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Quantum Loop

''Performance'' is its middle name -- can new software help companies link past, present, and future?
Russ Banham, CFO IT
March 17, 2003

Business is booming at Erickson Retirement Communities Inc. Or, to be more precise, baby-booming. With an aging population about ready to bid farewell to the three-bedroom colonials of their middle years and take up residence elsewhere, the company anticipates substantial growth to its nationwide network of retirement "campuses" during the next decade.

In just 20 years the company has grown from a single campus (literally — its first facility was the former campus of St. Charles College & Seminary) to 20 such facilities in five states, providing homes to 10,000 people and jobs to 5,500. Unfortunately, Erickson has grown in other respects, too. "We found that we had 30 separate accounting systems and two different general ledgers," says CFO Bernard Hirl. "We realized that was not a basis for us to move forward."

There are any number of ways to consolidate accounting and other finance systems, of course, but Erickson opted for an emerging concept known as "corporate performance management" or "business performance management" or "enterprise performance management." Call it what you will, this software can be thought of as balanced-scorecard-and-then-some. Essentially, CPM (we threw a dart) puts a set of integrated software modules to the task of aligning an organization's strategy with the tactics taken by its discrete parts and then measuring that alignment or lack thereof. But whereas balanced scorecards quantify a range of financial and nonfinancial data points, CPM measures those items in the context of business-strategy execution and management. "It's part quantitative and part qualitative," says Mike Schroeck, partner in charge of the global integrated analytics practice at IBM Business Consulting Services.

One driving force behind the CPM concept is the quest for "alignment" and "transparency," two inescapable corporate buzzwords that can prove difficult to achieve — largely because there is often no vantage point from which the entire organization can be clearly viewed. Until recently, for example, Targus Group International Inc. was unable to tell whether its business strategy was being properly executed. The Anaheim, California-based designer and marketer of mobile computing accessories — it pioneered the computerized notebook carrying case — was growing fast, but it could not objectively measure how it was performing. "I didn't know if we were really doing as well as things looked," says John McAlpine, CFO of the privately held company.

Targus has a long-term strategy and a senior-level group that, McAlpine says, is articulate and knowledgeable about where the company needs to go. But that doesn't mean, he adds, that "everyone in the organization was lined up and making sure that what they were doing wrapped back to our overall mission." In procurement, for example, the company wanted to be sure that it had the right amount of materials inventory in the pipeline, given its customer and manufacturing needs. But sales, manufacturing, and the procurement department weren't aligned in a way that optimized materials requisitions. Even if they had been, there was no way to really measure the outcome.

CPM is not brand new, but it represents an evolutionary advance over earlier (and still-dominant) software that addressed budgeting, planning, forecasting, analytics, and related functions. The same companies that pioneered those applications are now leading the CPM charge, seeing value for both customers and themselves in uniting a group of disparate financial applications into a suite of products that can serve as a sort of mini-ERP for finance.

"Until now, the general ledger had no understanding of the purchasing system," says Nazhin Zarghamee, chief marketing officer at Hyperion Solutions Corp., in Sunnyvale, California, one of many software companies offering CPM suites. "The notion of an integrated flow of information across the organization did not exist." Goal-setting, planning, budgeting, performance-monitoring, and other activities often took place in a near-vacuum. CPM, says Zarghamee, unites these related methods and metrics in order to consolidate and analyze financial and operational data, thus providing insight into key business drivers. (Caveat emptor, however: adopting CPM may require a customer to invest in newer generations of software from the same vendors that offered the earlier budgeting or forecasting products on which its CPM suites are now based. On the plus side, this may be an ideal opportunity to shop around, since current investments in some budgeting or forecasting products may not provide the basis for a move into CPM.)

A typical set of metrics might include information about customer profitability, product innovation, and supply-chain vendor performance. One aim is to show how things that are often measured separately actually affect one another. Related to that, CPM tries to take the pulse of everything and everyone within an organization so that, as Schroeck says, "even at the lowest levels, everyone knows they're being measured to ensure that what they're doing is consistent with top-level strategy."

This provides, in theory at least, a single and up-to-date version of financial truth and corporate health. More important, since CPM is an event-driven methodology, monitoring and measuring various key performance indicators, it serves as an early-warning system and will raise the appropriate red flags when performance goes awry.


Into the Loop
As mentioned, CPM is less a technology in its own right than a reconception of technologies that have existed for years. "CPM is the umbrella system, with various sets of technology underneath it," explains Sanjay Poonen, vice president of worldwide marketing at Redwood City, California-based business-intelligence vendor Informatica Corp. Other BI vendors — including Hyperion, SAS Institute, Cognos, Comshare, MicroStrategy, Business Objects, and many more — either tout performance-management suites outright or market their products with a decided CPM slant.

Poonen says CPM begins with the formulation of a business strategy. "First you develop a strategy, then a plan, then you execute the plan, measure the success of the executions, analyze these metrics, bring it all back to strategy, and start all over again," he comments. "Each enterprise, given its particular market, customer base, vendor relationships, and so on, requires different types of data and metrics. But it all boils down to the same thing — turning data into information for decision-making purposes."

Decision-support technologies are decades old, of course. What makes CPM different, says Comshare Inc. senior vice president Brian Hartlen, is the "closed-loop" nature of its design, in which data doesn't just flow toward a decision maker but through a company, allowing decisions at all levels to be driven by strategy and, when needed, to alter that strategy. Tom Manley, CFO of Ottawa-based Cognos Inc., says, "There is this mountain of data coming from ERP systems, CRM systems, supply-chain systems, and all these other applications, but few companies use it to improve performance."

But even those selling CPM software caution that it is not a panacea. "A customer has to create methodologies to monitor and manage hundreds of metrics on a proactive basis to drive actual performance," says Poonen. "You [have to] get underneath the data to improve performance or reset expectations."

Cashing In
CPM sounds like the answer to any number of corporate headaches, yet to date few companies have deployed it. According to technology research firm Gartner, fewer than 10 percent of Global 2,000 companies have implemented CPM, although the firm believes this will skyrocket to 40 percent by 2005. That's in sync with the expanding market for BI tools, applications, and data warehouses, which research firm IDC expects to grow from $3.8 billion in 2002 to $6 billion by 2006.

Software makers hope that early success stories will galvanize the market. Kids Headquarters is one CPM convert. During the past five years, the New York-based children's-apparel company experienced tremendous growth, from a small, family-owned garment business into a midsize national competitor with $500 million in annual sales. Its sudden spurt came with a price — Kids Headquarters could not determine if its employees were executing corporate strategy or if its resources were being allocated to the right business units. "We didn't know if we were pushing the right projects," says chief information officer Ron Cuevas. "We lacked data sets in different parts of the organization to determine if an employee or particular functional area was performing well. For example, since we couldn't measure how quickly a garment design reached procurement, we were unable to grade how well a designer was performing his or her job."

Kids Headquarters had an ERP system, but it was static, Cuevas complains. "There was no central platform where we could plug in all this data, consolidate it, and present it cohesively to different employees so they could drill through it and drive better plans and performance," he says.

Having installed CPM software (from Cognos), Kids Headquarters can now monitor a dozen key indicators, according to Kevin Downs, the company's chief technology officer. To make sure employees take the new system seriously, he says, "we will link bonus compensation to these metrics." The company also plans to extend the system to vendors in Asia, where 80 percent of its merchandise is sourced, to measure how they perform. "We used to rely on informal information that so-and-so failed miserably on its last delivery," says Downs. "Now we know exactly who is failing in what categories, so we can manage our supply chain much more efficiently."

John Kurtzweil, senior vice president, CFO, and treasurer at ON Semiconductor, a Phoenix-based microchip maker, says that visibility into near-term sales and profits are also challenges. "It's real tough to get anybody to commit to longer lead times on orders, which means we have to rely more on our modeling capabilities for the industry and for particular customers than we have in the past," he says. Jonathan Chadwick, vice president of corporate finance and planning at Cisco Systems Inc., says that "visibility has gotten markedly worse over the past 24 months. The economic situation has given rise to nobody being willing to commit [to placing orders] far out in advance."

Not Clinging to the Static
Erickson was drawn to CPM because of a need to stay firmly on budget and on schedule: each facility it builds costs $300 million and spans more than 2 million square feet. "While we have an ERP system," says CFO Hirl, "it does not give us the ability to consolidate and analyze information across the company. It also hasn't proven user-friendly enough for everyone to get what they need from it. Consequently, we lacked strong budgeting and forecasting."


Erickson spent $650,000 on a total CPM implementation, including a system from Hyperion, and trained 300 employees, mostly front-line managers, on how to use it. "They now have Web access for the entry of budgets and forecasts, which are continually analyzed, rolled up, and, where needed, reset," says Hirl. "We've transitioned from static reporting to interactive analysis."

Describing a system many CFOs can relate to, Hirl says that before the company adopted CPM, "each controller did his or her own plan. Since there was no methodology governing data sharing, performance, or consistency, we were never sure if the budget would be met, much less affect our strategy. If we wanted to compare the performance of one community to another to identify best practices, we couldn't." The company could, however, provide a shelf's worth of canned reports that Hirl says no one bothered to look at. Today, employees access relevant performance data via the Web and use it to stay focused on overall strategy.

In fact, involving more people in the related processes of budgeting, planning, forecasting, and performance-monitoring may be key to CPM's success — and not only because it will help vendors sell more seat licenses. As Targus's McAlpine says, "Information becomes obsolete quickly if you don't have a way to embed it into the fabric of the company." CPM is one way, and this year may reveal whether companies consider it the best way.

Russ Banham is a Seattle-based writer. He is the author of The Ford Century, a 100-year history of Ford Motor Co.

Performance Vindicators

Key drivers for those who plan to adopt CPM.
Source: CFO research services

Making the Old New Again

Auto-repair shops aren't generally considered data-driven enterprises, but Caliber Collision Centers may be an exception. The Irvine, California-based 67-store chain has 1,600 employees and so much business that, as former CFO Debby Morris says, "we were lost in data and we had no way to turn it into something valuable and actionable."

Rich in data but poor in IT budget, the company took a keen interest in Philadelphia start-up Satori Group Inc., a CPM firm that keeps costs low in part by leveraging the power of Excel spreadsheets. "At the time," recalls Morris, "we lacked a workable budgeting process, which was challenged by our multiple locations." Satori suggested a new approach: a centralized accounting system linked to a set of key performance indicators governing each region.

What interested Caliber was the price — just $150,000 — and the familiarity of the interface. "Basically, we've extended [business intelligence] right into the front-end Excel environment," says Satori CEO David Libesman. "Our proCube product makes reports understandable by allowing people to use the analytical tool they know best, but do far more with it."

OutlookSoft Corp. is another CPM vendor that emphasizes Excel integration and familiarity. Both companies are young and face stiff competition from the established budgeting and planning software companies that have embraced (and heavily marketed) the CPM vision, not to mention from ERP vendors. But they argue that their single, integrated products, priced right, can compete effectively with the suite or modular approach taken by most of the larger players. —R.B.

No Quick Fix

Obstacles to improving performance management.
Source: CFO Research Services

Enterprising, As Always

As the CPM market evolves, many different sorts of software players will try to claim it as their own, and that certainly would include such ERP vendors as Oracle Corp., PeopleSoft Inc., and SAP AG. John Van Decker, senior program director at IT research firm Meta Group Inc., says that as of now, the companies coming at CPM from the business-intelligence space have the lead. "It's still too early for the ERP vendors; with one or two exceptions, they're not consistently able to support performance management," he says. "While the ERP vendors offer very good integrated solutions, they're generally not at the level of the BI and financial analytic vendors."

But they certainly can't be counted out. "Their appeal is one-stop shopping; they can stress integration since they already 'own' the data via their ERP systems," says Van Decker. "For some buyers, that will make sense. But for now, with one or two exceptions, their functionality is not as sophisticated as that offered by other types of companies."


Chuck Teller, vice president of product strategy­financial management and EMP solutions at Pleasanton, California-based PeopleSoft, counters by saying, "Enterprise performance management is our play; it's what we focus on. BI vendors are a tool play." BI companies often say that ERP vendors have not made the leap from dealing with transactional data to dealing with analytical capabilities. ERP players respond that in fact their products now function as, in Teller's words, "a complete blueprint of transactional, analytical, and reporting solutions."

Given that companies can easily spend up to $1 million to deploy most forms of enterprise CPM in the first year alone, buyers will have to look hard at all the options. —R.B.




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