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Aligning Profit to Execution

The document provides an overview of a presentation on Enterprise Performance Management (EPM) by Edgewater Ranzal, highlighting the importance of profitability and cost management. It discusses the capabilities of the Oracle Hyperion EPM solution and the challenges companies face in accurately measuring profitability, particularly regarding indirect costs and the tools used for analysis. The document emphasizes the need for better financial analytics and a more integrated approach to cost management, alongside detailed case studies and insights into EPM best practices.

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Edgewater Ranzal EPM Day, New York City October 25, 2012 Mike Killeen Vice President of Technology mkilleen@ranzal.com Aligning Profit to Execution
► The Need for Profitability and Cost Management ► Overview of the Oracle Hyperion EPM Solution ► Case Study Closing Q&A Agenda ► Closing Q&A 2
About Edgewater-Ranzal One of the largest Full-Service Edgewater Acquired ► Publicly Traded as: EDGW ► One of The Boston Globe’s Top 100 businesses ► Ranked as one of the 500 fastest-growing stocks on Wall Street Planning Building Ranzal 3 ► One of the largest Full-Service Oracle/Hyperion EPM and BI practices. ► Oracle Platinum Partner presented with numerous awards and recognitions by Oracle including multiple Partner of the Year awards. ► Premier Consulting Services in North America, and a regional European office located in the United Kingdom. Founded in 1996 Essbase Acquired by Edgewater 2004 Data Integration & Warehousing/ CRM/ Web 2.0 Development Acquired Vertical Pitch 2007 HFM/ FDM Acquired Meridian 2010 HSF Planning 2001 Planning Building OBI Team 2011 OBIEE Build DRM & HPCM Teams 2009 DRM & HPCM
Our Services Dashboards & Scorecards, Profitability & Cost Mgmt, Financial Analytics & Reporting, Operational Analytics, What-if Analysis, Query & Reporting, Visual Exploration Financial performance, Legal, Segment & Mgmt Reporting, Financial Close HFM Optimization, Performance Lab SOX Compliance Support Planning, Budgeting, Forecasting, Workforce Planning, Capital Planning, Project Planning, Public Sector Budgeting, Strategic Finance Installation, Upgrades, Migration, System Monitoring, Backup and Recovery, Disaster Recovery, Load Testing, Hardware Sizing Consolidation & Reporting Business Intelligence Enterprise Planning Infrastructure Project Data Integration, Financial Data Management, Data Warehousing, Master Data Management, ETL Services, Performance Tuning, Automation Project/Program Mgmt, EPM Road Maps, Application Reviews, Business Requirements, Process Change, Documentation Infrastructure Training Support Services Data Services Project Management Support Services – Technical and functional Support Services. Remote Service Desk available to call for quick response to technical and application issues.KeyTeach Partnership – HFM, Planning, Essbase custom Training Class as well as Remote and CBT. COMPLEMENTS ORACLE TRAINING UNIVERSITY
The Need for Profitability & Cost ManagementManagement
Call Me Doing Fine Why Enterprise Performance Mgmt (EPM)? reactrecognize
Understanding Profitability Exposes Hidden Cost Behaviors “…Technology vendors are spending, on average, 19% of their selling, general, and administrative (SG&A) costs or $135,262 per quota-carrying salesperson in support-related activities. Few are aware of this enormous amount because the costs are hidden .”hidden .” “Uncovering The Hidden Costs Of Sales Support” Scott Santucci - April 13, 2009
Using the Wrong Tools to Effectively Analyze Profitability “Most companies are not using the right tools…spreadsheet based models are hard to change, error prone and difficult and time-consuming to use. Relying on desktop spreadsheets can keep your company from doing the kind of analyses it needs to Accurate Costing Is Key to Profitability Ventana Research, 2008 keep your company from doing the kind of analyses it needs to do when it needs to do them...”
Does Your Company use a tool today to perform allocations as part of a profitability management or cost management solution? If so, what tool do they use? 25% 25%25%25% 1. Packaged Profitability or Costing Application (e.g. HPCM, OFSAA) 2. Custom Solution Using EPM, BI, or OLAP Tool (e.g. Planning, EDW, Essbase) 3. General Ledger Polling Question #1 9 Packaged Profi... Custom Solutio... GeneralLedger Spreadsheets/M ... 3. General Ledger 4. Spreadsheets/Microsoft Access Solution or not sure
Profitability Defined Wikipedia Defines Customer Profitability as: “Customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period” Basic Formula: Profitability = Revenue - Direct Costs - Indirect Costs
Cost Definitions ► Direct Costs ► Costs Directly associated to the making of a product or delivery of a service ► Parts for the product ► Labor for Service Delivery ► Costs Directly attributed to the selling to a customer or client ► Shipping and Handling Expense Customer Processing Expense► Customer Processing Expense ► Indirect Costs ► Costs that are not directly attributable to the making of a product or the selling 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
Profitability Challenge #1 - Indirect Expenses Assignment to Products & Customers No Standard Process Standard, accepted process No Standard Process Indirect Costs are difficult to track and measure
Profitability Challenge #2 - Statutory Reports are not Timely or Detailed Enough • What defines a profitable customer? • What is the profit contribution margin of a product or a service? • What does it cost to sell to or to service customers? • What proportion of Financial transactions Consolidation (GL or HFM) • What proportion of resources does a specific customer consume? • Why hasn’t increased revenue resulted in increased profitability? transactions Financial Data (GL or HFM) Accumulator Bottom-line Results Organizational P&L
Profitability & Costing Solution Elements Analysis & Planning Product P&L by Activity Financial P&L Behavioral Data Raw Data Meaningful Attributions & Allocations
Raw Data – Financial P&L Legend C Customer Specific Costs P Product Specific Costs F Financial/Overheads Type P&L Line $ % of Rev C/P Units Sold 100 C/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 ► Projects Typical Financial Analysis C/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: Accounting Mgmt IT Mfg Plant Departmental Exp Variances ► Projects ► Line of Business/Channel ► While some elements of product profitability and customer profitability may be present, they are typically at a much higher level (e.g. many SKUs rolling up to a Product Line, or many Customers rolling up to a Channel) ► Significant manual effort may be involved in achieving this (e.g. Thick G/L, XL, Manual Journals) ► Complete Financial Results also occur at the close, where its often too late to react ► Need to be more detailed, timely, transparent & automated to be actionable
SHIPPED TO SOLD TO TERMS: FROM INVOICE DATE XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX 2% 15 days Net 16, USD DIRECT INQUIRIES TO: 1 (800) 999-9999 INVOICE SHIP DATE 11/01/2004 INVOICE DATE 11/01/2004 XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX PURCHASE ORDER NO. SHIP NO. CUST. NO. SALES DIST. PLEASE SHOW THIS INVOICE NUMBER WHEN REMITTINGTEST ORDER #1 S901999 B901999 2377 DATE INV’D 11/01/04 2002009999 ORDER DATE MM/DD DELIVERY DATE MM/DD ACCT. AT CUST. CARRIER SALES ORDER 19929988811/01 11/11 1202 Customer pick-up QUANTITY UNITS PRODUCT CODE DESCRIPTION UNIT PRICE AMOUNT 700 CA 4100000295 TBAH 24/500 75.35 52,745.00 Raw Data – Sample Operational Data 700 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 apps Customer - By Customer - Bill To/Sold To - Shipped To - By Market - Mkt (Channel) - Sales ID - Shipped To Product - Category - Sub-Category - Brand - Sku Time - Year - Quarter - Month(5-4-4) - Week - Day Accounts - Net Sales Dollars - Gross Sales Dollars - Less: Cash Disc - 2% 15 days - Efficiency Allow - Spec Allow, etc Attributes Quantity - SKU A (Case = 12) - SKU B (Case = 1000)
Meaningful Allocation – Top Down via Rules › Allocation Rules can use drivers such as headcount, percentages, hours, etc Customer Profitability Profit Before Overheads Gross Profit Total MDC Total Overheads Total Mktg Overhead Total Sales Overhead Allocation Rules Profitability CRM HR GL EDW EPM Available Driver & Allocation Source Data Total Sales Overhead Total General Overhead Total Associated Costs Broker Commissions JV Income
Meaningful Allocation – Bottoms Up Via ABC ► Activity based costing: ► Rather than looking at departmental expenses as a collection of costs by functional areas, look at them as a collection of activities. ► Functional view: ► Total Distribution Costs Order Desk Dept ► Specify a department & get cost - e.g., Order Desk - $100 ► Identify activities – e.g., take phone order, take fax order ► Identify % time spent on each activity – e.g., 70%, 30% ► Identify Driver for Each Activity – e.g. # of Orders - 50, 110 ► Calculate activity cost rates Example ► Order Desk Dept ► Warehousing Dept ► Shipping Dept ► Activity view: ► Total distribution costs: ► Take orders ► Pick items from shelves ► Drive trucks Calculate 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/fax order ► Load in drivers by customer ► Customer A – 10 phone orders = $14.00 total cost ► Customer B – 10 fax orders = $2.70 total cost ► Assuming Customer A & B order the same product, which is more profitable?
Decision Support – Sample Reporting & Analysis
Key Expectations of a Profitability & Cost Management Solution ► Reliability – Visibly defensible profitability and cost results ► Agility – Timely reflection of Senior Management – Timely reflection of results to be actionable ► Relevance – An ability to Allocate resources to the most important opportunities Financial Results Revenue & Cost Models Operational Results FP&A
Which of the below use cases would your organization prioritize as the top application for a Profitability & Cost Management Solution? 25% 25%25%25% 1. Cost Allocation Process for External Purposes 2. Activity Based Costing For External Purposes 3. High Level Profitability for Management Polling Question #2 21 CostAllocation Processf.. Activity Based Costing Fo... High LevelProfitability ... Detailed Custom er/Prod... Purposes 4. Detailed Customer/Product/Operational Profitability for Management Purposes
Overview of Oracle Hyperion EPM Profitability SolutionProfitability Solution
EPM/BI Platform Consolidation & Reporting reactrecognize today • The more mature the EPM platform, the more lead time to RECOGNIZE issues (i.e. the transfer from Finance to Operational insight) Building an EPM/BI Platform & Analysis (profitability) Financial Planning • The better enterprise reporting & analysis tools, the easier it is to RECOGNIZE issues. • The better transparency to details to revenues and costs, the more time for insight to REACT and resolve. • The more integrated these components, the faster time to REACT.Analysis (profitability)
Which of the following EPM/BI programs would you rank as MOST important to your organization? 25% 25%25%25% 1. Optimizing the Financial Close & Reporting Process 2. Improving the Budgeting, Forecasting & Planning Process Polling Question #3 24 Optim izing the... Im provingthe ... EnablingActio... Delivering and... Planning Process 3. Enabling Actionable Operational and Financial Analytics throughout the organization 4. Delivering and Optimizing a Profitability and/or Cost Management Solution
Oracle EPM and BI Architecture
Solution Component – Essbase OLAP Server
Profitability Applications are Multi-Dimensional in Nature
• Packaged Profitability functionality • Computes Profitability for Business Segments, Customers and Products • 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 stage Solution Component – Hyperion Profitability & Cost Management (HPCM) 28 • A User-Driven application • Measures, Allocates and Assigns Cost and Revenues via User Defined 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
Metadata Management Allocation Model Definition Cost & Revenue Allocation Calculations Profitability & Cost Analysis HPCM Workflow for Profitability & Cost Solution
HPCM Stages ► HPCM allocates Costs & Revenue Pools through one or more stages in a top down capacity ► Stage – Step in the allocation process that has similar pool characteristics Name Dimension 1 Dimension 2 Dimension 3 1 – GL BudgetCentre Account Related Party Allocation Flow ► Separate stages enable traceability!! 2 – Sum BudgetCentre CostPool 2 - Sum_Intra BudgetCentre CostPool 3 – Process Process Activity Client 4 – Service Service
Direct and Indirect (Genealogy) Allocations Drivers Deployed •FTE (Simple) •Various % Inputs (Custom) •Summarization (Even)
In a Perfect World, All Stages are Created Equal… R12 449 Account R12 449 Process R12 449 Service HPCM/Essbase is storing the data separately in each Stage!
HPCM Allocation Model Definition Components Source Stage General Ledger Target Stage Cost Pool Account Budget Centre Related Party Budget Centre Cost PoolDriver Driver Selections – Defines what Driver Definitions to use against the Source stage, typically the dimension identified as the driver definition. Assignment Rules Definitions– Defines the member combination in the target dimension for the assignment. Assignments– Defines the source dimension combination and the target Driver Definitions – Create an allocation formula/methodology that references a loaded metric within the model. 1 2 3 4 2 3 1 4 4 dimension combination and the target Assignment Rule 4 4
Sample Model Analysis – Trace Allocations Trace Allocation for Service
What’s New in 11.1.2.2 HPCM – Detailed Profitability Models
Solution Component – Common EPM/BI Reporting Tools
Information Delivery - Sample EPM Dashboard
Solution Component* - Hyperion Planning EPM Application Shorten Planning Cycles and Improve Business Predictability ► Powerful workflow and process management ► Intuitive interface for end user data entry ► Robust data integration ► Leverages Essbase for► Leverages Essbase for powerful reporting and analysis ► Scalable Web infrastructure ► Shared EPM Administration Tools
EPMA Hyperion Planning Multi User Data Entry Task Lists & Workflow Bottoms Up Calculations Reporting & Commentary HPCM Multi-Step Allocation Modeling Validation Reporting Traceability Maps & Analysis Data synch: Costs by Account & Dept Data synch: Direct Attribution to LOB Data synch: Shared Assumptions Shared Dimensions & Hierarchies (EPMA) HPCM & Planning – Better Together EPM Reporting & Analysis Web Analysis Financial Reports Smart View for Office Assumptions Data synch: Drivers by Account & Dept & LOB Data synch: Results by Account & Dept & LOB
What role do you see a budgeting/forecasting/planning product playing in a profitability & cost management solution? 25% 25%25%25% 1. Critical - the definition of a set of routines that can be shared with the profitability management solution for actuals, plans, forecast, and what-if scenarios 2. Important – the solution needs to support Polling Question #4 40 Critical-the definition of.. Im portant– the solutio... Nice to Have –can exten... NotIm portant– w e w ou.. 2. Important – the solution needs to support processing of both actuals and budget/forecast data sets 3. Nice to Have – can extend the profitability process through driver collection & an occasional what-if scenario 4. Not Important – we would run our processes only for actuals
Case Study An HR Consulting FirmAn HR Consulting Firm Planning & HPCM for a Fully Loaded P&L
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 Hyperion Planning and HPCM approach. • Solution on an Enterprise Platform - a platform for further growth. • Ability to easily run multiple versions.
Application Architecture Driver Data Hyperion Planning Hyperion Profitability & Cost Management Microsoft Excel Attribution Planning Application HPCM Cost Allocation Application Budget Planning Application HPCM Stage Management Utility
Business Logic STG 1 BONUS STG 2 PROP & STG 3 MGTI STG 4 PRE STG 5 POST STG 6 PRE HPCM STG 7 POST HPCM STG 8 TOTAL Budget Planning App SOURCE HPCM App BONUS PROP & ADMIN MGTI PRE ATTR POST ATTR TOTAL ALLOC SOURCE DATA Budget Planning App
Attribution Process – Data Form
Allocation Matrix
HPCM Model Architecture
HPCM Stage Balancing
HPCM Trace Allocations
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 data not the process. ► Risk mitigation – Enterprise platform
ClosingClosing
► Does your company understand the true costs of its products or services? ► Are costing models transparent enough? Can you easily trace back the assigned costs 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 a centralized HR function) accurately? ► Are people spending too much time maintaining our costing models and other elements of our costing system? Self-Evaluation Questions elements 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 ERP system? If not, what are the initial and ongoing costs of integrating that data into your ERP system?
Closing and Q&A 53 Mike Killeen, Vice President Edgewater Ranzal 108 Corporate Park Drive, Suite 105 White Plains, NY 10604 E-mail: mkilleen@ranzal.com
Appendix – HPCM Demo FlowAppendix – HPCM Demo Flow
Demo - Business User Defines Stages in HPCM Stage definition is wizard driven, and provides the appropriate selections for stage creation.
Demo - Model Validation – Stage Balancing Report Key Column
Demo - Business User Defines Drivers in HPCM1
Demo - Drivers are Assigned to Cost Pools2
Demo - Business Users Control Definition of Assignment Rules3
Demo - Business Users Map Source Stage to Targets Via Assignments 4 Or Allocation Assignments can be bulk loaded via a staging table.
Appendix – HPCM Reference InformationHPCM Reference Information
HPCM Key Terms & Concepts Key Term Standardised Usage HCPM allocation engine An allocation by definition is the split of one number into multiple based on a set of rules and methodologies. HPCM allocation (function) The split of data from a single source, located in one stage, to multiple targets, located in a different stage, through a particular methodology or calculation rule. Allocations can also exist within the same stage (called an intra-stage allocation). In HPCM, a driver, is defined as the unique combination of a calculation rule (e.g. pro-rate split, even distribution) withcombination of a calculation rule (e.g. pro-rate split, even distribution) with a measure or metric (e.g. Headcount, Manual Stat). Assignment In HPCM an assignment defines the unique pairings of source to target relationship. For example, the fact that Actuary Management Cost Center only allocates to the Actuary Operating Cost Centers (as opposed to all cost centers) is an assignment rule. The fact it uses headcount for that allocation is a driver. Traceability Traceability in HPCM is the process of visually flowing a cost pool forwards or backwards from any stage.

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Aligning Profit to Execution

  • 1.
    Edgewater Ranzal EPM Day,New York City October 25, 2012 Mike Killeen Vice President of Technology mkilleen@ranzal.com Aligning Profit to Execution
  • 2.
    ► The Needfor Profitability and Cost Management ► Overview of the Oracle Hyperion EPM Solution ► Case Study Closing Q&A Agenda ► Closing Q&A 2
  • 3.
    About Edgewater-Ranzal One ofthe largest Full-Service Edgewater Acquired ► Publicly Traded as: EDGW ► One of The Boston Globe’s Top 100 businesses ► Ranked as one of the 500 fastest-growing stocks on Wall Street Planning Building Ranzal 3 ► One of the largest Full-Service Oracle/Hyperion EPM and BI practices. ► Oracle Platinum Partner presented with numerous awards and recognitions by Oracle including multiple Partner of the Year awards. ► Premier Consulting Services in North America, and a regional European office located in the United Kingdom. Founded in 1996 Essbase Acquired by Edgewater 2004 Data Integration & Warehousing/ CRM/ Web 2.0 Development Acquired Vertical Pitch 2007 HFM/ FDM Acquired Meridian 2010 HSF Planning 2001 Planning Building OBI Team 2011 OBIEE Build DRM & HPCM Teams 2009 DRM & HPCM
  • 4.
    Our Services Dashboards& Scorecards, Profitability & Cost Mgmt, Financial Analytics & Reporting, Operational Analytics, What-if Analysis, Query & Reporting, Visual Exploration Financial performance, Legal, Segment & Mgmt Reporting, Financial Close HFM Optimization, Performance Lab SOX Compliance Support Planning, Budgeting, Forecasting, Workforce Planning, Capital Planning, Project Planning, Public Sector Budgeting, Strategic Finance Installation, Upgrades, Migration, System Monitoring, Backup and Recovery, Disaster Recovery, Load Testing, Hardware Sizing Consolidation & Reporting Business Intelligence Enterprise Planning Infrastructure Project Data Integration, Financial Data Management, Data Warehousing, Master Data Management, ETL Services, Performance Tuning, Automation Project/Program Mgmt, EPM Road Maps, Application Reviews, Business Requirements, Process Change, Documentation Infrastructure Training Support Services Data Services Project Management Support Services – Technical and functional Support Services. Remote Service Desk available to call for quick response to technical and application issues.KeyTeach Partnership – HFM, Planning, Essbase custom Training Class as well as Remote and CBT. COMPLEMENTS ORACLE TRAINING UNIVERSITY
  • 5.
    The Need forProfitability & Cost ManagementManagement
  • 6.
    Call Me Doing Fine WhyEnterprise Performance Mgmt (EPM)? reactrecognize
  • 7.
    Understanding Profitability ExposesHidden Cost Behaviors “…Technology vendors are spending, on average, 19% of their selling, general, and administrative (SG&A) costs or $135,262 per quota-carrying salesperson in support-related activities. Few are aware of this enormous amount because the costs are hidden .”hidden .” “Uncovering The Hidden Costs Of Sales Support” Scott Santucci - April 13, 2009
  • 8.
    Using the WrongTools to Effectively Analyze Profitability “Most companies are not using the right tools…spreadsheet based models are hard to change, error prone and difficult and time-consuming to use. Relying on desktop spreadsheets can keep your company from doing the kind of analyses it needs to Accurate Costing Is Key to Profitability Ventana Research, 2008 keep your company from doing the kind of analyses it needs to do when it needs to do them...”
  • 9.
    Does Your Companyuse a tool today to perform allocations as part of a profitability management or cost management solution? If so, what tool do they use? 25% 25%25%25% 1. Packaged Profitability or Costing Application (e.g. HPCM, OFSAA) 2. Custom Solution Using EPM, BI, or OLAP Tool (e.g. Planning, EDW, Essbase) 3. General Ledger Polling Question #1 9 Packaged Profi... Custom Solutio... GeneralLedger Spreadsheets/M ... 3. General Ledger 4. Spreadsheets/Microsoft Access Solution or not sure
  • 10.
    Profitability Defined Wikipedia DefinesCustomer Profitability as: “Customer profitability is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period” Basic Formula: Profitability = Revenue - Direct Costs - Indirect Costs
  • 11.
    Cost Definitions ► DirectCosts ► Costs Directly associated to the making of a product or delivery of a service ► Parts for the product ► Labor for Service Delivery ► Costs Directly attributed to the selling to a customer or client ► Shipping and Handling Expense Customer Processing Expense► Customer Processing Expense ► Indirect Costs ► Costs that are not directly attributable to the making of a product or the selling 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.
    Profitability Challenge #1- Indirect Expenses Assignment to Products & Customers No Standard Process Standard, accepted process No Standard Process Indirect Costs are difficult to track and measure
  • 13.
    Profitability Challenge #2- Statutory Reports are not Timely or Detailed Enough • What defines a profitable customer? • What is the profit contribution margin of a product or a service? • What does it cost to sell to or to service customers? • What proportion of Financial transactions Consolidation (GL or HFM) • What proportion of resources does a specific customer consume? • Why hasn’t increased revenue resulted in increased profitability? transactions Financial Data (GL or HFM) Accumulator Bottom-line Results Organizational P&L
  • 14.
    Profitability & CostingSolution Elements Analysis & Planning Product P&L by Activity Financial P&L Behavioral Data Raw Data Meaningful Attributions & Allocations
  • 15.
    Raw Data –Financial P&L Legend C Customer Specific Costs P Product Specific Costs F Financial/Overheads Type P&L Line $ % of Rev C/P Units Sold 100 C/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 ► Projects Typical Financial Analysis C/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: Accounting Mgmt IT Mfg Plant Departmental Exp Variances ► Projects ► Line of Business/Channel ► While some elements of product profitability and customer profitability may be present, they are typically at a much higher level (e.g. many SKUs rolling up to a Product Line, or many Customers rolling up to a Channel) ► Significant manual effort may be involved in achieving this (e.g. Thick G/L, XL, Manual Journals) ► Complete Financial Results also occur at the close, where its often too late to react ► Need to be more detailed, timely, transparent & automated to be actionable
  • 16.
    SHIPPED TO SOLDTO TERMS: FROM INVOICE DATE XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX 2% 15 days Net 16, USD DIRECT INQUIRIES TO: 1 (800) 999-9999 INVOICE SHIP DATE 11/01/2004 INVOICE DATE 11/01/2004 XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX PURCHASE ORDER NO. SHIP NO. CUST. NO. SALES DIST. PLEASE SHOW THIS INVOICE NUMBER WHEN REMITTINGTEST ORDER #1 S901999 B901999 2377 DATE INV’D 11/01/04 2002009999 ORDER DATE MM/DD DELIVERY DATE MM/DD ACCT. AT CUST. CARRIER SALES ORDER 19929988811/01 11/11 1202 Customer pick-up QUANTITY UNITS PRODUCT CODE DESCRIPTION UNIT PRICE AMOUNT 700 CA 4100000295 TBAH 24/500 75.35 52,745.00 Raw Data – Sample Operational Data 700 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 apps Customer - By Customer - Bill To/Sold To - Shipped To - By Market - Mkt (Channel) - Sales ID - Shipped To Product - Category - Sub-Category - Brand - Sku Time - Year - Quarter - Month(5-4-4) - Week - Day Accounts - Net Sales Dollars - Gross Sales Dollars - Less: Cash Disc - 2% 15 days - Efficiency Allow - Spec Allow, etc Attributes Quantity - SKU A (Case = 12) - SKU B (Case = 1000)
  • 17.
    Meaningful Allocation –Top Down via Rules › Allocation Rules can use drivers such as headcount, percentages, hours, etc Customer Profitability Profit Before Overheads Gross Profit Total MDC Total Overheads Total Mktg Overhead Total Sales Overhead Allocation Rules Profitability CRM HR GL EDW EPM Available Driver & Allocation Source Data Total Sales Overhead Total General Overhead Total Associated Costs Broker Commissions JV Income
  • 18.
    Meaningful Allocation –Bottoms Up Via ABC ► Activity based costing: ► Rather than looking at departmental expenses as a collection of costs by functional areas, look at them as a collection of activities. ► Functional view: ► Total Distribution Costs Order Desk Dept ► Specify a department & get cost - e.g., Order Desk - $100 ► Identify activities – e.g., take phone order, take fax order ► Identify % time spent on each activity – e.g., 70%, 30% ► Identify Driver for Each Activity – e.g. # of Orders - 50, 110 ► Calculate activity cost rates Example ► Order Desk Dept ► Warehousing Dept ► Shipping Dept ► Activity view: ► Total distribution costs: ► Take orders ► Pick items from shelves ► Drive trucks Calculate 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/fax order ► Load in drivers by customer ► Customer A – 10 phone orders = $14.00 total cost ► Customer B – 10 fax orders = $2.70 total cost ► Assuming Customer A & B order the same product, which is more profitable?
  • 19.
    Decision Support –Sample Reporting & Analysis
  • 20.
    Key Expectations ofa Profitability & Cost Management Solution ► Reliability – Visibly defensible profitability and cost results ► Agility – Timely reflection of Senior Management – Timely reflection of results to be actionable ► Relevance – An ability to Allocate resources to the most important opportunities Financial Results Revenue & Cost Models Operational Results FP&A
  • 21.
    Which of thebelow use cases would your organization prioritize as the top application for a Profitability & Cost Management Solution? 25% 25%25%25% 1. Cost Allocation Process for External Purposes 2. Activity Based Costing For External Purposes 3. High Level Profitability for Management Polling Question #2 21 CostAllocation Processf.. Activity Based Costing Fo... High LevelProfitability ... Detailed Custom er/Prod... Purposes 4. Detailed Customer/Product/Operational Profitability for Management Purposes
  • 22.
    Overview of OracleHyperion EPM Profitability SolutionProfitability Solution
  • 23.
    EPM/BI Platform Consolidation & Reporting reactrecognize today •The more mature the EPM platform, the more lead time to RECOGNIZE issues (i.e. the transfer from Finance to Operational insight) Building an EPM/BI Platform & Analysis (profitability) Financial Planning • The better enterprise reporting & analysis tools, the easier it is to RECOGNIZE issues. • The better transparency to details to revenues and costs, the more time for insight to REACT and resolve. • The more integrated these components, the faster time to REACT.Analysis (profitability)
  • 24.
    Which of thefollowing EPM/BI programs would you rank as MOST important to your organization? 25% 25%25%25% 1. Optimizing the Financial Close & Reporting Process 2. Improving the Budgeting, Forecasting & Planning Process Polling Question #3 24 Optim izing the... Im provingthe ... EnablingActio... Delivering and... Planning Process 3. Enabling Actionable Operational and Financial Analytics throughout the organization 4. Delivering and Optimizing a Profitability and/or Cost Management Solution
  • 25.
    Oracle EPM andBI Architecture
  • 26.
    Solution Component –Essbase OLAP Server
  • 27.
    Profitability Applications areMulti-Dimensional in Nature
  • 28.
    • Packaged Profitabilityfunctionality • Computes Profitability for Business Segments, Customers and Products • 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 stage Solution Component – Hyperion Profitability & Cost Management (HPCM) 28 • A User-Driven application • Measures, Allocates and Assigns Cost and Revenues via User Defined 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.
  • 30.
    HPCM Stages ► HPCMallocates Costs & Revenue Pools through one or more stages in a top down capacity ► Stage – Step in the allocation process that has similar pool characteristics Name Dimension 1 Dimension 2 Dimension 3 1 – GL BudgetCentre Account Related Party Allocation Flow ► Separate stages enable traceability!! 2 – Sum BudgetCentre CostPool 2 - Sum_Intra BudgetCentre CostPool 3 – Process Process Activity Client 4 – Service Service
  • 31.
    Direct and Indirect(Genealogy) Allocations Drivers Deployed •FTE (Simple) •Various % Inputs (Custom) •Summarization (Even)
  • 32.
    In a PerfectWorld, All Stages are Created Equal… R12 449 Account R12 449 Process R12 449 Service HPCM/Essbase is storing the data separately in each Stage!
  • 33.
    HPCM Allocation ModelDefinition Components Source Stage General Ledger Target Stage Cost Pool Account Budget Centre Related Party Budget Centre Cost PoolDriver Driver Selections – Defines what Driver Definitions to use against the Source stage, typically the dimension identified as the driver definition. Assignment Rules Definitions– Defines the member combination in the target dimension for the assignment. Assignments– Defines the source dimension combination and the target Driver Definitions – Create an allocation formula/methodology that references a loaded metric within the model. 1 2 3 4 2 3 1 4 4 dimension combination and the target Assignment Rule 4 4
  • 34.
    Sample Model Analysis– Trace Allocations Trace Allocation for Service
  • 35.
    What’s New in11.1.2.2 HPCM – Detailed Profitability Models
  • 36.
    Solution Component –Common EPM/BI Reporting Tools
  • 37.
    Information Delivery -Sample EPM Dashboard
  • 38.
    Solution Component* -Hyperion Planning EPM Application Shorten Planning Cycles and Improve Business Predictability ► Powerful workflow and process management ► Intuitive interface for end user data entry ► Robust data integration ► Leverages Essbase for► Leverages Essbase for powerful reporting and analysis ► Scalable Web infrastructure ► Shared EPM Administration Tools
  • 39.
    EPMA Hyperion Planning Multi UserData Entry Task Lists & Workflow Bottoms Up Calculations Reporting & Commentary HPCM Multi-Step Allocation Modeling Validation Reporting Traceability Maps & Analysis Data synch: Costs by Account & Dept Data synch: Direct Attribution to LOB Data synch: Shared Assumptions Shared Dimensions & Hierarchies (EPMA) HPCM & Planning – Better Together EPM Reporting & Analysis Web Analysis Financial Reports Smart View for Office Assumptions Data synch: Drivers by Account & Dept & LOB Data synch: Results by Account & Dept & LOB
  • 40.
    What role doyou see a budgeting/forecasting/planning product playing in a profitability & cost management solution? 25% 25%25%25% 1. Critical - the definition of a set of routines that can be shared with the profitability management solution for actuals, plans, forecast, and what-if scenarios 2. Important – the solution needs to support Polling Question #4 40 Critical-the definition of.. Im portant– the solutio... Nice to Have –can exten... NotIm portant– w e w ou.. 2. Important – the solution needs to support processing of both actuals and budget/forecast data sets 3. Nice to Have – can extend the profitability process through driver collection & an occasional what-if scenario 4. Not Important – we would run our processes only for actuals
  • 41.
    Case Study An HRConsulting FirmAn HR Consulting Firm Planning & HPCM for a Fully Loaded P&L
  • 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 Hyperion Planning and HPCM approach. • Solution on an Enterprise Platform - a platform for further growth. • Ability to easily run multiple versions.
  • 43.
    Application Architecture Driver Data HyperionPlanning Hyperion Profitability & Cost Management Microsoft Excel Attribution Planning Application HPCM Cost Allocation Application Budget Planning Application HPCM Stage Management Utility
  • 44.
    Business Logic STG 1 BONUS STG2 PROP & STG 3 MGTI STG 4 PRE STG 5 POST STG 6 PRE HPCM STG 7 POST HPCM STG 8 TOTAL Budget Planning App SOURCE HPCM App BONUS PROP & ADMIN MGTI PRE ATTR POST ATTR TOTAL ALLOC SOURCE DATA Budget Planning App
  • 45.
  • 46.
  • 47.
  • 48.
  • 49.
  • 50.
    Outcome ► Excellent visibilitythroughout 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 data not the process. ► Risk mitigation – Enterprise platform
  • 51.
  • 52.
    ► Does yourcompany understand the true costs of its products or services? ► Are costing models transparent enough? Can you easily trace back the assigned costs 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 a centralized HR function) accurately? ► Are people spending too much time maintaining our costing models and other elements of our costing system? Self-Evaluation Questions elements 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 ERP system? If not, what are the initial and ongoing costs of integrating that data into your ERP system?
  • 53.
    Closing and Q&A 53 MikeKilleen, Vice President Edgewater Ranzal 108 Corporate Park Drive, Suite 105 White Plains, NY 10604 E-mail: mkilleen@ranzal.com
  • 54.
    Appendix – HPCMDemo FlowAppendix – HPCM Demo Flow
  • 55.
    Demo - BusinessUser Defines Stages in HPCM Stage definition is wizard driven, and provides the appropriate selections for stage creation.
  • 56.
    Demo - ModelValidation – Stage Balancing Report Key Column
  • 57.
    Demo - BusinessUser Defines Drivers in HPCM1
  • 58.
    Demo - Driversare Assigned to Cost Pools2
  • 59.
    Demo - BusinessUsers Control Definition of Assignment Rules3
  • 60.
    Demo - BusinessUsers Map Source Stage to Targets Via Assignments 4 Or Allocation Assignments can be bulk loaded via a staging table.
  • 61.
    Appendix – HPCM ReferenceInformationHPCM Reference Information
  • 62.
    HPCM Key Terms& Concepts Key Term Standardised Usage HCPM allocation engine An allocation by definition is the split of one number into multiple based on a set of rules and methodologies. HPCM allocation (function) The split of data from a single source, located in one stage, to multiple targets, located in a different stage, through a particular methodology or calculation rule. Allocations can also exist within the same stage (called an intra-stage allocation). In HPCM, a driver, is defined as the unique combination of a calculation rule (e.g. pro-rate split, even distribution) withcombination of a calculation rule (e.g. pro-rate split, even distribution) with a measure or metric (e.g. Headcount, Manual Stat). Assignment In HPCM an assignment defines the unique pairings of source to target relationship. For example, the fact that Actuary Management Cost Center only allocates to the Actuary Operating Cost Centers (as opposed to all cost centers) is an assignment rule. The fact it uses headcount for that allocation is a driver. Traceability Traceability in HPCM is the process of visually flowing a cost pool forwards or backwards from any stage.