math”)

Activity based management

Process

improvement

Profit

management

Shareholder

Value

Value

Operational ABC

(efficiency)

Strategic ABC

(effectiveness)

ABC Provides the Data for ABM


123

AGENDA




3) Risk Management










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.







125

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.

A Quiz. “Our budgeting exercise ... “


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$

a b c

1

2

3

4

5

6

7

8

Sheet 1

Spreadsheet Budgeting – It is Incremental !!


127

Match the Budget Method to its Category

Demand-

driven

Project-

driven

Integrated

Budget(Rolling

Financial Forecasts)


Budgeting is typically disconnected from

the strategy. But this problem is solved if

management funds the managers’ projects.

(1) Non-Recurring Expenses // Strategic Initiatives

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 ------->







129

Activity-Based Costing

- Historical & Descriptive

- Starts with known:

spending

driver measures

output quantities

- Calculates “costs”

Activity-Based Planning

- Predictive

- Requires capacity analysis

- Starts with estimated outputs

- Applies ABC/M rates

- Solves for Resource “expenses”

NowPast Future

ABC/M

ABP

(2) Recurring Expenses // Future Volume & Mix


Customers andService-recipients

Resources

Process Costs

Output &Outcome Costs

inputs

Resource

expenses can

be calculated

with

“backwards

ABC/M”

Operational Resource Capacity Planning

Start Here.


131

ABC/M ABP

Known

?

?

resources

work

activities

cost

objects

Provides consumption rates

NowPast Future

ABC/M

ABP

Predictive Accounting


ABC/M ABP

? calculated

?

Estimated

resources

work

activities

cost

objects

NowPast Future

ABC/M

ABP








133

Marginal / Incremental Expense Analysis

Most savvy managers know that some expenses are

fixed short-term and variable long term.

They want to know the financial impact of a decision.

Decision examples:

• Adding / dropping products, channels, or customers

• Make versus buy

• Outsourcing or not

• Capital investment justification

• Budgeting / rolling financial forecasts


Accounting Treatments and Behavior of Capacity (expenses)

NowPast Future

Descriptive

Predictive

unused

used

sunk

fixed(unavoidable)

variable(adjustable

capacity;

avoidable)

Traceable to

products,

channels,

customers,

sustaining

unused



135

High

Low

Low High

Severity of impact on

event occurrence and

achievement

of objectives

probability of an event occurring

(3) Risk Assessment Grid… ERM is not just contingency planning

8

10 3

4

5

6

7

19

2

Do not budget

Budget


Recurringexpenses

Non-recurringexpenses

Demand-driven

Project-driven

volume & mix

of drivers

productionand

ABP/B

strategymap andrisk grid

IntegratedBudget

(rollingfinancial

forecasts)

Budget method

Strategic & risk

mitigation projects

Match the Budget Method to its Category







137

Define and adjust

strategy and risk, and

create strategy map

Create balanced

scorecard

Identify and

manage strategic

initiatives

Approve strategy

risk and capital

budget

Managerial

Accounting(e.g., Activity-based

Costing)

Derived budget

(and rolling

financial forecasts)

Strategy methods

(e.g., SWOT)

Manage and

improve core

processes

Financial Modeling

KPI dashboard

feedback

(2) capital budget

(3) strategy budget

(4) risk budget

Operational Modeling(by employee teams)Strategic

objectives

knowledge

= financial information (e.g. $)

Strategy Modeling(by executives)

priority projects and processes

Forecast drivers(e.g. sales) ;

develop productionplan

Traditional and

driver-based

budgeting (e.g. PBB)

Capacity

resource plan

Driver volumesand mix

Results andoutcomes

Changes andresponses

e.g., hours,Pounds,

# employees

(1) Operationalbudget

KPItargets

Driver consumption rates

Acceptable?

Revise

plan

OK

No

Yes

Linking Strategy and Risk to the Budget


Key Concepts and Definitions

A target is what we would like to happen

which we achieve by producing …

A forecast which is what we think will happen

based on:

A set of plans is which is what we intend to do,

which we change to achieve our target


139

Don’t treat forecasting as a “special event.”

We haven’t forecasted in a while,

maybe we should try that again….

Forecasting should be an on-going part of

monitoring the business.140

Continuous refreshing the rolling financial forecast

…accuracy

100%

0%

More frequent forecast intervals assure better accuracy.


time





141

#1 / single point

worst base best

#2 / three points #3 / multiple probabilistic

$ $

$10M$.5M

probability

Which budget report would you prefer?(measuring sales, expenses, profit, etc.)

Analytics: Probabilistic Planning Scenarios


What are the Organizational Behavior Barriers?

Budgeting (and Rolling Financial Forecasts)

Excel Hell.

Excess power of managers with the loudest voice or

strongest muscles and with sandbag padding expertise.

Tradition – incremental / decremental cost center line-

item without cost driver interdependencies.


143

Evaluating the Costing Journey:

A Costing Levels Continuum

Maturity Model

By Gary Cokins

Most organizations are

typically at lower levels of

maturity in adopting

progressive managerial

accounting practices,

methods and systems.

International Federation of Accountants Report


1D

Lev

el #

2D 3D4D

5D

6D

7D

8D

Blind

ProcessVisibility

Output Visibility

Improved Output

Information/ Approximate

Accuracy

Improved Treatmentof Indirect

Costs

CustomerDemandSensitive

UnusedCapacity

Aware

(1) Descriptive ContinuumEXPENSE TRACKING, COST

REPORTING

and CONSUMPTION RATES

(2) Predictive ContinuumDEMAND DRIVEN PLANNING

with CAPACITY SENSITIVITY

bookkeepingprocess and

Lean accounting

Direct costswithout (3) and with

(4) support coststo output groups

Push Activity-Based costing(ABC);

Product costs

Standardcosting to individual outputs;

Project acct;Job order

costing

Level 6D with Channel and

customerprofitabilityReporting;

Cost-to-serve

Unused capacity

costs (estimated)

Costing Continuum / Levels of Maturity(most companies are Level 5D and 1P)

Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins published by the International Federation of Accountants, 2015

2P

3P

4P

5PPull

Activity-based

ResourcePlanning

Time-drivenABC

ResourceConsumptionAccounting

Simulation

(ABRP);Forecast

driver quantities

X unit consumption

rates;

Driver based budgeting

(TDABC);Forecast

driver quantities

X time consumption

rates;

Direct cost focus;

Repetitive work

conditions

(RCA);Level 2P

with proportional costing at direct and

support depts.

Ultimate in consumption

rates;

1P

%G/L acct.

Incremental





145

AGENDA




3) Risk Management









Organization

Resources(capacity)

Strategy,Mission

How Does It All Fit Together?

ERP, etc.Customer

Satisfaction

Scorecards,

Dashboards

CRM

ROI

$Shareholders

SupplierInputs


147

Organization

Resources(capacity)

Strategy,Mission

In Summary … first, we energize with good managerial accounting.

ERP, etc.Customer

Satisfaction

Scorecards,

Dashboards

CRM

ROI

$Shareholders

SupplierInputs

Managerial

Accounting,

analytics


Organization

Resources(capacity)

CRM

ROI

$

ERP, etc.

Risk Mgmt., Strategy map,

KPIs

KPIScores

Feedback

Order fulfillment

Strategy,Mission

CustomerSatisfaction

EPM is Circulatory and Simultaneous

SupplierInputs

Scorecards,

Dashboards

Targeting

needs

Shareholder Wealth Creation is not a goal. It is a result!

Shareholders







149

Organization

Resources(capacity)

CRM

ROI

$

ERP, etc.

Risk Mgmt., Strategy map,

KPIs

KPIScores

Feedback

Order fulfillment

Strategy,Mission

CustomerSatisfaction

Shareholders

EPM is Circulatory and Simultaneous

SupplierInputs

Scorecards,

Dashboards

Targeting

Shareholder Wealth Creation is not a goal. It is a result!

leakage(waste)

wasted resources

needs

Less productivity reduces Shareholder Wealth


Historical, Descriptive (trends, insights, inferences)

Time = 0(now)

Predictive(uncertainty, risk mgmt.)

Past(reactive)

Future(proactive)

Two BA Views: Hindsight and Foresight

What happened? Where? And

why is this happening? What will happen next? What is

the best that can happen?


151

Power of Information

$ROI

Raw

Data

Standard

Reports

Ad hoc

Reports &

OLAP

Descriptive

Modeling(with analytics)

Predictive

Modeling

Data Information Knowledge Decisions

Prescriptive Analytics

/ Optimization

The Intelligence Hierarchy


Insights

152

Machine Learning • Clustering • Spatial • Linear Regression • What-if

Modeling • Simulation • Forecasting • Text Mining • Optimization •

Exception Monitoring • Multidimensional • Segmentation • Time Series

The Analytical Spectrum

Descriptive

How much did I sell

for each item by

channel and location?

Diagnostic

How much inventory

did it require?

Predictive

How will changing

interest rates affect

mortgage

prepayments?

Prescriptive

What is the best

pricing and promotion

strategy to minimize

churn on wireless

phone contracts.

Types of

Analytics







153

AGENDA




3) Risk Management









Why has the adoption rate for EPM’s

methodologies been so slow?

The Buy-in to Performance Management


155

IT and Users have common goals

IT Users

• Make better decisions

• Optimize performance /

manage risk

• Achieve strategic

objectives

But IT systems evolve organically and erratically.(The user has an itch, and IT scratches it.)


Remove the wall between IT and Users

IT(a set of technologies)

(gatekeepers of data)

Business(analytical sandbox)(a set of capabilities)

- Daily operations

- Keep the lights on

- Batch processing

- Data storage

- Data structures

- Data governance

- Discovery

- Investigation

- Analysis







157

IT’s view of

BusinessBusiness’ view of

IT

- competitor

- solve but don’t operate

- IT resource intensive

- risky; low concern for

governance and control

- a mystery of what they do

- obstructionists

- controlling

- uncooperative

- bureaucrats

- less skilled than us

- just a service center

BA provides IT the opportunity to drive value, but IT will

need to be more tolerant and flexible.

Remove the wall between IT and Users


Why is the adoption rate so slow? What are the barrier categories?

(1) Technical barriers include IT related issues.

(3) Organizational behavior barriers involve

resistance to change, culture, and leadership.

(2) Perception barriers are excess complexity

and affordability.


159


The Deeper Root Cause Barriers (1 of 4)

Not wanting to be measured and held accountable.

Perceived loss of control. “If I’m automated, I’m not

needed.”

Fear of knowing the truth … or it is flawed truth.

Human nature’s resistance to change.




Stove-pipe rivalries.

Misalignment of incentives. Poor KPI metrics and targets.

Insecurity and confidence deficiency – obsession to

know “who else has done it” rather than judge if it just

makes sense to do. (The ROI dilemma.)

Confirmation bias – starting with preconceptions to be

validated.







161



Lack of leadership (which is not the same as

management).

Not realizing that line managers have less interest in

historical reporting and greater interest in predictive

outcomes.

Inflated expectations that analytics is the magic pill …

to cure all problems.




Etc., etc. … there are many more !

Inadequate training – “I feel like a dog watching

television; I do not know what I am looking at.”.

Excel Hell.


163

To create change, you need to create the need for change! How?

Change only occurs and continues only when:

(D x V x F) > R

the product of 3 factors

is greater than R

esistance to change

Dissatisfaction

with how

things are

Vision of what

“better” would look like

First

practical

steps

Overcoming Resistance to Change


The Complete Vision of Performance Management

Make the RPM of the EPM and BA gears spin …

… better, faster, cheaper … safer and smarter







165

Baseball has received much attention

“Moneyball” tells the

story of how quantitative

analysis can overcome

perceptions of old

school thinking.


The Oakland As

lowered their salary

costs, but did not begin

winning until they

applied deep analytics.

166

BBHOF

My pride and joy …. Redemption.



168

Action steps Get educated. Get buy-in.

Rapid prototyping. Start small; think big.

Improve incentives. (Motivational theory)

Getting Started Actions and Resources


Resources:http://www.epmchannel.com/2013/04/09/exceptional-epm-cpm-systems-are-an-exception/

http://www.blog.corpeum.com/strategyexperts/gary-cockins/gary-cokins-strategy-essential

A suggestion: Have your management team read either or both of these

educational pieces. Then schedule a meeting for discussion. Have each

manager answer, “What did I learn? What issues and concerns do I

have about EPM?” This will stimulate needed conversations.





http://www.epmchannel.com/2013/04/09/exceptional-epm-cpm-systems-are-an-exception/

http://www.blog.corpeum.com/strategyexperts/gary-cockins/gary-cokins-strategy-essential


169

From Theory to Practice

Your success depends

on how well and how fast

the right information and

intelligence gets to the

right people.


Thank You

Gary Cokins, CPIM

Analytics-Based Performance Management LLC

Cary, North Carolina USA

www.garycokins.com

919 720 2718

[email protected]




mailto:[email protected]


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