Profitability and Cost Management (PCM)

From survival to sustainable to profitable

Agenda
Profitability & Cost Management
The Landscape Why are Organizations interested in Profitability & Cost Management?

A Simple Example Hyperion Profitability & Cost Management

Profitability Vs Sustainability Vs Profitability

Survival is not a synonym for sustainable

Survival
Survival is easy we survive if we keep our doors open, even if we lose 50% of our customer and staff. We can grow again even if we make some bad decisions now. Where are you focusing your cost saving initiatives now?

Sustainability
Sustainability is hard knowing that you will be around to weather the next economic crisis because you have developed that strategy already by making the correct cost cutting and restructuring decisions today We are able to cut cost knowing we are not doing this to the detriment of our future operations and market

Profitability
Profitability making smarter decisions in a sustainable environment to allow us to exceed our competitors market performance We made intelligent strategic decisions yesterday, allowing us to ramp up our sales and operations to dominate the market today

Why Profitability and Cost Management?

 What are your companys cost saving initiatives? How do you identify those initiatives? How successful has your company been?

The Profitability Landscape

9 out of 10 cost reduction programs fail to achieve their targets
Gains that are achieved are typically shortlived

Cost drivers are not clearly understood

As a result, cost-cutting initiatives are not targeted at the right places
2007 KPMG worldwide survey of more than 400 companies

The Profitability Landscape

A majority of companies have some type of formal process to produce and calculate profitability information The ability to calculate accurate and timely information is extremely limited Manual and spreadsheet-driven processes are still the norm New, more integrated approaches are needed Companies are increasingly looking to packaged profitability management applications The market will shift from build to buy by 2010
IDC Research, May 2008

Thesis
Finance

Anti Thesis
Operations

Synthesis
Organisation Reconstruct the organisation from a vertical view to a horizontal view

Statutory Accounting Environment

Financial Data Accumulator Summarized Results
XYZ Corp.

A blizzard of transactions

General Ledger (Account Balance)

Revenue

Expenses Profit

 What defines a profitable customer? What is the profit contribution margin of a product or a service? What does it cost to sell or service customers? What proportion of resources does a customer consume?

Why hasnt increased revenue resulted in increased profitability?

Costing/Profitability Environment
Behavioral Data Customer Profitability Full Product Costing Drivers of Cost Decision Support

General Ledger

Financial Data

Meaningful Assignments

Contributors of Cost
Some are obvious and relatively easier to assign Material Others require analysis to appropriately assign Direct Labor

Production Overhead Administrative Support Quality Service

Product Management Customer Service Sales/ Marketing Support Utilities

Organizations are asking for flexibility in how to assign and transform these costs!

Profitability and Cost Management

An analytical application that enables you to: Accurately assign, measure, and manage costs and revenues Use any methodology to transform financial data through multiple stages Compute costs and profitability for business segments Use scenarios to evaluate alternate approaches

. Leads to Business Intelligence

QUANTATIVE Who are the most and least profitable customers? What products/services contribute the most to the bottom line? Does customer or product/service profit vary by region? What is the profit contribution margin of a product/service? or a service? QUALITATIVE Why are customers profitable or unprofitable? Why is the cost to sell or service different across the customer base? How do business processes impact customer profitability? How is resource consumption affected by product/service maturity? COMPARATIVE
How might we improve?

What Is? Why?

How to adjust Plans and Budgets to affect Profitability? How are we doing compared to others in our industry?

What Now?

Example
Direct Bank
Close call centres Change investment policy Launch marketing campaign across all markets and customers Launch Islamic Banking

Probably need to do all, based on true business insight and analysis Each decision has a further impact on other areas of the business

PCM and CPM

ABC provides the basic of CPM
ABC is a key building block of CPM. Preformed correctly, it provides visibility into dimensions of corporate performance and solve difficult problems for organizations with mature CPM initiatives. (Frank Buytendijk, Gartner, 2005)

Dynamic Costing and Pricing is becoming more imperative

profitability management is not a controlling activity in the back office anymore, but has become an instrument to compete better in the front office. (Frank Buytendijk blog, 2008)

PCM and Budgeting

Two(or more) stage allocation methodology. Activities consume resources, Products/Services consume activities. Accurate unit costs Proper allocation and management of shared/support services. Accurate capacity management at an operational/activity level.

PCM and Perf Management

Strategy poses more questions than answers PCM allows you to answer the questions by modeling strategic initiatives into your current operations Perform what-if analysis Cost, Resource and Activity drivers are typically part of the PCM model already therefore result collection and scorecard population is potentially simplified

Bikes A Simple Example

Using Profitability & Cost Management

Bikes Manufactoring
Medium-sized bicycle manufacturer Recent increase in sales revenue: Due mainly to increased purchases by big-box store: Q-mart RESULT: Monthly revenue has increased Profit and profit margin has decreased Q-mart has asked Bikes to supply more product

Bikes needs to better understand costs and profitability of its customers!

Bikes is seeking answers to

How are my customers consuming activities? Which department costs are being consumed by products? Which of my regions are profitable?

Bikes Manufacturing Depiction of costs

General Ledger

Business Operations

Build an Allocation model to transform costs through these stages!

Products

Customers

Markets

What Is?

Why?

Bikes The Improvement

After reviewing the sales costs, a program of customer education has reduced costs of: Sales Order Processing Sales Costs Returns Processing Improving the bottom line

What Now?

ORACLE|Hyperion
Profitability & Cost Management

Hyperion Profitability and Cost Management Design Principles

1. 2. 3. 4. Take advantage of common EPM technology Flexible methodology Allow the business, not just IT and Finance, to control the design and creation of the allocation solution Let the application take care of the Essbase technical components - Use the power of Essbase for calculation and reporting

Flexibility
Up to 9 stages of cost allocations Intra-stage Allocations Reciprocal Allocations Support for multiple cost allocation methodologies ABC, Time estimation, Percentage allocation, Even Splits Supports both cost and revenue allocations Integrated with the leading EPM and ERP Systems

Profitability Management Environment

Metadata Management Allocation Model Definition Cost & Revenue Allocation Calculations Load Cost, rules, FDM, & Store Revenue Driver other Data Calculate Model & Store Results Validate the Model Generate the Reporting Essbase Cube Reporting Cube Profitability & Cost Analysis

Create & Manage Dimensional Hierarchies Deploy the Application Enterprise Performance Management Architect

Create & Manage Business Model: Stages of Allocations Drivers Allocation Rules Automated CalcScript Essbase Generation Calculation Cube

Reporting Cube with Allocation Genealogy Profitability Analysis Cost & Revenue Contribution Analysis

Web Analysis, Financial Reporting, Excel, Smartview

Hyperion Profitability & Cost Management

Thank You