Complexity is costly and risky. Companies need to turn a critical eye on their ever-expanding sprawl of performance management systems and processes.
In the past decade, companies have launched an all-out attack on the complexity of their financial processes. Armed with performance management (PM) technologies, many have succeeded in handing off number-crunching tasks of staggering difficulty to the tools and resources best able to handle them -- IT hardware and software -- and turning over more holistic and creative tasks to the resource best able to handle those: their people. Along the way, they've learned how to untangle spreadsheets, tighten the accuracy of their budgets, and shorten closing cycles.
But having tackled complexity in a few core financial tasks, many businesses are now finding that it's sneaking through the back door via the performance management architecture itself. As their PM ambitions have expanded far beyond budgeting and planning, too many organizations have built a maze of add-ons, even for mission-critical tasks such as regulatory reporting. At the same time, relentlessly escalating government and compliance demands have added even more layers of complexity. The result: proliferating, multiple, and poorly linked systems and applications that reduce the accuracy of financial reporting, undermine decision-making, and saddle the organization with high administration and maintenance costs.
How many PM tools does an average company use? Would you believe ... five? In a global survey of stakeholders in performance management processes at companies of all sizes, the Business Applications Research Center (BARC), an independent institute and advisory firm, found an overall average of 4.9 tools per company. Nearly half of the respondents said that their organization uses four or more systems for its performance management tasks, and 11 percent say that they use a startling 10 tools or more (see Exhibit 1). In addition, unlike the situation for ERP, many companies don't have a PM strategy.
Not surprisingly, bigger companies tend to use more systems. And "the more tools companies use for performance management, the bigger the problems get," the study notes. "Data transfer between systems as well as different methodologies, processes, and user interfaces of different tools lead to many challenges in running and administering the overall PM and data management structure." For "challenges," read: "costs."
The study also points to sharp disjunctions among some core elements of performance management, even among the relatively few companies that claim to have achieved some sort of integration. Take planning, budgeting, and forecasting, for example. While 63 percent of companies with some level of PM integration say that they've linked these processes to consolidation and reporting, only 27 percent have managed to link them to strategy management, and just 22 percent have linked them to compliance and risk management.
"Integrated" or Unified?
The recent spate of buyouts in the PM market resulted in the formation of a few ERP-based mega-vendors, and you might assume that these players are best positioned to offer truly unified systems that weld PM's various components into a coherent whole.
It's a doubtful assumption, though. There's no question that these firms wanted to add PM capabilities to build a more comprehensive set of offerings. But comprehensive is a far cry from unified. What these vendors describe as "integrated" capabilities often turn out to be a collection of loosely connected, disparate applications that were acquired over time, but lack a single user interface, database, or administration.
Still, PM pros are convinced of the value of a unified platform. In the 2009 BPM Pulse Survey (available here) from advisory services firm BPM Partners, almost three-quarters of participants identified a unified front end as an important tech capability, and 58 percent placed a high value on a unified back end (see Exhibit 2).
At the same time, these execs are increasingly skeptical that the mega-vendors can give them what they need. In BPM Partners' previous (2008) poll, 54 percent of respondents said that they would consider an ERP provider as a performance management provider. In the 2009 survey, though, only 27 percent said that they would do so (see Exhibit 3). Conversely, the number of respondents who said that they would look at application or "best of breed" vendors that specialize in performance management jumped from 37 percent in 2008 to 68 percent in 2009.
What Would a Unified PM Solution Look Like?
The challenge confronting performance management is, to paraphrase Einstein, one of making everything as simple as possible -- but no simpler. Companies need a solution that meets their specific needs without sacrificing any of the power of PM. They need a solution that encompasses all of the complexity of their financial processes and delivers optimal simplicity. Call it "simplexity." What would constitute truly unified -- as opposed to "integrated" -- PM? Tagetik, a next-generation unified performance management solution, offers:
• One data platform. The quest for a single version of the truth can't succeed in a performance management environment that's cluttered with multiple databases, point solutions, and entity-specific PM tools. To meet today's control and compliance demands, the CFO needs to manage all PM processes companywide from a single data platform.
• One user interface. Finance processes are organically related, and moving from one work focus to another shouldn't mean switching between disparate interfaces. Users appreciate the seamless connections provided by a single, intuitive interface. It helps them learn the tool and may reduce training costs.
• A broad reach. The system's reach should extend beyond the PM basics to the intersection of finance with risk management (e.g., access management, segregation of duties, financial controls) and with operations. For example, strategic planning measures should be clearly outlined in operational budgets. The same tool that crunches the numbers for external financial statements should also be able to unify other critical financial processes such as consolidation, statutory reporting, working capital analysis, profitability modeling, and strategy management. It should also allow companies to leverage their existing technology infrastructure investments.
Six Questions to Ask Your Vendor (and Yourself)
The nudge to rationalize your PM system can come from many sources. A series of acquisitions may have left your organization with a medley of overlapping tools that fail to deliver enterprise-wide insight. Tighter economic conditions may have thrown a sudden spotlight on the wasteful maintenance costs of legacy systems. Or, simply, your needs may have changed over time. Whether you're looking to install your first PM system or to upgrade your old one, the recent upheaval in the PM software market calls for more, not less, due diligence.
So how do you simplify the complexity? Here are some questions you should ask your provider:
1. Am I buying more than I need? While the mega-vendors present themselves as the "safe" choice, you'll want to ensure that you're not paying a premium price simply for the brand. These firms are used to doing massive implementations, and they may try to sell you on a vision that's much larger than you intended. And they certainly have enough products and services to use every penny you can muster.
Make sure that your solution is right-sized. If you're investing in a new system, remember that a premium price will likely apply not only to license fees, but also to consulting, training, support, and annual maintenance fees. If you're reevaluating your current solution, check that you're not paying for more functionality or seats than you are using. And make sure that you're factoring in your full support costs. Can you inexpensively expand your solution after the initial application is installed? If you're on a client-server architecture, factor in your facilities overhead and system maintenance costs, such as paying programmers to modify code or database support when you need to make changes.
2. Am I buying less than I need? Companies that take as their starting point a PM tool with a function set that's too narrowly focused -- for example, budgeting and planning, perhaps with some dashboards thrown in -- often do so because they're hoping to keep things simple. The weakness of this approach becomes clear when a capability that the organization initially regarded as an outlier in the PM range -- profitability modeling, let's say, or working capital analysis -- suddenly becomes a do-or-die corporate imperative. The result: more ad hoc purchases of niche products, more improvised hookups, more scope for overlaps, more risk of data deterioration. In short, more complexity and cost.
If you're considering a multiproduct solution or a mix of homegrown and niche applications, make sure that you've got a good handle on the maintenance and support costs (including the personnel needed to manage the applications and their supporting databases) and how those compare with unified products.
3. Is the solution unified -- front and back? Is the user interface intuitive and consistent across different work areas? At the back end, is the product truly unified, or is it more like a collection of disparate applications loosely tied together? Bear in mind that solutions that are not native performance management tools tend to be resource-intensive; any changes that you need to make may require expensive consulting support.
4. What's the total cost of ownership? Companies often take too narrow a view of costs when calculating the ROI on a performance management investment. A system that relies heavily on spreadsheets, for example, may seem inexpensive, but it generates hidden and indirect expenses such as the time and resources needed for manual inputs and reworks, and the potentially devastating cost of misleading information.
Consider the time and cost required for implementation, including third-party consultants. How much customization will be required? What are the opportunity costs for user training? Bear in mind that heavily customized solutions will almost always require additional consulting fees to make changes or to upgrade to the next release.
Don't forget the risk side, either. The more complex the solution, the greater the chance that it will deviate from the original budget for implementing and integrating it, resulting in higher costs than anticipated. Consider also the risk that once the product is deployed, it may not meet your needs, resulting in lower overall benefits. Risk-adjusting your estimates can help you to create a more meaningful and accurate projection of ROI.
5. What's the product road map? Many PM providers have indulged in acquisition drives in the past couple of years, and not all of the products that they've acquired are going to survive. Yours may be one of the products slated for a slow death through attrition. Ask for a presentation of the product road map. Is the PM package still a part of the firm's future plans? Is the vendor willing to guarantee continued support for a sufficient number of years?
Also consider that you may have to re-implement the solution you are buying now if a new generation of the release is introduced later in the product life cycle.
6. Does the system align with your organization's processes? The final test of a PM system is how well it meets your business needs. Your goal in buying the software is to better support your processes and simplify the complexity of your financial processes, not to install something that requires you to bend your processes to fit the way a particular package works. Take a broad view of your processes. Does the system meet your financial governance needs? Will it fit easily into your transactional environment? Can it handle your operational data?
Don't make the common mistake of basing your decision only on the sales demo and marketing pitch (every company has a good demo). Ask the vendor to provide a proof of concept, a prototype that shows their ability to handle your organization structure, business rules, data, and reporting requirements.
Above all, look for a solution that can handle your needs well into the future. After all, there's no sign that the forces which have transformed the CFO's role in recent years -- the need to collaborate with the entire organization to drive strategy, the demand for insight into operational activities, the ever-increasing burden of compliance -- are weakening. To meet those challenges and get the most from their performance management investment, CFOs will need a PM solution that delivers maximum insight and optimal simplicity.