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Enabling Breakthrough Financial Performance with Corporate Performance Management

  Article published in DM Direct Special Report
February 14, 2006 Issue
 
  By Veena Gundavelli

Today's Global 2000 corporations are striving to maintain profitability and contain costs in the face of challenging markets. As a result, IT organizations are being pushed by many departments across the enterprise to provide enabling technologies that help companies achieve their corporate objectives of increasing efficiencies and top line growth. Corporate finance departments are now demanding that IT provide and support solutions that enable continuous business performance management and business process alignment throughout the enterprise.

Enter the corporate performance management (CPM) paradigm. As corporations continue to grow through mergers and acquisitions, the end result is a myriad of disconnected financial systems. Finance departments can no longer drive the organization to higher levels of performance without first gaining global visibility into key finance processes such as accounts receivable and accounts payable along with the systems that support these functions. Cash flow processes such as receivables and payables often span the globe with centralized shared services centers supporting multiple business units, customers and suppliers. Measuring and managing these business-critical processes requires specialized CPM solutions that offer global oversight, predictive analytics composed of planning and forecasting, and the ability to dovetail corporate strategy with advanced process automation. By providing a cash flow performance management solution, IT executives can empower corporate finance departments to generate higher levels of free cash flow, reduce cost of operations, and unlock working capital from receivables and payables, a critical source of funds for future investment and expansion of business operations.

The Emergence of CPM as a Corporate Standard

Enterprises have been using business intelligence (BI) tools such as dashboards, key performance indicators (KPIs), scorecarding and analytics for a long time. Standard management reviews and reporting have been offered as core features of enterprise resource planning (ERP) applications for years. However, after the initial wave of ERP implementations had been completed, it was readily apparent to many companies that process management and performance measurement were capabilities severely lacking in those applications. In response, a new set of BI applications emerged which leveraged multidimensional analytics and scorecards to deliver visibility into current and historical levels of corporate performance. Eventually, these BI solutions were enhanced with budgeting, planning and forecasting applications which offered a f orward looking view into performance along with specialized decision support tools. This paradigm marked a new chapter in CPM with a new, more powerful level of strategic capabilities made readily available to corporations.

Although these CPM solutions have provided value to many enterprises and driven performance forward, it has largely been beneficial to senior executives in the enterprise. The value has not fully trickled down to the operational elements of corporations, where actual transactions are carried out in day-to-day activities. CPM solutions in the market have concentrated on providing consolidated visibility over operations and giving executives the power to carry out strategic functions like planning and goal setting. The ability to transform corporate strategies and objectives into flawless execution at the operational level presents a significant opportunity to deliver value to today's enterprise. The answer lies in extending the existing CPM paradigm to include specialized automation capabilities, thereby instituting proven best practices and process excellence that work in concert with corporate strategy.

A New Revolution in Corporate Performance Management

Now, the next generation of CPM solutions has arrived with the potential to not only measure business performance but also optimize end-to-end business processes. These specialized solutions, exemplified by a new breed centered around cash flow and financial functions, leverage the initial CPM concept with deep capabilities around consolidation of data, dashboards and scorecards, and planning and forecasting functions, and dovetails this with specialized process automation and control. In the case of finance functions like receivables and payables, a cash flow performance management system utilizes the CPM framework and fuses BI and predictive analytics such as cash flow forecasting tools to proven automation functionality around credit risk, receivables and payables.

Figure 1: A Specialized CPM Solution for Cash Flow Performance Management

As can be seen in Figure 1, the new specialized CPM paradigm enables corporations to ensure that there is alignment from the executive level down through the different divisions and business units. This is done first by establishing an extensible technology architecture composed of the following:

Enterprise Data Integration Layer: This leverages specialized application integration tools to extract, transform and load data from multiple, disconnected ERP and financial systems.

Cash Flow Management Server: This consolidates all necessary receivables and payables data into one unified data platform. It also takes into consideration global requirements like multiple currencies, multiple languages, multiple source systems and country and region-specific needs.

Cash Flow Performance Engines with Embedded Best Practices: This is the core technology platform that contains a set of engines which govern the employment of business rules, workflows, collaboration tools and more to drive the specialized CPM applications.

Cash Flow Planning and Forecasting Applications: These powerful decision support tools allow finance executives to project future cash flows from receivables and payables. Based on the results, corrective actions can be driven throughout the enterprise in order to achieve set objectives.

Cash Flow Performance Management Dashboard: This is typically a graphical representation of various KPIs that help measure and monitor cash flow. Finance executives can employ this as a scorecard tool to analyze historical, current and future performance and trends.

Specialized Cash Flow Process Automation: This last component makes specialized CPM applications a powerful new alternative to other performance management tools. These are business rules and workflow-enabled tools around specific business processes. They are designed with embedded best practices to automate repetitive, nonvalue-added activities while redirecting staff towards more value-added functions.

Using this cash flow performance management technology architecture, an iterative learning cycle is established. This iterative process for specialized CPM focused on cash flow follows this cycle as shown in Figure 2.

Figure 2: An Iterative Approach to Cash Flow Performance Management

Set Goals: This is the set of activities where executives set corporate objectives and in turn set goals for various divisions under their jurisdiction. In the case of cash flow goals, it could mean collecting a certain portion of revenues or managing receivables to a certain level of collections efficiency. A common metric used to measure receivables performance is days sales outstanding, which indicates how quickly outstanding invoices are collected with respect to extended payment terms.

Analyze Performance: Based on the goals and objectives, corporate performance is then measured for the entire organization and then analyzed by various divisions, departments and customers. The gap between goals and actual performance is then measured in order to formulate effective strategies.

Align Processes: This activity requires executives to develop an effective strategy and in turn drive operational processes. By aligning the divisional processes with specialized business rules, corporations can ensure that transactions are carried out in accordance with corporate goals. This is where the advanced decision support capabilities come into play. Cash flow performance management solutions include the capability to forecast projected cash from receivables and payables management. These projections can then prompt finance executives to drive the divisions to increase efforts in collections or delay payments to specific suppliers. In this manner, the net cash flow position is optimized with receivables and payables staff working towards corporate goals.

Perform Actions: Based on the business rules set up by division manners as a result of executive strategy, operational staff can then carry out the necessary activities using the specialized CPM solution. One advantage over traditional CPM that such a solution provides is the ability to effectively transform executive strategy into action. This ensures that the cost of operations as well as any inherent inefficiencies are minimized. For example, cash flow activities such as credit and receivables are automated with business rules and workflow processes. Processes such as dispute resolution, invoice document transmission and payment scheduling are supported by the system, while personnel are freed up to focus on higher value-added activities such as strengthening customer relationships.

Control Processes: An important part of any solution aimed at creating process excellence is a robust control framework. With guided actions and a detailed audit trail of all related activities in the enterprise, a specialized CPM solution minimizes process defects and helps ensure the highest levels of transactional quality. Additionally, the current mandate of Sarbanes-Oxley stipulates that many enterprise processes require internal controls and auditability to reduce the risk of financial wrongdoing. All of these considerations are addressed in a cash flow performance management solution where structured process automation ensures that processes like credit risk evaluation and customer collection calls follow consistent methodologies around the globe. Prebuilt internal controls for SOX compliance also provide detailed audit trails and mitigate corporate risk.

Measure Results: Since business processes are subject to internal and external forces which introduce variances, it is important to continuously monitor performance and measure results. In a specialized CPM application, results of process activities are measured against the goals of the department, division and finally the corporation as a whole. Cash flow performance management solutions come with prepackaged reports and analytics around credit limit usage, average time to collect, average level of customer payment disputes, average amounts of discounts taken during payables processing and so forth.

Report: This is another important part of specialized CPM applications wherein a continuous feedback loop allows communication of performance through the organization to the executives responsible for crafting corporate strategy. Results at the transaction level are communicated in real time to departmental, division and corporate heads. Each set of resulting measurements is automatically translated into a format that is understandable by successive layers of executive management. Specifically, this means that results are explained in the specialized CPM solution in terms of goals and objectives at each level of the corporation. For example, a cash flow performance management solution could measure and report past-due receivables in comparison to goals set at the individual collections personnel level, the department level, the division level and the corporate level. This provides insight into how exactly different business units are performing and how much each contributes to the total corporate cash flow performance.

Refine Strategies: Finally, based on the continuous feedback loop between process automation and decision support functions, specialized CPM applications help institute a learning mechanism across the enterprise. Based on the results of various corporate strategies, as instantiated with rules-based process automation, executives can measure the gap between actual and expected outcomes. The analysis of these variances can lead to the creation of more effective strategies in the future. Specialized CPM applications like cash flow performance management solutions enable the enterprise to easily modify strategies and business rules that ultimately drive transactional processes. A full history is maintained on previous decisions in a knowledge repository to offer executives the ability to adapt strategies from similar business scenarios.

Driving Financial Excellence with Cash Flow Performance Management

An example of a global corporation that was able to leverage a specialized cash flow performance management solution to achieve significant business value is Solectron Corporation. Solectron, a $12 billion electronics contract manufacturer, had multiple ERP systems from the various operating concerns it had acquired over the previous years. Gaining global visibility and enhancing cash forecasting was a prime corporate directive aimed at enabling its Shared Services team to manage worldwide cash flow. The utilization of cash flow performance management technology came in handy at a time when Solectron was focused on centralization of receivables functions. "Our cash flow management system presents critical data from the different ERP systems in a consistent layout and structure, giving collectors and managers access to real-time information on receivables, customers, aging, cash forecasts and more - all in one place," said Val Plotkin, Solectron accounts receivable manager. "In addition, the business rules-driven strategies ensure that the collections staff is in line with our treasury group's objectives with prioritized tasks."

Solectron used the specialized CPM application with the following capabilities:

  • Consolidation of cash flow data from multiple financial systems,
  • Support for multiple currencies spanning the globe,
  • Business intelligence and analytics on cash flow,
  • Strategy driven automation of receivables processes,
  • Country- and region-specific automation of receivables functions, and
  • A continuous feedback loop from transactional processes to executive management.

This initiative brought significant quantifiable benefits to Solectron after deploying the solution along with shared services teams spanning across three continents and over 20 different sites. The results were an astounding $14 million in interest savings and $1 million in direct expense reduction. "By accelerating the velocity at which cash flows into the organization, Solectron could reduce borrowing expenses, minimize foreign currency exposure and bad debt write-offs and collect interest on the extra cash on hand," stated Perry Hayes, Solectron's vice president and treasurer.

...............................................................................

For more information on related topics visit the following related portals...
Business Intelligence (BI), Corporate Performance Management (CPM) and ROI.

Veena Gundavelli is chairman and founder of Emagia Corporation. She has extensive experience in the software industry and brings with her a strong business management background combined with solid technical expertise. A visionary and seasoned entrepreneur, Gundavelli founded Emagia in 1998. Under her leadership and vision, the company established itself as the leader in enterprise cash flow management with leading-edge products and a marquee Fortune 100 and Global 2000 customer base. She can be reached at veena.gundavelli@emagia.com.



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