Assessing the Value of Performance Management:
Why traditional ROI methods aren’t always the answer
Enterprise performance management (EPM) is known to create a more intelligent enterprise – one that can access data and use information to drive better processes and make smarter decisions. As with any investment, stakeholders will be anxious to determine return on investment (ROI) – but since EPM, which includes strategic decision making, planning, and financial reporting, is not directly tied to revenue enhancement, calculating a precise ROI can be difficult.
An organization may spend time establishing the direct relationships between planning improvements and revenues. Making assumptions about drivers only to arrive at a questionable ROI analysis, some organizations miss the forest for the trees. EPM benefits an organization in many indirect ways, bringing together data and analytics to drive decisions, creating a framework to better manage the performance of suppliers, customers, profitability, and plans. On a global scale, EPM has a pervasive impact on the thinking and decision making that drives improved performance. This article helps recast your focus toward the intangible benefits of EPM, which very often prove to provide lasting and significant benefits to the organization.
The Pitfalls of Applying Traditional ROI Tactics to EPM
ROI is typically calculated in terms of dollar value – revenue or margin improvements or cost savings resulting directly from investment. It can be more difficult to measure the dollar value of EPM-related improvements such as better data, more timely reports, and a more efficient planning process, though that makes them no less valuable. If an organization uses a traditional planning approach – starting with last year’s budget and then adjusting revenue and costs by set percentages to create a forecast – how much better is a predictive, bottom-up planning approach enabled by EPM? While it can be tempting to equate a better plan with better decisions (and so greater margin improvements), asserting that adopting EPM will improve margins by 1%, for example, may be overly simplistic and unrealistic.
But could line-of-business managers’ ability to forecast in more detail improve an organization’s performance? Where traditional planning process might, for example, forecast only a flat 5% increase in sales, EPM techniques could offer analysis at the individual customer level. An organization might look at its largest accounts and begin to analyze how each will react to ads, promotions, and product innovation. How might various marketing and R&D activities affect the buying behavior of these customers? Business planning and consolidation can support such detailed budget rollups – and help create much more accurate three-to-five-year planning. So armed, an organization can better plan, staff, train, and support a wide range of sales, marketing, and R&D activities.
Another traditional ROI approach looks at process efficiencies. Employees can spend a lot of time producing reports and crunching data. If EPM automates these processes or makes them more efficient, how do the gains translate into time and dollar savings? While an organization can calculate time spent working with Excel spreadsheets, and time saved due to EPM – for example, one hour per week per employee – the real value lies in overall impact on the organization.
Intangible Benefits of EPM
The quest to put a hard number on the value and benefit of EPM shouldn’t overshadow its more intangible, but just as significant, benefits. For example, most organizations close their financial books once every month or quarter. The impact of a quick month end is significant. Take two hypothetical organizations with 500 employees and 20 accounting staff. If those 20 employees can reduce the month end close from 9 days down to 4 days, they now have nearly 40% more time to spend on proactive services and daily accounting routines. A fast close not only is more efficient, but also demonstrates to stakeholders that the organization can quickly produce an accurate representation of its performance. The result: The organization is seen by investors, banks, and partners as both effective and efficient.
Rather than looking solely for exact numbers, organizations must recognize that planning is a fluid process with both quantifiable and less easily measured benefits. Better plans help employees understand the drivers of performance, and so energize the company as a whole. A rich performance management and planning culture both attracts committed, self-motivated employees and encourages their global thinking about the implication of results. Such a culture permeates an organization, opens conversations, and drives results. Through EPM, SAP Services can enable this type of transformation and encourage organizations to re-examine their planning processes from the bottom up. As an example, a company could re-evaluate the use of variance commentary. When the monthly budget contains precise limits for an activity, such as sales, power, payroll, or cost of sales, monthly variance analysis helps explain unexpected changes to plan. However, if operational expenditures were simply educated guesses (for example, PR campaigns, travel, or consultancy fees) and are incurred as needed, monthly variance analysis on these items provides less insight and value.
Better Plans, Better Performance
Good planning can be identified in many ways: through traditional ROI calculation, but also through the recognition that the right strategic decisions and investments further both short- and long-term organizational goals. Better plans improve performance over time in a host of ways both concrete and intangible. They create actionable and realistic goals – and, through them, a more intelligent enterprise.
Every day, SAP Services helps companies identify and implement business planning and EPM improvements. To learn more about how we can help ensure that EPM delivers maximum benefits for your business, visit us at www.sap.com/services.
Edwin van Geel, EMEA practice manager for Enterprise Performance Management.