Quantifiable EPM Benefits Emerge
It sounds simple. Follow these steps:
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1. Define the metric.
2. Set the goal.
3. Monitor the process and measure performance.
4. Alert when a metric is malfunctioning.
5. Take action to adjust process.
6. Repeat.
Enterprise performance management (EPM) is top of mind among business executives, and leading companies are beginning to achieve significant, quantifiable benefits with it. However, getting even one line of business (LOB) to this point is a major undertaking, requiring large reserves of cash, discipline, and patience. Users who've implemented EPM projects tell us that:
- Subpar data quality and architecture are the main obstacles to wholesale adoption of performance management. Projects often require a data warehouse at the front end.
- EPM initiatives are therefore more complicated and expensive than expected.
Despite such obstacles, the most advanced companies are enjoying the initial fruits of performance management success, and they plan to keep investing in this area. AMR Research spoke to two dozen North American and European companies to see what EPM tools they are using and what pitfalls they've encountered. Our interviews also illustrated the following:
- Users understand that performance management products are at different stages of maturity and are making decisions to solve problems now;
- Return on investment cases for EPM require a nontraditional approach; and
- Once you decide to proceed, there are common imperatives to every performance management initiative.
The Data Quality Issue
At the outset, EPM projects often run up against a brick wall. Disparate systems and data combine to ensure that even if an EPM tool or application is applied, all that will come out on the other side is rubbish. The GIGO rule — garbage in, garbage out — definitely applies here. Examples of this abound:
- Company A wanted to install supply chain performance management software but discovered that it had 17 disparate pools of supply chain data. A two-year data warehouse project ensued; and
- Planning to commence an ambitious performance management project, Company B used a single enterprise vendor but had several highly customized instances. A lengthy data warehouse project ensued.
More Time, More Money Than Expected
Given today's demand for instant ROI, EPM projects are something of a throwback. None of the initiatives we looked at would make it past today's tough-minded CIOs, who demand small teams, fixed schedules, and a hard ROI up front. That these projects take longer and cost more than you might think is only possible because business leaders — to be more precise, C-level business leaders — are driving the bus.
The minimum initial project cost we encountered was $500,000, including hardware, software, and services (see Figure 1). It's important to mention that projects at the lower end of the cost scale had already addressed their data concerns or were confining their initiative to a single LOB. Users that selected their ERP vendor for performance management did not experience noticeably lower costs than users that chose the best-of-breed route.
Figure 1: Initial EPM Project Costs for Selected Users
Source: AMR Research
Maturity Levels May Vary
For heterogeneous enterprise environments, customers reported that a best-of-breed vendor is the sensible choice. The very concept of enterprise software suites calls into question (at the present time, anyway) the vendors' commitment to unbiased interfaces with multiple applications and data sources.
For those with common ERP architectures, the enterprise vendors merit serious consideration. If the selection process is heavily influenced by information technology (IT) professionals, enterprise vendors' performance management modules are more likely to get the nod, even if they are not the unanimous choice from a business point of view. For instance, in firms where SAP dominates, its Strategic Enterprise Management suite requires only an incremental increase in IT resources compared to introducing a new vendor and technology architecture to the mix.
EPM and ROI — Do They Mix?
Pre-project assessments highlight softer benefits, but harder returns are tough to forecast. This is not a straightforward "fire 20 people" or outsourcing decision that has an instant impact on the balance sheet or P&L statement. It's more about shining a light in corners to see what's there and, more importantly, choosing a course of action. Performance management is a multi-step process, not a single project. Users characterize it as implementation followed by "endless tinkering." The benefits are often not realized until a year or more into a project and, when realized, benefits may be soft. For example, visibility into performance may be achieved, but the ability to understand and act may not be.
Despite these challenges, EPM initiatives are a priority for many business executives, and for good reason — they're working. In marked contrast with the grumbling we often hear about ERP implementations, not a single executive we spoke with regretted embarking on an EPM project. Returns are undeniable, though not instantaneous (see Figure 2).
Figure 2: EPM returns and benefits are quantifiable
Source: AMR Research
The overwhelming interest in EPM, combined with a challenging funding environment, gives rise to the question: How exactly do you justify these projects? If the data warehouse issues are in good shape, you're in better shape. If you also have top-executive sponsorship and accountability, that's even better. However, if your organization is in less than good shape in regards to data, sponsorship, and accountability, there are ways to justify performance management.
Consider these "creative" quantitative approaches to justifying performance management:
- For supply chain performance management — forecasting savings achieved from reduced inventory over time;
- For financials-led performance management — quantifying the time and effort saved by reducing the time required to reach a quarterly or monthly close; and
- For general performance management in association with a data warehouse project — quantifying the time and effort saved by having business users responsible for their data rather than specialists or IT process, maintain, cleanse, process, and distribute data (this leads to better data as well).
Executive or board-level mandates take care of many ROI questions, simply because the governance pressure on these people is compelling. One of the most ambitious (and expensive) projects we looked at was justified by the decree of a single individual: "I want this thing, and I don't care what anyone says. We're doing it." His role? Chairman and CEO of a Fortune 500 company.
Making It Happen
Business drives, but IT needs to ride shotgun — many data warehouse projects in recent years were not entirely effective because of a lack of business buy-in. However, the importance of the upfront data piece means that IT really does need to stand shoulder to shoulder with business. That said, Figure 3 outlines the four basic components of a performance management initiative.
Figure 3: Prerequisites for Establishing a Performance Management Baseline
Source: AMR Research
Because these are long-term projects that require intimate knowledge of an individual firm's strategy and operations, the likelihood of a third party being called in to engineer is slim. For the most part, companies are engineering on their own, with some help from performance management vendor professional services groups. Also, it's important to remember that depending on which strategy/tool is employed, EPM requires ongoing internal resources on both the business and IT sides.
EPM tools differ in their initial costs, implementation time, and ongoing support requirements. Pre-built applications are quicker to implement, but they are more generic and less flexible in their analytics. For example, users focusing a preconfigured tool for one piece of their supply chain — say, inventory — experienced quicker returns, although nothing resembling instant gratification. At the other end of the scale, we have analytics packages that rely heavily on IT and specialist staff for their care and feeding.
User-adoption challenges can be formidable. Aligning incentives aids adoption. If the identification and root causes of key performance indicators (KPIs) are properly achieved, linked to individual incentives, and broadcast to users, usage is improved. One of the most effective incentives, depending on the tool or application used, occurs by default: Business users, not IT, are responsible for inputting and managing their data. The adoption and subsequent success of EPM initiatives in these situations is much more likely.
Recommendations
With improved visibility into business and operations, users are able to identify issues and, with luck, root causes. However, being able to react quickly and consistently — the "take action to adjust process" piece — remains a challenge. The policies and procedures that support the adjustment process must be embedded in your EPM initiative. Change management becomes a major requirement. For example, you need to reduce a certain product line by 50 percent ASAP, and you have long-term contracts in place with your suppliers. You've essentially been informed that a hurricane is headed for your house. You even know something about hurricanes: what they're made of and how they form. Is this knowledge particularly helpful? Not really. To be more capable in protecting your house, you need to do the following:
- Be ready. Use analytics as a catalyst for business process change within the company. Be as ready as you can to execute once you identify issues. This will be an iterative process;
- Start small. If data from an LOB is in relatively decent shape and KPIs can be identified, start there;
- If data warehousing is already under way in your company, performance management can and should be implemented in tandem;
- Don't shortchange yourself on EPM, especially the initial project. Use your very best people both on the business and IT sides. Do not rely on what are considered "surplus" resources for these initiatives;
- Businesses using global IT services firms are spending at the top end of the EPM budget range. Use outside services firms for tactical technology and/or domain expertise sparingly to reduce project costs; and
- There is the potential for overconfidence in users that have already implemented a data warehouse or universal ERP system. While these give you a leg up, EPM process challenges are still tricky.
