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Financial Analysis Clears the “Profit Haze”
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Corporate executives are constantly looking for ways to increase
revenue, profitability, and shareholder value. Moving into new markets,
building new products, making acquisitions, and creating new business
models while optimizing internal financial and operational
effectiveness are just some of the strategies employed to achieve these
There is one challenge, however, that tends to hinder growth and
profitability no matter which strategy is employed: the lack of
visibility that executives have into the financial state of the
business. Informal "shadow IT systems" consisting mainly of
spreadsheets and manual processing crop up in an attempt to provide
insight into the business. Although spreadsheets work at an individual
level, they do not effectively scale
to support a collaborative environment of multiple diverse business
units. The situation is compounded when the business becomes more
complex as a result of internal and external changes, such as mergers
and acquisitions, expansion into new markets and new economic,
political and regulatory environments. In the worst case, a lack of
insight into the impact of these changes can paralyze an organization.
Financial analytics solutions improve corporate performance by
creating visibility into
all areas of an organization, effectively clearing the haze that exists
around the true state of the company. They are designed to greatly
increase business agility by providing
an accurate, up-to-date, and comprehensive picture of the business. By
improving visibility into areas such as the most profitable customers,
the best suppliers, and the most profitable products and services and
by providing a consistent definition
of financial terms such as profit and costs, an organization can more
quickly and confidently make strategic business decisions.
In addition to increasing business agility, financial analytics
solutions enable organizations to reduce risk exposure and plan for
change. They allow executives and managers to instantly model the
effects of unforeseen and planned events and take preemptive action
based on these insights.
This paper discusses the challenges that organizations face when
trying to understand their existing business positions and future
business scenarios. It focuses specifically on profitability analysis.
If your CEO or board or shareholders asked you an apparently simple
question: "Who are our 10 most profitable customers?", how long would
it take you to answer? Would you know what they meant by "profitable"?
Would you know what they meant by "customers"? Whom would you ask, or
where would you go to find the answer?
It's frightening to think about the amount of money being wasted by
organizations around the world due to their inability to get clarity on
their financial performance
or situation. Investments in business units are made inappropriately,
based on (at best) an approximation or "educated guess" of their
profitability, or (at worst) their "gut feel." Without clear insight
into the real financial state of the business, organizations are
shooting in the dark when making strategic business decisions.
Improved performance management requires extracting the maximum
value from your business as a whole by analyzing each component part.
It requires identifying the areas of the business that are
underachieving, understanding why, and taking the appropriate action in
a timely fashion. It requires identifying the most profitable areas of
the business to maximize the return on your investments, and increasing
agility within the business
by predicting and responding to changes in market conditions to gain a
Complexity Drives the Need for Improved Performance Management
Performance management comprises many areas, including marketing
effectiveness, resource allocation, sales optimization, pipeline
management, and financial analysis.
As organizations grow, particularly by acquisition, their business
environments become more fragmented and complex. Getting a handle on
every aspect of performance management becomes more and more
challenging, requiring huge amounts of data integration, aggregation,
The driver for formalizing the language, definitions, processes, and technology around
performance management, therefore, is not the size of the organization, but its complexity.
This paper focuses on the challenges presented by financial
analysis arguably the aspect of performance management having the
greatest impact on an organization's revenue and profitability growth.
The Profitability Challenge
So, have you found out who your 10 most profitable customers are
yet? If you have,
a) you've guessed, b) it's one of a handful of KPIs that you've made a
significant investment in identifying, or c) you're in the minority of
companies that can actually access this information quickly and
easily congratulations! Most organizations, however, face many
challenges when trying to understand profitability.
No Single View of "Profit"
The majority of large organizations are so complex that there is no
single, company-wide definition of financial metrics such as "revenue,
"cost," "profit," and "gross margin." Each line of business likely has
its own method for measuring the profitability of customers, products,
or market segments. This is particularly an issue in global
organizations where accounting rules are different in every country.
Islands of Information
Revenue and cost data is often held in multiple disconnected IT
systems, each with its own method of recording this information.
Decentralized "shadow IT systems" sprout up as the business grows,
usually in the form of myriad spreadsheets and error-prone human
intervention. The purpose of these spreadsheet systems is to connect
the disparate IT systems and create that elusive (and often notorious)
of the truth" sometimes across the organization, but more often within
a single business area. However, these spreadsheet systems frequently
manipulate source data to the point where the data is stale,
unrecognizable, and virtually meaningless.
Islands of Responsibility
Responsibility for performance management is also isolated in
disconnected organizational islands. Decision-makers within business
units or departments are given the responsibility to improve
efficiencies within their business areas without being accountable for
the impacts on areas of the company outside of their units. This
further encourages the creation of information islands and shadow IT
Without a single clear view of the interdependencies between the
various areas of the business, it is difficult for decision-makers to
predict how an action in their area of the business will impact other
areas of the business. Decision-makers therefore cannot
be held accountable for any negative consequences of their actions
until they have visibility into those consequences.
With each step in the spreadsheet process, there is a danger of
introducing errors into the data. And there are many, many steps in
these spreadsheet processes. Some errors are introduced inadvertently.
One need only search the Internet for "spreadsheet errors" to find
dozens of horror stories resulting from simple mistakes made while
working with spreadsheets. In one case, a single error in a spreadsheet
resulted in shares
in a public company dropping more than 25 percent, prompting the
resignation of the CFO1. Numerous spreadsheet audits have shown that
100 percent of complex spreadsheets contain at least one error with
around 5 percent containing very serious errors2. Other spreadsheet
inconsistencies may be due to the tendency of line managers to "tweak"
their financials in order to represent themselves in the best possible
Huge Effort Required to Maintain Manual Processes
Without a single-source system for cross-company profitability
information and analysis, organizations face a major challenge in the
time and effort spent updating spreadsheets, coordinating changes, and
determining which numbers are correct and what they mean. Because each
business unit measures its performance differently, comparing
performance and conducting analysis across units to determine
opportunities and challenges requires a large amount of human effort.
This becomes even more of a challenge whenever change occurs within the
business. Add to this the various checks and balances designed
to ensure spreadsheet accuracy, and you end up with a significant
Aside from the cost of this huge manual effort, the lead time
between a business event occurring and the relevant managers or
executives becoming aware of the event is very extensive. Opportunities
are not seized due to the fact that they are not recognized until they
have passed. Additionally, issues that could easily be "nipped in the
bud" grow until they require significant effort to resolve. Business
agility is non-existent.
It is a sobering thought that critical business decisions continue
to be made on the basis of data retrieved in such a manual, untimely,
and error-prone fashion.
The Challenge for IT
IT organizations are under pressure to "do more with less." In
addition, they have policies, procedures, and processes designed to
ensure consistency, stability, and reliability
in the solutions that they deliver. Two core areas of financial
analysis conflict with these fundamental objectives: flexibility and a
requirement for a deep understanding of the business. Re-aligning
project teams within IT to address these requirements means
an investment that most IT organizations cannot justify.
There are two kinds of flexibility. The first is flexibility of the
approach used to create the solution. The application development group
within IT organizations usually has solid experience and processes in
place for designing and developing transactional applications that
support well defined business processes. Examples of these
transactional applications include customer relationship management
(CRM), supply chain management (SCM), and enterprise resource planning
(ERP). The path to creating these applications is well trodden: gather
business requirements, translate the business requirements into
functional requirements, design and build the solution, test the
solution, and deploy it. "Success" in these projects is defined by
on-time, on-budget delivery
of the originally specified solution. A change in requirements partway
through the project, therefore, results in a lengthy change request
Financial analysis solution requirements, by their nature, change
constantly. Requirements specified one day may be obsolete within a few
months. The "traditional" IT project process is not designed for this
type of never-ending, constantly changing project. Financial analysis
solutions require a quick response to change. New business rules must
be reflected within the system in a very short time frame. This implies
a dedicated IT resource, ready to act on any change request from the
business, and the adoption
of a highly iterative approach.
The second kind of flexibility lies in the solution itself. IT is
experienced in delivering transactional applications with embedded
business logic and process "states" that support existing (usually
stable) business processes. Rarely is IT experienced in delivering
flexible solutions that can be quickly updated to adapt to new business
logic, processes, models and "states." Yet this is exactly what a good
financial analysis solution requires. The priorities of stability,
reliability, scalability, and auditability all take precedence over
flexibility in solutions typically delivered by IT.
Understanding the Business
A good financial analysis solution should reflect existing business
models and adapt quickly to new ones. In order to achieve this, IT
would have to work very closely across
all departments to understand the nuances of each. However, business
unit managers and executives understand their processes better than
anyone within IT can ever hope to.
Organizations use financial analysis solutions not just to manage
and monitor existing processes and states, but also to define
as-yet-unknown processes and states. The users of a financial analysis
solution are often unsure themselves about what changes they need to
implement within the business to maximize revenues and profits.
Taken together, there are very few IT organizations that could
justify the investment required to build such a flexible solution,
commit to such stringent service levels
for updates, and spend the time understanding the business at the level
The Opportunity for IT
An alternative to building a solution from scratch is to adopt a
dedicated financial analysis solution that enables business users to
take control of the business logic within the application. Financial
analysis solution vendors understand the challenges that managers and
executives have in managing and analyzing financial information across
the organization, and have developed solutions to address such
challenges. These solutions allow IT project teams to open up options
to business users rather than imposing limits on their requirements.
Commercial financial analysis solutions form the core of business
strategy development and are therefore highly valuable within the
organization. The opportunity for IT is to support business users in
the implementation of these systems, enabling IT to move further
up the value chain from "core infrastructure" to "business support
service." The result?
An increase in the value of IT to the business, and an aligning of
IT with business strategy two objectives that many CIOs have at or near
the top of their priority list.
The Ideal Solution
The ideal financial analysis solution clearly lies somewhere between
of the spreadsheet and the auditability, robustness, and real-time
nature of a traditional transactional IT system. It must be a broad,
end-to-end solution, capable of accessing multiple source systems,
seamlessly integrating into your solution set with minimal disruption,
and delivering real business value.
The solution must be flexible enough to support the models and
processes that exist within the existing spreadsheet systems. It should
be a toolkit that enables the business users themselves to define the
various "states" and processes, rather than an out-of-the-box
application that IT must set up, maintain, and manage.
Easy to Use
Spreadsheet users must find the solution as easy to work with as
their existing system; that is to say, based on a spreadsheet paradigm.
This way, users waste no time
in transitioning to the new system, which reduces time-to-value and
ensures high adoption rates.
A Unified View
The ideal solution must enable the business to create a common
definition of financial measures such as revenue and cost across the
organization, so that you can compare apples to apples and oranges to
oranges. It must also make users aware of the impact their decisions
have on other business areas.
The solution must also enable managers and executives to take a view
that goes beyond their own business units and monitor their performance
relative to their peers, the industry, and previous periods. It must
enable them to measure resource utilization and to use this
information, along with profitability measurements, to justify requests
for increased resources or investments.
Current and Forward-looking
The ideal solution must not only present the most up-to-date
information from source systems, but must also instantly reflect any
changes to business models made by users.
In addition, the ideal solution must enable scenario testing to assess alternative strategies.
Finally, the solution must be under the ownership of the business, which has responsibility for defining the business models.
At a technical level, it must be flexible enough to access data in
every source system and must be available to every authorized user. It
must allow free-form data entry, have support for queries, what-if
analysis, and instant publishing of updated models.
It must be noted that technology alone is not the solution. Without
some form of financial foundation and process in place, you cannot
expect to implement a financial analysis solution and meet all of your
challenges overnight. Technology eliminates the manual manipulation of
data, resulting in greater efficiencies and business agility, reduced
cost, and reduced errors. It also solves the issue of the "disconnects"
in the company: disconnects between finance and the business,
disconnects between various units within the business, and disconnects
between various support systems. Business processes must already be in
place in order to take advantage of technology.
One example of a financial analysis solution is IBM Cognos TM1. TM1
is an analytics tool kit that is designed for implementation in large
organizations that have complex financial structures. Given that the
notion of "profitability" is different in every organization, TM1
customers can tailor the financial analysis solution to meet their
IBM Cognos TM1 uses the familiar row-and-column approach to enable
users to model their business as they would with a stand-alone
spreadsheet. Users can modify cells
to perform what-if analysis on models and update them directly through
the spreadsheet interface. Updates are reflected instantly due to TM1's
in-memory analytical engine.
A further benefit of having a centralized, in-memory analytical
engine is that every business unit has visibility into all other areas
of the organization. Users can see the ripple
effect across the organization, positive or negative, of any change
they make to the models.
TM1 also extends traditional spreadsheet functionality by offering
multidimensional functionality as opposed to a single spreadsheet which
offers two dimensions: rows and columns. For example, a spreadsheet
will readily enable viewing and analyzing product data across
geographies, but when a time dimension is introduced, analysis becomes
much more complex.
The Benefits of Centralized Financial Analysis
There are numerous benefits of building a single dependable source
for profitability information. To start, you can eliminate
embarrassment when asked for basic financial metrics such as your top
10 most profitable customers by the CEO, board members, shareholders,
or regulatory bodies.
Perhaps more important is having a tool that provides the insight
you need to increase revenue, profitability, and competitive advantage,
while minimizing risk exposure and reducing the cost of running the
Increased Revenues and Profits
When you can quickly and easily identify which are your most
profitable customers and products, your best suppliers, and your most
effective channels to market and understand why they're top
performers you can apply the underlying enablers for these successes
throughout the organization and focus investment in these areas.
For example, a financial analysis solution can allow you to measure
the financial success of sales promotions based on any number of
dimensions, giving you a deeper understanding of customer behavior, and
providing the insight you need to profitably promote the right product
to the right customer base in the right geography at the
Improved Competitive Advantage
A company that is agile enough to adapt quickly to the changing
is a company with a competitive advantage. The ability to implement new
business models, identify new market opportunities, and quickly pursue
those opportunities enables you to compete in your market more
The IBM Global CEO Study 2006 found that among analyzed firms,
"business model innovation had a much stronger correlation with
operating margin growth than the other two types of innovation" the
other types being operations and products/services/markets3. Business
model innovation is stifled without business agility.
What-if analysis enables companies to evaluate how change occurring
or outside the business might affect them. Analysis can be performed on
any number of scenarios, such as "What if we purchased this company?"
or "What if we swapped suppliers?" Such scenarios help organizations
move from being reactive
to change to being proactive and managing for change.
Companies that are clear on the financial state of the business and
the ways external factors affect the business are more aware of and
therefore more responsive to risk events. For example, the company that
has clarity on where and how the price of oil impacts the business, and
puts contingencies in place, will be in a more competitive position
than its competitors.
Reduced Cost and Increased Value of Finance
Having a single source system for financial analysis enables you to
reduce the amount of human resources required to gather and analyze
financial information. The manual overhead of working with spreadsheets
to extract, aggregate, compare, analyze, and share data is eliminated.
In addition, time spent agonizing over which set of data is closer to
reality is eliminated. This results in a reduction in the cost of the
finance organization. In addition, analysts can perform analysis rather
than simply reporting, increasing their value to the company.
Increased Confidence in Decisions
Because the information being analyzed can be relied upon as
accurate, up-to-date, consistent, and dependable, your confidence when
making business decisions such as how to allocate resources within the
business increases. Knowing where to invest
in order to realize a maximum return on investment results in higher
Critical strategic decisions should be based on clear visibility of
the facts and on a view of likely future scenarios. Clearing the haze
around revenue, cost, and profit across
an entire organization is not a trivial task. Shadow IT systems that
attempt to address this challenge are resource-intensive, cumbersome,
and error-prone, hindering growth
Can you afford to continue to make strategic business decisions based on inaccurate, outdated information?
Financial analysis solutions are designed to be agile and
dependable, bringing clarity to the reasons behind your growth and
serving as a compass to steer you toward future growth. They enhance
the value of the investment you have made in your existing business
support systems such as CRM, ERP, SCM, and sales force automation (SFA)
over the past decade and distill enterprise-wide information into the
answer to a few simple questions: How can
we increase revenue, maximize profits, and increase our competitive
About the Author
Russell Cooper is TEC's business intelligence (BI) analyst. He has
over 15 years
of experience in the enterprise software industry, and has a keen
interest in how organizations maximize the value of their existing
data. During his career, Cooper has worked exclusively for companies
that have built their businesses around the storage, movement, and
retrieval of data from electronic data interchange (EDI) to BI, from
fourth-generation language (4GL) application development to geographic
information systems (GISs). This experience has afforded Cooper a broad
perspective on data and data management.
Now based in Ireland, Cooper has a global perspective on business,
in many countries including the UK, Australia, Denmark, and the US. His
consulting business focuses on helping organizations to understand
their technical strengths and differentiators, and to articulate these
to prospective customers.