From the November 2006 issue of Treasury & Risk magazine

Making BPM Pay Off

Microsoft Corp.'s recent moves into the business performance management (BPM) tools market--with its emphasis on budgeting, planning, forecasting and reporting--has raised the profile of a finance technology sector long dominated by the likes of Hyperion, Cognos and more niche players like OutlookSoft. Now, a new study from The Hackett Group identifies what, intuitively, experts had suspected: There are quantifiable financial benefits from adopting best practice BPM (also known as enterprise performance management, or EPM). In a study of more than 200 large companies, those in the top quartile in both efficiency and effectiveness measures were designated "world class" in their BPM practices. The elite group had, on average, 2.4 times the equity market returns (stock price performance plus dividends) on a three-year average basis than their industry peers and had significantly lower operating profit volatility. "What we've shown is a clear correlation," says James Creelman, senior business advisor at The Hackett Group. "The combination of higher equity market returns and lower year-over-year profit volatility pretty clearly shows that [these] world-class companies share the kind of higher level of control that BPM provides."

There could be several factors at work, which contribute to that control--both process and automation oriented. Non-technological BPM best practices include the use of top-down budget targeting established by corporate staff, rather than traditional bottom-up targets. Another trend is reducing the number of line items in their budgets. The best practice companies relied on 37% fewer line items than their lower performing peers, and they were 44% more likely to use rolling forecasts, for part or the whole annual budgeting process.

On the automation side, world-class companies shared a high reliance on balanced scorecarding tools, which integrate financial and operational metrics to show how non-financial indicators--say, customer satisfaction--contribute to financial results and a company's overall strategic direction. "The key thing about scorecarding is it offers as close as you can get to real-time information," says Creelman. Another advantage of scorecarding software tools: Performance at various operating units, through the use of common metrics available through a Web interface, can be visible across a company, allowing best practices from one region or department to be more easily transferred to other areas. The availability of real-time numbers also can make forecasting and reporting outputs more reliable: The world-class companies in the survey were 37% more likely to place a high degree of reliability in forecasting and reporting outputs.

Among the sub-optimal group--meaning those that ranked below the top quartile in both efficiency and effectiveness metrics--more than half indicated a heavy reliance on spreadsheets, while the world-class companies used spreadsheets for budgeting 19% less often. The use of the Web allows for more real-time reporting, as well as better information sharing among an enterprise's far-flung operations. "Across the board, world-class companies have much more access to the Internet for the distribution of reports," says Creelman. "They need to get the right information to the right people at the right time, and they utilize technology to do so."

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