integrating enterprise performance (epm) and enterprise ...€¦ · title: closing note – risk...

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Integrating Enterprise Performance (EPM) and Enterprise Risk Management (ERM)

Gary Cokins, CPIMAnalytics-Based Performance Management LLCCary, North Carolina USAwww.garycokins.com 919 720 [email protected]

Copyright 2018 www.garycokins.com Analytics-Based Performance Management LLC

MetricStreamGRC SummitBaltimore, MarylandJune 6, 2018

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About Gary CokinsFounder, Analytics-Based Performance Management LLC

B.S. Industrial Engineering & Operations Research; Cornell University, 1971

M.B.A. Finance & Accounting; Northwestern University, Kellogg Graduate School of Management, 1974

Previous Associations:- FMC Corporation - Consultant with: Deloitte,

KPMGElectronic Data Systems [EDS, now HP]

- SAS (16 years)Copyright 2018 www.garycokins.com Analytics-Based Performance Management LLC

http://www.garycokins.com/


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Managers who have previously struggled at promoting the integration of enterprise risk management (ERM) and enterprise performance management (EPM) and integrating them into their decision support systems.

Who will benefit from this presentation?

Managers who intend to “champion” any or all EPM and ERM improvement techniques and need a compelling call to action.




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AGENDA

§ Enterprise Risk Management (ERM) and GRC versus Enterprise Performance Management (EPM)

§ What is Enterprise Performance Management (EPM)?§ Three Categories of Risks§ Examples of ERM with EPM § ERM / EPM as Value Multipliers through Integration




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ERM & GRC versus EPMERM & GRC EPMBrake Pedal

Risk RewardAudit, Control & Compliance Performance Improvement

Cost center Profit center

First line of defense First line of offense

• Preserve• Protect• Perform


Align with Mission



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Are risk managers supportive of long-term profit growth, or do they present obstacles that might stifle it?

Unfortunately this topic has had a dark edge. A report of The Economist Intelligence Unit is titled, “Fall guys: Risk management in the front line.” In the report, a risk manager claims he was fired for telling his company’s board of directors that the organization was taking on too much risk.

Did management want to ignore a red flag of caution to pursue higher profits? This involves whether strategy planners view risk managers as profit optimizers or detractors.

http://perspectives.eiu.com/strategy-leadership/fall-guys

Risk Managers: Friend or Foe of Executives?




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AGENDA






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Confusion and Lack of Consensus about EPM

Is it human resources PM?

Is it alignment, such as strategic or resource allocation?

Is it process, productivity and quality improvement?

Is it scorecards, dashboards, KPIs and measures?

Or … is it all of the above? And even more?


The good news is this …..



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What has caused interest in EPM?

1 Executives frustrations with strategy failure.

2 Increased accountability.

3 More rapid decision making.

4 Mistrust of the managerial accounting system for transparency.

5 Poor customer value management

6 Contentious budgeting – poor resource capacity planning.

7 Dysfunctional supply chain management.

8 Unfulfilled ROI promises from IT systems – lack of integration.




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What has caused interest in EPM?

1 Executives frustrations with strategy failure.

2 Increased accountability.

3 More rapid decision making.

4 Mistrust of the managerial accounting system for transparency.

5 Poor customer value management

6 Contentious budgeting – poor resource capacity planning.

7 Dysfunctional supply chain management.

8 Unfulfilled ROI promises from IT systems – lack of integration.




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What is Analytics-based Performance Management?

Analytics-based Enterprise and Corporate Performance Management (EPM/CPM) is the integration of multiple methods with each embedded with business analytics, such as segmentation analysis, and especially predictive analytics … to achieve the strategy and to make better decisions.




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AGENDA






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Three Categories of Risks

Preventable Risks – Unauthorized employee actions; breakdowns in standard operating procedures.

Strategy Execution and EPM Risks – Taken to execute the C-suite’s strategy to generate superior returns.

External Risks – From uncertain, uncontrollable external events that cannot easily be predicted or influenced.

Source: Robert S. KaplanAustrian Controllers ConferenceMarch 6, 2014 Vienna




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Preventable Risks (#1)Preventable Risks – Unauthorized employee actions; breakdowns in standard operating procedures.

Can be reduced by:

§ Communication of “Codes of Conduct” and mission and vision statements

§ Strong compliance practices (e.g., internal controls like “segregation of duties,” internal audit, standard operating procedures, whistle blowing promotion)





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Strategy and EPM Risks (#2)

Strategy Execution and EPM Risks – Taken to execute the C-suite’s strategy to generate superior returns.

Examples: credit risk, R&D programs, hazardous environments.

These types of risk cannot be reduced to zero. Their likelihood of occurring can be reduced or effectively contained should they occur.

Examples to follow. Source: Robert S. KaplanAustrian Controllers ConferenceMarch 6, 2014 Vienna




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External Risks (#3)

External Risks – From uncertain, uncontrollable external events that cannot easily be predicted or influenced.

Managers often “don’t know that they don’t know.” Scenario exercises can identify risks.

If envisioned, however, risk mitigation actions can be taken:§ Build earthquake or flood-proof structures§ Backup data centers in distant locations§ Insurance, hedging, diversification





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AGENDA






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What has Caused Interest in EPM?

1) Failure by executives to execute their well-formulated strategy.




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Vision and Mission Statements

Vision& Mission

BalancedScorecard

StrategyMapping

A Vision statement answers “where do we want to go?

Strategy maps and scorecards answer, “How will we get there?”




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Vision& MissionExceed shareholder

expectations

Improve profitmargins

Increase salesvolume

Diversify incomestream

Increase sales toexisting customers

Diversify customer base

Test newproducts

Target profitablemarket segments

develop newproducts

Optimize internalprocesses

Attract newcustomers

Developemployee skills

Integratesystems

Learning, Innovation, & Growth

Internal Process

Customer

Financial


Risks can be identified for each strategic objective in the strategy map



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Vision& MissionExceed shareholder

expectations

Improve profitmargins

Increase salesvolume

Diversify incomestream

Increase sales toexisting customers

Diversify customer base

Test newproducts

Target profitablemarket segments

develop newproducts

Optimize internalprocesses

Attract newcustomers

Developemployee skills

Integratesystems

Learning & Growth

Internal Process

Customer

Financial

A learning environment

stimulates

Process excellence

Customer intimacy

Financial value

leads to

creating





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Vision& Mission

Learning, Innovation, & Growth

Internal Process

Customer

Financial



Macroeconomic factorsExchange rate fluctuationsPolitical environments

Competitor actionsConcentration of Revenues in too few customers

Dysfunctional organizational structureInadequate controls

Immigration regulationsObsolescence of technologies

and products

Examples




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KPIs(strategic context)

Must have

targets

PIs(operational)

With

targets

Without

targets

- Trends

- Upper / lower

thresholds

Project-based

KPIs

Process-based

KPIs

Scorecard(inter-related

measures with

cause-and-effect

correlations)

Dashboard(measures in isolation)

Budget &

Resource

Planning

StrategyDiagram Measurements

$ $

Frequency of reporting

quarterly

monthly

weekly

daily

hourly

real-time

Without

targets

Derived from - drill-down analysis

- alert messages

What is the difference between KPIs and PIs?




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Strategy Map Rapid Prototyping Workshop

Managers learn better by “doing”.

A fast start is a one day workshop using Strengths, Weaknesses, Opportunities, and Threats (SWOT) on yellow Post-Its to quickly define the strategic objectives.

Crawl, walk, run, fly.




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4) Mistrust of the managerial accounting system and its flawed cost allocations and misleading cost reporting of outputs, products, standard service-lines, channels, customers and outcomes.

5) The shift from being product-centric to customer centric.




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A simple explanation of ABC …that you can explain to yourspouse (or boss) tonight.




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#of

Activity-Based View

To: ABC Data Base

Key/scan claimsAnalyze claimsSuspend claimsReceive provider inquiries Resolve member problemsProcess batchesDetermine eligibilityMake copiesWrite correspondenceAttend training

Total

$ 31,500121,00032,500

101,50083,40045,000

119,000145,50077,100

158,000

$914,500

Claims Processing Dept

Salaries

Equipment

Travel expense

Supplies

Use andoccupancy

Total

$621,400

161,200

58,000

43,900

30,000

$914,500

$600,000

150,000

60,000

40,000

30,000

$880,000

$(21,400)

(11,200)

2,000

(3,900)

––

$(34,500)

PlanActualFavorable/

(unfavorable)

Claims Processing Department

Chart-of-Accounts View

From: General LedgerActivity

cost drivers

#of#of#of#of#of#of#of#of#of

Pro

duct

s / c

usto

mer

s

$914,500

Each Activity Has Its Own Cost Driver


When managers get this kind of report, they areeither happy or sad, but they are rarely any smarter!



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Multiple-Stage Cost Flowing

SimpleABC

ExpandedABC

Resources

Resources

Activities

Objects

Objects

Activities




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$ 30 sales- 28 expenses

= $ 2 profit

$ 2 profit

Unrealized profit revealed by ABC

Net Revenues

MinusABC costs =

profit

More important than a better costing method are its results.




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Value of Company = f(Value from Customers)

The only value a company will ever create is the valuethat comes from its customers – the current ones and the

new customers acquired in the future.

To remain competitive, one must determine how to keep customers longer, grow them into bigger customers, make

them more profitable, serve them more efficiently, and acquire relatively more profitable customers.

Source: Don Peppers and Martha Rogers, Peppers & Rogers Group (edited)




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Indirect expenses

Distribution

Sales, Marketing, General and admin (S,G&A)

Customer+

Direct material,Direct labor &

Equipment

Costs from Sales & Marketing are not Products

Channel+

Product




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CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)Sales $$$ Margin $ Margin

(Sales - SCosts) % of SalesProduct-Related

Supplier-Related costs (TCO) $ xxx $ xxx 98%

Direct Material xxx xxx 50%Brand Sustaining xxx xxx 48%Product Sustaining xxx xxx 46%Unit, Batch* xxx xxx 30%

Distribution-RelatedOutbound Freight Type* xxx xxx 28%Order Type* xxx xxx 26%Channel Type* xxx xxx 24%

Customer-RelatedCustomer-Sustaining xxx xxx 22%Unit-Batch* xxx xxx 10%

Business Sustaining xxx xxx 8%Operating Profit xxx 8%

* Activity Cost Driver Assignments use measurable quantity volume of Activity Output(Other ActvityAssignments traced based on informed (subjective) %s)

Product-relatedcosts

Channel & Customer-relatedcosts

ABC Customer Profit & Loss Statement




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High

Low

Low HighCost-to-Serve

Product Mix Gross Profit

Margin

VeryProfitable

Veryunprofitable

Profita

ble

Unprofit

able

Types of Customers

Migrating Customers to Higher Profitability




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Rapid Prototyping withIterative Remodeling (crawl, walk, run, fly)

Each iteration enhances the use of the ABC system.

ABC Models

3

ABC System(repeatable, reliable, relevant)

#0

#1

#2

#3

210

Make your mistakes early and often, not later when the system is too hard to change.




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6) Contentious Budgeting – The budget is typically a fiscal exercise by the accountants that is:

(1) disconnected from the executive team’s strategy and enterprise risk management mitigation, and

(2) not based on future driver volumes.




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Match the Budget Method to its Category

Recurringexpenses

Non-recurring

expenses

Demand-driven

Project-driven

IntegratedBudget

(RollingFinancial Forecasts)




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High

Low

Low High

Severity of impact onevent occurrence and

achievementof objectives

probability of an event occurring

Risk Assessment Grid for Budgeting

8

10 3

4

5

6

7

19

2

Do not budget

Budget




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Recurringexpenses

Non-recurringexpenses

Demand-driven

Project-driven

volume & mix of drivers

productionand

ABP/B

strategymap andrisk grid

IntegratedBudget

(rollingfinancial

forecasts)

Budget method

Strategic & risk mitigation projects

Match the Budget Method to its Category




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AGENDA






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Organization Resources

(capacity)

Strategy,Mission

How Does It All Fit Together?

ERP, etc.CustomerSatisfaction

Scorecards,Dashboards

CRM

ROI

$Shareholders

Owners

SupplierInputs


Connecting customer value to shareholder value



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OrganizationResources

(capacity)

Strategy,Mission

In Summary … first, we energize with good managerial accounting.

ERP, etc.CustomerSatisfaction


CRM

ROI

$Shareholders

SupplierInputs

ManagerialAccounting;

Analytics




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OrganizationResources(capacity)

CRM

ROI

$

ERP, etc.

Risk Mgmt., Strategy map,

KPIs, KRIs

KPIScores

Feedback

Order fulfillment

Strategy,Mission

CustomerSatisfaction

EPM is Circulatory and Simultaneous

SupplierInputs


Targeting

needs

Shareholder Wealth Creation is not a goal. It is a result!

Risks should be assessed for each “arrow”

Shareholders




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OrganizationResources

(capacity)

CRM

ROI

$

ERP, etc.

Risk Mgmt., Strategy map,

KPIs

KPIScores

Feedback

Order fulfillment

Strategy,Mission

CustomerSatisfaction

Shareholders

CPM is Circulatory and Simultaneous

SupplierInputs


Targeting

leakage(waste)

wasted resources

needs

Less productivity reduces Shareholder Wealth


Shareholder Wealth Creation is not a goal. It is a result!

Risks should be assessed for each “arrow”



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The Complete Vision of Performance Management

Make the RPM of the EPM and BA gears spin …… better, faster, cheaper … safer and smarter




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From Theory to Practice

Your success depends on how well and how fast the right information and intelligence gets to the right people.




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Action steps§ Get educated. Get buy-in.§ Rapid prototyping. Start small; think big.§ Improve incentives. (Motivational theory)

Getting Started Actions and Resources


Resources:http://www.epmchannel.com/2013/04/09/exceptional-epm-cpm-systems-are-an-exception/

https://opexsociety.org/body-of-knowledge/enterprise-corporate-performance-management/

http://www.garycokins.com/images/pdfs/Cokins%20AICPA%20JOA%20Promise%20Perils%20of%20ERM.pdf

A suggestion: Have your management team read either or both of these educational pieces. Then schedule a meeting for discussion. Have each manager answer, “What did I learn? What issues and concerns do I have about EPM?” This will stimulate needed conversations.


http://www.epmchannel.com/2013/04/09/exceptional-epm-cpm-systems-are-an-exception/


http://www.garycokins.com/images/pdfs/Cokins%20AICPA%20JOA%20Promise%20Perils%20of%20ERM.pdf


http://www.epmchannel.com/2013/04/09/exceptional-epm-cpm-systems-are-an-exception/


http://www.garycokins.com/images/pdfs/Cokins AICPA JOA Promise Perils of ERM.pdf

http://www.garycokins.com/images/pdfs/Cokins AICPA JOA Promise Perils of ERM.pdf

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Thank You

Gary Cokins, CPIMAnalytics-Based Performance Management LLC

Cary, North Carolina USA

www.garycokins.com

919 720 2718

[email protected]




integrating enterprise performance (epm) and enterprise ...€¦ · title: closing note – risk...

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