Profitability and Cost

Management (PCM)

From survival to sustainable to profitable

Management (PCM)

• Profitability & Cost Management

– The Landscape

– Why are Organizations interested in Profitability &

Cost Management?

Agenda

Cost Management?

• A Simple Example

• Hyperion Profitability & Cost Management

Profitability Vs Sustainability

Vs Profitability

Survival is not a synonym for sustainable

• Survival is easy – we survive if we keep our

doors open, even if we lose 50% of our

customer and staff.

• We can grow again even if we make some bad

Survival

• We can grow again even if we make some bad

decisions now.

• Where are you focusing your cost saving

initiatives now?

• Sustainability is hard – knowing that you will

be around to weather the next economic crisis

because you have developed that strategy

already by making the correct cost cutting and

Sustainability

already by making the correct cost cutting and

restructuring decisions today

• We are able to cut cost knowing we are not

doing this to the detriment of our future

operations and market

• Profitability – making smarter decisions in a

sustainable environment to allow us to exceed

our competitors market performance

• We made intelligent strategic decisions

Profitability

• We made intelligent strategic decisions

yesterday, allowing us to ramp up our sales

and operations to dominate the market today

Why Profitability and Cost

Management?Management?

• What are your company’s cost saving

initiatives?

• How do you identify those initiatives?

• How successful has your company been?

• 9 out of 10 cost reduction programs fail to

achieve their targets

–Gains that are achieved are typically short-

lived

• Cost drivers are not clearly understood

The Profitability Landscape

• Cost drivers are not clearly understood

–As a result, cost-cutting initiatives are not

targeted at the right places2007 KPMG worldwide survey of

more than 400 companies

• A majority of companies have some type of formal

process to produce and calculate profitability information

– The ability to calculate accurate and timely

information is extremely limited

– Manual and spreadsheet-driven processes are still the

norm

The Profitability Landscape

norm

• New, more integrated approaches are needed

– Companies are increasingly looking to packaged

profitability management applications

– The market will shift from “build” to “buy” by 2010

IDC Research, May 2008

Thesis

Anti

ThesisFinance Operations

SynthesisOrganisation

Reconstruct the organisation from a vertical view to a horizontal view

General

Ledger

General

Ledger

Accumulator

A blizzard of

transactions

Financial

Data

XYZ Corp.

Revenue

Summarized

Results

Statutory Accounting

Environment

(Account

Balance)

(Account

Balance)

transactions

Expenses

Profit

• What defines a profitable

customer?

• What is the profit

contribution margin of a

product or a service?

• What does it cost to sell or • What does it cost to sell or

service customers?

• What proportion of resources

does a customer consume?

Why hasn’t increased

revenue resulted in

increased profitability?

GeneralGeneral

BehavioralData

CustomerProfitability

Full Product

Costing/Profitability

Environment

General

Ledger

General

Ledger

FinancialData Meaningful

AssignmentsDecisionSupport

Full Product Costing

Drivers of Cost…

Others require analysis to appropriately assign

MaterialDirect Labor

Some are obvious and relatively easier to assign

Production Overhead

Product Management

Contributors of Cost

Management

Customer Service

Administrative Support

Quality Service

Sales/ Marketing

Support

Organizations are asking for flexibility in how to assign and transform these costs!

Utilities

An analytical application that enables you to:

– Accurately assign, measure, and manage costs and revenues

– Use any methodology to transform financial data through multiple

stages

– Compute costs and profitability for business segments

– Use scenarios to evaluate alternate approaches

Profitability and Cost

Management

QUANTATIVE

– Who are the most and least profitable customers?

– What products/services contribute the most to the bottom line?

– Does customer or product/service profit vary by region?

– What is the profit contribution margin of a product/service? or a service?

QUALITATIVE

– Why are customers profitable or unprofitable?

What Is?

Why?

…. Leads to Business Intelligence

– Why are customers profitable or unprofitable?

– Why is the cost to sell or service different across the customer base?

– How do business processes impact customer profitability?

– How is resource consumption affected by product/service maturity?

COMPARATIVE• How might we improve?

– How to adjust Plans and Budgets to affect Profitability?

– How are we doing compared to others in our industry?

Why?

What Now?

• Direct Bank

– Close call centres

– Change investment policy

– Launch marketing campaign across all markets and customers

– Launch Islamic Banking

Example

–

• Probably need to do all, based on true business insight

and analysis

• Each decision has a further impact on other areas of the

business

• ABC provides the basic of CPM

– ABC is a key building block of CPM. Preformed correctly, it provides

visibility into dimensions of corporate performance and solve difficult

problems for organizations with mature CPM initiatives.

(Frank Buytendijk, Gartner, 2005)

• Dynamic Costing and Pricing is becoming more imperative

PCM and CPM

• Dynamic Costing and Pricing is becoming more imperative

– …profitability management is not a controlling activity in the back

office anymore, but has become an instrument to compete better in

the front office.

(Frank Buytendijk blog, 2008)

• Two(or more) stage allocation methodology.

Activities consume resources,

Products/Services consume activities.

• Accurate unit costs

PCM and Budgeting

• Accurate unit costs

• Proper allocation and management of

shared/support services.

• Accurate capacity management at an

operational/activity level.

• Strategy poses more questions than answers

• PCM allows you to answer the questions by modeling strategic initiatives into your current operations

PCM and Perf Management

operations

• Perform what-if analysis

• Cost, Resource and Activity drivers are typically part of the PCM model already –therefore result collection and scorecard population is potentially simplified

Bikes – A Simple

ExampleUsing Profitability & Cost Management

Example

• Medium-sized bicycle manufacturer

• Recent increase in sales revenue:

– Due mainly to increased purchases by big-box store: Q-mart

• RESULT:

– Monthly revenue has

Bikes needs to better understand costs and

profitability of its customers!

Bikes Manufactoring

– Monthly revenue has increased

– Profit and profit margin has decreased

• Q-mart has asked Bikes to supply more product

• How are my customers consuming activities?

• Which department costs are being consumed

by products?

• Which of my regions are profitable?

Bikes is seeking answers to…

• Which of my regions are profitable?

Build an Allocation model to transform costs

through these stages!

General Ledger

Business

Operations

Bikes Manufacturing –

Depiction of costs

Products Customers

Markets

What Is?

Why?

• After reviewing the sales

costs, a program of

customer education has

reduced costs of:

– Sales Order Processing

– Sales Costs

– Returns Processing

Bikes – The Improvement

– Returns Processing

• Improving the bottom line

What Now?

ORACLE|Hyperion

Profitability & Cost Management

ORACLE|Hyperion

1. Take advantage of common EPM technology

2. Flexible methodology

3. Allow the business, not just IT and Finance, to control the design and

creation of the allocation solution

4. Let the application take care of the Essbase technical components

- Use the power of Essbase for calculation and reporting

Hyperion Profitability and Cost

Management Design Principles

- Use the power of Essbase for calculation and reporting

• Up to 9 stages of cost allocations

– Intra-stage Allocations

– Reciprocal Allocations

• Support for multiple cost allocation methodologies

– ABC, Time estimation, Percentage allocation, Even Splits

– Supports both cost and revenue allocations

Flexibility

– Supports both cost and revenue allocations

• Integrated with the leading EPM and ERP Systems

• Create & Manage

Dimensional

Hierarchies

• Deploy the

Application

Create & Manage

Business Model:

• Stages of Allocations

• Drivers

• Allocation Rules

• Automated CalcScript

Generation

• Store Cost, Revenue &

Driver Data

• Calculate Model & Store

Results

• Validate the Model

• Generate the Reporting

Cube

Reporting Cube with

Allocation Genealogy

• Profitability Analysis

• Cost & Revenue

Contribution Analysis

Metadata

Management

Allocation

Model

Definition

Cost & Revenue

Allocation

Calculations

Profitability & Cost Analysis

Enterprise

Performance

Management

Essbase

Calculation

Load rules, FDM,

other

Essbase

Reporting

Profitability Management Environment

GenerationManagement

Architect

Hyperion

Profitability &

Cost

Management

Calculation

Cube

Reporting

Cube Web Analysis,

Financial

Reporting, Excel,

Smartview

Thank YouThank You