AFP recently interviewed Ron Dimon, a director with Deloitte and an expert on enterprise performance management. Dimon and FP&A Manager Bradley Page of Archer Daniels Midland will lead a session about EPM and value mapping at AFP Annual Conference. Learn more about this session here and be sure to register for the AFP Annual Conference by September 16 to save $200.
AFP: What is EPM and how do you define it?
Ron Dimon: Enterprise Performance Management, it’s the culmination of data, technology, and processes that help build a management operating system for an organization. It’s that thing, those tough processes that connect strategy to execution. And the way I think about it is every organization has a set of strategic objectives/goals, well, how do you get those, how do you debate them in a data-driven way to say that these are the right goals. And so, I’d say you build a variety of financial and operational models that prove out that the goals are doable in your industry in this economy with the resources that you have and what’s possible. Are we stretching our goals? Are we overcommitted? Do we have the right target scale? And the ones that we use, the historical data we have, and third-party econometric data that we have, once we put that all together in a good model then that tells us what our target should be by month, by part of the P&L, by geography, by product line. And that’s what turns into the next part of EPM which is where pretty much as far as I can tell the only place in organization where commitments are made and reported budgets are planned and forecasted. This is where a sales team will commit to a revenue number in a quarter using certain products through channels to certain customers.
And then when you take that commitment and push it through your organization, you generally find some new constraint that you haven’t thought about before or that are emerging. New competitive constraints, new price constraints, new headcount constraints. Those constraints should come back into that model that was done earlier so you get better and better at sort of predicting the future and then making commitments and predicting and making commitments. So, that’s the first part of enterprise performance management.
And the second half is then figuring out, well, what actually happened, what’s the actual result that we got that we said we were going to get and looking at the variants for that. So, all of the management reporting that’s done around variants on those targets.
And then the last step is to understand why you got what you got, why did we overachieve a number or missed a target or what’s the cross-sell on one product versus another and what’s the uplift of our services revenue. All the great insights that you want in a business, you go back and make that next decision of what’s possible, what’s next, what’s possible from this point on given that we know what we know.
AFP: Where do you think organizations struggle most? Part one, part two, or part three, or all of them?
Ron Dimon: Well, to a varying degree—you know, I think about it in terms of a maturity of model and their maturity in various degrees depending on what industry you’re in and they’re pretty good—you know, reporting has come a long way. So, I think just getting visibility into your actuals is usually not bad, I’ll call it that way. You know, there’s still some problem areas, things like profitability reporting.
The least is this idea of modeling, of modeling the business and doing some robust, data-driven what-if’s that are shared throughout the organization and contained really useful data. Typically organizations do a lot of what-if modelings in Excel and that’s great. It just generally isn’t collaborative or using the right amount of historical data or using a lot of external third-party data. I think there’s a huge opportunity to discover what’s next and what’s possible through better financial and operational blended models or integrated models.
AFP: What do you think holds organizations back from doing the what-if scenario planning? Is it simply because they’ve never been asked to do it before or is it really just literally a communications breakdown?
Ron Dimon: I think it’s primarily trying to be proactive. Wrestling away enough time from the day-to-day mechanics of information management. Especially in finance, we’re all so busy collecting the data and transforming it and consolidating it and eliminating it and journal entry yet to make them look like so much time and effort is put into the mechanics of that that we don’t have a lot of time to sit back and analyze it. And then modeling is even worse because modeling is trying to predict the future given a certain set of circumstances in a scenario. Well, we’re so busy doing the mechanics that we’re not sitting in the room saying, "What happens if fuel prices double in the next year? What happens if our nearest competitor acquires another business and competes heavier? What happens if we have new price pressures?" So, I don’t think people are sitting in a room as a process and then modeling that in a robust enough way that you can get contributions from all over the organization.
AFP: Your session at Annual Conference will touch on the process and mapping out value creation. I’m wondering if you could walk me through that, providing just one example. Because when I saw that, I thought, isn’t value creation very bluntly sales and revenue, or is it something a little more ambiguous or less intrinsic?
Ron Dimon: Well, that’s a perfect question. So, that’s what I thought too. And I used to work for Hyperion for 10 years and we would help people measure volume, price, revenue, expense, into the balance sheet. But when we really started to get into it, we would ask, well, what drives volume. And that’s what I want to do. I want to ask that question, what drives those obvious key performance indicators, those obvious metrics, and get into it into more detail, to understand the root cause of why we may under or overachieve our forecast.
So, what drives volume? It can take us into areas of headcount in sales. It could take us over to product quality. It could take us to things like invoice quality and service quality, and all sorts of connections that you may not have thought of otherwise, that one key driver value on volume. And price is the whole other conversation around branding awareness and our market share and our competitive differentiation and feature functionalities in our products. So, you get to have these really meaty business conversations about two simple drivers. And if you have enough time with enough different stakeholders in the organization, not just finance but also with marketing, sales, supply chain, customer support, and HR, and you have enough detail in those conversations and layer them on top of each other, really quickly you get to see, you experience visually where a lot of roads lead, and they lead to some surprising places.
I had one client in the mining industry where it came back to training. Training their sales force, training their safety operators, training all sorts of people was one of the root causes of value creation and yet they had no system to track actual training hours. They have no forecasting system to say here is how many hours we’re going to put this role through in this quarter in this domain, you know like safety training or whatever it was. So, it gave them a whole new insight about if we do a better job of reporting and modeling, planning and analyzing training data and cause and effect, we can build up more value in the business. That’s the kind of insight that we’re looking for, that “Aha!”
And by mapping the value, one of the things we try to do is put the whole business on one sheet of paper. And that’s what I’m going to show at the AFP conference, is how we did that for Archer Daniels Midland and put the every major business function and layers of the organization on a three foot-by-two foot sheet of paper and that let us have that value conversation with the stakeholder and record it in a repeatable fashion so that when we layer all the conversations on top of each other, those natural patterns emerge of some of the root value drivers.