Exceptional EPM/CPM Systems are an Exception
Quite naturally, many organizations over-rate the quality of their enterprise and corporate performance management (EPM/CPM) practices and systems. In reality, they lack in being comprehensive and how integrated they are. For example, when you ask executives how well they measure and report either costs or non-financial performance measures, most proudly boast that they are very good. Again, this is inconsistent and conflicts with surveys where anonymous replies from mid-level managers candidly score them as “needs much improvement.”
Every organization cannot be above average!
What makes exceptionally good EPM/CPM systems exceptional?
Let’s not attempt to be a sociologist or psychologist and explain the incongruities between executives boasting superiority while anonymously answered surveys reveal inferiority. Rather let’s simply describe the full vision of an effective EPM/CPM system that organizations should aspire to possess.
First, we need to clarify some terminology and related confusion. EPM/CPM is not solely a system or a process. It is instead the integration of multiple managerial methods – and most of them have been around for decades arguably even before there were computers. EPM/CPM is also not just a CFO initiative with a bunch of scorecard and dashboard dials. It is much broader. Its purpose is not about monitoring the dials but rather moving the dials.
What makes for exceptionally good EPM/CPM is that its multiple managerial methods are not only individually effective, but they are also seamlessly integrated and embedded with analytics of all flavors. Examples of analytics are segmentation, clustering, regression, and correlation analysis.
EPM/CPM is like musical instruments in an orchestra
I like to think of the various EPM/CPM methods as an analogy of musical instruments in an orchestra. An orchestra’s conductor does not raise their baton to the strings, woodwinds, percussion, and brass and say, “Now everyone plays loud.” They seek balance and guide the symphony composer’s fluctuations in harmony, rhythm and tone.
Here are my six main groupings of the EPM/CPM methods – its musical instrument sections:
- Strategic planning and execution – This is where a strategy map and its associated balanced scorecard fits in. Together they serve to translate the executive team’s strategy into navigation aids necessary for the organization to fulfill its vision and mission. The executives’ role is to set the strategic direction to answer the question “Where do we want to go?” Through the use of correctly defined key performance indicators (KPIs) with targets then the employees’ priorities, actions, projects, and processes are aligned with the executives’ formulated strategy.
- Cost visibility and driver behavior – For commercial companies, this is where profitability analysis fits in for products, standard services, channels, and customers. For public sector government organizations this is where understanding how processes consume resource expense in the delivery of services and report the costs, including the per-unit cost, of their services. Activity-based costing (ABC) principles model cause-and-effect relationships based on business and cost drivers. This involves progressive, not traditional, managerial accounting such as ABC rather than broadly averaged cost factors without causal relationships.
- Customer Management Performance – This is where powerful marketing and sales methods are applied to retain, grow, win-back, and acquire profitable, not unprofitable, customers. The tools are often referenced as customer relationship management (CRM) software applications. But the CRM data is merely a foundation. Analytical tools, supported by software, that leverage CRM data can further identify actions that will create more profit lift from customers. These actions simultaneously shift customers from not only being satisfied to being loyal supporters.
- Forecasting, planning, and predictive analytics – Data mining typically examine historical data “through the rear-view mirror.” This EPM/CPM group directs attention forward to look at the road through the windshield. The benefit of more accurate forecasts is to reduce uncertainty. Forecasts for the future volume and mix quantities of customer purchased products and services are core independent variables. Based on those forecasts that so many dependent variables have relationships with, therefore process-related costs derived from the resource expenses can be calculated and managed. Examples of dependent variables are the future headcount workforce and spending levels. CFOs increasingly look to driver-based budgeting and rolling financial forecasts grounded in ABC principles using this group.
- Enterprise risk management (ERM) – This cannot be omitted from the main group of EPM/CPM. ERM serves as a brake to the potentially unbridled gas pedal that EPM/CPM methods are designed to step hard on. Risk mitigation projects and insurance requires spending which reduces profits and also steers expenses from resources the executive team would prefer to earn larger compensation bonuses. So it takes discipline to ensure adequate attention is placed on appropriate risk management practices.
- Process improvement – This is where lean management and Six Sigma quality initiatives fit in. Their purpose is to remove waste and streamline processes to accelerate and reduce cycle-times. They create productivity and efficiency improvements.
EPM/CPM as integrated suite of improvement methods
CFOs often view financial planning and analysis (FP&A) as synonymous with EPM/CPM. It is better to view FP&A as a subset. And although better cost management and process improvements are noble goals, an organization cannot reduce its costs forever to achieve long-term prosperity.
The important message here is that EPM/CPM is not just about the CFO’s organization; but it is also the integration of all the often silo-ed functions like marketing, operations, sales, and strategy. Look again at the six main EPM/CPM groups I listed above. Imagine if the information produced and analyzed in each of them were to be seamlessly integrated. Imagine if they are each embedded with analytics – especially predictive analytics. Then powerful decision support is provided for insight, foresight, and actions. That is the full vision of EPM/CPM to which we should aim to aspire in order to achieve the best possible performance.
Today exceptional EPM/CPM systems are an exception despite what many executives proclaim. If we all work hard and smart enough, in the future they will be standard practices.