Business performance management software can guide companies to the most lucrative capital investments. But data integration problems hold up progress.
If you ever owned a Swiss Army knife, you probably discovered more uses for it than you first imagined. Some tools are more versatile than initially meets the eye. Business performance management (BPM) software is just such an instrument. Most companies use it for budgeting and forecasting, but other applications -- such as its assistance in evaluating the consequences of prospective capital investments -- are worth equal consideration.
"The immediate usages for BPM are financial
consolidation, reporting and budgeting, as ways to respond to the Sarbanes-Oxley Act," says Lee Geishecker, research vice president at Gartner Inc. in Sandwich, Mass. "BPM for capital spending is a sort of phase two. The ability to apply BPM capabilities to capital spending is just now coming up on corporate radar screens."
Geishecker calls capital expenditures a "blow hole" in the balance sheet, since so many questions surrounding those decisions seem to be up in the air. "Finance managers tend to question if their depreciation methods are appropriate (particularly in areas such as software depreciation), whether or not they're allocating costs correctly, and how well their capital spending decisions are lining up with the company's strategic vision," she says. "BPM offers help on those fronts, enabling more in-depth analysis."
A few major trends are currently transforming the capital spending function. One is the increasing frequency of investment allocations. Thanks to technology, decisions about where to spend are no longer considered only once a year. "The capital spending process is becoming a more frequent activ-ity than it used to be," says Paul Hamerman, vice president, enterprise applications, at Forrester Research Inc. in Midlothian, Va. In part, at least, that's because "there's a move toward an almost continuous forecasting capability," he points out.
Mark Smith, senior vice president of research at Ventana Research in Belmont, Calif., has witnessed situations in which ongoing forecasting has had dramatic effects on capital planning. "Particularly if it's a large, manufacturing type of company, finance and the operating business are working in concert to determine revenue forecasts and supply chain forecasts, and the capital spending component coincides with those forecasting decisions," he says.
This collaborative approach to capital spending decisions represents a second trend in the discipline. Some BPM applications can facilitate collaboration by encouraging communication among different departments and eliminating misunderstandings about what the company is purchasing and why. "BPM software vendors like Hyperion and Cognos offer a collaborative capability, making the capital spending process more interactive and involving more people," says Hamerman. "Companies will be able to react more quickly to changing business conditions using collaborative planning processes and tools, compared to the cumbersome spreadsheet approach they used before."
Of course, for this rosy prediction to become reality, forecasting and capital spending processes must rely on a single source of data, which requires systems to be integrated so that everyone is looking at the same information at the same time. The integration challenge is keeping some companies from becoming as competent with their forecasting and capital planning as they'd like to be.
"Too often, the forecasting component is disconnected from the strategic goals because the company lacks a common information platform," Smith says. "As a result, everyone can end up with a different forecast." In addition to basing all decisions on data that resides in a single location, managers who are responsible for producing their own forecasts should be asked to use a standard template, to prevent them from coloring outside the lines, Smith advises.
A final trend in capital management is the use of progressive methodologies that reduce the risk that investments will turn sour. One such technique is the real options model. It's based on the concept of investing a small amount in each of several possibilities, then narrowing down the number of investments over time. A company initially diversifies its investments, and only as it begins to see results from each option does it decide which to pursue more earnestly and which to abandon. BPM gives the real options process more validity because it enables managers to base decisions on data that offers clear insights into the strengths and weaknesses of each investment.
The biggest capital-planning challenge for The Monarch Beverage Company Inc. in Atlanta, which creates channels for distributing bottlers' product lines, is providing the right amount of marketing support for each of its clients. "Probably the biggest capital expenditure we have is in marketing," says Amy Whitehead, manager of business systems and procedures. "There are rebates to retail stores, co-op marketing agreements, and many other marketing arrangements we can make with our most-favored clients. To better understand which [clients are most profitable], we're using a BPM solution from Geac/Comshare, which went live in April 2003.
"Our forecasting and capital spending acumen is only as good as the data we're basing those decisions on," she continues. "Now we can look at key sales by bottlers and wholesalers, the cost of sales, [and] trends in our market, so we can forecast out these expenses more accurately." BPM has also helped Monarch manage inventory levels better, according to Whitehead, because it provides better information about anticipated sales.
BPM's performance-evaluation benefits can extend to relationships with vendors, too. Todd Richardson, manager of budget and reimbursement at Mercy Health PartnersWestern Ohio, a 3,000-employee health care provider in Springfield, Ohio, relies on FRx Forecaster to rate his company's vendors.
"BPM has helped us figure out which vendors we'll keep and which ones we won't," says Richardson, whose company implemented the software in the spring of 2002. "It's also helped us produce big savings within our supply area. Instead of purchasing supplies with no clear idea of their usage amounts or expected demand, now our supply managers can drill down to see which line items on their budgets are causing problems and nip them in the bud before cost overruns in the supply area get out of hand. It's enabled us to save over $1 million in the supply area."
One large area of corporate investment that requires ongoing measurement is employee performance. The return-on-labor (ROL) metric shows where more workers are needed, what training laggards may require to get up to speed, and where regional gaps in sales coverage may be growing.
For people-intensive businesses like Gilbane Building Co., a $2.8 billion construction company in Providence, R.I., ROL is a key metric. "We look at benchmark data to obtain our ROL, a metric we've been focusing on for years," says Lori Enos, assistant controller. "However, it's been enhanced with the BPM solution we purchased from Cartesis in April 2002. It's much more efficient with everything located in one database. We don't have to maintain three of them anymore or send multiple spreadsheets back and forth to each other. Now it's easier to get the ROL metric for each of our 10 business units whenever we want to."
Gilbane uses the ROL metric to monitor -- on a quarterly basis -- how well its people-intensive investments are paying off and how much they're likely to pay off in months ahead. Enos and her colleagues download current information on each employee from human resources and payroll, then load that information into a human-capital forecasting template, which they use to project payroll for each department. They feed those projected expenses into the BPM software and add up the cost of office supplies and equipment to create a budget for each business unit. The BPM system makes the five-year profitability plan created by the company's CEO more measurable.
By enabling data systems to share information, BPM software simplifies capital spending decisions. "It facilitates better communication not only among users, but among a company's different systems, helping [managers] see which users need what kinds of capital resources in order to improve their effectiveness," says Smith.
At Entergy Services Inc., a $10 billion utility company based in New Orleans, a BPM application has helped answer basic capital spending questions by integrating data from other software systems. "All of our spending information is in one place now, so when we want to know where we're overspending, how our cash flow is doing, whether to issue more bonds to cover certain expenses or rate trend information, we have only one place to go to get it," says Steve K. Myers, manager of revenue and cash accounting. "We don't spend nearly as much time getting those kinds of questions from managers, which gives us more time to analyze spending and our costs. This is a capability we've been developing ever since 1995, when we first began to purchase BPM tools from PeopleSoft."
All of the company's investment decisions are made within its treasury function. "That department can develop more accurate forecasts on where to get better rates, whether to go long-term or short-term, and what investments to focus on using better, more updated data from a single source," Myers says. "One thing that's helped us improve our technological capabilities is eliminating the amount of customization we've put in place over the years. Customizing our technology makes upgrading what we have more difficult, so we've been careful to keep the urge to customize down to a minimum."
Integrated corporate data also enables BPM software to support major organizational decisions. "BPM's scenario-planning features offer an important capability for companies engaged in merger-and-acquisition activity," Hamerman says, "or in evaluating the likely success of different new product launches and gaining a better handle on the business impact of doing those kinds of things."
Entergy has seen this benefit, as well. The company aggressively seeks out merger and acquisition (M&A) candidates, and BPM data has helped it make better choices, according to Myers. "If we buy a company, we want to be able to easily absorb them into our processes without adding much head count. The integration of our systems and the elimination of customization in our technology facilitates upcoming merger-and-acquisition plans. That was something we learned from our merger with Florida Power and Light a few years ago. It was a wake-up call for what we needed to do in the future to make the M&A process more streamlined."
Some finance managers believe new corporate governance legislation is preventing their company from taking the kinds of risks necessary to produce long-term growth. Using BPM software to pin down the most lucrative courses of action -- for example, the best M&A opportunities -- can help alleviate that gun-shy attitude. And the scenario-planning capabilities in BPM applications can take some of the stress out of capital spending decisions. But business performance management software is a tool that must take root within the culture before managers become willing to use it for these important purposes.
Out of the Ivory TowerHistorically, managers charged with capital spending have tended to make their decisions in a vacuum, without consulting the people on the receiving end of those decisions. That's made it difficult to channel the right amount of resources to the right people at the right time. With the help of BPM, this isolation-booth approach to capital spending is beginning to change. That's because BPM: 1. Makes more transparent the capital needs of the organization across departments and business units. 2. Fosters communication between decision-makers and those who must live with the decisions. 3. Connects people with business activities, revealing a truer picture of capital consumption, where waste lies and where there's insufficient capacity. 4. Improves forecasting accuracy, helping direct resources to those parts of the organization in which ROI will be greatest. 5. Keeps the organization on track, moving toward the common corporate vision, and discourages political infighting over who gets what. 6. Highlights the shortcomings of a calendar-based approach to budgeting, which improves flexibility in funding emerging opportunities. 7. Enables faster allocation of resources to trouble spots before they can fester and grow into major concerns. |