Analytics-Based Enterprise Performance Management

1
Analytics-Based Enterprise
Performance Management
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com
919 720 2718
gcokins@garycokins.com
Copyright 2016 www.garycokins.com Analytics-Based Performance Management LLC

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About Gary Cokins
Founder, 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,
KPMG Peat Marwick,
Electronic Data Systems [EDS, now HP]
- SAS

3
Gary Cokins’ part time role as the IMA Executive in Residence
IMA Strategic
Finance magazine;
December 2013,
January 2016;
Trend #1
“Measuring and
Managing Customer
Profitability”; IMA
Strategic Finance;
February 2016.
http://www.imanet.org/
docs/default-
source/sf/2016_02/02
_2016_cokins.pdf?sfvr
sn=2

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Managers who have previously struggled at
promoting FP&A, enterprise performance
management (EPM) and integrating business
analytics (BA) into their decision support systems.
Who will benefit from this presentation?
Managers who intend to “champion” any or all EPM
and BA improvement techniques and need a
compelling call to action.

5
AGENDA
1) Compelling Needs for Enterprise Performance Management (EPM)
2) Overview of EPM
3) The Rise of Business Intelligence (BI) and Analytics
4) Strategy Formulation and Strategy Management
5) Fact-based Managerial Accounting (with ABC/M)
6) Customer Profitability and Value Management
7) The Shift in ROI’s Source from Tangible to Intangible Assets
8) Accelerating the Rate of Adoption for Implementing EPM
Summary, Discussion, Questions and Answers

6
Key questions
What? So what? Then what?

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Drowning in data but starving for information.

8
AGENDA
2) Overview of EPM

9
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 is Analytics-based Performance Management?
Analytics-based Performance Management
is the integration of multiple methodologies
with each embedded with business analytics,
such as segmentation analysis, and
especially predictive analytics … to achieve
the strategy and to make better decisions.

11
Long-term Trends in Government
A growing impatience by taxpayers and
governance boards with waste and inefficiency
is leading to demands for evidence of outputs,
outcomes, transparency and accountability.
“more with less” …
“value for money” ...
“quality of life”

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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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AGENDA
2) Overview of EPM

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Why is business analytics needed?
-- by first-to-market (via innovation)?
-- by customer loyalty?
But how sustainable are these long-term?
-- by low-cost and low-price provider?
-- Other?
How does an organization gain a competitive edge?

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Isn’t competition ultimately about cost
leadership, differentiation, or focus?*
-- cost leadership strategy – via improving process efficiencies, unique
access to low cost inputs, vertical integration, avoiding certain costs, etc.
-- differentiation strategy – via developing products and/or services with
unique traits valued by customers.
But don’t each of these have risks today?
-- focus strategy – via concentrating on a narrow segment with entrenched
customer loyalty.
* Source: Michael E. Porter’s three generic strategies.

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Problem: Generic strategies are vulnerable !
-- cost leadership strategy – other firms lower their costs.
-- differentiation strategy – imitation by competitors; changes in
customer tastes.
The best defense is agility with quicker and
smarter decision making using statistics,
analytics, and operations research.
-- focus strategy – broad-market cost leaders or micro-segmenters invade
and erode your customers’ loyalty.

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Confusion and lack of consensus about BA
Is it business intelligence (BI) with enhancements?
Is it probabilities and statistics, like regression and
correlation analysis?
Is it the technology of data governance, management and
quality?
Is it forecasting? Is it optimization equations?
Or … is it all of the above? And even more?
Is business analytics (BA) a data warehouse?
Is it data mining with query and reporting?

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Work backwards with the end in mind.
Regardless of how “analytics” should be defined, there
should be no argument as to its purpose:
Better decisions. Better Actions.
Analytics’ goal should be to gain insights and solve
problems, to make better and quicker decisions with
more accurate and fact-based data, and to take actions.

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Improving Performance by Unifying EPM and BA
-- BI Reporting consumes stored information.
-- Business Analytics produces new information.
-- Enterprise Performance Management deploys Analytics.
It is not about monitoring the dials on a dashboard,
but rather moving the dials.

20
Queries simply answer questions. Business analytics
creates questions.
Business Analytics – insights and actions
Further, analytics then stimulate more questions, more
complex questions, and more interesting questions.
Most importantly, business analytics also has the power to
answer the questions.

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What Pressures Cause Interest in Business Analytics?
-- Volatility, uncertainty, risk and clock-speed
-- Standardized processes (e.g. ERP, CRM systems)
-- Intuition of the potential value of unused structured and text data
-- Enormous IT processing power
-- Exponential growth in data, users, searches
-- Complexity and variables are replacing “gut feel

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Examples of Analytics
-- Hollywood celebrities and the film industry
-- Sports teams
But what about business analytics in
mainstream businesses?
-- Crime prevention
-- music score analysis
Will Smith: Independence Day; Men in Black; I, Robot; I am Legend; Hancock

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Retail sales and merchandising analytics [markdown and assortment planning]
Financial services analytics [risk and loan credit scoring]
Pharmaceutical analytics [drug development and clinical trials]
Marketing analytics [CRM, segmentation, and churn analysis]
Text analytics [sentiment analysis]
Financial control analytics [customer payment collections]
Fraud analytics [insurance and medical claims]
Pricing analytics [price sensitivity analysis]
Telecommunications analytics [customer behavior]
Supply chain and transportation analytics [route optimization]
Manufacturing analytics [warranty claims]
Hospital analytics [patient scheduling]
Human resources analytics [workforce planning]
Banking analytics [anti-money laundering]
Police analytics [crime pattern analytics]
There are many Business Analytics Domains

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STANDARD REPORTS
AD HOC REPORTS
QUERY DRILLDOWN (OR OLAP)
ALERTS
1
2
3
4
Reactive (Descriptive)

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STANDARD REPORTS
AD HOC REPORTS
QUERY DRILLDOWN (OR OLAP)
ALERTS
1
2
3
4
5
6
7
8
FORECASTING
STATISTICAL
ANALYSIS
PREDICTIVE
MODELING
OPTIMIZATION
Reactive Proactive(Descriptive) (Inferential)

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AGENDA
2) Overview of EPM

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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
Balanced
Scorecard
Strategy
Mapping
A Vision statement answers
“where do we want to go?
Strategy maps and scorecards answer,
“How will we get there?”
The strategy map and scorecard are mechanical.
They help realize the vision and mission.

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FinancialCustomerInternalProcessLearning
Maximize Shareholder Value
Generic Strategy Map Architecture
Financial
Customer
Internal
Processes
Learning &
Innovation

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Vision
& Mission
Exceed shareholder
expectations
Improve profit
margins
Increase sales
volume
Diversify income
stream
Increase sales to
existing customers
Diversify
customer base
Test new
products
Target profitable
market segments
develop new
products
Optimize internal
processes
Attract new
customers
Develop
employee skills
Integrate
systems
Learning
& Growth
Internal
Process
Customer
Financial

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Vision
& Mission
Exceed shareholder
expectations
Improve profit
margins
Increase sales
volume
Diversify income
stream
Increase sales to
existing customers
Diversify
customer base
Test new
products
Target profitable
market segments
develop new
products
Optimize internal
processes
Attract new
customers
Develop
employee skills
Integrate
systems
Learning
& Growth
Internal
Process
Customer
Financial
A learning environment
stimulates
Process excellence
Customer intimacy
Financial value
leads to
creating

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A scorecard is more of a social tool than a technical tool.
Measurement
Period;
1st Quarter
Strategic
Objective
Identify
Projects,
Initiatives,
or
Processes
KPI
Measure KPI Target KPI Actual
comments /
explanation
Executive Team X X
Managers and
Employees X X their score X
<----- period results ------->
Who Does What?

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The Key to Scorecards
How does everyone answer this single question:
“How am I doing on what is important?”
The overriding purpose of a strategy map and
scorecard system is to make mission and
strategy everyone’s job.
Strategy Maps and Scorecards provide this answer.

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Scorecard Lessons Being Painfully Learned
 Scorecard or Report Card?
 KPIs or PIs?

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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
Strategy
Diagram Measurements
$ $
Frequency of
reporting
quarterly
monthly
weekly
daily
hourly
real-time
Without
targets
- drill-down analysis
- alert messages
What is the difference between KPIs and PIs?

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AGENDA
2) Overview of EPM

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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.

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Direct and Absorption Costing
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Ideally, all costs should be directly charged, but as variety, complexity, and
technology increases, more costs are indirect and shared.
Activities
Resources
Final
Cost
Objects
Project
accounting ABC/M ALLOCATIONS
Labor
Reporting
Estimates
OUTPUTS, PROCESSES, PRODUCTS, SERVICE LINES, MARKETS, CHANNELS, ORDERS, CUSTOMERS
1st Preference
2nd Preference
3rd Preference
Last Resort
Cost-Driver Table
Work
Order
Standard
Routing,
Bill of
material
Standard
costing
Activity
Driver

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

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Cost
Components
Stages in the Evolution of Businesses
IntegratedOld-fashioned Hierarchical
Changes in Cost Structure
100%
Overhead
(indirect expenses)
Direct (recurring) Labor
Material
1950 2020
Direct
0%
Broadly
averaged cost
allocation was
acceptable.
Cost errors
are large and
misleading.
The Need for Tracing, not Allocating, Costs

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Customers and
Service-recipients
Resources
Process Costs
Output &
Outcome Costs
inputs
This is
known.
Appropriations,
approved budget
spending levels
But ?
But ?
The Primary View of Most Managers

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Insurance Claims Processing Department
The General Ledger View is
Structurally Deficient for Decision Analysis.
Salaries
Equipment
Travel expense
Supplies
Use and
occupancy
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)
PlanActual
Favorable/
(unfavorable)
Chart-of-Accounts View
When managers get this kind of report, they are
either happy or sad, but they are rarely any smarter!

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#of
Activity-Based View
To: ABC Data Base
Key/scan claims
Analyze claims
Suspend claims
Receive provider inquiries
Resolve member problems
Process batches
Determine eligibility
Make copies
Write correspondence
Attend training
Total
$ 31,500
121,000
32,500
101,500
83,400
45,000
119,000
145,500
77,100
158,000
$914,500
Claims Processing Dept
Salaries
Equipment
Travel expense
Supplies
Use and
occupancy
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)
PlanActual
Favorable/
(unfavorable)
Claims Processing Department
Chart-of-Accounts View
From: General Ledger
Activity
cost
drivers
#of
#of
#of
#of
#of
#of
#of
#of
#of
$914,500
Each Activity Has Its Own Cost Driver

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The ABC/M Cross - What Questions are Answered?
Cost Assignment View (ABC)
Process
View
(ABCM)
Resources
Resource Cost
Assignment
Activities
Activity Cost
Assignment
Resource
Drivers
Activity
Drivers
© CAM-I 1990 (adapted)
Source: The Consortium of Advanced Manufacturing International (CAM-I).
Cost
Drivers
Cost Objects
(outputs)
What do we
spend?
Why do we
spend what we
spend?
What do we do?
Why do we do
what we do?
And how much?
Who or what do
we do it for?

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Multiple-Stage Cost Flowing
Simple
ABC
Expanded
ABC
Resources
Resources
Activities
Objects
Objects
Activities

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Multilevel Cost Flowing - the Math
Support
activities
$30
Material
$10
Product/service
activities $15
Products
$25
Customer
activities $20
Infrastructure
sustaining $25
Resource Costs
($70)
External Customer/Orders + Sustaining
$70
ABC as a total system in this example begins with $70. It then reassigns and
accumulates the costs into the final cost objects (outputs) without double-counting.
Price
data
Resources
Activities
$10 $10
$10
$10
$10$10
$5
$15
$25$45
$25
$15
$30
Cost-driver Table
*intermediate activity drivers
reassign each activity's
cumulative input costs plus its
own cost.
*Inter-
mediate
Resource
drivers
Final
activity
drivers
Final cost
objects

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ABC/M Cost Assignment Network
Salary, Fringe
Benefits
Direct
Material
Phone,
Travel
Supplies
Depreciation
Rent,
Interest,
Tax
Customers
Business
Sustaining
Products,
Services
Resources
(general ledger view)
Work
Activities
(verb-noun)
Final
Cost
Objects
Suppliers
(1)DemandsOnWork
Costs(2)
“CostsMeasuretheEffects”
Support
Activities
Equipment
Activities
People
Activities
“cost-to-serve”
paths

48
ABC/M Cost Assignment Network
Salary, Fringe
Benefits
Direct
Material
Phone,
Travel
Supplies
Depreciation
Rent,
Interest,
Tax
Customers
Business
Sustaining
Products,
Services
Resources
(general ledger view)
Work
Activities
(verb-noun)
Final
Cost
Objects
Suppliers
(1)DemandsOnWork
Costs(2)
“CostsMeasuretheEffects”
Support
Activities
Equipment
Activities
People
Activities
“cost-to-serve”
pathsDirectcosts

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$ 30 sales
- 28 expenses
= $ 2 profit
$ 2 profit
Unrealized profit revealed by ABC
Net
Revenues
Minus
ABC costs =
profit
More important than a better costing method are its results.

50
Sales $ 31.0
- Expenses 31.5
= prof/(loss) $ (0.5)
loss = $ (0.5)
More important than a better costing method are its results.
Net
Revenues
Minus
ABC costs =
profit

51
Activity
Costs
each activity’s
driver quantity
unit activity
driver cost
x
(eg. # of registrations)
Price/Fee
(Revenue)
ABC provides insight for the product’s or service’s cost
drivers and driver quantities.
Work
Activities
Activity Costs “pile up” into outputs.

5252
Two Views of Cost --- The Cost Object View
Dept. 1
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Dept. 2
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Dept. 3
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Outputs
Resources
Suppliers
Products
Orders
Customers
Sustaining
Process Measures
X = activities
= process
= cost drivers
$
The Vertical view of Assigning Costs

5353
Dept. 3
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Dept. 2
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Dept. 1
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
xxxxxxx
Outputs
Resources
Suppliers
Products
Orders
Customers
Sustaining
Process Measures
X = activities
= process
= cost drivers
$
Two Views of Cost --- The Process ViewThe Horizontal view of Sequencing Costs

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Supplier
(direct material)
Key:
Enterprise
Cost
Business
Processes
Process A
Processes include activities that have high to
low value-adding content.
VA
NVA
Processes: Six Sigma, Lean Management,
and Value Stream Mapping
$
$
$
$
$
$
$
$
ABM also provides unit costs of outputs for
cost visibility and benchmarking.

55
AGENDA
2) Overview of EPM

56
What has Caused Interest in ABPM?
5) Strategic – The shift from being product-centric to
customer centric.

57
Value of Company = f(Value from Customers)
The only value a company will ever create is the value
that comes from its customers – the current ones and the
new ones 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)

58
CEO Concerns Confirm this Understanding
Most
important
Moderately
important
Balancing short-term goals w/ long-term strategy
Focusing on core competencies
Managing risk on an enterprise basis
Using technology for competitive advantage
Building a responsive, flexible organization
Attracting and retaining skilled workers
Responding to regulatory changes
Improving productivity
Increasing market share
Attracting and retaining loyal customers
Mean scores
7.62
7.66
7.67
7.8
7.82
7.86
7.93
8.02
8.39
8.95
Source:
Gartner, 2011:
"Bank CEOs
Rate Business
& Technology
Concerns"
#1
since
2002

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Products and standard service-lines are not the only
thing for which accountants should compute costs.
What about costs that have nothing to do with making
products and delivering standard service-lines?
The problem with traditional accounting’s product gross
profit margin reporting is you don’t see the bottom half of
the picture.
So what about the Other Below-the-line
“Calculated” Costs?

60
60
INCOME STATEMENT
Sales $ 100
- Product direct costs -20
- Overhead cost -10
----------------------------------------------
= Gross profit margin $ 70
What about Costs Below Product Costs ?
- selling costs -20
- distribution costs -10
- marketing costs -20
- administrative costs -10
----------------------------------------------
= Total Profit $ 10
The accountants
report these by
each product (but
they are wrong
without ABC).
?
We have no visibility
of these costs by
customer (except in
total) !

61
Indirect expenses
Distribution, Sales & Marketing
General, Accounting, and Administration
Customer
+
Direct material,
Direct labor &
Equipment
Costs from Sales & Marketing are not Products
Channel
+
Product

62
# 1- Customer Retention – It is relatively much more
expensive to acquire a new customer than to retain
an existing one.
# 2 – Sources of Competitive Advantage – As products
and standard service-lines become commodity-like,
then the shift is towards service-differentiation.
Why Do Customer-related Costs Matter?
The Perfect Storm

63
# 4 - Power Shift – The Internet is shifting power …
irreversibly … from sellers to buyers.
# 3 - CRM’s “One-to-One” Marketing – Pepper &
Rodgers have hailed technology as the enabler to (1)
identify customer segments, and (2) tailor marketing
offers.
Why Do Customer-related Costs Matter?
The Perfect Storm

64

65
WORK
ACTIVITIES
(examples)
SUPPLIER
SUSTAINING
UNIT &
BATCH
LEVEL
BRAND
SUSTAINING
PRODUCT/SERVICE
LINE SUSTAINING
UNIT &
BATCH
LEVEL
CUSTOMER
SUSTAINING
UNIT &
BATCH
LEVEL
SENIOR
MGT
UNUSED
CAPACITY
R&D
OSHA
DOT
RESOURCES
FINAL
COST OBJECTS
# Advertisements
SUPPLIERS
SUPPLIER
-
RELATED
PRODUCTS/SKUs
SALARY &
FRINGE BENEFITS
DIRECT
MATERIAL
CAPITAL
(equipment-related)
NON-WAGE RELATED
(e.g., operating supplies)
# Machine
hours
# Material
moves
# Set-ups
# Shows
#
Advertisements
RELATIONSHIP
MANAGEMENT
PURCHASES,
RECEIPTS
•BRAND/PRODUCT-
RELATEDWORK,
•BRAND/PRODUCT-
RELATED ADVERTISING
& MERCHANDISING,
•FACILITIES COST
MACHINES
MAKE PRODUCT,
MOVE PRODUCT,
SET-UPS
TRADE SHOWS,
IMAGE ADVERTISING
SALES CALLS,
ORDER HANDLING,
FREIGHT
# POs
#
Receipts
# Sales
calls
# orders
# shipments
CUSTOMERS
Gvt
RegulatorsARBITRARY
(for full
absorption)
ARBITRARY
(for full
absorption)
BUSINESS
SUSTAINING
RELATED
PRODUCT & SERVICE LINE-
RELATED
CUSTOMER-
RELATED
IRS
ABC/M Profit Contribution Margin Layering
Etc.
#
Pounds
#
Gallons
# Meters
Facility costs
Product-specific

66
CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)
Sales $$$ Margin $ Margin
(Sales - Costs) % of Sales
Product-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-Related
Outbound Freight Type* xxx xxx 28%
Order Type* xxx xxx 26%
Channel Type* xxx xxx 24%
Customer-Related
Customer-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-
related
costs
Channel &
Customer-
related
costs
ABC Customer Profit & Loss Statement

67
High
(Creamy)
Low
(Low Fat)
Low High
Cost-to-Serve
Product Mix
Margin
Very
Profitable
Very
unprofitable
Types of Customers
Migrating Customers to Higher Profitability

68
High
(Creamy)
Low
(Low Fat)
Low High
Cost-to-Serve
Product Mix
Margin
Very
Profitable
Very
unprofitable
Types of Customers
KPI Target
KPI Linkage of Customer Profits to the Scorecard

69
Customer Sales Volume Versus Profits
Sales Volume (logarithmic scale)
Profitability
$ 0
$ (unprofitable)
$ profitable
Customers tend to cluster. Medium-volume customers can be
much more profitable than large-volume customers!
These losers
drag down
profits
$ small $ large

70
GARY COKINS
Principal, Global
Business Advisory
Services, SAS
THOMAS P.
KLAMMER
Professor of
Accounting
(retired)
University of North
Texas
TERRANCE L.
POHLEN
Associate
Professor of
Logistics
University of North
Texas

71
1
2
n
1
n
1
2
3
n
1
n
1
2
3
n
1
2
n
1
n
1
2
n
1
2
n1
n
1
Consumers/end-customers
Initialsuppliers
n
Tier 3+ to
Initial
suppliers
Tier 2
suppliers
Tier 1
suppliers
Tier 1
customers
Tier 2
customers
Tier 3+ to
consumers
Focal Company
Members of the Focal Company’s Supply Chain
Non-Members of the Focal Company’s Supply Chain
Managed Process Links
Monitor Process Links
Not-Managed Process Links
Non-Member Process Links
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, James D. Pugh, “Supply Chain Management: Implementation Issues and
Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 2.
Value Chain Management Involves LinkagesSupply Chain Trading Partner Relationships

72
Rapid Prototyping with
Iterative Remodeling
Each iteration enhances the use of the ABC/M system.
ABC/M Models
3
ABC/M System
(repeatable, reliable, relevant)
#0
#1
#2
#3
210

73
Balancing Levels of Accuracy with Effort
Accuracy
of
Final Cost
Objects
100%
0%
World Class
ABC System Design
Little
Level of Data Collection Effort
GreatModest
A
B

74
B / C > 1.00
Senior Management’s
Benefits vs. Costs Test
The objective is to raise the executive
team’s perception of B (the benefits) while
driving down C (the administative effort to
collect and report).

75
Benefits from ABC Rapid Prototyping
- Accelerated learning
- Solving the thorny “leveling” problem
- Preventing “over-engineering” ABC model size
- Peer group: Pre-determining uses for the information
- Replacing misconceptions with reality.
- Getting ROI from earlier insights and decisions.

76
The spending budget for sales and marketing is critical …
but it should be treated as a preciously scarce resource to
be aimed at generating the highest long-term profits.
This means answering questions like:
Which type of customer is attractive to newly acquire,
retain, grow, or win back? And which types are not?
How much should we optimally spend attracting, retaining,
growing, or recovering each customer micro-segment?
The CFO must now help Sales and
Marketing … to better target customers.
A Shift in the CFO’s Emphasis

77
… over-spending uneccessarily on loyal
customers for what is needed to retain them.
… under-spending on marginally loyal
customers and risk their defection to a
competitor.
Therefore, what is the optimum spending
level for differentiated services to different
micro-segments of customers?
Optimizing Customer Value ---
“Smart” Sales Growth
You can destroy shareholder wealth
creation by …

78
The CFO must now help Sales and
Marketing … to better target customers.
Segmentation, predictability, churn, offers, deals,
risk and uncertainty must be understood in the
language of money.
A Shift in the CFO’s Emphasis

79
Improve the value mix of customers
Source: Managing Customer Relationships by Martha Rogers
LMC MVC’s
Growth by increasing
value of customers
Numberofcustomers
Customer actual value
2
1
3
Growth by increasing
number of customers
Notes
1. Only focusing on
the number of
customers
acquired results in
a degraded mix as
low-value
customers by
definition are
easier to acquire
2. A customer centric
strategy will not
acquire any
customer; only
higher-value ones

80
 Acquire more customers
 Acquire customers likely to have a higher CLV
 Improve new customer acquisition conversion rates
 Reduce cost-to-serve per customer
 Cross- and up-sell additional products and services
 Retain customers longer; reduce the churn rate
 Increase customers’ propensity to refer customers
Actions to increase customer total CLV

81
AGENDA // What about Budgeting?
2) Overview of EPM

82
6) Contentious Budgeting – The budget is typically a fiscal
exercise by the accountants that is:
(1) disconnected from the executive team’s strategy, and
(2) not based on future driver volumes.

83
is invasive and time-consuming ... with few benefits.
takes 14 months from start-to-end.
requires two or more executive “tweaks” at the end.
is obsolete in two months due to events and re-organizations.
starves the departments with truly valid needs.
caves in to the “loudest voice” and “political muscle.”
rewards veteran sand-baggers who are experts at padding.
incorporates last year’s inefficiencies into this year’s budget.
Is over-stated from the prior year’s “Use-it-or-lose-it” spending.
A Quiz. “Our budgeting exercise ... “

84
Current Year Budget Year
Wages 400,000.00$ Formula = Column B * 1.05
Supplies 50,000.00$
Rent 20,000.00$ Copy down
Computer 40,000.00$
Travel 30,000.00$
Phone 20,000.00$
Total 560,000.00$
a b c
1
2
3
4
5
6
7
8
Sheet 1
Spreadsheet Budgeting – It is Incremental !!

85
Match the Budget Method to its Category
Demand-
driven
Project-
driven
Integrated
Budget
(Rolling
Financial
Forecasts)

86
Budgeting is typically disconnected from
the strategy. But this problem is solved if
management funds the managers’ projects.
(1) Non-Recurring Expenses // Strategic Initiatives
Measurement
Period;
1st Quarter
Strategic
Objective
Identify
Projects,
Initiatives,
or
Processes
KPI
Measure KPI Target KPI Actual
comments /
explanation
Executive Team X X
Managers and
Employees X X their score X
<----- period results ------->

87
 Activity-Based Costing
- Historical & Descriptive
- Starts with known:
spending
driver measures
output quantities
- Calculates “costs”
 Activity-Based Planning
- Predictive
- Requires capacity analysis
- Starts with estimated outputs
- Applies ABC/M rates
- Solves for Resource “expenses”
NowPast Future
ABC/M
ABP
(2) Recurring Expenses // Future Volume & Mix

88
Customers and
Service-recipients
Resources
Process Costs
Output &
Outcome Costs
inputs
Resource
expenses can
be calculated
with
“backwards
ABC/M”
Operational Resource Capacity Planning
Start Here.

89
ABC/M ABP
Known
?
?
resources
work
activities
cost
objects
Provides consumption
rates
NowPast Future
ABC/M
ABP
Predictive Accounting

90
ABC/M ABP
? calculated
?
Estimated
resources
work
activities
cost
objects
NowPast Future
ABC/M
ABP

91
Long-term Short-term
Planning time
Horizon
difficult
manageable
easy
In the very short term, you would not fire employees on
Tuesday due to low work load, but hire them back on
Wednesday. But in the future you may replace full-time
employees with contractors, or lease assets you might have
purchased. In this way, so-called fixed costs behave variably.
Effort level to
adjust capacities
Capacity only Exists as Resources

92
Accounting Treatments and Behavior of Capacity (expenses)
NowPast Future
Descriptive
Predictive
unused
used
sunk
fixed
(unavoidable)
variable
(adjustable
capacity;
avoidable)
Traceable to
products,
channels,
customers,
sustaining
unused

93
High
Low
Low High
Severity of impact on
event occurrence and
achievement
of objectives
probability of an event occurring
(3) Risk Assessment Grid
… ERM is not just contingency planning
8
10 3
4
5
6
7
19
2
Do not budget
Budget

94
Recurring
expenses
Non-recurring
expenses
Demand-
driven
Project-
driven
volume & mix
of drivers
production
and
ABP/B
strategy
map and
risk grid
Integrated
Budget
(rolling
financial
forecasts)
Budget method
Strategic & risk
mitigation projects
Match the Budget Method to its Category

95
Define and adjust
strategy and risk, and
create strategy map
Create balanced
scorecard
Identify and
manage strategic
initiatives
Approve strategy
risk and capital
budget
Managerial
Accounting
(e.g., Activity-based
Costing)
Derived budget
(and rolling
financial forecasts)
Strategy methods
(e.g., SWOT)
Manage and
improve core
processes
Financial Modeling
KPI dashboard
feedback
(2) capital budget
(3) strategy budget
(4) risk budget
Operational Modeling
(by employee teams)Strategic
objectives
knowledge
= financial information (e.g. $)
Strategy Modeling
(by executives)
priority projects and processes
Forecast drivers
(e.g. sales) ;
develop production
plan
Traditional and
driver-based
budgeting (e.g. PBB)
Capacity
resource plan
Driver volumes
and mix
Results and
outcomes
Changes and
responses
e.g., hours,
Pounds,
# employees
(1) Operational
budget
KPI
targets
Driver consumption rates
Acceptable?
Revise
plan
OK
No
Yes
Linking Strategy and Risk to the Budget

96
Key concepts and definitions
A target is what we would like to happen
which we achieve by producing
A forecast - what we think will happen
based on:
A set of plans: what we intend to do,
which we change to achieve our target

97
Don’t treat forecasting as a “special event.”
We haven’t forecasted in a while,
maybe we should try that again….
Forecasting should be an on-going part of
monitoring the business.

98
Continuous refreshing the rolling financial forecast
…accuracy
100%
0%
More frequent forecast intervals assure better accuracy.
time

99
ACCOUNTING
Financial
Accounting
Cost Measurement
Managerial
Accounting
Cost Accounting
Financial Reporting
regulatory compliance
Cost Reporting &
Analysis
(feedback on performance)
Decision Support/
Cost Planning
•[e.g., GAAP, IFRS]
•Costs of goods sold
•Inventory valuation
• Spending vs. budget variance
analysis
• Profitability reporting
• Process analysis (e.g., lean,
benchmarking, COQ)
• Performance measures
• Learning; corrective actions
• Fully absorbed & incremental pricing
• Driver-based budgeting & rolling
financial forecasts
• What-if analysis
• Product, channel & customer
rationalization
• Outsourcing & make vs. buy analysis
History Future
Low value-add Modest value-add High value-add
Source data capture
(transactions /
bookkeeping)
Non-financial data
capture
The Domain of Costing
Tax
Accounting
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins
published by the International Federation of Accountants, 2010
Source: PABC IGPG “Evaluating and Improving Costing in Organizations” published by the International Federation of Accountants, 2009
Cokins’ IFAC.org
Taxonomy of
Accounting
GAAP,
rules

100
Evaluating the Costing
Journey:
A Costing Levels Continuum
Maturity Model
By Gary Cokins
Most organizations are
typically at lower levels of
maturity in adopting
progressive managerial
accounting practices,
methods and systems.
International Federation of Accountants Report
http://www.garycokins.com/images/pd
fs/20131105-
IFAC_Evaluating_the_Costing_Journ
ey_by_Gary_Cokins.pdf

101
1D
Level#
2D 3D
4D
5D
6D
7D
8D
Blind
Process
Visibility
Output Visibility
Improved
Output
Information/
Approximate
Accuracy
Improved
Treatment
of Indirect
Costs
Customer
Demand
Sensitive
Unused
Capacity
Aware
(1) Descriptive Continuum
EXPENSE TRACKING, COST
REPORTING
and CONSUMPTION RATES
(2) Predictive Continuum
DEMAND DRIVEN PLANNING
with CAPACITY SENSITIVITY
bookkeeping
process and
Lean accounting
Direct costs
without (3) and with
(4) support costs
to output groups
Push
Activity-
Based
costing
(ABC);
Product
costs
Standard
costing to
individual
outputs;
Project acct;
Job order
costing
Level 6D with
Channel and
customer
profitability
Reporting;
Cost-to-serve
Unused
capacity
costs
(estimated)
Costing Continuum / Levels of Maturity
(most companies are Level 5D and 1P)
Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins published by the International Federation of Accountants, 2016
2P
3P
4P
5P
Pull
Activity-
based
Resource
Planning
Time-
driven
ABC
Resource
Consumption
Accounting
Simulation
(ABRP);
Forecast
driver
quantities
X unit
consumption
rates;
Driver based
budgeting
(TDABC);
Forecast
driver
quantities
X time
consumption
rates;
Direct cost
focus;
Repetitive
work
conditions
(RCA);
Level 2P
with
proportional
costing at
direct and
support
depts.
Ultimate in
consumption
rates;
1P
%
G/L acct.
Incrementa
l

102
STRATEGY
REALIZATION
CUSTOMERS,
MARKETS
SUPPLY CHAIN
MANAGEMENT
PRODUCTS,
CHANNELS &
CUSTOMERS
ACTIVITIES
(ABC/M)
RESOURCES
SHAREHOLDER
WEALTH
PERFORMANCE
MEASUREMENT
SCORECARDS
PROCESS
MANAGEMENT
General
ledger
PROJECT
ACCOUNTING,
PROGRAM
MANAGEMENT
KEY PERFORMANCE INDICATORS (KPIs) versus ACTUALS
PROFITABILITY
ANALYSIS
DEMAND STRATEGY
Expenses
TIME
SUPPLY / INVEST
STRATEGY
PRODUCT &
SERVICES
DEMAND
VOLUME & MIX
FORECAST
MAXIMIZE
MINIMIZE
OPERATIONAL PERFORMANCE
- PRODUCTIVITY & EFFICIENCY
- BENCHMARKING
- UTILIZATION/YIELD
- TOTAL QUALITY MANAGEMENT
(Cost of Quality)
UNUSED
(AVAILABLE)
CAPACITY
Asset
management
ACTIVITY
DRIVERS
REVENUES
$$s hours
Performance Management
MAXIMIZE
Alignment of cost
structure to strategy
What-if Planning?
Source: ABC/M: An Executive
Guide; Gary Cokins
CAM-I ABC Cross - Expanded

103
AGENDA
2) Overview of EPM

104
Organization
Resources
(capacity)
Strategy,
Mission
How Does It All Fit Together?
ERP, etc.
Customer
Satisfaction
Scorecards,
Dashboards
CRM
ROI
$
Shareholders
Supplier
Inputs

105
Organization
Resources
(capacity)
Strategy,
Mission
In Summary … first, we energize
with good managerial accounting.
ERP, etc.
Customer
Satisfaction
Scorecards,
Dashboards
CRM
ROI
$
Shareholders
Supplier
Inputs
Managerial
Accounting;
Analytics

106
Organization
Resources
(capacity)
CRM
ROI
$
ERP, etc.
Risk Mgmt.,
Strategy map,
KPIs
KPI
Scores
Feedback
Order fulfillment
Strategy,
Mission
Customer
Satisfaction
EPM is Circulatory and Simultaneous
Supplier
Inputs
Scorecards,
Dashboards
Targeting
needs
Shareholder Wealth Creation is not a goal. It is a result!
Shareholders

107
Organization
Resources
(capacity)
CRM
ROI
$
ERP, etc.
Risk Mgmt.,
Strategy map,
KPIs
KPI
Scores
Feedback
Order fulfillment
Strategy,
Mission
Customer
Satisfaction
Shareholders
EPM is Circulatory and Simultaneous
Supplier
Inputs
Scorecards,
Dashboards
Targeting
Shareholder Wealth Creation is not a goal. It is a result!
leakage
(waste)
wasted resources
needs
Less productivity reduces Shareholder Wealth

108
Historical, Descriptive
(trends, insights, inferences)
Time = 0
(now)
Predictive
(uncertainty, risk mgmt.)
Past
(reactive)
Future
(proactive)
Two BA Views: Hindsight and Foresight
What happened? Where? And
why is this happening? What will happen next? What is
the best that can happen?

109
Power of
Information
$ROI
Raw
Data
Standard
Reports
Ad hoc
Reports &
OLAP
Descriptive
Modeling
(with analytics)
Predictive
Modeling
Data Information Knowledge Decisions
Prescriptive Analytics
/ Optimization
The Intelligence Hierarchy
Insights

110
AGENDA
2) Overview of EPM

111
Why has the adoption rate for
analytics-based EPM’s
methodologies been so slow?
The Buy-in to Performance Management

112
IT and Users have common goals
IT Users
• Make better decisions
• Optimize performance /
manage risk
• Achieve strategic
objectives
But IT systems evolve organically and erratically.
(The user has an itch, and IT scratches it.)

113
Remove the wall between IT and Users
IT
(a set of technologies)
(gatekeepers of data)
Business
(analytical sandbox)
(a set of capabilities)
- Daily operations
- Keep the lights on
- Batch processing
- Data storage
- Data structures
- Data governance
- Discovery
- Investigation
- Analysis

114
IT’s view of
Business
Business’ view of
IT
- competitor
- solve but don’t operate
- IT resource intensive
- risky; low concern for
governance and control
- a mystery of what they do
- obstructionists
- controlling
- uncooperative
- bureaucrats
- less skilled than us
- just a service center
BA provides IT the opportunity to drive value, but IT will
need to be more tolerant and flexible.
Remove the wall between IT and Users

115
Why is the adoption rate so slow?
What are the barrier categories?
(1) Technical barriers include IT related issues.
(3) Design deficiencies include poor
measurements or their calculations and weak
models and assumptions.
(4) Organizational behavior barriers involve
resistance to change, culture, and leadership.
(2) Perception barriers are excess complexity
and affordability.

116
To create change, you need to create the need for change! How?
Change only occurs and continues only when:
(D x V x F) > R
the product of 3 factors
is greater than R
esistance to change
Dissatisfaction
with how
things are
Vision of what
“better” would look like
First
practical
steps
Overcoming Resistance to Change

117
The Complete Vision of Performance Management
Make the RPM of the EPM and BA gears spin …
… better, faster, cheaper … safer and smarter

118
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/
http://www.blog.corpeum.com/strategyexperts/gary-cockins/gary-cokins-strategy-essential
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.

119
From Theory to Practice
Your success depends
on how well and how fast
the right information and
intelligence gets to the
right people.

120
Thank You
Gary Cokins, CPIM
Analytics-Based Performance Management LLC
Cary, North Carolina USA
www.garycokins.com
919 720 2718
gcokins@garycokins.com

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