INDUSTRY OUTLOOK APRIL Profitability Analytics Light the Financial Path

Transcription

1 INDUSTRY OUTLOOK APRIL 2013 Profitability Analytics Light the Financial Path

2 Leveraging performance management and profitability analytics to drive business growth Companies strive to attain profitability, yet those that can t or can t fast enough inevitably suffer consequences from fickle shareholders and corporate boards, not to mention lenders and fund managers. Chief financial officers (CFOs) bear the brunt of this dilemma, as they are asked to grow revenues, increase profitability and manage compliance issues in addition to the myriad financial tasks that go along with their position. Now, the role of the CFO is changing, with finance professionals moving from tactical to more strategic roles within their organizations. Many CFOs are even required as part of their job description to work on front-end issues. This change creates a need for leveraging every piece of data available related to customers and cash management. It also drives a larger strategy to create stronger business performance and profitability models for their businesses. While the economic downturn forced many CFOs hands, driving mandates to improve profitability, now it has become more difficult for CFOs to differentiate between accounting profitability and true profitability. According to a March 2009 IDC report, many companies are investing a lot of effort to produce relevant profitability information, and there are still limitations to the information companies can currently compile. 1 This results in a significant impact on decision making and, in the long run, profitability and liquidity. Data is making a big difference for CFOs and their companies. According to Economist Intelligence Unit Survey 2013, commissioned by Wipro Technologies, improving profitability is one of three top process areas where data has made the biggest positive difference. 2 DATA DELIVERS CFOs must break out of the traditional way that they have looked at financial performance. Typically, the process starts with CFOs examining the overall profitability data, working backward to figure out which products, services and customers are responsible for the highest percentage of profits. This process of profitability is flawed, however, since there are more variables involved than can be assessed by taking a backward view. For instance, a company s largest client may not be its most profitable. In fact, in some instances a company s largest clients may actually cost it money in the long run, once the cost of capital, customer support, discounts and other variables is factored in, explains Shri Ranganathan,Principal Consultant, Analytics & Information Services, Wipro Technologies. 1. Profitability Management: Using Business Intelligence and Analytics to Make Better Business Decisions, International Data Corporation (IDC), March 2009, p. 1, ftp://ftp.software.ibm.com/software/data/sw-library/ cognos/pdfs/analystreports/ar_profitability_mgmnt_using_bi_and_analytics_to_make_better_business_ decisions.pdf 2 The Data Directive: How data is driving corporate strategy and what still lies ahead, April 2013, conducted by the Economist Intelligence Unit and commissioned by Wipro 2 APRIL 2013

3 By concentrating only on volume, you don t know the level of interaction or support you may have to extend to that customer, he explains. When you can marry a variety of metrics, you may see quickly that the same customers that are interacting with your When you can marry a variety of metrics, you may see quickly that the same customers that are interacting with your company most often may be the very ones that are costing you five to 10 points on your margin. If you have the wherewithal to manage these relationships, you can improve net margins. Shri Ranganathan, Principal Consultant, Analytics & Information Services, Wipro Technologies company most often may be the very ones that are costing you five to 10 points on your margin. If you have the wherewithal to manage these relationships, you can improve net margins. Other issues are transparency and communication. It can be difficult for CFOs to constantly monitor the financial landscape and effectively disseminate reports to those in finance as well as the rest of the C-suite, the corporate board, research and development, and the sales and marketing departments, says Ranganathan. Most people have BI reports, but they struggle when it comes to managing business performance. CFOs as well as others in finance, sales and marketing want to be able to access and analyze real-time metrics from disparate data sources and to get them deployed on their mobile devices. THE BOTTOM LINE Leveraging analytics, organizations can anticipate and mitigate potential issues to boost profitability. For instance, a car manufacturer in Michigan could be severely affected by a tsunami in the Asia-Pacific region if its supply chain partners can no longer produce and ship necessary parts. This could lead to assembly line shortages, so it is almost a necessity for that car maker to model different scenarios and put proactive plans in place ahead of time to avoid such shortages. Modeling would uncover this problem and after taking into account budgets, staffing levels and customer marketing could help the customer put a mitigation plan into place. Profitability and predictive analytics applications and services can help CFOs examine all aspects of buying and selling and service across multiple channels, as well as: Identify the true profitability of the enterprise across channels, products and functions. Improve budgeting, planning and forecasting outcomes based on predictive models. Identify the customers, segments, product lines and channels that have a direct impact on the bottom line. Create a list of loyal customers based on past and forecast purchasing behavior. Reach out to the right customer with the right offer at the right time. Create demand-driven pricing in real time, based on business rules and strategies. Focus their efforts on business changes and initiatives that can help them achieve business goals. Improve the decision-making process by combining disparate data some of which may have been previously inaccessible. Help to improve customer loyalty in a world where consumers expect that companies will always engage with them based on their needs and desires, no matter where they are in the sales cycle. Reduce the current reporting time frame from several weeks to only three to four days. 3 APRIL 2013

4 The Path to Success There are broad ranges of performance management and profitability analytics solutions available on the market, and getting started with an implementation is easier and faster than many organizations may realize. A deployment can take as little as two to four months, start to finish, depending on a company s existing financial applications and technologies. The process typically starts with an assessment. Wipro, working with the client s finance department, asks key users and stakeholders to identify the processes that need to be streamlined, assessed and controlled. The information comes directly from the line-of-business managers working in conjunction with technology experts. Companies want to know what they can do to become a world-class financial company. Specifically, they want a way to keep the close cycle down to three or four days. They want to report faster and more accurately, explains Shri Ranganathan, Principal Consultant, Analytics & Information Services, Wipro Technologies. We spend the first part of every engagement on functional analysis to help them do just that. Once specific goals are set, development starts. Overwhelmingly, these solutions are technologyagnostic. It doesn t matter what financial tools are already installed or which vendor a company is already working with, says Ranganathan. Change management, including training, begins soon after. Again, this is not an IT initiative. It s a frontend initiative, says Ranganathan. We want to help users go in and decide how reports are going to look, giving them access to better information presented through eye-catching dashboards and reports that can be distributed through their devices of choice. Profitability analytics can also help a company improve security and compliance, since the extensive reporting afforded by such a solution ensures that the company s financial baseline is tight and meets all of the required regulations. This is something that must change, says Ranganathan. Analytics solutions have been around for 15 or 20 years, but now that the technology landscape has changed, we can use them to assess profitability, sales channels, customers and vendors, he says. CFOs can get started on their profitability analytics journey by first doing an assessment of their financial processes and needs (see sidebar). CFOs need to find the right blueprint for success, explains Ranganathan. The key stakeholders, including the functional users, need to be involved in the assessment process. PROFITABILITY ANALYTICS BRING ON THE PROFITS All of these benefits improved profitability, better compliance and a greater focus on the right customers can be achieved by monitoring business metrics, something that is one of the strategy drivers of business today. Companies, for instance, want to keep tabs on key performance indicators (KPIs). In many instances, the old adage, You can t manage it if you can t measure it, comes into play. For some CFOs, profitability analytics are helping them bring true change to their businesses. Profitability analytics help companies analyze structured and unstructured data to see trends and patterns that affect a business positively or negatively. The business value of profitability metrics and data is significant, according to a ZDNet article, 3 and can: Help business leaders clarify and identify business goals. Allow them to uncover multiple business strategies, as well as corresponding implications for the business. Give business units the ability to incrementally make changes and build capabilities. Indeed, the issues that CFOs are facing today can be solved using analytics and information management technology, including profitability analytics. This is corroborated by a March 2012 Gartner report, Magic Quadrant for Corporate Performance Management Suites: Increasingly, profitability-modeling applications are focusing on profit optimization capabilities that enable executives to see the impact of different strategies on profitability from different perspectives, such as customer or product. 4 Profitability analytics include modules for strategic planning, initiative and goal 3. Enterprise architects play key role in transformation, data analytics value but they need to act fast, say Open Group speakers, Dana Gardner, ZDNet, January 31, 2012, enterprise-architects-play-key-role-in-transformation-data-analytics-value-but-they-need-to-act-fast-say-opengroup-speakers/ Magic Quadrant for Corporate Performance Management Suites, John E. Van Decker, Neil Chandler, Christopher Iervolino, Gartner, March 19, 2012, forCorporatePerformanceManagementSuites.pdf 4 APRIL 2013

5 Analytics solutions have been around for 15 or 20 years, but now that the technology landscape has changed, we can use them to assess profitability, sales channels, customers and vendors. Shri Ranganathan, Principal Consultant, Analytics & Information Services, Wipro Technologies management, scorecards and strategy maps, and a dashboard that aggregates and displays metrics and key performance indicators (KPIs), enabling them to be examined at a glance before further exploration via additional business intelligence (BI) tools, according to Gartner s report. 5 The other important facet to consider is the cost of capital or economic profit models to help analyze the true profitability drivers. This breadth of information is new to many companies that make decisions based on customer volume how often they are interacting with a customer. Using these tools, companies can glean insights about a wide variety of variables and identify their most profitable customers by not only looking at sales volume but also data related to marketing, segmentation, support, loyalty and number of transactions. And when this happens, CFOs have the chance to shine, says Ranganathan. CFOs can assess what makes a customer profitable and what makes a customer unprofitable, [which helps] them more accurately predict future business trends and needs, reduce risk and exercise more control of their processes, he says. 5. Ibid., p. 4 5 APRIL 2013

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