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Operational Performance Management:
The Next Step in Corporate Agility, Transparency and Predictability

  Article published in DM Direct Newsletter
March 24, 2006 Issue
 
  By David Menninger

Corporate (or business) performance management (CPM) is a methodology to optimize the execution of business strategy. CPM consists of a set of integrated, closed-loop, analytic processes, supported by technology, that address financial as well as operational data and enable a business to define, measure and manage its performance against strategic goals.1

CPM can facilitate a corporate balanced scorecard, which, paraphrased, can be considered:

  • Financial,
  • Customer-focused,
  • Operational, and
  • Employee.

Operational performance management (OPM) is the next horizon in enterprise-wide CPM, covering the monitoring, analysis and management of processes, activities and transactions - including interaction with the supply chain. As the enterprise understands the success of CPM in finance, they begin to realize that the same tools and strategies can drive operational success.

There are several key aspects of OPM; they are:

  • The need to perform complex business modeling;
  • Handling large data sets, both financial and operational;
  • Frequently changing data - including possibly real-time data feeds; and
  • The integration of data from multiple sites.

Complex Business Modeling

For a solid understanding of operational performance, employees must analyze myriad layers of data from processes and procedures, products, resources, policies and external influences. They need to model this information, posing what-if scenarios to reflect complex attributes of the business such as inventory and merchandise planning, supply and demand, customer/product/brand profitability, risk analysis, activity-based costing, compensation planning and so on.

Given the evolving nature of commerce, the company must be able to test its model(s) on the spot with different scenarios, validating that the models are competitive, profitable and sufficiently supported with resources. The modeling capability must also address complexity on a number of levels: volatile data such as channel inventories; large volumes of data such as call detail records information, both financial and non-financial; and scenarios with a large number of variables such as activity based costing.

A publishing division of a multinational media conglomerate needed to manage circulation, staff and costs. The publisher has a particularly sophisticated set of business issues to deal with.

As part of its operational performance management solution, the publisher created and defined its business model. Modeling to a highly detailed level has enabled this publisher to document its business logic and assumptions and deploy applications across the organization. Through complex allocations built into the model, the publisher can now analyze performance by magazine title, by region, by manager and even by employee, regardless of which application - general ledger, ERP (enterprise resource planning) and the like - owns the relevant data. Additionally, because the system incorporates the business assumptions, the publisher can now anticipate the amount of quarterly and annual commission payouts, again, based on title, region, etc. This brings a much higher level of predictability into the business.

By employing a common business model across the enterprise, the results of changes in plans and forecasts can be reflected immediately in the business model.

Large Data Sets

With the current state of industry, it's easy to see that strategic applications are rapidly improving on the amounts of data they manage and the number of users they support. Companies turn to the OPM systems to help make sense of the data explosion.

When its own subscriber base grew to more than one million, one of the largest mobile phone carriers in the Middle East realized that its statistical analysis system for tracking and responding to customer usage began to run out of steam in terms of the level of detail it could handle in any given timeframe. And speed of response in the contemporary cellular business can mean commercial life-or-death for operators. Mobile service providers must have the ability to analyze customer usage behavior and respond to or anticipate trends in the marketplace.

As part of a general overhaul of its IT infrastructure, the provider decided to deploy an OPM solution. The performance management solution is able to handle massive data sets for millions of concurrent customers in "right time" by keeping data readily available for analysis in memory and performing complex calculations on demand.

With the system, the company is able to optimize rate programs, proactively prevent attrition, increase customer satisfaction, check product profitability, analyze customer profitability, dissect average revenue per users, do highly detailed account segmentation, and perform active financial planning, budgeting and forecasting. The separate data sets for this information were generated by a myriad of applications, and these needed to be consolidated into one overarching dashboard for sophisticated analysis.

What was the end result? The company can continuously and proactively offer its customers the most competitive rates and services available in one of the world's most competitive markets.

A credit card management firm is part of a preeminent financial services company with customer accounts in the multimillions, in multiple countries. With multiple types of credit cards, this firm needed to be able to analyze profitability by client. While revenue and overall profitability was fairly easy to calculate, looking at allocations and various corporate activities by account was more complex.

On a macro level, the organization views profitability as revenue minus allocated and direct expenses. However, allocating expenses (operating, marketing/promotions and corporate) is not as simple as dividing it up between the various clients.

Rather, the company had somewhat changing allocations - and realized that automating the allocation process would enable them to develop algorithms that could be applied (and adjusted) to the different clients. The allocations were numerous and consisted of potentially more than 60,000 different data names, including consolidations and elements. They also included operational statistics including the number of hours worked by person and by location, the number of accounts opened and closed and the number and type of customer service calls received. This data needed to be accumulated, stored and analyzed on a daily and monthly basis in order to allocate the appropriate expenses by client.

By using an OPM solution, the credit card firm is now able to organize all this data into multidimensional sets that enable the financial analysts, managers and executives to easily access this information.

Additionally, the credit card company is able to incorporate promotions, travel, overhead and other expenses into the allocation cycle. This ultimately gives the executives the ability to make more strategic decisions, based on accurate and up-to-date information. Perhaps the most significant reporting on profitability is now the what-if scenario planning. Using an OPM solution, executives and management can drill down to information and the performance of any client account by any number of variables - such as by region, promotion, etc. This information can be both historical (i.e., what is the performance?) and as scenario planning (i.e., if the company ran this promotion in this region, what would the impact be?). This ability to use what-if modeling helps the firm make decisions that improve profitability and reduce risk.

Information on Demand

The past will always be in the past, and the era of batch processing - waiting for information - has passed. As the Internet heralded "Internet time," the world became an on-demand world.

Realistically, all levels of the enterprise - IT managers, line-of-business managers, plant and brand managers, financial analysts and most significantly senior executives - demand the answers to their questions to be available as rapidly as they can click on a mouse.

Unfortunately, those in the trenches - most specifically, the IT managers and systems experts - know there are often significant delays in finding the answers to these questions.

Today, businesses that lead their industries have moved beyond annual, quarterly and even monthly analysis and reporting, to requiring varying levels of the organization to engage in weekly, daily and even near real-time or real-time scenario planning and reporting.

As such, responses need to be immediate - they essentially function as part of the business forecasting and reforecasting process. By experimenting with the variables, managers can quickly see the results of the change - but this activity requires the ability for the performance management system to recalculate in a matter of seconds, not hours.

Sharing this information - whether in the form of Excel spreadsheets, Web browsers or actual reports - is also an important aspect of providing information on demand. And, to add a further requirement, these varying team members often need to participate in the analysis and reporting process - not just viewing and absorbing details, but inputting specifics, changing factors. These people need to write back to the information source.

The need for real-time or right-time data could be near impossible or put a significant strain on the existing IT infrastructure, However, flexible performance management applications rely on ETL tools (extract, transform and load) easily connecting with separate financial, operational (enterprise resource planning/ERP) and HR applications to facilitate on-demand requests.

Data Integration

Finding the answers to any problem is always much easier when the facts are located in one place. Unfortunately, most companies have IT systems that were developed in silos. These silos not only inhibit executive decision making on a global basis, but also put significant demands on the IT teams.

OPM can be the driver to create a corporate single version of the truth. Achieving the efficiencies and effectiveness of OPM requires a single source of information. In turn, this creates more transparency and accuracy in the data used for critical decision making.

Organizations of all sizes, in a wide range of industries, have begun to realize the benefits of deploying a common business model across the organization and relying on performance management tools to manage, maintain and automate it.

Consider the case that involves a major credit card issuer. Fraud is one of the biggest problems facing financial services firms today; with today's rampant theft of identities and extensive credit fraud, credit card companies are faced with dissatisfied customers, financial liability and damage to the company's reputation.

One international credit card firm has a large, sophisticated fraud-prevention operation that consists of a value analysis team, which measures and assesses the current fraud threat, and an initiative team, which develops ways to prevent and combat that theft.

With 11.4 million customers and 13.6 million cards in circulation, this credit card company would need an OPM system that not only addressed the core requirements, but could also handle massive amounts of transactional data. As part of its proactive approach to preventing fraud, this firm has turned to performance management software that includes business modeling functionality. Modeling has enabled the firm to start with fraud analysis, looking for "hot spots" in the transactions while incorporating collaboration and workflow for automated alerting.

The company now relies on a common business model as the basis for easily deploying applications for identifying fraud in which new cards sent to customers are intercepted en route. The solution enables the company to identify high-risk postal codes and then calculate the optimum delivery spend by using different delivery methods for different postal code areas. The company also uses an application to analyze high-volume transaction data alongside fraud data.

By relying on OPM, this credit card company has moved from insight based on past events to insight based on current and anticipated events. It translates into less financial risk for the firm, less reputation-damaging fraud and improved customer experiences.

A large beverage retailer with more than 2,000 outlets and 12,500 employees turned to OPM to run a more successful business - the firm is focused on fast response to consumer opportunities and creating and delivering new products and concepts to the market quickly.

The company had been facing a significant challenge in managing the distribution of its products to its stores. Individual spreadsheets (and workbooks) had been used to manage stock control and order goods. Additional spreadsheets were relied upon for different divisions, creating a nightmare of consolidation in order to get consistent and reliable information for the big picture.

Now, with OPM, the vast amount of data is consolidated into one central information point - and the beverage company's centralized information provides details on variables by product and store, allowing the company to better understand weekly fluctuations. With the solution, merchandise managers have in-depth, real-time insight into sales from the company's 2,000 stores, enabling them to make predictions and calculate preemptive forward orders from their suppliers.

One of the biggest benefits to a single source of information is that the company now has integrated financial and operational planning in disparate business units. And, even as vital, the company has management reports more quickly, with less effort and guaranteed accuracy.

Getting Started

As a cross-enterprise system and activity, OPM can be owned by any number of departments - finance, IT or even business unit leaders. The key is to identify which group or individual has a strategic enterprise role to lead this initiative. Tying both financial and nonfinancial metrics and drivers to the project ensures that the operational activities are aligned with the organization's strategic goals.

The benefit to operational performance management is enormous. According to Gartner, companies that correlate nonfinancial measures with financial results see higher returns on both assets and equity.2

As you can see from both the business theory and real examples described, operational performance management is here now, bringing agility, transparency and predictability to organizations worldwide.

References:

  1. This definition is courtesy of the BPM Standards Group.
  2. Rayner, Nigel. "Performance Management Must Move Beyond Finance." December 9, 2005.
...............................................................................

For more information on related topics visit the following related portals...
Corporate Performance Management (CPM), Data Integration, Enterprise Information Management and Real-Time Enterprise.

David Menninger oversees worldwide marketing activities as vice president of worldwide product management and marketing at Applix, Inc. He brings more than 20 years of industry experience to the position, most recently serving as chief marketing officer for ArsDigita in Cambridge, MA. Previously Menninger spent seven years in the business intelligence community as the Vice President of Product Marketing for Oracle's OLAP Products and Vice President of Product Management for Oracle's Data Mining Technologies. Prior to that, as technology evangelist for IRI Software, he helped educate the market about OLAP leading to Oracle's acquisition of the Express product line. Menninger also served on the OLAP Council, is a frequent speaker at industry trade shows, and has authored numerous articles for industry trade publications. You can contact him at dmenning@applix.com.

 



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