Aligning Profit to Execution

Edgewater Ranzal

EPM Day, New York City

October 25, 2012

Mike Killeen

Vice President of Technology

[email protected]

Aligning Profit to Execution

► The Need for Profitability and Cost Management

► Overview of the Oracle Hyperion EPM Solution

► Case Study

Closing Q&A

Agenda

► Closing Q&A

2

About Edgewater-Ranzal

One of the largest Full-Service

Edgewater

Acquired

► Publicly Traded as: EDGW

► One of The Boston Globe’s Top 100 businesses

► Ranked as one of the 500 fastest-growing stocks on Wall Street

Planning Building

Ranzal

3

► One of the largest Full-Service

Oracle/Hyperion EPM and BI

practices.

► Oracle Platinum Partner presented

with numerous awards and

recognitions by Oracle including

multiple Partner of the Year awards.

► Premier Consulting Services in North

America, and a regional European

office located in the United Kingdom.

Founded in 1996

EssbaseAcquired byEdgewater

2004Data

Integration & Warehousing/

CRM/Web 2.0

Development

AcquiredVertical Pitch

2007HFM/FDM

AcquiredMeridian

2010HSF

Planning2001

Planning

BuildingOBI Team

2011OBIEE

Build DRM & HPCM Teams

2009DRM &HPCM

Our ServicesDashboards & Scorecards, Profitability &

Cost Mgmt, Financial Analytics &

Reporting, Operational Analytics, What-if

Analysis, Query & Reporting, Visual

Exploration

Financial performance, Legal,

Segment & Mgmt Reporting, Financial Close

HFM Optimization, Performance Lab

SOX Compliance Support

Planning, Budgeting, Forecasting,

Workforce Planning, Capital Planning,

Project Planning, Public Sector

Budgeting, Strategic Finance

Installation, Upgrades,

Migration, System Monitoring,

Backup and Recovery, Disaster

Recovery, Load Testing,

Hardware Sizing

Consolidation &

Reporting

Business

Intelligence

Enterprise

Planning

InfrastructureProject

Data Integration, Financial Data

Management, Data Warehousing, Master Data

Management, ETL Services, Performance

Tuning, Automation

Project/Program Mgmt, EPM

Road Maps, Application

Reviews, Business

Requirements, Process Change,

Documentation

Infrastructure

Training

Support

Services

Data

Services

Project

Management

Support Services – Technical and

functional Support Services.

Remote Service Desk available to

call for quick response to technical

and application issues.KeyTeach Partnership

– HFM, Planning, Essbase custom Training

Class as well as Remote and CBT.

COMPLEMENTS ORACLE TRAINING UNIVERSITY

The Need for Profitability & Cost

ManagementManagement

Call MeDoing Fine

Why Enterprise Performance Mgmt (EPM)?

reactrecognize

Understanding Profitability Exposes Hidden Cost Behaviors

“…Technology vendors are spending, on average, 19% of theirselling, general, and administrative (SG&A) costs or $135,262 perquota-carrying salesperson in support-related activities.

Few are aware of this enormous amount because the costs arehidden .”hidden .”

“Uncovering The Hidden Costs Of Sales Support”Scott Santucci - April 13, 2009

Using the Wrong Tools to Effectively Analyze Profitability

“Most companies are not using the right tools…spreadsheetbased models are hard to change, error prone and difficult andtime-consuming to use. Relying on desktop spreadsheets cankeep your company from doing the kind of analyses it needs to

Accurate Costing Is Key to ProfitabilityVentana Research, 2008

keep your company from doing the kind of analyses it needs todo when it needs to do them...”

Does Your Company use a tool today to perform allocations as part of a profitability management or cost management solution? If so, what tool do they use?

25% 25%25%25%1. Packaged Profitability or Costing

Application (e.g. HPCM, OFSAA)

2. Custom Solution Using EPM, BI,

or OLAP Tool (e.g. Planning, EDW,

Essbase)

3. General Ledger

Polling Question #1

9

Pac

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fi...

Cust

om S

olutio

...

Gen

eral L

edge

r S

pread

shee

ts/M

...

3. General Ledger

4. Spreadsheets/Microsoft Access

Solution or not sure

Profitability Defined

Wikipedia Defines Customer Profitability as:

“Customer profitability is the difference between the

revenues earned from and the costs associated with

the customer relationship in a specified period”

Basic Formula:

Profitability = Revenue - Direct Costs - Indirect Costs

Cost Definitions

► Direct Costs

► Costs Directly associated to the making of a product or delivery of a service

► Parts for the product

► Labor for Service Delivery

► Costs Directly attributed to the selling to a customer or client

► Shipping and Handling Expense

Customer Processing Expense► Customer Processing Expense

► Indirect Costs

► Costs that are not directly attributable to the making of a product or the selling to a customer

► Operating Costs (e.g. Call Center, Plant Overhead)

► Selling Costs (e.g. Sales & Marketing)

► Investment Costs (e.g. R&D, Initiatives)

► G&A Costs (e.g. IT, HR, Finance, Admin)

► Finance Charges for Cost of Capital Employed

Profitability Challenge #1 -

Indirect Expenses Assignment to Products & Customers

No Standard Process

Standard,

accepted

process

No Standard Process

� Indirect

Costs are

difficult to

track and

measure

Profitability Challenge #2 -

Statutory Reports are not Timely or Detailed Enough

• What defines a profitable

customer?

• What is the profit

contribution margin of a

product or a service?

• What does it cost to sell

to or to service

customers?

• What proportion of

Financial

transactions

Consolidation

(GL or HFM) • What proportion of

resources does a specific

customer consume?

• Why hasn’t increased

revenue resulted in

increased profitability?

transactions

Financial

Data

(GL or HFM)

AccumulatorBottom-line

Results

Organizational P&L

Profitability & Costing Solution Elements

Analysis &Planning

Product P&L by Activity

Financial P&L

Behavioral

Data

RawData

MeaningfulAttributions &

Allocations

Raw Data – Financial P&L

Legend

C Customer Specific Costs

P Product Specific Costs

F Financial/Overheads

Type P&L Line $ % of Rev

C/P Units Sold 100

C/P Gross Sales 1,000$ 102%

C/P Less Disc, Rtrns & Allow. (20)$ -2%

Net Sales 980$ 100%

C/P COGS @ Std 400$ 41%

Raw Materils,

Labor, Freight In,

Mfg Ovhd

► Accounts

► Legal Entity/Company

► Cost Center/Department

► Product Line/Profit Center

► Other Chart Fields:

► Sub Accounts/Functional Area

► Projects

Typical Financial Analysis

C/P COGS @ Std 400$ 41%

F COGS @ Var 23$ 2%

Less: Total COGS 423$ 43%

Gross Profit 557$ 57%

P/F/O Selling & Marketing Exp 150$ 15%

F G&A Exp 100$ 10%

Less: Total Operating Exp 250$ 26%

Operating Income 307$ 31%

F Depreciation & Amortization (75)$ -8%

F Other Inc/(Exp) (50)$ -5%

Net Income Before Taxes 182$ 19%

Less: Income Taxes @ 40% 73$ 7%

Net Income After Taxes 109$ 11%

Dept Costs:

Accounting

Mgmt

IT

Mfg Plant

Departmental Exp

Variances

► Projects

► Line of Business/Channel

► While some elements of product profitability and customer profitability may be present, they are typically at a much higher level (e.g. many SKUs rolling up to a Product Line, or many Customers rolling up to a Channel)

► Significant manual effort may be involved in achieving this (e.g. Thick G/L, XL, Manual Journals)

► Complete Financial Results also occur at the close, where its often too late to react

► Need to be more detailed, timely, transparent & automated to be actionable

SHIPPED TO SOLD TO TERMS: FROM INVOICE DATE

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

2% 15 daysNet 16, USD

DIRECT INQUIRIES TO:1 (800) 999-9999

INVOICE SHIP DATE 11/01/2004INVOICE DATE 11/01/2004

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

PURCHASE ORDER NO. SHIP NO. CUST. NO. SALES DIST. PLEASE SHOW THIS INVOICE NUMBERWHEN REMITTINGTEST ORDER #1 S901999 B901999 2377

DATE INV’D11/01/04 2002009999

ORDER DATEMM/DD

DELIVERY DATEMM/DD ACCT. AT CUST. CARRIER SALES ORDER

19929988811/01 11/11 1202 Customer pick-up

QUANTITY UNITS PRODUCT CODE DESCRIPTION UNIT PRICE AMOUNT

700 CA 4100000295 TBAH 24/500 75.35 52,745.00

Raw Data – Sample Operational Data

700 CA 4100000295 Efficiency Allowance 333333 0.05- 35.00-700 CA 4100000295 SpecAllow-OI RateCs 654737 0.50- 350.00-700 CA 4100000295 Freight-Backhaul 1.08- 155.74-700 CA 4100000295 Fuel Allow Percent 6% 9.34-700 CA 4100000295 Unload Allowance 0.04- 28.00-

Data Sources: Order Mgmt, A/R, Billing, Trade Spending apps

Customer

- By Customer

- Bill To/Sold To

- Shipped To

- By Market

- Mkt (Channel)

- Sales ID

- Shipped To

Product

- Category

- Sub-Category

- Brand

- Sku

Time

- Year

- Quarter

- Month(5-4-4)

- Week

- Day

Accounts

- Net Sales Dollars

- Gross Sales Dollars

- Less: Cash Disc

- 2% 15 days

- Efficiency Allow

- Spec Allow, etc

Attributes

Quantity

- SKU A

(Case = 12)

- SKU B

(Case = 1000)

Meaningful Allocation – Top Down via Rules

› Allocation Rules can use drivers such as headcount, percentages, hours, etc

Customer

Profitability

Profit Before Overheads

Gross Profit

Total MDC

Total Overheads

Total Mktg Overhead

Total Sales Overhead

Allocation Rules

Profitability

CRM HR GL EDW EPM

Available Driver & Allocation Source Data

Total Sales Overhead

Total General Overhead

Total Associated Costs

Broker Commissions

JV Income

Meaningful Allocation – Bottoms Up Via ABC

► Activity based costing:

► Rather than looking at departmental expenses as a collection of costs by functional areas, look at them as a collection of activities.

► Functional view:

► Total Distribution Costs

Order Desk Dept

► Specify a department & get cost - e.g., Order Desk - $100

► Identify activities – e.g., take phone order, take fax order

► Identify % time spent on each activity – e.g., 70%, 30%

► Identify Driver for Each Activity – e.g. # of Orders -50, 110

► Calculate activity cost rates

Example

► Order Desk Dept

► Warehousing Dept

► Shipping Dept

► Activity view:

► Total distribution costs:

► Take orders

► Pick items from shelves

► Drive trucks

Calculate activity cost rates

► Divide departmental cost by driver

► Phone order rate = $100*70%/50 = $1.40/phone order

► Fax order rate = $100*30%/110 = $0.27/fax order

► Load in drivers by customer

► Customer A – 10 phone orders = $14.00 total cost

► Customer B – 10 fax orders = $2.70 total cost

► Assuming Customer A & B order the same product, which is more profitable?

Decision Support – Sample Reporting & Analysis

Key Expectations of a Profitability & Cost Management Solution

► Reliability– Visibly defensible

profitability and cost results

► Agility– Timely reflection of

Senior Management

– Timely reflection of results to be actionable

► Relevance– An ability to Allocate

resources to the most important opportunities

Financial Results

Revenue & Cost Models

Operational Results

FP&A

Which of the below use cases would your organization prioritize as the top application for a Profitability & Cost Management Solution?

25% 25%25%25%

1. Cost Allocation Process for External Purposes

2. Activity Based Costing For External Purposes

3. High Level Profitability for Management

Polling Question #2

21

Cost

Allo

cati

on P

roce

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.

Act

ivit

y Bas

ed C

ostin

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...

Hig

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rofit

abili

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.

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Purposes

4. Detailed Customer/Product/Operational

Profitability for Management Purposes

Overview of Oracle Hyperion EPM

Profitability Solution Profitability Solution

EPM/BI Platform

Consolidation

& Reporting

reactrecognize

today

• The more mature the EPM platform, the

more lead time to RECOGNIZE issues (i.e.

the transfer from Finance to Operational

insight)

Building an EPM/BI Platform

& Analysis(profitability)

Financial

Planning

• The better enterprise reporting & analysis

tools, the easier it is to RECOGNIZE issues.

• The better transparency to details to

revenues and costs, the more time for

insight to REACT and resolve.

• The more integrated these components,

the faster time to REACT.Analysis

(profitability)

Which of the following EPM/BI programs would you rank as MOST important to your organization?

25% 25%25%25%

1. Optimizing the Financial Close & Reporting

Process

2. Improving the Budgeting, Forecasting &

Planning Process

Polling Question #3

24

Optim

izing th

e... Im

provi

ng th

e ...

Enablin

g Act

io...

Deliv

ering a

nd...

Planning Process

3. Enabling Actionable Operational and

Financial Analytics throughout the

organization

4. Delivering and Optimizing a Profitability

and/or Cost Management Solution

Oracle EPM and BI Architecture

Solution Component – Essbase OLAP Server

Profitability Applications are Multi-Dimensional in Nature

• Packaged Profitability functionality

• Computes Profitability for Business Segments, Customers and

Products

• Pre-Built Framework for profitability modeling:

• Pre-built Measures dimension

• Support for Multiple Cost Allocation methodologies

• Pre-Built Validation reporting

• Graphical Interactive Traceability Maps

• Genealogy Reporting shows flow from any stage to any stage

Solution Component – Hyperion Profitability & Cost Management (HPCM)

28

• A User-Driven application

• Measures, Allocates and Assigns Cost and Revenues via User

Defined Rules

• Finance User-facing Administration

• Provides Scenario Modeling for Decision Making

• Tightly integrated with the full Hyperion EPM Suite

• Shared Data and Metadata via EPMA

• Shared Reporting Tools like Financial Reports & Web Analysis

• Proven Technology Stack

Metadata Management

AllocationModel

Definition

Cost & RevenueAllocation

CalculationsProfitability & Cost Analysis

HPCM Workflow for Profitability & Cost Solution

HPCM Stages

► HPCM allocates Costs & Revenue Pools through one or more stages in a

top down capacity

► Stage – Step in the allocation process that has similar pool

characteristics

Name Dimension 1 Dimension 2 Dimension 3

1 – GL BudgetCentre Account Related Party

Allocation Flow

► Separate stages enable traceability!!

2 – Sum BudgetCentre CostPool

2 - Sum_Intra BudgetCentre CostPool

3 – Process Process Activity Client

4 – Service Service

Direct and Indirect (Genealogy) Allocations

Drivers Deployed

•FTE (Simple)

•Various % Inputs (Custom)

•Summarization (Even)

In a Perfect World, All Stages are Created Equal…

R12 449

Account

R12 449

Process

R12 449

Service

HPCM/Essbase is storing the data separately in each Stage!

HPCM Allocation Model Definition Components

Source StageGeneral Ledger

Target StageCost Pool

Account

Budget

Centre

Related

Party

Budget

Centre

Cost PoolDriver

Driver Selections – Defines what Driver

Definitions to use against the Source

stage, typically the dimension identified

as the driver definition.

Assignment Rules Definitions– Defines

the member combination in the target

dimension for the assignment.

Assignments– Defines the source

dimension combination and the target

Driver Definitions – Create an allocation

formula/methodology that references a

loaded metric within the model.

1

2

3

4

2 3

14

4 dimension combination and the target

Assignment Rule

44

Sample Model Analysis – Trace Allocations

Trace Allocation for Service

What’s New in 11.1.2.2 HPCM – Detailed Profitability Models

Solution Component – Common EPM/BI Reporting Tools

Information Delivery - Sample EPM Dashboard

Solution Component* - Hyperion Planning EPM Application Shorten Planning Cycles and Improve Business Predictability

► Powerful workflow

and process management

► Intuitive interface for end

user data entry

► Robust data integration

► Leverages Essbase for ► Leverages Essbase for

powerful reporting and

analysis

► Scalable Web

infrastructure

► Shared EPM

Administration Tools

EPMAHyperion Planning

Multi User Data Entry

Task Lists & Workflow

Bottoms Up Calculations

Reporting & Commentary

HPCM

Multi-Step Allocation Modeling

Validation Reporting

Traceability Maps & Analysis

Data synch:

Costs by Account & Dept

Data synch: Direct Attribution

to LOB

Data synch: Shared

Assumptions

Shared Dimensions &

Hierarchies (EPMA)

HPCM & Planning – Better Together

EPM Reporting & Analysis

Web Analysis

Financial Reports

Smart View for Office

Assumptions

Data synch: Drivers by

Account & Dept & LOB

Data synch: Results by

Account & Dept & LOB

What role do you see a budgeting/forecasting/planning product playing in a profitability & cost management solution?

25% 25%25%25%1. Critical - the definition of a set of routines that

can be shared with the profitability

management solution for actuals, plans,

forecast, and what-if scenarios

2. Important – the solution needs to support

Polling Question #4

40

Cri

tical

- th

e defin

ition o

f..

Import

ant – th

e solu

tio...

Nic

e to

Have

– c

an ex

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Not I

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we w

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2. Important – the solution needs to support

processing of both actuals and budget/forecast

data sets

3. Nice to Have – can extend the profitability

process through driver collection & an

occasional what-if scenario

4. Not Important – we would run our processes

only for actuals

Case Study

An HR Consulting FirmAn HR Consulting Firm

Planning & HPCM for a Fully Loaded P&L

Business Process

► Process

• Creation of a “Fully Burdened” dataset.

• Attribute the “Fully Burdened” dataset.

• Allocate the Costs to the lowest level of the business (Entity & C2 Dimensions)

► As-Is• A large tactical MS Excel solution – 50+ worksheets

• Difficult to interrogate the process.• Difficult to interrogate the process.

• Difficult to control changes.

► To-Be

• To deliver an allocation system that uses a combined Hyperion

Planning and HPCM approach.

• Solution on an Enterprise Platform - a platform for further growth.

• Ability to easily run multiple versions.

Application Architecture

Driver Data

Hyperion Planning

Hyperion Profitability & Cost Management

Microsoft Excel

Attribution Planning

Application

HPCM

Cost Allocation Application

Budget Planning

Application

HPCM Stage

Management Utility

Business Logic

STG 1

BONUS

STG 2

PROP &

STG 3

MGTI

STG 4

PRE

STG 5

POST

STG 6

PRE

HPCM

STG 7

POST

HPCM

STG 8

TOTAL

Budget Planning

App

SOURCE

HPCM App

BONUS PROP &

ADMIN

MGTI PRE

ATTR

POST

ATTR

TOTAL

ALLOC

SOURCE

DATA

Budget Planning

App

Attribution Process – Data Form

Allocation Matrix

HPCM Model Architecture

HPCM Stage Balancing

HPCM Trace Allocations

Outcome

► Excellent visibility throughout the allocation process.

► A platform for great reporting.

► Ability to run multiple versions.

► Lower IT involvement (Run the Model).

► Can answer business questions quickly.

A robust and repeatable process.► A robust and repeatable process.

► Business areas can understand their costs – challenge the data

not the process.

► Risk mitigation – Enterprise platform

ClosingClosing

► Does your company understand the true costs of its products or services?

► Are costing models transparent enough? Can you easily trace back the assigned costs to the activities and line item expenses that drive them?

► Do your costing methods operate at the right level of detail?

► Are you satisfied that you are allocating shared services (such as IT or a centralized HR function) accurately?

► Are people spending too much time maintaining our costing models and other elements of our costing system?

Self-Evaluation Questions

elements of our costing system?

► Can people in your company quickly test how changes to commodity, input costs, lower or higher volumes will affect our profitability?

► Are you getting answers from our costing systems fast enough to be actionable? Would reducing this process time improve our competitiveness or profitability?

► Is all of the data that you need to understand true costs available in a single ERP system? If not, what are the initial and ongoing costs of integrating that data into your ERP system?

Closing and Q&A

53

Mike Killeen, Vice PresidentEdgewater Ranzal

108 Corporate Park Drive, Suite 105

White Plains, NY 10604

E-mail: [email protected]

Appendix – HPCM Demo FlowAppendix – HPCM Demo Flow

Demo - Business User Defines Stages in HPCM

Stage definition is wizard driven, and provides the appropriate selections for

stage creation.

Demo - Model Validation – Stage Balancing Report

Key Column

Demo - Business User Defines Drivers in HPCM1

Demo - Drivers are Assigned to Cost Pools2

Demo - Business Users Control Definition of Assignment Rules3

Demo - Business Users Map Source Stage to Targets Via

Assignments

4

Or Allocation

Assignments can be

bulk loaded via a

staging table.

Appendix –

HPCM Reference InformationHPCM Reference Information

HPCM Key Terms & Concepts

Key Term Standardised Usage

HCPM allocation engine An allocation by definition is the split of one number into multiple based on

a set of rules and methodologies.

HPCM allocation (function) The split of data from a single source, located in one stage, to multiple

targets, located in a different stage, through a particular methodology or

calculation rule. Allocations can also exist within the same stage (called an

intra-stage allocation). In HPCM, a driver, is defined as the unique

combination of a calculation rule (e.g. pro-rate split, even distribution) with combination of a calculation rule (e.g. pro-rate split, even distribution) with

a measure or metric (e.g. Headcount, Manual Stat).

Assignment In HPCM an assignment defines the unique pairings of source to target

relationship. For example, the fact that Actuary Management Cost Center

only allocates to the Actuary Operating Cost Centers (as opposed to all cost

centers) is an assignment rule. The fact it uses headcount for that allocation

is a driver.

Traceability Traceability in HPCM is the process of visually flowing a cost pool forwards

or backwards from any stage.