Why EPM? How?..

This article will resume the way SAP EPM define their various products and show some recommendations for projects:

SAP Strategy Management

• Management strategies (Vision and Mission)
• Establishment of strategic map
• Monitoring indicators (KPI, KRI, Triggers…) above
• IT Independent

SAP Profitability and Cost Management

• Reports profitability by different actors in the business
• Reports of different types of costs
• Implementation of financial models based on the financial rules
• Economic Value Added

SAP Business Planning and Consolidation

• Creation and monitoring of budget
• Rolling forecast
• Financial consolidation and / or other
• Modeling for important aspects
• Reports no difference , only reality

               EPM

How companies must integrate these solutions?
The order must be in the form of a pyramid, Strategy Management, Profitability and Cost Management and Business Planning and Consolidation.

It is noteworthy to mention that there are cases where the order is in reverse order: better implement and achieve the objectives better suited to the culture of the company.

Is There a difference between different software houses offering EPM ?
Reality and experience indicate that beyond the software house, the successful implementation 50 % will be related to the expert that promotes and makes recommendations at the time of the design of the solution. The remaining 50 % will depend on the health of ERP system, alternative systems and core business system.

In many cases these projects seem as a whole and worked in proper order can reach an implementation period of about 1.3 years for three (3) solutions. However, sometimes this time becomes 3 times larger.

Let us know why happen:
When starting a project, the client tends to focus on their current need, the expert does not expect to understand the impact into the solution could happen when not considering future options such as EVA estimate, cost of capital by product, etc. This new changes to currently implemented models creates a second phase of unexpected changes. THIS IS WRONG

The expert must make really business consultancy to client and customer should understand that this is the first step to implement a best in class solution model; it is an integrated solution EPM and as such should have all participation of CFO / CIO of the company.

The best way to participate in these projects is through open and conversational sessions with the client. Much more difficult is to find Fixed-price projects whose requirements do not lead to changes in the future.

The measurement of the main indicators of the company must be present in all areas of EPM; the measurement should be possible from a financial point of view. Finally it is the shareholder who reviews them.

Focused with the aim of keep informed to senior management and shareholder then, establishing a priority order in discussions with the requirements requested by the customer in order to anticipate changes. A classic example is EVA (economic value added), which measures the result of the management of the business and therefore what size the cake has increased or decreased.

Another practical example is the WACC (weighted average cost of capital), which is requested by auditors and lenders.  Make click for more information about EVA:  http://www.investopedia.com/terms/w/wacc.asp

We must do more consulting business!

In this case I propose to start with a consulting business framework as the following:

We need to use different methodologies and business tools to implement solutions related to EPM concepts. Is not only a “AS-IS” vs “TO-BE” design.

After all, it can be concluded that this type of projects are not based only in a technical vision, but on a vision that is more related to business consulting in initial stage. How Data must be moved, migrated, transported or any other aspect is not a problem bigger than model a financial vision when the main goal of the project is automate a Strategic / Financial Process as budget. This is the bigger mistake on failed projects, more time than expected, cost consumer, re-evaluation. Sometimes cheaper à expensive.  

My recommendation is to address these projects with a separate aspects below a framework that involve: Financial processes, technological base, agents and consumer.

Daniel Juvinao

Twitter: @danieljuvinao

BANKS PERFORMANCE

BANKS PERFORMANCE

To improve  banking operations It's important to adapt their processes to respond to internal and external users in shorter times.

Generally, there is a tendency to compare financial results between different regions. The impact on net interest income becomes the results comparative metrics which, do not necessarily represent the real money market impact on balance because is in a different context in terms of regulations , customers and culture.

The Latin America region, banks have adapted to use specific applications, not always performed by appropriate advisory team, so It makes dificult to have applications to bring a full range of banking services available in a region, if these applications are not in context and do not provide appropriate solutions, which are not oriented to real customers needs. These solutions usually are sold and forced to be adapted rather than being adopted , thus generating more work, major changes, more cost and more effort , issues which ultimately may also be more frustrating due to longer time invested in its implementation.

Investments oriented to operational improvements based on reducing decision making time, must be supported by best in class teams in the industry, where low tolerance to failure must be implemented because it affect banks financial results in different ways (customers, delinquency , operating errors ... finally returns and profitability).

How can be defined the profitability of a bank in practical way so it is involve simple process improvements and technological support?  

Must be defined the priorities of a commercial bank, where main clients in Latin American, has specific consumer expectations, culture, and needs which are substantiated on the current environment.

Regulatory impact on financial margin requires greater analysis, and a management team oriented towards financial efficiency.

Lets see an example:

Analyze whether the performance indicators are representative in circumstances where the environmmet  is volatile. Some indicators such as Bad Debt can be transformed into Bad Debt under assesment, where the assets are adjusted to market risk + risk inherent to the own portfolio. An example: From a risk perspective, an in-customer is low risk, same out-customer is high risk, it is an overall good customer?

How can this point be achieved without technological support? How can we achieve reorienting technology to support to functional experts at work, so they can take proactive tinking and make assertive business decisions? One of the most important aspects for considering these changes is time of response, which is crucial to obtain valuable information that let analysts answer the following questions.

What it is the CFO, asking for, when arrives to your office?

• It is the liquidity level within the tolerance margin?

• Is the transactional cost being optimized?

• How are the costs vs. income, expenses, revenues, gross margin, etc.?

• Pool rate is appropriate to the opportunity cost?

What’s the CMO ask?

• How is the customer level satisfaction for each channel?

• Has improved customer profitability?

• Has changed customers loyalty, retention rate?, queries?

What's the CIO ask?

• Does the platform operating 24x24?

· Which are the top reasons affecting delinquency level?, economical environment reasons?

• Are risk assessments and compliance polices applied?

• ...

To answer some of these questions, have been developed some solutions that let redirecting functions from the technological support to the functional expert, letting IT Team focus to maintaining the operation of the systems available 24x24.

It is vital for the banking operation to adjust the response in shorter time; we should not talk about researches cross regions; in our region, we have to see how banks adapt the use of targeted applications with an appropriate equipment and with appropriate consulting. It doesn’t makes any sense to have all banking solutions available if does not have the right consulting and functional team working together for finally satisfied customer’s needs. The Investments based on operational improvements for the reduction of time in the decision making must be supported by the best ones in the industry, no opportunity is given to failure, because as we saw earlier, this issues directly affects bank financial results by different angles (customers, delinquency, operational errors, and finally profitability)

What prospects solutions do we have available on Market?

A set of solutions that allows answering all the questions outlined above and many more ... EPM Enterprise Performance Management and Business Intelligence, both designed to create a view integrated and consistent of the different angles listed above. https://help.sap.com/boepm/

1. So, how is defined profitability in banks?

As ROA, ROE, Margin, Spread (%) and any ratio that connect cash flow or net income to the resources invested

2. What about profitability by branch?

First, in order to be profitable, there must be continuity in the operation and innovation process in the branch; in this case, we measure quantitative effects (customer assets, deposits, gross interest income, fees, expenses, costs, etc.) and qualitative effects (customer service) that impact the overall result of the bank. They are (branches) almost self-sufficient entities that distribute products and services.

If we look at the portfolio of EPM (Enterprise Performance Management), we would find a solution that will allow us to model this vision of profitability; a tool for example as SAP PCM (Profitability and Cost Management).

Other solution is SAP Business Objects, which allow you to create logical cubes with ETL process that will leave us assign costs, expenses and income to a particular type of branch.

Let’s take a view:

A.      SAP PCM

PCM provides a more intuitive and focused interface to be used by the finance team, so it is a more flexible tool that can be used independently of the IT team to create profit/cost models.

It can be integrated with DB SAP and Non-SAP.

BENEFITS

There is a higher quality in the reports of profitability and costs in different dimensions, due to  SAP PCM eliminates the distributions of income, costs, expenses and investments layers and iterations which is done through a large volume of data and dimensions. Example:

• Customer profitability.

· Customer Net revenue

• Customer Service satisfaction.

• Profitability per branch.

• Cost per serving.

• Logistics costs.

• Costs per transaction: back, middle and front office.

• Customer value, over the time.

• Economic Profit (Economic Value Added) by cost object.

Several alternatives to issue information, either on own web reports, emission data to other databases and data warehouse or business intelligence tools whether or not SAP.

In relation to the model and financial process

• Management of the financial model independently of the IT area.

• Flexibility to handle various versions of the financial model (Actual, Budget,

Prognosis, Economic Value Added).

• Provides the simulation scenarios based on indicators planning and continuous forecasts.

• Reports of errors and warnings of calculation, which allows to the owner of the model to have better control of calculations, and maintain safety and reliability of the information that is provided to users.

• Execution of calculations with a large volume of data in a short time (this point it is certainly a great differentiator).

B.      SAP BUSINESS OBJECTS

Other solution is Business Objects, which allow you to create logical cubes with ETL process that will leave us assign costs, expenses and income to a particular type of branch.

It’s possible to create indicators as KPI, KRI, and other performers to track the branch profitability. We must incorporate some predictivity potential with Predictivity Analytics to make a best practice and become a successfully branch management.

Do you think this it is possible?

This article is dedicated to the profitability and cost management, in future articles will be analyzed the different EPM solutions that deal with Planning and Strategy, including more details.

Daniel Juvinao

Banking: Customers View - Q&A Part I

Banking: Customers View - Q&A Part I

For any bank reach 360 customers visibility is fundamental part in this times, including decisions based on core business.

Customer dimensions are hard to work manually, for example delinquency rate (KRI), Royalty rate (KMI), Accounts in other banks, Avg by Tx – Assets, etc.

Why is this information valuable for Bank Managers?

Now think you can take this information and convert to knowledge, experience, sentiment and prediction; avoiding standard business “thinking”. Learning about your customers will define the new vision, mission and of course a new strategy to convert your strategies.

What this knowledge will let me bring as Banking Manager?

New offers adapted to new segment and targets. Decoder the capacity to launch campaigns to new customers adapted to your new target segments strategy.

Compete with “knowledge”, adapt to market changes when happens, move, close, cancel, launch and redesign campaigns and products to new financial situations.

Is Risk Management prepared for this change?

Of course, Risk Management are more appropriate professionals to faster implement actions related to customer behavior with financial products, recommend about Xsell, Upsell and any other strategy organized by segments.

From my POV, Risk Managers are the natural owners of this information, and of course they are the final authority to approve any change in financial products or new campaigns.

Why Financial Managers are internal clients of this information?

Because Financial Managers determine when a strategy implemented around the bank has accomplish with his objective in financial terms. Must provide feedback and Results analysis based on specific business drivers, risk drivers, performance drivers, economic drivers and country drivers. So, must convert a financial statement in a business feedback to Operations, Risk Managers, CMO and CEO.

Do the Banks Managers believe in Process Changes?

Sure, today banks must adapt their processes and staff profiles to new IT Solutions. It is an evolution impulse by IOT; those banks reaching first adaptations will share greater market sizing and better results than competence.

Thinking about reducing time to Market to launch new products, is a reflexing we must provide to banks whose want to be the first to implement innovation business through new products and services, those with more than traditional services as public services payments and mobile apps to access home banking.

R&D, Innovation and economics analysis Units are fundamental supports as back office to the core business but not as decision makers.

New type of consumer behavior are changing the way banks must conduct their strategy with other industries and new clients. Is not only an IT transformation... 

  

Why Budget Automation?

I start this issue by asking how many advantages do I get automating the budget of the company?  There are many answers, but let’s see some that have been observed over the years of experience:

• Increased Budget Control and therefore better financial results to make the right decisions at the right time.

• Increased ability to foresee risks in the immediate and medium term.

• Ability to assess and anticipate financial scenarios.

• Increased financial efficiency margins.

• Ability to better align my team. Determine their functions and focus on the real objectives of the company.

• A strategic vision aligned to financial and operational objectives of the company is observed.

• Uniqueness of the financial issues of the company. "We talk about the same."

• Etc…

Now, how do I begin to build the initiative to automate the budget?

We must look at different aspects and how these aspects help me in that determination.

Let's see what I have to do to determine the important aspects of each agent.

• Me: I represent the thrust of the initiative; I am the owner and beneficiary of the solution. I must explain as from me benefit each other agents.

• My team: must be convinced of the direct benefits that brings this initiative and offer you a reorientation of duties that allow them to have more time to analyze and less time to execute operational activities.

• Collaborating teams: every month, those teams help to financials to understand the industry movements, the hard competition and the general news about I+D. We can say Marketing, Sales, Business / Product, Risk and Compliance. All are geared to form a united team to make a single message to the shareholders of the company. Now this gear does not flow by itself, it requires effort and extra work. How to convince these teams to support and participate in this initiative? Will they benefit from new package of information in short time? Will the better understand the financial aspects of their areas? Etc. Convince them!

• IT Tem: the enormous efforts of the IT team should be directly benefited with this initiative, perhaps 50-80% reduction of work to be achieved. They will support you if you offer a work plan with reduced activities, increased efficiency, more control and less work. Remember, without their support you can hardly successfully push the proposal.

• Sponsor: the biggest beneficiary of these initiatives, the sponsor must see in these projects the ability to light the numbers that were in the shadows. Should be able to make decisions based on facts to tack or maintain the course of the company. If the sponsor is not able to achieve this, then reformulates the project.

The company's financial statements should speak for themselves, actions and turns must be appreciable finally here. The shareholder must clearly see that investment is in good hands.

Show me what you offer.

Asks the consulting firm to show you what they refer to processes automation, watch it and judge it with your team. Ask a lot of questions. Try to put your business culture in this new process and prepares a report with the results to your potential sponsor. Do not let them convince you without evidence.

Ask for an ideal team of consultants to achieve the objectives. Evaluate the ability of team to communicate. This is very important to achieve the expected results of the project.

Test what they say.

Try to emulate an activity inside the consultant demo where are involved all agents described above and estimated results with the deliverables you expect to receive and their results.

	Data Load	Process Visualization	Time	Activities	Reports
Me	N/A	All	Decrease 100%	Decrease 20%	Online
My team	Decrease 150%	All	Decrease 200%	Decrease 150%	Online and Control
Collaboration Teams	Decrease 80%	Now On	Decrease 50%	Decrease 1 day	Online and same data
IT Team	Decrease 200%	No	Decrease 120%	Decrease 3 days	Independence
Sponsor	N/A	All	10x faster decisions	Less meetings and 10x faster	Online
The Company	Decrease 5 days to close books	All	Financial Statements 10x faster	Business plan 95% accurate	Online

  

Calculates and calculates.

Analyzes the ROI of the project, asks for help to consultants. Determine with sponsor:

• How many bad decisions could have been avoided last year and translate it into money.

• How many good decisions could increase the value of bad decisions and translate into money.

• Check Compliances assessment with regulatory indicators and measure how many goals were breached and its financial impact.

• Analyze the market share of the company and calculates the impact of the next 36 months assuming you keep in the same trend. Now, calculate present value.

• Compare the budget with reality and determine the absolute variance.

• Others.

Take those figures and add it all, result must be multiply it by the opportunity cost of the company. If the company is in the Stock Exchange, take previous number and multiply with the beta of the industry and by two (annual basis) .

This result is the photo in terms of inefficency of the company in two years without your new proposal. Discuss it!.

SAAS or OnPremise?

I want to share with you a simple analysis noting differences of IT investment on SAAS and OnPremise infraestructures. Both are in the same starting conditions, i.e. capabilities HW / SW are similar and period is estimated in10 years.
In this study I have considered HW, SW, Staff, Training, COB, Upgrades, Inflation, ,consulting, training and support factors. For a more conservative analysis it has not been considered a decrease in prices due to increase in SAAS new customers expected in next 3 years nor to the entry of new competitors with new  database technologies . 

In order to obtain a valid approximation of the SAAS services we have considered a company that provides those services and calculated the approximate amount with a public tool from a web site and the other information has been taken from field experience.

We have not considered devaluations nor currency depreciations.

Example, COB = 10M, then 10% 1M must be added to your recurrent Outflow of OnPremise infrastructure (2M).

Now, total OnPremise outflow = 2M + 1M = 3M. This figure must be compared at same Time (t) with SAAS outflow to verify what the company priority due to current situation is.

As we can see, a break point is observed in year 5, when a OnPremise scenario turns out to be more expensive  assuming HW replacement . I see an onCloud investment should be studied as long term and not short term.

If you want to make a trial before long term contract of SAAS then you can estimate your COB ( continuity of Business) and take 10 % of the outflow and assign to total OnPremise contract with the aim to retire in case of having obtained a disservice in first year.

I suggest use 10% in “normal” conditions, but you can increase to 50% in social, 

Economic or other stressed conditions.

Example, COB = 10M, then 10% 1M must be added to your recurrent Outflow of OnPremise infrastructure (2M).

Now, total OnPremise outflow = 2M + 1M = 3M. This figure must be compared at same Time (t) with SAAS outflow to verify what the company priority due to current situation is.

  

We have calculated the present value of both types of investment over a period of 10 years and the result establishes that if you intend to migrate to technologies SAAS is best do it based on the consideration of evidence of 10 % of the COB and gradually decreasing of expenses incurred in  the OnPremise infrastructure. 

If we observe how the cash flows are distributed over the years and compare between them, we can check are inversely proportional, therefore we would have lower volatility in SAAS cash flow than OnPremise cash flow which is better for Finance Team.

It has also been observed that as IT costs in terms of infrastructure move faster or in other words,  paid faster ( cases of weak-currency countries ) , showing the breaking point is reached sooner, specifically in year 3 due to slower indexation of SAAS services in US$ currency than other solutions used to build infrastructure OnPremise in local currency and local inventory. 

A conclusion:  You must go to cloud the way you prefer but do it at least three years if you want to save money

(This conslusion is personal, it does not suggest at any time make or take decisions of any person or company based on it.)


Next more...

Daniel Juvinao