Companies are always attempting to improve profitability. Whether they are very successful or struggling to survive, profit improvement increase returns to shareholders, allows for greater reinvestment in the business or simply allows them to stay in business. This is nothing new but in recent years, the terms such as Performance Management (PM), Corporate Performance Management (CPM), or Business Performance Management (BPM) have been coined to reflect efforts by software vendors to target this area. CPM and BPM are technology initiatives to analyze how a company is doing, determine why and what the company should be doing going forward.
According to a study completed by AMR Research, seven leading business intelligence/performance management (BI / PM) vendors recorded revenue growth in 2006 (BI Landscape: A Closer Look at License Revenue, November 2, 2006). Two key trends are helping drive this growth in PM:
- Increased global competition and the resulting pressure on prices are driving initiatives in CPM. In manufacturing industries such as metals and chemicals, the increase in offshore capacity requires even greater efficiency in operations in order to maximize profits. The growth in the CPM market is solid evidence of corporations' desire to find innovative ways beyond the traditional management of margins and costs to optimize profitability.
- Manufacturers are seeking greater use of the data that they now have available, especially as a competitive weapon. The growth in CPM efforts is also driven by the greater availability of data within organizations. Having spent millions of dollars in enterprise systems to capture sales, cost and production data, manufacturers are looking for ways to use this data to increase efficiency, compete more effectively and thereby increase profits.
Challenges with data
The accumulation of data with technology systems evolved with the data existing in silos and making it difficult to bring together. This is not just a function of different information being stored in systems from different vendors with different data formats, schemas, and user interfaces. It is also due to elements of the data being accumulated in one system without having to be tied to different elements of the same entity (e.g. product, transaction) held in another system. For example, the identifying reference to a given product (number, name, or description) might be completely different in the ERP system to that which is used in the production system. Companies know that there is value in using the data they have available, but there are challenges to overcome in using it to improve performance.
A second challenge with corporate data lies in the granularity of specific information. For example, while a manufacturer may possess data on freight costs, this may not be broken down to the individual product level. To use such data as effectively as possible requires being able to break down the available information to a more detailed level.
Emergence of new, targeted CPM / BI applications
To complement companies' growing desire to make more use of available information, a new breed of applications is emerging in the CPM area to address specific applications that will help improve performance including profitability. Such applications include budgeting, forecasting, and strategic planning. Several of these extend the use of business intelligence in the enterprise.
While BI tools have provided strong value to organizations in being able to analyze the wealth of historical data now available, new BI applications can address specific challenges. For example, there has been increasing interest on the part of manufacturers to combine margin and production run-rate data to evaluate products, customers, deals, etc., on a profit-per-time basis rather than on a profit-per-unit one. The reason for this interest lies in the fact that the key metric for companies in reporting to shareholders is return on assets (ROA). While generally reported as a percentage, in reality ROA is a time-based measure since it is reported for given year or quarter.
Aligning operational decisions with shareholder goals
When a per unit metric is used to make the myriad of everyday decisions in sales, marketing, finance, and production, there is a fundamental mismatch between this metric and that of most interest to shareholders – ROA. If these key operating decisions are made on a margin-only or profit-per-unit basis, overall corporate profitability and ROA will never be maximized. Manufacturers could easily leave profits worth 3-5% of revenue on the table. For a $1-billion company, this amounts to $30-$50 billion over the course of the fiscal year.
While manufacturers have long realized the importance of production run-rates, as well as that of margin, they had no easy way to combine the different sets of data — especially if they are making hundreds or thousands of products in multiple production facilities and selling them to numerous customers.
However, applications are now available that address this challenging problem. They provide the ability to look at the profitability of individual products, customers, deals, markets, sales regions, salespeople, plants, and production lines from a profit-per-minute perspective. This view frequently leads to drastically different operating, marketing and pricing decisions than would have been made by looking at margin only. An application generating profit-per-minute views across the enterprise makes it possible to use ROA at the operational level since, as both are time-based measures, they are directly related. Thus, it enables choices in product, customer, and asset mix, and also in strategic pricing levels that can make significant gains in corporate profitability.
Embracing new applications
The previous example shows how the combination of the competitive environment, the availability of data, and the emergence of targeted CPM / BI applications provide a new route to the constant goal of profitability improvement. The challenges involved with the disparate sources of data and the difficulty of applying horizontal tools are leading manufacturers to avoid engaging in costly, time-consuming internal efforts and embracing a new breed of targeted applications which can further contribute to corporate profitability goals.