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Profitability and Cost ) M anagement ( PCM From survival to sustainable to profitable
Profitability and Cost
)
M
anagement (
PCM
From survival to sustainable to profitable
Agenda • Profitability & Cost Management – The Landscape – Why are Organizations interested in
Agenda
• Profitability & Cost Management
– The Landscape
– Why are Organizations interested in Profitability &
Cost Management?
• A Simple Example
• Hyperion Profitability & Cost Management
Profitability Vs Sustainability Vs Profitability Survival is not a synonym for sustainable
Profitability Vs Sustainability
Vs Profitability
Survival is not a synonym for sustainable
Survival • Survival is easy – we survive if we keep our doors open, even
Survival
• Survival is easy – we survive if we keep our
doors open, even if we lose 50% of our
customer and staff.
• We can grow again even if we make some bad
decisions now.
• Where are you focusing your cost saving
initiatives now?
Sustainability • Sustainability is hard – knowing that you will be around to weather the
Sustainability
• Sustainability is hard – knowing that you will
be around to weather the next economic crisis
because you have developed that strategy
alread
g
restructuring decisions today
y
b
y
makin
the correct cost cuttin
g
and
• We are able to cut cost knowing we are not
doing this to the detriment of our future
operations and market
Profitability • Profitability – making smarter decisions in a sustainable environment to allow us to
Profitability
• Profitability – making smarter decisions in a
sustainable environment to allow us to exceed
our competitors market performance
• We made intelligent strategic decisions
yesterday, allowing us to ramp up our sales
and operations to dominate the market today
Why Profitability and Cost Management?
Why Profitability and Cost
Management?
• What are your company’s cost saving initiatives? • How do you identify those initiatives?
• What are your company’s cost saving
initiatives?
• How do you identify those initiatives?
• How successful has your company been?
The Profitability Landscape • 9 out of 10 cost reduction programs fail to achieve their
The Profitability Landscape
• 9 out of 10 cost reduction programs fail to
achieve their targets
–Gains that are achieved are typically short-
lived
• Cost drivers are not clearly understood
–As a result, cost-cutting initiatives are not
targeted at the right places
2007 KPMG worldwide survey of
more than 400 companies
The Profitability Landscape • A majority of companies have some type of formal process to
The Profitability Landscape
• A majority of companies have some type of formal
process to produce and calculate profitability information
– The ability to calculate accurate and timely
information is extremely limited
– Manual and spreadsheet-driven processes are still the
norm
• New, more integrated approaches are needed
– Companies are increasingly looking to packaged
profitability management applications
– The market will shift from “build” to “buy” by 2010
IDC Research, May 2008
Anti Thesis Thesis Finance Operations Synthesis Organisation Reconstruct the organisation from a vertical view to
Anti
Thesis
Thesis
Finance
Operations
Synthesis
Organisation
Reconstruct the organisation from a vertical view to a horizontal view
Statutory Accounting Environment Financial Accumulator Summarized Data Results XYZ Corp. General General Ledger
Statutory Accounting
Environment
Financial
Accumulator
Summarized
Data
Results
XYZ Corp.
General
General
Ledger
Ledger
Revenue
A blizzard of
transactions
(Account
(Account
Balance)
Balance)
Expenses
Profit
• What defines a profitable customer? • What is the profit contribution margin of a
• What defines a profitable
customer?
• What is the profit
contribution margin of a
product or a service?
• What does it cost to sell or
service customers?
• What proportion of resources
does a customer consume?
Why hasn’t increased
revenue resulted in
increased profitability?
Costing/Profitability Environment Behavioral Data Customer Profitability GG enera enera ll Ledger Ledger Full
Costing/Profitability
Environment
Behavioral
Data
Customer
Profitability
GG
enera
enera
ll
Ledger
Ledger
Full Product
Costing
Drivers of
Financial
Cost…
Data
Meaningful
Decision
Assignments
Support
Contributors of Cost Some are obvious and relatively easier to assign Others require analysis to
Contributors of Cost
Some are obvious and relatively easier to assign
Others require analysis to appropriately assign
Direct
Material
Labor
Production
Product
Overhead
Management
Administrative
Customer
Utilities
Support
Service
Quality
Sales/
Service
Marketing
Support
Organizations are asking for flexibility in how to assign and transform these costs!
Profitability and Cost Management An analytical application that enables you to: – Accurately assign, measure,
Profitability and Cost
Management
An analytical application that enables you to:
– Accurately assign, measure, and manage costs and revenues
– Use any methodology to transform financial data through multiple
stages
– Compute costs and profitability for business segments
– Use scenarios to evaluate alternate approaches
…. Leads to Business Intelligence QUANTATIVE – Who are the most and least profitable customers?
…. Leads to Business Intelligence
QUANTATIVE
– Who are the most and least profitable customers?
– What products/services contribute the most to the bottom line?
What Is?
– Does customer or product/service profit vary by region?
– What is the profit contribution margin of a product/service? or a service?
QUALITATIVE
– Why are customers profitable or unprofitable?
Why?
– Why is the cost to sell or service different across the customer base?
– How do business processes impact customer profitability?
How is resource consumption affected by product/service maturity?
COMPARATIVE
• How might we improve?
What Now?
– How to adjust Plans and Budgets to affect Profitability?
– How are we doing compared to others in our industry?
Example • Direct Bank – Close call centres – Change investment policy – Launch marketing
Example
• Direct Bank
– Close call centres
– Change investment policy
– Launch marketing campaign across all markets and customers
– Launch Islamic Banking
• Probably need to do all, based on true business insight
and analysis
• Each decision has a further impact on other areas of the
business
PCM and CPM • ABC provides the basic of CPM – ABC is a key
PCM and CPM
• ABC provides the basic of CPM
– ABC is a key building block of CPM. Preformed correctly, it provides
visibility into dimensions of corporate performance and solve difficult
problems for organizations with mature CPM initiatives.
(Frank Buytendijk, Gartner, 2005)
• Dynamic Costing and Pricing is becoming more imperative
– …profitability management is not a controlling activity in the back
office anymore, but has become an instrument to compete better in
the front office.
(Frank Buytendijk blog, 2008)
PCM and Budgeting • Two(or more) stage allocation methodology. Activities consume resources, Products/Services
PCM and Budgeting
• Two(or more) stage allocation methodology.
Activities consume resources,
Products/Services consume activities.
• Accurate unit costs
• Proper allocation and management of
shared/support services.
• Accurate capacity management at an
operational/activity level.
PCM and Perf Management • Strategy poses more questions than answers • PCM allows you
PCM and Perf Management
• Strategy poses more questions than answers
• PCM allows you to answer the questions by
modeling strategic initiatives into your current
operations
• Perform what-if analysis
• Cost, Resource and Activity drivers are
typically part of the PCM model already –
therefore result collection and scorecard
population is potentially simplified
Bikes – A Simple Example Using Profitability & Cost Management
Bikes – A Simple
Example
Using Profitability & Cost Management
Bikes Manufactoring • Medium-sized bicycle manufacturer • Recent increase in sales revenue: – Due mainly
Bikes Manufactoring
• Medium-sized bicycle
manufacturer
• Recent increase in sales revenue:
– Due mainly to increased
purchases by big-box store:
Bikes needs to better
understand costs and
profitability of its
customers!
Q-mart
• RESULT:
– Monthly revenue has
increased
– Profit and profit margin has
decreased
• Q-mart has asked Bikes to supply
more product
Bikes is seeking answers to… • How are my customers consuming activities? • Which department
Bikes is seeking answers to…
• How are my customers consuming activities?
• Which department costs are being consumed
by products?
• Which of my regions are profitable?
Bikes Manufacturing – Depiction of costs General Ledger Business Build an Allocation model to transform
Bikes Manufacturing –
Depiction of costs
General Ledger
Business
Build an Allocation model
to transform costs
through these stages!
Operations
Products
Customers
Markets
What Is?
What Is?
Why?
Why?
Bikes – The Improvement • After reviewing the sales costs, a program of customer education
Bikes – The Improvement
• After reviewing the sales
costs, a program of
customer education has
reduced costs of:
– Sales Order Processing
– Sales Costs
– Returns Processing
• Improving the bottom line
What Now?
ORACLE|Hyperion Profitability & Cost Management
ORACLE|Hyperion
Profitability & Cost Management
Hyperion Profitability and Cost Management Design Principles 1. Take advantage of common EPM technology 2.
Hyperion Profitability and Cost
Management Design Principles
1. Take advantage of common EPM technology
2. Flexible methodology
3. Allow the business, not just IT and Finance, to control the design and
creation of the allocation solution
4. Let the application take care of the Essbase technical components
- Use the power of Essbase for calculation and reporting
Flexibility • Up to 9 stages of cost allocations – Intra-stage Allocations – Reciprocal Allocations
Flexibility
• Up to 9 stages of cost allocations
– Intra-stage Allocations
– Reciprocal Allocations
• Support for multiple cost allocation methodologies
– ABC, Time estimation, Percentage allocation, Even Splits
– Supports both cost and revenue allocations
• Integrated with the leading EPM and ERP Systems
Profitability Management Environment Allocation Metadata Model Cost & Revenue Allocation Calculations
Profitability Management Environment
Allocation
Metadata
Model
Cost & Revenue
Allocation
Calculations
Profitability & Cost Analysis
Management
Definition
• Create & Manage
Dimensional
Hierarchies
Create & Manage
Business Model:
• Store Load Cost, rules, Revenue FDM, &
Driver other Data
Reporting Cube with
Allocation Genealogy
• Stages of Allocations
• Deploy the
• Calculate Model & Store
Results
• Profitability Analysis
• Drivers
Application
• Validate the Model
• Cost & Revenue
Contribution Analysis
• Allocation Rules
Enterprise
• Automated CalcScript Essbase
Generation
• Generate the Reporting
Essbase
Performance
Cube
R
epor
ti
ng
Management
Calculation
Cube
Architect
Cube
Web Analysis,
Financial
Reporting, Excel,
Smartview
Hyperion
Profitability &
Cost
Management
Thank You
Thank You