The Basics of BPMBy Karen S. Henrie | Posted 01-29-2007
The Basics of BPM
Improving outdated budgeting-and-planning processes is a critical starting point, and pre-requisite, for BPMbut it's not the endgame.
Over time, a carefully conceived and well-implemented business performance management strategy can help a company better execute its strategic plan, increase profitability, and strengthen its balance sheet. Yet many companies initially set off down the path toward BPM, also known as corporate performance or enterprise performance management, with a much less ambitious goal in mind: overhauling outdated and inaccurate manual budgeting-and-planning processes.
BPM is a strategy that combines management methodologies, processes and technologies to help companies ensure they are meeting their strategic goals. BPM softwareincreasingly bundled in BPM suites from vendors such as Hyperion Solutions Corp. and Cognos Inc.leverages underlying business intelligence data and provides users with easily understood analytical applications and reporting tools, such as dashboards and scorecards. According to IDC Research Director Kathleen Wilhilde, the worldwide BPM and financial analytic applications market was valued at $1.59 billion in 2005, with an annual growth rate of 11.2 percent forecast through 2010.
But despite BPM's high-level strategic promise, implementing the technology is essentially a bottom-up process that begins with accurate forecasting. Budgeting-and-planning is an area of perennial concern for most organizations, according to Murray Beach, managing director with Natick, Mass.-based Boston Corporate Finance, a technology-focused investment bank. "Managers and boards of directors are constantly evaluating their own performance, and the company's, against the budget, so the accuracy of the budget as it's being drawn up is essential," says Beach. "As businesses become more complex, the challenge of making the budget accurate and transparent has expanded tremendously."
Craig Schiff, CEO of Stamford, Conn.-based BPM Partners, says his consultancy often works with companies motivated by tactical budgeting problems. "Budget season is here. The people supplying the budgets, and the people trying to collect, consolidate and analyze those budgets, are all looking for ways to make the process less painful," says Schiff. In fact, in a 2006 survey conducted by BPM Partners, 53 percent of respondents cited budgeting as the leading component in their BPM initiatives. Just 37 percent chose operational analytics, the next most popular choice.
But BPM is not all nuts and bolts. According to John Van Decker, a vice president with Gartner Inc.: "Most companies start their [BPM] initiatives tactically to address financial concerns. But then they see an opportunity to more broadly improve their performance processes, and extract additional value out of investments they've already made. Lots of companies have implemented huge enterprise applications only to discover they still can't do planning. [BPM] takes business intelligence and puts methodologies around it, so information goes to the right people."
Of course, there are some side effects to BPM. The shift to automated, Web-based budgeting-and-planning processes typically ratchets up transparency and accountability within organizationsa cultural shift that pushes many employees out of their comfort zones. Executives need to address those concerns upfront, through education, training and awareness, while clearly sending the message that business performance is everyone's responsibility.
Ask your CFO:
How well are our budgeting-and-planning processes serving the needs of the finance department and the business units?
Ask your head of strategic planning:
How can we best leverage our operational and financial systems to improve planning and performance monitoring?
Any BPM strategy should be joined at the hip with the company's strategic plan. Consistency and visibility of an agreed-upon data set are key.
For companies looking to adopt a performance-minded culture, moving away from ad hoc, manual budgeting-and-planning processes is a good starting point. BPM involves more staff in budgeting-and-planning, and thus broadens accountability for company performance, from the bottom up. "Nobody wants to expand the budgeting process when it's Excel-based," notes BPM Partners' Schiff, but he also encourages companies to think strategically from the outset. The key to the bigger BPM picture, says Schiff, is threefold: continually revisit the overarching enterprise strategy, make sure the right stakeholders are involved, and identify the metrics that matter most to them. "When you have a dashboard with an appropriate number of key metrics, say, 12 to 20, then BPM is doing its job," he says.
Princess Cruise Line, a wholly owned subsidiary of Miami-based, $11 billion Carnival Corp., first pursued BPM out of tactical necessity, but the cruise company has since realized strategic value as well. Princess Cruises was initially driven to update its largely manual Excel- and Access-based budgeting system after Sept. 11, when the company was forced to quickly revise ship schedules that were linked tightly to airline schedules, all massively disrupted in the days and weeks following the attacks. According to Director of Financial Planning Greg Bozigian: "Changing our annual budget and projections in the face of such a radical shift highlighted the fact that, as our business was getting bigger and more complex, the manual approach was not going to cut it anymore."
The events of Sept. 11 also forced Princess Cruises to improve its cost structure across the board, as demand for cruises waned following the attacks. It was a hugely complex process. Princess Cruises currently operates 17 ships under its own brand, plus has financial planning and operational responsibility for two additional ships under the Cunard brand. Adding to the complexity, the cruise business is actually several businesses in one: Princess Cruises' key business lines include hotel operations, fleet operations, technical operations, port operations and more, each with its own revenues and cost drivers. Before implementing BPM, each department relied on a separate set of assumptionsnumber of voyages, length of voyage, number of port stops, and the likewhen preparing its budget. Says Bozigian: "Prior to moving to an accurate, common, Web-based planning system, we lacked adequate visibility into all the pertinent players, and we lacked accountability."
To gain better control over costs, revenues and profitability, and to consolidate individual financial and operational business-activity plans into a single system, Princess Cruises purchased Cognos Planning in 2002. One key requirement was that the system be easy to use and maintain, since it is owned and managed by Princess Cruises' finance department, not IT. The company put the application into service in 2003, with help from Cognos Services, as part of its 2004 budget process. The cruise line purchased two license types: Contributors (the bulk of users) access the Web-based application to input their data, make changes and review their models, while a smaller number of finance analysts do the heavy lifting, such as building models.
In February 2003, Princess Cruises' planning staff members were trained on the application, and preliminary planning models were developed. By July roughly 200 end users were trained, and the models went live. The Cognos Planning application has since been expanded to other business areas, including tour planning, HR, and the onboard boutiques and restaurants that are a key revenue source for the company.
Today, using a common set of assumptions provided by the finance team, Princess Cruises can project its budget using real-time data while also taking past actuals into account. Says Bozigian: "We have more visibility into the data, so we can do much more detailed analysis in both finance and operations, say, by month or by ship." Princess Cruises can also better manage key cost driverssuch as fuel consumption and port stopsby analyzing historical trends, performing what-if scenarios, incorporating external data such as global fuel rates, and more.
Bozigian notes other benefits of BPM: "By making budgets and forecasts tighter and leaner, there tends to be less sandbagging, and people spend less," he says. Princess Cruises' financial-planning group has been freed up from consolidating and aggregating data. "We used to spend 80 percent of our time coming up with the number and making sure it was correct, and 20 percent analyzing the business. Now the reverse is true," he adds. And the finance team is operating with fewer analysts, despite having responsibility for more ships as well as the Cunard brand.
The yield-management and market-planning departments may be the most strategic beneficiaries of Princess Cruises' more accurate, collaborative and accountable budgeting-and-planning processes. With a clearer picture of the actual cost structure, these departments are better able to plan voyages and determine the price to charge for various cabins on different ship classesboth critically important for maximizing profitability.
Ask your CEO:
What are the key performance metrics that our executive management monitors the most?
Ask your heads of operations:
How can budgeting-and-planning processes be used to increase accountability and monitor operations performance?
Putting in a BPM system is akin to changing a culture. The days of hiding behind inaccurate budgets or forecasts are over.
National homebuilder and designer Kimball Hill Inc., with over $1 billion in 2005 revenues, faced many typical challenges with its budgeting-and-planning processes. Director of Financial Planning Anabel Lopez says her group previously spent up to four weeks preparing Excel spreadsheets for the division heads, controllers and others with budgeting responsibility, which were dispersed among the Rolling Meadows, Ill.-based company's 14 divisions. The spreadsheets were slow and cumbersome, taking up to 20 minutes just to load, she says, so "end users didn't want to use them." Users often overwrote formulas, or used accounts not approved in the corporate chart of accounts. The finance team would then be forced to spend up to three weeks reconciling, aggregating and uploading all that data into the ERP system, with extensive hands-on support from the IT group. Says Lopez: "We had a lot of disconnects between Excel and ERP. My team had to figure out, line by line, where the problems were." Strategically monitoring business performance was out of the question; Kimball Hill could barely monitor its own budget.
In 2005 the company moved to a Web-based, automated BPM system from Cognos, phasing in its new budgeting-and-planning system over nine months. During the transition, the biggest challenge was ensuring end-user support and comfort with the proposed changes, beginning with company controllers and then with divisional accountants, regional presidents and other users.
Initially, Kimball Hill's finance group focused on replacing a single Excel spreadsheet, and gradually unfolded additional features. "Change isn't easy for people to handle," says Lopez." We introduced a little at a time, gradually increasing the data involved, and providing training. Through a process of slow and deliberate training, we made sure people were comfortable at each step before introducing the next one," she says.
Though employees may resist at first, the changes that BPM bring can be very healthy for your business. Janis O'Bryan, CIO and senior vice president of IT at Dallas-based Hudson Advisors, which manages roughly $31 billion in real estate assets, says the move to more streamlined planning has produced a change in culture across the company, including in her own IT department. "IT people now feel more empowered and responsible for the purchases they request. They have more information and can see for themselves if their requests are accounted for in the budget." But O'Bryan concedes that process changes weren't always made democratically. "The corporate controller determined what was required to meet business needs. Regions didn't have input into what data was neededyet they were key to understanding things like the usability of entering data and the efficiency of workflow processes," she says.
At Princess Cruises, Bozigian believes that strong support from both the president and senior financial executive was critically important to successfully implementing the new budgeting-and-planning systems. He readily admits that "putting in a system can easily be compared to changing a culture. People don't like change." But, he adds, "the days of hiding behind that plan or forecast are over. A lot of excuses have been removed, and everyone has to perform and optimize."
Ask your head of corporate training:
What steps can we take to ensure our employees support our move to a performance-based culture, and embrace the tools they need to use to make it happen?
Ask your I.T. vendor:
What training best practices have you observed within companies implementing BPM systems?