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Analytics-Based Performance Management, LLC |
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April 27, 2015 Issue |
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The Most Powerful Name In Corporate News and Information |
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EPM System for Strategic and Operational Performance Improvement |
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CEO
Analytics-Based Performance Management, LLC www.garycokins.com
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – April 26, 2015
BIOGary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in advanced cost management and enterprise performance and risk management (EPM/ERM) systems. He is the founder of Analytics-Based Performance Management LLC, an advisory firm located in Cary, North Carolina at www.garycokins.com. He began his career in industry with a Fortune 100 company in CFO and operations roles. He then worked 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a leading provider of enterprise performance management and business analytics and intelligence software. His two most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (ISBN 978-0-470-44998-1) and Predictive Business Analytics (ISBN 978-1-118-17556-9), published by John Wiley & Sons. Mr. Cokins can be contacted at gcokins@garycokins.com.
CEOCFO: Mr. Cokins, what is the idea behind Analytics-Based Performance Management today? Mr. Cokins: Enterprise performance management (EPM), which I will describe in more detail, is the integration of multiple management methods. EPM is typically confused far too narrowly as a CFO initiative with a bunch of dashboards. It is much broader than that. Increasingly, business analytics are imbedded in each of the EPM methods. Examples of EPM methods are a strategy map and its companion balanced scorecard with key performance indicators (KPIs) for strategy execution; product channel and customer profitability reporting; and the shift from traditional budgeting’s cost center rollup consolidations to driver-based budgets and beyond to driver-based rolling financial forecasts. Each of those three EPM method examples can have business analytics imbedded into them. Examples of analytics are regression, correlation, clustering and segmentation analysis.
Mr. Cokins: I serve all types companies in all industry and service sectors, including public sector government agencies. This is because EPM methods universally apply to any organization. As background, my career began as a division CFO and then operations manager with a large US conglomerate. Then I was 15 years as a consultant with Deloitte, KPMG, and EDS (now part of HP). My last 16 years were with SAS, a leading business intelligence (BI) software vendor, as a Principle Consultant. My experiences have been across all industries since EPM is horizontal. Organizations in every industry and service sector are similar in terms of needing effective performance measures, increased productivity, good cost management, better planning, and understanding which products and customers they make or lose profits on. Even public sector government organizations need to understand their costs, especially the unit costs of their outputs and services.
Mr. Cokins: The first thing I assess is how deficient are an organization’s performance measurements and their management accounting system. For the latter, we are not talking about their financial accounting. That is for external regulatory compliance and the investment community, and it follows rules such as set by SEC in the USA. I look to see how poor their methods are for calculating their costs. They typically involve allocations of indirect and shared expenses, commonly referred to as “overhead”. Their accountants routinely use very crude, archaic ways of “peanut butter spreading” these expenses into product costs. I also assess if their cost calculations go below the gross product profit margin line to also calculate the costs of their channels and customers. This way they can see a whole profit and loss statement for each customer including all of the profit margin layers. The reason this is relevant is that there is a misconception that the largest customers in sales volume are also the most profitable. That is rarely the case. Large customers tend to be demanding and require extra services and price discounts. They may be large in sales, but they may not be comparably large in profits. The reason I am describing this is because there is a large wide gap between the chief financial officer function and the chief marketing officer and VP of sales. Part of what I am doing at the end of my career is trying to close that wide gap between accounting and the line management functions.
CEOCFO: Are you surprised that in 2015 most companies still do not realize there is so much deficiency in that area? Mr. Cokins: I am more than surprised. I am shocked and frustrated. I was fortunate in my career in 1988 with KPMG to have been trained by the famous Harvard Business School professor, Robert S. Kaplan, on activity-based costing (ABC). ABC is a cost accounting method that resolves the cost allocation problem I earlier described. I completed many projects during my five years with KPMG before I moved on. I observed that the difference between the proper and accurate cost calculations from ABC and the client’s beliefs of their product costs were substantially different. I said to myself then that the ABC method was going to take off like a rocket, and in the next five years every corporation and organization on the planet Earth will have adopted this method. They have not. However, ABC is not a fad or fashion. Organizations eventually will. What I have learned is there is a long learning curve for organizations to become more progressive. If you ask me later in this interview, I will share with you some of the reasons why I believe it is taking so long for organizations to become more progressive. I can describe what impediments are slowing the adoption rate of EPM methods. They are more social and behavioral than technical. The software tools today are proven.
CEOCFO: When you are working with an organization and you come up with an answer for them or a plan for them, do most tend to follow it? How are you able to help a company implement what you figured out and not fall back into bad habits? Mr. Cokins: When you talk about an improvement plan or how to motivate organizations, I begin by implementing the very first model or system very crudely but quickly. My method involves rapid prototyping. For a strategy map and its companion balanced scorecard, with an organization’s executives in a room, I can help them construct it in a one day workshop, including its KPIs. For an ABC model, it involves getting five or six cross-functional employees who are knowledgeable in a room and creating the first model in two days. This initial ABC model is typically quite robust. Its purpose is not to initially provide useful information (although much of it is), but rather to accelerate their learning as to what their system will eventually look like when it is more detailed and granular as well as to get buy-in from managers who are skeptical. On the afternoon of the second day, I bring in the management team to view the new information system that these cross-functional employees have built. I manage everyone’s expectations that the information is a high-level first-start because it is not complete or sufficiently detailed. In cases, a strategy map or an ABC model, my rapid prototyping method accelerates the learning and accelerates buy-in from managers. In addition, managers start realizing what types of much better decisions they could use with this information. What I am doing with this “start small but think big” approach is answering your question on how I help organizations. I teach organizations to fish so they can fish on their own without further consulting assistance. The best way to learn and understand is to apply a rapid prototyping method to design an EPM system for your own organization rather for a fictitious one as is done in training courses.
Mr. Cokins: There is the whole range of not only the skeptical but also the fearful because you are talking about costs. I have only been talking about management accounting. There are the other EPM components, which include performance measurements, strategy execution and the like. But some types of employees are insecure and nervous. They worry about their job security because you are talking about costs and measurements, whereas in contrast to the other extreme, there are managers who realize that this type of better information through better methods will make their organization more competitive and achieve superior performance. This is good and beneficial for all stakeholders – themselves, their owners, their shareholders, and their executives. It is beneficial even in the public sector which obviously does not have a profit angle. Government agencies need to be more efficient and responsive to use their limited resources to serve citizens.
CEOCFO: What is a concrete example of something that is fairly common? Mr. Cokins: Companies typically discover, as I earlier mentioned, that their largest customers in commercial organizations are not their most profitable ones. They discover that some products are way over-costed and others under-costed. With ABC information, managers also now have visibility as to why their customers are more are less profitable aside from their sales volume because they can see the various costs of services, extra effort and the like. This is referred to as the costs-to-serve. These types of systems that I help organizations construct do not provide immediate answers, but rather they generate questions, including better questions that collectively stimulate needed conversations. The actions can then be more appropriate once they see this information, such as which types of customers are most attractive to retain, to grow, to win back, or to acquire. Which types of customers are not? How much should we be optimally spend on offers, deals, and marketing campaigns for our customers? ABC information connects customer profitability with shareholder wealth creation. The goal of marketing and sales should not simply be to grow market share and increase sales, but rather to grow profitable sales.
Mr. Cokins: Yes, I do follow up. I perform this exercise quickly, just within a week or two, so I am interested to see how they have progressed after I have left. Because I am now semi-retired yet remain very busy, I do not want to do full delivery consulting that I did earlier in my career and be away from home for months. As I mentioned I call this teach them to fish, and they can fish on their own. They can now proceed on the journey without me because they have rapidly learned the EPM method, and then they just need to proceed with iterations as they get more level of detail, accuracy, visibility and the like to the information they need. I usually follow up every month afterwards. If your question is if they abandon the EPM method, none of them do. The information they now can see and analyze is too good and useful for them to stop and go back to their old ways that provide misleading, grotesquely inaccurate, or incomplete information.
CEOCFO: Are there particular types of projects, given a choice, that you would prefer to work on? Mr. Cokins: By industry, my preference is not retail, because marketing information is far more dominant with retailers than financial information. A retailer’s marketing department is much closer to customers in a business to consumer (B2C) company. The other types of companies I care less to work with are those with one-time projects, make-to-order products and one-of-a-kind products like for making a satellite. I like organizations that have repetitive work that is continuous. In short, I like to work with all types of organizations except for those two types.
CEOCFO: Are many companies coming to you after they have tried some form of analytics or big data? Or, are you getting people who are coming initially knowing they need more than what is usually available? Mr. Cokins: Probably more of the latter. Managers want new ideas and education, and they seek subject matter experts like me. Since I write many articles and blogs for professional institutes and magazines, I receive a substantial number of emails responding to what I have written. What I am discovering is that people are looking for coaching and mentoring, including for their own personal career. This is especially true with younger professionals. They are looking out for the best interests of their organization, but they are also looking ahead to their own careers, especially the millennials – the ones who are age 35 and under. I find on a daily basis I am constantly emailing to people links to or PDFs of articles that I have written. At this age of 65 with a successful career behind me, my value is now what I know rather than what I do on a particular job.
Mr. Cokins: I have been very fortunate in my career including working for first class employers. I grew up in a working class family in Chicago, and I was fortunate to receive financial scholarships to go to an Ivy League school graduating with a B.S. degree in industrial engineering and operations research and an MBA from Northwestern University Kellogg School of Management. I think at the end of your career you can either sit on the porch in a rocking chair or play golf, or you can give back. I have chosen the latter. I believe there was a time for my learning, and now with a successful 40-year career behind me it is my time for teaching. I teach not simply by educating but also by inspiring. There is a difference.
CEOCFO: What is next for Analytics-Based Performance management? Mr. Cokins: I am finding that I am doing more recorded webcasts that are part of the online learning movement. This way I can capture my acquired knowledge and share it with others who are ambitious. I am increasingly presenting at conferences for professional institutes or industry associations and for various software vendors, such as SAP, the large Germany-based ERP software vendor. I also present for financial planning and analysis (FP&A) cloud-based financial software vendors.
CEOCFO: What should people remember when they read about Gary Cokins and Analytics-Based Performance Management? Mr. Cokins: Do not underestimate the behavioral aspects of improving an organization’s performance. There are in my mind two types of managers. There are Newtonian managers and Darwinian managers. Newtonian managers, like the physicist Isaac Newton, view the world as a big machine with levers, pulleys, dials, and computer software. They like to manage by the numbers. They have to appreciate that there is a Darwinian side to managing, like the biologist Charles Darwin, and that the organization and all the stakeholders are organisms like in biology that involve sense and respond behavior. There needs to be a blend of the two. Many professionals are more of the Newtonian type. Although I am quantitative, I hope the impact I have on others that I coach is for them to not underestimate the importance of behavioral change management in accelerating the adoption rate of all the proven EPM methods that comprise what I call the components of enterprise or corporate performance management. |
Analytics-Based Performance Management LLC “I teach organizations to fish so they can fish on their own without further consulting assistance. The best way to learn and understand is to apply a rapid prototyping method to design an EPM system for your own organization rather for a fictitious one as is done in training courses.” - Gary Cokins, CPIM
Analytics-Based Performance Management, LLC www.garycokins.com
Gary Cokins 919 720 2718 gcokins@garycokins.com
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Performance Management Companies, Analytics-Based Performance Management LLC, CEO Interviews 2014, Gary Cokins, CPIM, EPM System for Strategic and Operational Performance Improvement |
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Gary
Cokins, CPIM