The Business Impact of EPM (a case study)

December 16, 2008
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What difference does Enterprise Performance Management (EPM) make in your business?

This is the question Finance, IT, and the business should be asking themselves (it’s the same question they should be asking about any initiative, by the way).

You can look at it in at least 3 different ways:

  1. Table StakesEPM enables standard management processes that every (publicly traded) company must do well:
    • Budgeting, Planning & Forecasting
    • Financial Conso

What difference does Enterprise Performance Management (EPM) make in your business?

This is the question Finance, IT, and the business should be asking themselves (it’s the same question they should be asking about any initiative, by the way).

You can look at it in at least 3 different ways:

  1. Table StakesEPM enables standard management processes that every (publicly traded) company must do well:
    • Budgeting, Planning & Forecasting
    • Financial Consolidation & Statutory Reporting
    • Management Reporting & Business Intelligence
    • Profitability Analysis
    • and other financial and operational modeling, planning, analysis, and reporting
  2. Improving PerformanceEPM can have a material impact on revenue, profit, cash flow, and overall return on capital:
    • Understanding customer and product profitability allows companies to focus on marketing and selling the products that give the best return, as well as have an impact on pricing strategy to make sure they have the right balance of volume, mix, and revenue
    • Gathering and sharing information on DSO, DPO, and DII – delivered to the right people in the organization (and tied to employee rewards) – can have a positive impact on cash cycle
    • Quickly modeling NewCo scenarios in a pending acquisition and basing those models on historical data and actual constraints (by product, by geo, by customer segment, etc.) can give a more accurate picture of available synergies to set the expectations of the street
  3. Executing StrategyEPM should close the loop between what you want to happen in the business (and how), and what actually happened (any why):
    • Records & Documents business model assumptions, constraints & drivers
    • Connects those models into your annual operating plans, budgets & forecasts
    • Monitors and alerts exceptional variances from actual to plan
    • Helps you understand the root causes of variance and plug that corporate knowledge back into the business model and strategy
    • Ties it all together with a common business language, common master data, and improved visibility & alignment.

Let’s take the a look at the potential impact of EPM using a real company scenario.

Since I’m in the market for a new chair, I’ll pick the office furnitureindustry (please note, while the financial data is accurate – based onthe last 4 quarters of publicly available information – the initiativesand scenarios are of my creation).

I’ll use the following companies in my analysis:

  • Steelcase – NYSE: SCS
  • Miller Herman – NasdaqGS: MLHR
  • Kimball International – NasdaqGS: KBALB
  • HNI (parent of The HON Company) – NYSE:HNI

Steelcase is reporting the highest revenue growth versus theirpeers (7.8% vs. 4.9% for MLHR, 5.1% for KBALB, and -2.6% for HNI),while reporting the lowest operating profit (5.3% vs 12.1%, 1.9%, and6.4% respectively). So while their sales velocity is “best in class,”their margins are suffering.

One area worth looking at is Selling, General & Administrative(SG&A) expense – Steelcase is at 27.3%. Only HNI is higher at 28.5%and the other competitors are all around 19%. Now I recognize thatcompanies have a lot of leeway in booking some expense to SG&A andsome to Cost of Goods Sold, so it may not be entirely apples-to-apples(in other words, the difference in SG&A rates may show up in COGS),but let’s assume they are comparable.

So how could EPM make a difference in SG&A at Steelcase?

Here are a few ideas:
– manual data entry, collection, normalization and tie-out (forreports, forecasts, and so on) is an area ripe for automation, andreduces IT and administrative costs (so long as after improving theinefficiencies, there is a corresponding reduction (or redistribution)of head-count,
– adding better visibility to travel and entertainment costs (through adashboard and variance alerting) and better accountability (throughbetter analysis of the corresponding effect those costs have on drivingnew revenue),
– reducing ‘at risk’ customers and the cost of responding to at-riskcustomers through more proactive forecasting, reporting, and analysisof customer satisfaction (down to the incident level),
– improving order-fill rates by adding visibility to material supply,perhaps by including your trading partners in your BI initiatives andforecasts

And how can EPM impact Revenue Growth at Steelcase?  Even though they are best-in-class, why rest on your laurels?

A few more ideas:
– a sales forecast that matches the business (geo, product, customersegment) and connects to the actual sales pipeline system (Siebel forexample), can give more visibility into the quality of the forecast,problem areas, and can even let management focus efforts on sellingmore profitable products,
– marketing can have access to the sales forecast to make sure they arepromoting the right products, generating the right leads, and generallyfilling the pipeline appropriately,
– pricing analysts can run a variety of models to see what price mixand bundling should have the most success in a particular market, orwith a particular channel,
– additional visibility in the new product introduction process (andtimeline) will help sales and marketing ramp up faster and improvereadiness when products are released.

The areas that EPM can impact are far-reaching, diverse, and almostlimitless. Anything that you can manage (that is, model, plan for,report on, or analyze) can be improved with EPM tools, processes, andpeople/roles.

Let’s take HNI as another example and look at potential ROI. If HNIcould improve Revenue growth by 2% (using, for example, some of the EPMsolutions listed above) AND improve SG&A by 2% (again, usingSteelcase examples above) from a combination of process &technology (to the right people) – all in alignment with strategy – andwe know 2% is doable in their industry (and 2% is very conservative) -then there is an $8.8 Million (USD) cash improvement and an $18 Million recurring benefit to the business.  THAT is certainly worth a closer look.

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