Aligning Profit to Execution

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Edgewater Ranzal Oracle Ace and Director of Technology Mike Killeen was invited to present on the need for profitability and cost management, at Oracle EPM Day in New York.

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Aligning Profit to Execution

  1. 1. Edgewater RanzalEPM Day, New York CityOctober 25, 2012Mike KilleenVice President of Technologymkilleen@ranzal.comAligning Profit to Execution
  2. 2. ► The Need for Profitability and Cost Management► Overview of the Oracle Hyperion EPM Solution► Case StudyClosing Q&AAgenda► Closing Q&A2
  3. 3. About Edgewater-RanzalOne of the largest Full-ServiceEdgewaterAcquired► Publicly Traded as: EDGW► One of The Boston Globe’s Top 100 businesses► Ranked as one of the 500 fastest-growing stocks on Wall StreetPlanning BuildingRanzal3► One of the largest Full-ServiceOracle/Hyperion EPM and BIpractices.► Oracle Platinum Partner presentedwith numerous awards andrecognitions by Oracle includingmultiple Partner of the Year awards.► Premier Consulting Services in NorthAmerica, and a regional Europeanoffice located in the United Kingdom.Founded in1996EssbaseAcquired byEdgewater2004DataIntegration &Warehousing/CRM/Web 2.0DevelopmentAcquiredVertical Pitch2007HFM/FDMAcquiredMeridian2010HSFPlanning2001PlanningBuildingOBI Team2011OBIEEBuild DRM &HPCM Teams2009DRM &HPCM
  4. 4. Our Services Dashboards & Scorecards, Profitability &Cost Mgmt, Financial Analytics &Reporting, Operational Analytics, What-ifAnalysis, Query & Reporting, VisualExplorationFinancial performance, Legal,Segment & Mgmt Reporting, Financial CloseHFM Optimization, Performance LabSOX Compliance SupportPlanning, Budgeting, Forecasting,Workforce Planning, Capital Planning,Project Planning, Public SectorBudgeting, Strategic FinanceInstallation, Upgrades,Migration, System Monitoring,Backup and Recovery, DisasterRecovery, Load Testing,Hardware SizingConsolidation &ReportingBusinessIntelligenceEnterprisePlanningInfrastructureProjectData Integration, Financial DataManagement, Data Warehousing, Master DataManagement, ETL Services, PerformanceTuning, AutomationProject/Program Mgmt, EPMRoad Maps, ApplicationReviews, BusinessRequirements, Process Change,DocumentationInfrastructureTrainingSupportServicesDataServicesProjectManagementSupport Services – Technical andfunctional Support Services.Remote Service Desk available tocall for quick response to technicaland application issues.KeyTeach Partnership– HFM, Planning, Essbase custom TrainingClass as well as Remote and CBT.COMPLEMENTS ORACLE TRAINING UNIVERSITY
  5. 5. The Need for Profitability & CostManagementManagement
  6. 6. Call MeDoing FineWhy Enterprise Performance Mgmt (EPM)?reactrecognize
  7. 7. Understanding Profitability Exposes Hidden Cost Behaviors“…Technology vendors are spending, on average, 19% of theirselling, general, and administrative (SG&A) costs or $135,262 perquota-carrying salesperson in support-related activities.Few are aware of this enormous amount because the costs arehidden .”hidden .”“Uncovering The Hidden Costs Of Sales Support”Scott Santucci - April 13, 2009
  8. 8. Using the Wrong Tools to Effectively Analyze Profitability“Most companies are not using the right tools…spreadsheetbased models are hard to change, error prone and difficult andtime-consuming to use. Relying on desktop spreadsheets cankeep your company from doing the kind of analyses it needs toAccurate Costing Is Key to ProfitabilityVentana Research, 2008keep your company from doing the kind of analyses it needs todo when it needs to do them...”
  9. 9. Does Your Company use a tool today to perform allocations as part of aprofitability management or cost management solution? If so, what tool dothey use?25% 25%25%25%1. Packaged Profitability or CostingApplication (e.g. HPCM, OFSAA)2. Custom Solution Using EPM, BI,or OLAP Tool (e.g. Planning, EDW,Essbase)3. General LedgerPolling Question #19PackagedProfi...CustomSolutio...GeneralLedgerSpreadsheets/M...3. General Ledger4. Spreadsheets/Microsoft AccessSolution or not sure
  10. 10. Profitability DefinedWikipedia Defines Customer Profitability as:“Customer profitability is the difference between therevenues earned from and the costs associated withthe customer relationship in a specified period”Basic Formula:Profitability = Revenue - Direct Costs - Indirect Costs
  11. 11. Cost Definitions► Direct Costs► Costs Directly associated to the making of a product or delivery of aservice► Parts for the product► Labor for Service Delivery► Costs Directly attributed to the selling to a customer or client► Shipping and Handling ExpenseCustomer Processing Expense► Customer Processing Expense► Indirect Costs► Costs that are not directly attributable to the making of a product or theselling to a customer► Operating Costs (e.g. Call Center, Plant Overhead)► Selling Costs (e.g. Sales & Marketing)► Investment Costs (e.g. R&D, Initiatives)► G&A Costs (e.g. IT, HR, Finance, Admin)► Finance Charges for Cost of Capital Employed
  12. 12. Profitability Challenge #1 -Indirect Expenses Assignment to Products & CustomersNo Standard ProcessStandard,acceptedprocessNo Standard ProcessIndirectCosts aredifficult totrack andmeasure
  13. 13. Profitability Challenge #2 -Statutory Reports are not Timely or Detailed Enough• What defines a profitablecustomer?• What is the profitcontribution margin of aproduct or a service?• What does it cost to sellto or to servicecustomers?• What proportion ofFinancialtransactionsConsolidation(GL or HFM) • What proportion ofresources does a specificcustomer consume?• Why hasn’t increasedrevenue resulted inincreased profitability?transactionsFinancialData(GL or HFM)AccumulatorBottom-lineResultsOrganizational P&L
  14. 14. Profitability & Costing Solution ElementsAnalysis &PlanningProduct P&L by ActivityFinancial P&LBehavioralDataRawDataMeaningfulAttributions &Allocations
  15. 15. Raw Data – Financial P&LLegendC Customer Specific CostsP Product Specific CostsF Financial/OverheadsType P&L Line $ % of RevC/P Units Sold 100C/P Gross Sales 1,000$ 102%C/P Less Disc, Rtrns & Allow. (20)$ -2%Net Sales 980$ 100%C/P COGS @ Std 400$ 41%Raw Materils,Labor, Freight In,Mfg Ovhd► Accounts► Legal Entity/Company► Cost Center/Department► Product Line/Profit Center► Other Chart Fields:► Sub Accounts/Functional Area► ProjectsTypical Financial AnalysisC/P COGS @ Std 400$ 41%F COGS @ Var 23$ 2%Less: Total COGS 423$ 43%Gross Profit 557$ 57%P/F/O Selling & Marketing Exp 150$ 15%F G&A Exp 100$ 10%Less: Total Operating Exp 250$ 26%Operating Income 307$ 31%F Depreciation & Amortization (75)$ -8%F Other Inc/(Exp) (50)$ -5%Net Income Before Taxes 182$ 19%Less: Income Taxes @ 40% 73$ 7%Net Income After Taxes 109$ 11%Dept Costs:AccountingMgmtITMfg PlantDepartmental ExpVariances► Projects► Line of Business/Channel► While some elements of product profitabilityand customer profitability may be present, theyare typically at a much higher level (e.g. manySKUs rolling up to a Product Line, or manyCustomers rolling up to a Channel)► Significant manual effort may be involved inachieving this (e.g. Thick G/L, XL, ManualJournals)► Complete Financial Results also occur at theclose, where its often too late to react► Need to be more detailed, timely, transparent& automated to be actionable
  16. 16. SHIPPED TO SOLD TO TERMS: FROM INVOICE DATEXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX2% 15 daysNet 16, USDDIRECT INQUIRIES TO:1 (800) 999-9999INVOICE SHIP DATE 11/01/2004INVOICE DATE 11/01/2004XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXPURCHASE ORDER NO. SHIP NO. CUST. NO. SALES DIST. PLEASE SHOW THIS INVOICE NUMBERWHEN REMITTINGTEST ORDER #1 S901999 B901999 2377DATE INV’D11/01/04 2002009999ORDER DATEMM/DDDELIVERY DATEMM/DD ACCT. AT CUST. CARRIER SALES ORDER19929988811/01 11/11 1202 Customer pick-upQUANTITY UNITS PRODUCT CODE DESCRIPTION UNIT PRICE AMOUNT700 CA 4100000295 TBAH 24/500 75.35 52,745.00Raw Data – Sample Operational Data700 CA 4100000295 Efficiency Allowance 333333 0.05- 35.00-700 CA 4100000295 SpecAllow-OI RateCs 654737 0.50- 350.00-700 CA 4100000295 Freight-Backhaul 1.08- 155.74-700 CA 4100000295 Fuel Allow Percent 6% 9.34-700 CA 4100000295 Unload Allowance 0.04- 28.00-Data Sources: Order Mgmt, A/R, Billing, Trade Spending appsCustomer- By Customer- Bill To/Sold To- Shipped To- By Market- Mkt (Channel)- Sales ID- Shipped ToProduct- Category- Sub-Category- Brand- SkuTime- Year- Quarter- Month(5-4-4)- Week- DayAccounts- Net Sales Dollars- Gross Sales Dollars- Less: Cash Disc- 2% 15 days- Efficiency Allow- Spec Allow, etcAttributesQuantity- SKU A(Case = 12)- SKU B(Case = 1000)
  17. 17. Meaningful Allocation – Top Down via Rules› Allocation Rules can use drivers such as headcount, percentages, hours,etcCustomerProfitabilityProfit Before OverheadsGross ProfitTotal MDCTotal OverheadsTotal Mktg OverheadTotal Sales OverheadAllocation RulesProfitabilityCRM HR GL EDW EPMAvailable Driver & Allocation Source DataTotal Sales OverheadTotal General OverheadTotal Associated CostsBroker CommissionsJV Income
  18. 18. Meaningful Allocation – Bottoms Up Via ABC► Activity based costing:► Rather than looking at departmentalexpenses as a collection of costs byfunctional areas, look at them as acollection of activities.► Functional view:► Total Distribution CostsOrder Desk Dept► Specify a department & get cost - e.g., Order Desk- $100► Identify activities – e.g., take phone order, take faxorder► Identify % time spent on each activity – e.g., 70%,30%► Identify Driver for Each Activity – e.g. # of Orders -50, 110► Calculate activity cost ratesExample► Order Desk Dept► Warehousing Dept► Shipping Dept► Activity view:► Total distribution costs:► Take orders► Pick items from shelves► Drive trucksCalculate activity cost rates► Divide departmental cost by driver► Phone order rate = $100*70%/50 =$1.40/phone order► Fax order rate = $100*30%/110 = $0.27/faxorder► Load in drivers by customer► Customer A – 10 phone orders = $14.00 totalcost► Customer B – 10 fax orders = $2.70 total cost► Assuming Customer A & B order the same product,which is more profitable?
  19. 19. Decision Support – Sample Reporting & Analysis
  20. 20. Key Expectations of a Profitability & Cost Management Solution► Reliability– Visibly defensibleprofitability and costresults► Agility– Timely reflection ofSeniorManagement– Timely reflection ofresults to be actionable► Relevance– An ability to Allocateresources to the mostimportant opportunities FinancialResultsRevenue &Cost ModelsOperationalResultsFP&A
  21. 21. Which of the below use cases would your organization prioritize as the topapplication for a Profitability & Cost Management Solution?25% 25%25%25%1. Cost Allocation Process for External Purposes2. Activity Based Costing For External Purposes3. High Level Profitability for ManagementPolling Question #221CostAllocationProcessf..ActivityBasedCostingFo...HighLevelProfitability...DetailedCustomer/Prod...Purposes4. Detailed Customer/Product/OperationalProfitability for Management Purposes
  22. 22. Overview of Oracle Hyperion EPMProfitability SolutionProfitability Solution
  23. 23. EPM/BI PlatformConsolidation& Reportingreactrecognizetoday• The more mature the EPM platform, themore lead time to RECOGNIZE issues (i.e.the transfer from Finance to Operationalinsight)Building an EPM/BI Platform& Analysis(profitability)FinancialPlanning• The better enterprise reporting & analysistools, the easier it is to RECOGNIZE issues.• The better transparency to details torevenues and costs, the more time forinsight to REACT and resolve.• The more integrated these components,the faster time to REACT.Analysis(profitability)
  24. 24. Which of the following EPM/BI programs would you rank as MOST important toyour organization?25% 25%25%25%1. Optimizing the Financial Close & ReportingProcess2. Improving the Budgeting, Forecasting &Planning ProcessPolling Question #324Optimizingthe...Improvingthe...EnablingActio...Deliveringand...Planning Process3. Enabling Actionable Operational andFinancial Analytics throughout theorganization4. Delivering and Optimizing a Profitabilityand/or Cost Management Solution
  25. 25. Oracle EPM and BI Architecture
  26. 26. Solution Component – Essbase OLAP Server
  27. 27. Profitability Applications are Multi-Dimensional in Nature
  28. 28. • Packaged Profitability functionality• Computes Profitability for Business Segments, Customers andProducts• Pre-Built Framework for profitability modeling:• Pre-built Measures dimension• Support for Multiple Cost Allocation methodologies• Pre-Built Validation reporting• Graphical Interactive Traceability Maps• Genealogy Reporting shows flow from any stage to any stageSolution Component – Hyperion Profitability & Cost Management (HPCM)28• A User-Driven application• Measures, Allocates and Assigns Cost and Revenues via UserDefined Rules• Finance User-facing Administration• Provides Scenario Modeling for Decision Making• Tightly integrated with the full Hyperion EPM Suite• Shared Data and Metadata via EPMA• Shared Reporting Tools like Financial Reports & Web Analysis• Proven Technology Stack
  29. 29. MetadataManagementAllocationModelDefinitionCost & RevenueAllocationCalculationsProfitability & Cost AnalysisHPCM Workflow for Profitability & Cost Solution
  30. 30. HPCM Stages► HPCM allocates Costs & Revenue Pools through one or more stages in atop down capacity► Stage – Step in the allocation process that has similar poolcharacteristicsName Dimension 1 Dimension 2 Dimension 31 – GL BudgetCentre Account Related PartyAllocationFlow► Separate stages enable traceability!!2 – Sum BudgetCentre CostPool2 - Sum_Intra BudgetCentre CostPool3 – Process Process Activity Client4 – Service Service
  31. 31. Direct and Indirect (Genealogy) AllocationsDrivers Deployed•FTE (Simple)•Various % Inputs (Custom)•Summarization (Even)
  32. 32. In a Perfect World, All Stages are Created Equal…R12 449AccountR12 449ProcessR12 449ServiceHPCM/Essbase is storing the data separately in each Stage!
  33. 33. HPCM Allocation Model Definition ComponentsSource StageGeneral LedgerTarget StageCost PoolAccountBudgetCentreRelatedPartyBudgetCentreCost PoolDriverDriver Selections – Defines what DriverDefinitions to use against the Sourcestage, typically the dimension identifiedas the driver definition.Assignment Rules Definitions– Definesthe member combination in the targetdimension for the assignment.Assignments– Defines the sourcedimension combination and the targetDriver Definitions – Create an allocationformula/methodology that references aloaded metric within the model.12342 3144 dimension combination and the targetAssignment Rule44
  34. 34. Sample Model Analysis – Trace AllocationsTrace Allocationfor Service
  35. 35. What’s New in 11.1.2.2 HPCM – Detailed Profitability Models
  36. 36. Solution Component – Common EPM/BI Reporting Tools
  37. 37. Information Delivery - Sample EPM Dashboard
  38. 38. Solution Component* - Hyperion Planning EPM ApplicationShorten Planning Cycles and Improve Business Predictability► Powerful workflowand process management► Intuitive interface for enduser data entry► Robust data integration► Leverages Essbase for► Leverages Essbase forpowerful reporting andanalysis► Scalable Webinfrastructure► Shared EPMAdministration Tools
  39. 39. EPMAHyperion PlanningMulti User Data EntryTask Lists & WorkflowBottoms Up CalculationsReporting & CommentaryHPCMMulti-Step Allocation ModelingValidation ReportingTraceability Maps & AnalysisData synch:Costs by Account & DeptData synch: Direct Attributionto LOBData synch: SharedAssumptionsShared Dimensions &Hierarchies (EPMA)HPCM & Planning – Better TogetherEPM Reporting & AnalysisWeb AnalysisFinancial ReportsSmart View for OfficeAssumptionsData synch: Drivers byAccount & Dept & LOBData synch: Results byAccount & Dept & LOB
  40. 40. What role do you see a budgeting/forecasting/planning product playing in aprofitability & cost management solution?25% 25%25%25%1. Critical - the definition of a set of routines thatcan be shared with the profitabilitymanagement solution for actuals, plans,forecast, and what-if scenarios2. Important – the solution needs to supportPolling Question #440Critical-thedefinitionof..Important–thesolutio...NicetoHave–canexten...NotImportant–wewou..2. Important – the solution needs to supportprocessing of both actuals and budget/forecastdata sets3. Nice to Have – can extend the profitabilityprocess through driver collection & anoccasional what-if scenario4. Not Important – we would run our processesonly for actuals
  41. 41. Case StudyAn HR Consulting FirmAn HR Consulting FirmPlanning & HPCM for a Fully Loaded P&L
  42. 42. Business Process► Process• Creation of a “Fully Burdened” dataset.• Attribute the “Fully Burdened” dataset.• Allocate the Costs to the lowest level of the business (Entity & C2 Dimensions)► As-Is• A large tactical MS Excel solution – 50+ worksheets• Difficult to interrogate the process.• Difficult to interrogate the process.• Difficult to control changes.► To-Be• To deliver an allocation system that uses a combined HyperionPlanning and HPCM approach.• Solution on an Enterprise Platform - a platform for further growth.• Ability to easily run multiple versions.
  43. 43. Application ArchitectureDriver DataHyperion PlanningHyperion Profitability & Cost ManagementMicrosoft ExcelAttribution PlanningApplicationHPCMCost Allocation ApplicationBudget PlanningApplicationHPCM StageManagement Utility
  44. 44. Business LogicSTG 1BONUSSTG 2PROP &STG 3MGTISTG 4PRESTG 5POSTSTG 6PREHPCMSTG 7POSTHPCMSTG 8TOTALBudget PlanningAppSOURCEHPCM AppBONUS PROP &ADMINMGTI PREATTRPOSTATTRTOTALALLOCSOURCEDATABudget PlanningApp
  45. 45. Attribution Process – Data Form
  46. 46. Allocation Matrix
  47. 47. HPCM Model Architecture
  48. 48. HPCM Stage Balancing
  49. 49. HPCM Trace Allocations
  50. 50. Outcome► Excellent visibility throughout the allocation process.► A platform for great reporting.► Ability to run multiple versions.► Lower IT involvement (Run the Model).► Can answer business questions quickly.A robust and repeatable process.► A robust and repeatable process.► Business areas can understand their costs – challenge the datanot the process.► Risk mitigation – Enterprise platform
  51. 51. ClosingClosing
  52. 52. ► Does your company understand the true costs of its products or services?► Are costing models transparent enough? Can you easily trace back the assignedcosts to the activities and line item expenses that drive them?► Do your costing methods operate at the right level of detail?► Are you satisfied that you are allocating shared services (such as IT or acentralized HR function) accurately?► Are people spending too much time maintaining our costing models and otherelements of our costing system?Self-Evaluation Questionselements of our costing system?► Can people in your company quickly test how changes to commodity, input costs,lower or higher volumes will affect our profitability?► Are you getting answers from our costing systems fast enough to be actionable?Would reducing this process time improve our competitiveness or profitability?► Is all of the data that you need to understand true costs available in a single ERPsystem? If not, what are the initial and ongoing costs of integrating that data intoyour ERP system?
  53. 53. Closing and Q&A53Mike Killeen, Vice PresidentEdgewater Ranzal108 Corporate Park Drive, Suite 105White Plains, NY 10604E-mail: mkilleen@ranzal.com
  54. 54. Appendix – HPCM Demo FlowAppendix – HPCM Demo Flow
  55. 55. Demo - Business User Defines Stages in HPCMStage definition is wizarddriven, and provides theappropriate selections forstage creation.
  56. 56. Demo - Model Validation – Stage Balancing ReportKey Column
  57. 57. Demo - Business User Defines Drivers in HPCM1
  58. 58. Demo - Drivers are Assigned to Cost Pools2
  59. 59. Demo - Business Users Control Definition of Assignment Rules3
  60. 60. Demo - Business Users Map Source Stage to Targets ViaAssignments4Or AllocationAssignments can bebulk loaded via astaging table.
  61. 61. Appendix –HPCM Reference InformationHPCM Reference Information
  62. 62. HPCM Key Terms & ConceptsKey Term Standardised UsageHCPM allocation engine An allocation by definition is the split of one number into multiple based ona set of rules and methodologies.HPCM allocation (function) The split of data from a single source, located in one stage, to multipletargets, located in a different stage, through a particular methodology orcalculation rule. Allocations can also exist within the same stage (called anintra-stage allocation). In HPCM, a driver, is defined as the uniquecombination of a calculation rule (e.g. pro-rate split, even distribution) withcombination of a calculation rule (e.g. pro-rate split, even distribution) witha measure or metric (e.g. Headcount, Manual Stat).Assignment In HPCM an assignment defines the unique pairings of source to targetrelationship. For example, the fact that Actuary Management Cost Centeronly allocates to the Actuary Operating Cost Centers (as opposed to all costcenters) is an assignment rule. The fact it uses headcount for that allocationis a driver.Traceability Traceability in HPCM is the process of visually flowing a cost pool forwardsor backwards from any stage.

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