World-Class Enterprise Performance Management Drives More Than Twice the Shareholder Return
Executives can more than double their companyâs equity market returns and drive higher stock price, larger dividends and significantly lower operating profit volatility by improving enterprise performance management (EPM) capabilities, including planning, budgeting, forecasting and reporting, to world-class levels, according to research from The Hackett Group.
At the same time, Hackett found that typical companies are, to a large extent, âflying blindâ due to poor EPM performance. Despite the fact that they spend more than twice as much as world-class companies on planning and performance management processes and operate with more than twice the staff, their planning functions fail to deliver timely, relevant insights into their customers, competitors, market and business environment. Therefore executives at these firms are less able to align operational activities to support strategic corporate goals. World-class companies are defined for the purposes of this paper as those that perform in the top quartile across an array of efficiency and effectiveness metrics in Hackettâs benchmark.
Hackettâs research, which analyzed detailed benchmark findings from more than 200 large companies, found that companies with world-class EPM performance generate considerably higher equity market returns, including stock price increase and dividends, than typical companies in their industry. In addition, these top companies outperform the equity market returns seen by typical companies in the Dow Jones Industrial Average. The Hackett research identifies an array of practices that companies rely on to achieve world-class EPM performance, including focusing on fewer budget line items and making greater use of online reporting tools. They produce reports faster than typical companies, and company management has much greater confidence in the reliability of forecasting and reporting outputs.
Twice the Spending, Half the Return
World-class EPM organizations deliver 2.4 times higher returns than the industry-relative three-year average indexed equity market returns of typical companies (see Figure 1). They also perform more consistently, with year-over-year operating profit volatility (over a three-year average) significantly lower than the 33 percent seen by typical companies. In addition, management at companies with world-class EPM organizations are 37 percent more likely to place a high degree of reliability on forecasting and reporting outputs than at peer-group companies, a key metric in assessing the value of analysis performed.
World-class EPM organizations achieve superior performance despite the fact that they spend only about half of what typical companies do in this area. These companies have 45 percent lower business analysis process costs than their peers, and 53 percent lower planning and performance management costs (see Figure 2). They also operate with only 11.4 individuals on their planning and performance management staff per $US billion of revenue, which is 57 percent fewer than peer-group companies.
The Hackett Group has identified certain practices that play critical roles in helping world-class EPM organizations outperform the competition. World-class EPM organizations frequently use top-down budget targets established by corporate, rather than a traditional bottom-up approach. World-class companies also focus on materiality by reducing the number of line items in their budgets, relying on 37 percent fewer line items than peer-group companies, and are 44 percent more likely than most companies to be using rolling forecasts, either as part of the annual budgeting process or as a replacement for it.
The use of online tools to distribute or access standard reports is another proven practice leveraged by world-class companies. Enabling Web-based report viewing leads to more real-time information exchange and offers a competitive advantage in rapidly changing markets. In addition, world-class companies generate 53 percent fewer reports per $US billion of revenue than typical companies. These companies understand that by reducing complexity and focusing on the right operational business performance drivers, they can dramatically reduce the time and expense of report generation while providing decision makers with more relevant and timely information.
Shareholder value analysis is also a key approach used by world-class companies to enrich the information and data provided for decision support. Shareholder value analysis, which deals explicitly with the cost of equity capital in return calculations, provides a broader economic rationalization of business success. Incorporation of all costs, both explicit and implicit, into the decision-making framework ensures adequate returns to the providers of capital. World-class companies use this approach in the development of strategic plans markedly more often than the peer group (83 percent versus 66 percent).
In general, world-class companies incorporate more forward-looking analysis into their performance reports. Rapidly changing market dynamics create risk, and basing decisions solely on historical information is insufficient for predicting likely future performance. It is this realization that has led the best companies to develop balanced scorecards and other business performance frameworks to provide managers with historical information (financial and operational results) combined with additional business performance driver data â which is more predictive in nature â and externally oriented measures of relative performance. Hackett found that world-class companies have nonfinancial information embedded in their performance reports more often than typical companies. They also spend more time on proactive analysis and less time explaining what happened in the past. This proactive bias translates into 31 percent more reports and commentaries that address future improvement actions or potential opportunities.
One of the most important considerations for companies is weighing the trade-offs between practicing fiscal discipline and allowing sufficient financial flexibility to take advantage of new opportunities or deal with a downturn. World-class companies are more likely to tie a comprehensive investment/debt strategy to the companyâs overall operating and strategic plan, which gives them sufficient lead time to procure the required capital to fund key strategic goals and operating plans. This is true for 83 percent of world-class companies versus 59 percent of typical companies. All companies should align their investment/debt practices with the business environment that shapes their overall strategic plan.
Another theme common to world-class performance is complexity reduction, in both processes and technology. In EPM, this translates into world-class companies being 29 percent more likely to generate business performance reports from a single database. A single data repository reduces errors and allows managers to spend less time searching for information and more time on analysis.
Finally, all companies in the study still widely use spreadsheets as a stand-alone budgeting tool. Using spreadsheets for budgeting purposes opens the organization to potential process breakdowns. Given their propensity for errors, coupled with the ease with which users can edit and change formulas and assumptions, using a spreadsheet as a stand-alone budgeting tool makes creating âone single, reliable version of the truthâ difficult. So it is significant that, while more than half of typical companies report high use of spreadsheets for budgeting, world-class companies are 19 percent less likely to do so.
Looking Ahead
Further inroads are expected to be made by streamlining and simplifying the budgeting process. World-class EPM organizations will continue to reduce the number of budgeted line items down to the critical few that are truly required for measuring an organizationâs progress against strategic objectives. The leaders will further ensure that selected budget items articulate key business drivers while providing for a better understanding of current and expected performance. They will also slash budget cycle times through increased use of top-down target setting supported with technologies that provide on-demand access to information.
The Hackett Groupâs certified practice of top-down target setting, in conjunction with more evolved bottom-up planning, will dramatically accelerate the budgeting cycle. In addition, with this approach, planners can more easily hit clearly defined targets and align the budget much more closely with strategic objectives. Business-unit executives or leaders of corporate services (such as finance) will spend less time on multiple budget iterations. Top performers will further reduce the budget detail throughout the organization, ensuring driver-based planning and budgeting processes at the business unit and regional levels.
Lastly, Hackett expects world-class EPM organizations to continue de-emphasizing the budget in favor of driver-based rolling forecasts. Closer cross-functional collaboration and the synchronizing of different performance management models will lead to greater accuracy and reliability from the forecasting process.
