The ROI of Performance Management
In today's turbulent economic environment, chief financial officers and other
business managers are scrutinizing capital investment projects like never before.
Especially with investments in technology, CFOs are taking a hard look at the
real return from the money, people, and time involved.
At many companies, this means looking beyond the standardization and improved efficiency that their technology systems provide, toward evaluating ways that technology can help them operate their businesses more effectively. One of these methods is the use of business performance management (BPM) initiatives.
In considering such initiatives, organizations must balance the apparently conflicting goals of reducing costs while investing in the tools that will help them make better decisions and improve business performance. Until now, many investments in solutions for planning, analysis, and reporting have been made solely on the "soft" expectations that they will improve decision-making, unify data, and make information more widely available to the company's employees and business partners.
We'll explore how finance organizations today are quantifying the return on investment (ROI) for their performance management initiatives and are justifying their investments in the enabling technologies.
The Impact of Performance Management
Companies can achieve numerous benefits, both qualitative and quantitative, through BPM initiatives. Qualitative benefits include improved decision-making and greater visibility of information. Quantitative benefits include workforce redeployment and reduction opportunities, quicker cycle times for key processes, and more efficient technology investment.
IDC, a leading research and analysis firm, sums up the benefits as business process enhancements, productivity benefits, and technology-related savings. When evaluating the real-dollar return of BPM initiatives, IDC found that nearly 54 percent of the total ROI for BPM initiatives achieved by companies participating in a recent survey came from business process enhancements. Such enhancements include all identifiable annual savings that were realized from changes in business processes supported by the analytic applications. An example might include improvements in strategy development and deployment throughout the company.
The second leading benefit was enhanced productivity — all the efficiency savings that were due to reduced time and effort for tasks such as planning and budgeting — which accounted for nearly 42 percent of the resulting ROI. The final 4 percent was related directly to savings in technology costs, including costs for unnecessary applications.
Qualitative results are truly in the eye of the beholder, as each company experiences benefits that are unique to its operating environment. Consider these statements from leading enterprises across the globe:
"Through performance management, we can constantly monitor results, take timely corrective action, and meet the demands of a dynamic market." — International electronics distributor
"An end-of-quarter closing, from the point in time at which the data is initially recorded by the reporting units right down to the consolidated financial statements, now only takes a few days." — Leading insurance services firm
"Business performance management delivers valuable information in a consistent form to all locations worldwide. This enables us to compare, in an exception-based way, locations, brands, and accounts, and to continually strengthen our competitive position." — Multinational CPG company
Best Practices in BPM
To achieve superior qualitative and quantitative results in their BPM programs, companies must design initiatives that address the particular needs of their organizations. Programs with the best returns involve a broad range of stakeholders and are fully integrated with company operations and technology. Such programs also include careful analyses of ROI and time-to-payback for the various business functions and applications that are involved.
Create a Dialogue
Organizations that are most successful in BPM use it to establish a dialogue rather than as a whip to implement corrective actions. In fact, properly deployed, analytical systems can remove much of the subjectivity of traditional ad hoc reporting and analysis. This, in turn, can reduce friction among internal stakeholders and can enhance communication between business lines. In addition, a well-structured BPM program increases the speed and deployment of information, thus minimizing crises that may erupt due to data that is unavailable or incomplete.
As Henry Morris of IDC aptly puts it, companies must "democratize the information assets" and deliver timely and relevant analytics to the end consumers. In return, companies can gain operational alignment with corporate objectives, conversations and "thought starters" that engage all employees in the business, and the immediate and proactive measurement and monitoring of business performance at all levels of the organization. There is nothing more powerful in business today than employees who are deeply engaged in their companies. Such engagement requires an understanding of what drives the business forward.
Close the Loop
An analysis of best practices in use for BPM today clearly indicates that an end-to-end, integrated approach is the only way to achieve accurate, world-class performance management. This means that you must tie your operational systems directly to your analytical systems and offer bidirectional feedback. It also requires integration of information, people, and processes within the analytical environment itself.
Many organizations have a hodgepodge of planning, reporting, and analysis tools collected through a variety of departmentalized purchases over the years. Such a disparate analytical environment is highly inefficient and may even lead to incorrect business decisions.
Leaders in business performance management recommend that companies adopt integrated solutions (see Figure 1) that offer end-to-end planning and analysis capabilities including:
- Strategic planning;
- Operational planning;
- Financial budgeting;
- Financial consolidation and reporting; and
- Analysis, scorecarding, and benchmarking.
With a well-integrated system, organizations can ensure that everyone is making decisions based on the same information and that those decisions are communicated throughout the organization via a common analytical framework. In this respect, a closed-loop approach makes information useful and actionable.
Figure 1: Closed-Loop Performance Management
Integrate People, Processes, and Technology
In addition to the right applications, a successful performance management system requires a holistic view of the people, processes, and technology involved. Personal behaviors, actions, and motivations may change with the new system. Processes may be streamlined to enhance the flow of information. Through automation, technology can help people, departments, executives, and companies make better decisions.
Recent implementers of analytical solutions recommend getting end users involved in the process both early and often. This approach ensures a buy-in from users across the enterprise and encourages individuals to use their expertise to design an optimum performance management solution.
Says Tom Nehila, director of business planning and forecasting for Avaya, a global communications provider, "I look at the performance management process as a contract between the CEO, the operational world, and finance to determine where we need to focus to drive our company forward."
Balance Risk and Reward
According to IDC, BPM activities can be segmented into the three primary business functions: customer relationship, financial/ business performance, and operations/ production. Each function produces varying results of ROI and time-to-payback. In a recent study, operations/production implementations — which might involve production, delivery, and other operational metrics — earned a median return on investment of 277 percent. Financial and customer relationship projects returned median ROIs of 139 percent and 55 percent, respectively. Financial/business performance projects had the quickest average payback period, however, at 1.13 years. That compares to average payback periods of 1.41 years and 2.39 years for operations/production and customer relationship projects.
The data show that there is no "one size fits all" for BPM deployments. Instead, companies must weigh the intended results and benefits of their individual efforts with the correlating costs and timelines of their returns.
Analytics in Action
The following case study of OfficeMax comes from a recent IDC report, The Financial Impact of Business Analytics, and was developed to demonstrate the quantifiable value that can be achieved through analytical initiatives.
OfficeMax
Revenue: $4.636 billion
Primary Objective: Obtain actionable data on out-of-stock; identify cross-selling opportunities
Primary Users: Replenishment managers
ROI: 27 percent (after tax)
Highlight: Identified $69 million in "dead inventory"
Background
In a market where the competition runs the gamut from other national office-supply superstores to the local drugstore that carries school supplies, OfficeMax is one of a triumvirate of stores that dominate. Managing inventory, knowing what's in stock down to the last eraser and where it is on the shelf, is key to facilitating the high turnover of goods that's required for an office-supply store to be profitable. Product sitting on a shelf for weeks or months on end equates to lost revenue. Thus, OfficeMax must be savvy about inventory levels and customer preferences to make the most of its shelf space and maintain its competitive position. The deployment of a data warehouse and an analytic application to handle replenishment enables OfficeMax to predict inventory levels, optimize store content, and link marketing practices with optimized store content.
Business Challenge
OfficeMax faces intense pressure to make its inventory-replenishment operations as efficient as possible for each of its almost 1,000 stores. Its challenge is to learn which products should be stocked in what quantities and at which stores to minimize inventory investment and maximize sales. The lack of a consolidated data source and analytics application focused on inventory replenishment was a barrier to achieving these goals. Allocation strategy is a key to making the right investment in inventory at the right time for each SKU in each store. This requires quantifying what it costs to keep individual items that gather dust on the shelves, as well as quantifying how many sales are lost due to inadequate stock. This information itself constitutes the first step toward accurate forecasting. OfficeMax needed to consolidate its data into a single environment to create timely and accurate reports, as well as to distribute the reports on an as-needed basis to different levels of different departments within the company. In addition, OfficeMax had to improve its understanding of the consumer as well as of the larger, competitive environment for the purpose of inventory planning.
Business Analytics Approach
With its newly consolidated data source and newly implemented analytic application for inventory replenishment, OfficeMax can generate standard reports, as well as perform drill-down and ad hoc reporting. It has developed three levels of reporting: a standard production report; a standard report template with some built-in flexibility; and a completely customizable report that is available only to power users.
OfficeMax developed a report to identify dead inventory (merchandise with a discontinued code but with no disposition). Dead inventory represents an inefficient use of money and shelf space. The report has uncovered $69 million in dead inventory that now can be reallocated or sold off so the shelf space can be better utilized. Further benefits of the analytic application include a weekly snapshot of on-hand merchandise as well as a daily out-of-stock report for all stores. The weekly on-hand reports are a first step and should evolve into more frequent reporting as experience grows. OfficeMax is beginning to report on lost sales by item by store due to out-of-stock inventory and is using this information for demand planning. The value of this usage-to-demand planning is expected to become evident over the next three to six months and will be road-tested during the back-to-school promotions followed by the back-to-basics promotions in early 2004.
Reports now under development include advertisement reporting to improve forecasts, prevent missed margins, and reduce customer ill will; cross-tab reporting on top sellers that are out-of-stock; price-point comparison reporting that will lead to the development of price elasticity models; and a deeper consumer understanding that will eventually enable OfficeMax to market individually to customers on the spot.
Conclusion
By carefully crafting a BPM program to suit the particular needs of your company, and by weighing the various costs and benefits involved, you too can enjoy attractive ROIs from such initiatives. Whether you seek quantitative benefits like improved productivity, or qualitative enhancements like more effective decision-making, you can create a successful BPM initiative by bringing the many resources of your company together through fully integrated IT solutions that support end-to-end analysis and planning.
