In Part one of this two-part guide, IT analyst Barry Wilderman explains what enterprise performance management software does and provides tips on how to match key features to your organization's financial reporting and strategy requirements. Part two covers how to choose a specific EPM software product or vendor.
Most companies deploy some type of ERP system for the basic accounting functions of general ledger, accounts payable, accounts receivable and fixed assets. This is all well and good for keeping the books, but to take financial management analysis to the next level, you need enterprise performance management software.
EPM software's tools help the CFO manage revenue and cost over at least a five-year horizon. It goes beyond just day-to-day management of the financial function. It promotes the allocation of scarce resources to support the organization's budgeting, planning and strategy processes. Much of this analysis comes from using advanced business intelligence (BI) tools.
What EPM software does
Budgeting, planning and strategy are all critical functions to the success of an organization, and most enterprise performance management software vendors automate all three processes.
Budgeting helps companies set their short-term plans, usually over 12 months, with projections for both revenue and expenses and therefore profitability. The budgeting process allows the CFO and CEO to set current and intermediate goals for the company.
Planning extends the time horizon beyond budgeting. Some companies will budget for year one and plan for year two. Others view the process as more continuous and may only budget for three months and re-plan after that. Driver-based planning and rolling forecasts are common techniques applied here.
Strategy often takes in the view over a five-year horizon, and EPM software that includes balanced scorecards and strategy maps can help considerably. When done correctly, the strategy will tie back to the budget.
The third major group of EPM functions relates to closing the books -- and beyond. This set of functions is often called "the last mile of finance," and includes financial close, consolidation, financial reporting and disclosure. Especially for public companies, the Extensible Business Reporting Language (XBRL) is an increasingly common mechanism for reporting such financial results.
Revenue management -- another common feature of EPM software -- deals with demand management, yield management and pricing optimization. Cost optimization handles activity-based costing and management, raw material and yield management, and supplier relationship management.
How EPM relates to other enterprise applications
Although Microsoft Excel is ubiquitous in the financial world, it's not the best way to perform EPM functions. Web-based front ends provide more power and control over data entry, and on the reporting and analytics side, specialized BI software is superior. Excel is best saved for simpler tasks.
More on EPM software
Watch a video on choosing EPM software
Read about SAP EPM OnDemand
Understand the role of EPM software in financial planning
While most EPM suites have capabilities for reporting and analysis, third-party BI tools are more powerful. Besides the products from five large vendors -- IBM Cognos, Oracle Hyperion, SAP Business Objects, Infor and SAS -- numerous products exist from vendors such as Anaplan, Information Builders, MicroStrategy, QlikTech, Quantrix and Tableau Software that offer sophisticated tools for multidimensional analysis.
Enterprise performance management software must often interoperate with ERP platforms from vendors such as Infor, Oracle and SAP that handle such important business functions as human resources, customer relationship management (CRM), manufacturing and logistics. ERP packages, in turn, are often integrated with specialized software for human capital management, CRM, and sales and operations planning.
Key issues to consider before selecting EPM software
If you are using Excel and an ERP package for budgeting, analyze their shortcomings and determine what additional benefits you might derive from an EPM software package. If budgeting is to remain a tired old technique in your organization, keep using your tired old software.
But does your company have a strategic planning culture? Is there a strategic planning process for creating five-year plans? Are balanced scorecard and strategy maps routinely used? If all of these are true, then EPM software is probably a wise investment.
The organization's financial reporting needs can be another deciding factor. What are the issues you have with closing the books, especially consolidation, financial reporting and disclosure, perhaps using XBRL? An EPM software package's last-mile functions could determine which one you choose.
Some companies try to improve their margins by managing price on a regular basis. This is certainly the case in the airline and hospitality industries. But it can be challenging to raise prices without hurting customer satisfaction. If this type of price management is critical to your success, consider EPM software that has a revenue optimization feature.
Other companies instead try to improve margins by managing costs -- steelmakers and electric utilities are prominent examples. For companies that strive to be low-cost providers, enterprise performance management software with strong activity-based cost management and cost optimization features are a good fit.
Finally, many EPM vendors offer cloud deployment. First decide if cloud is important to you, then make sure your vendor has a suitable off-premises solution.
About the author:
Barry Wilderman has more than 30 years of experience as an industry analyst, researcher and consultant at such companies as META Group, Lawson Software, SalesOps Analytics and McKinsey and Company. He is currently president of Wilderman Associates. Contact him at Barry@WildermanAssociates.com and on Twitter at @BarryWilderman.