The ultimate rolling forecast workshop

Having fun at the workshop

Forecasting is a critical topic for many companies these days. No big surprise: the volatility and the speed in the world requires organizations to stay agile. About four years ago, my team and I started working with several customers and thought-leaders (David Axson, Steve Morlidge) to collect best practices for forecasting in these turbulent times. The results of the countless hours of talking, brainstorming, analyzing and reading are captured in the IBM Cognos ‘Best Practices in Rolling Forecasts’ workshop. This workshop ended up being way more successful than any one of us would have ever imagined. I have personally delivered over 100 of these events in the past three years.

THE WORKSHOP FORMAT

Forecasting is a complex topic and we were able to collect a full library worth of experiences. But simplicity rules and we selected the most interesting aspects

David Axson is showing the way!

to fill the agenda for a half-day workshop. That creates more focus and the attendees leave with just enough ideas to drive change in their organizations and without feeling overwhelmed. The overall focus is on the business process and not software. While we share a lot of best practices, the workshops are very interactive. We usually have extended and very fruitful discussions amongst the participants. Many attendees stay after the official event ends to continue their idea exchange. This is one of my favorite parts. There are always many things to learn.

BEST PRACTICES AND MORE

Static vs rolling forecasts?

So, what do we cover? A lot! The focus is clearly on proven practices that were identified by our customers. But it is also important to look beyond those things. We therefore injected some thought-provoking ideas from our thought-leaders. And each workshop we run typically provides new ideas, stories and experiences that we leverage to enhance the materials.  It would be too much detail to cover in this post but here are some of the things we discuss:

  • Is a rolling forecast right for your organization?
  • What’s the right time horizon? 90-day? Four quarter? Six quarter? Three year?
  • How often should you update the forecast?
  • How do you use a rolling forecast as an early alert of threats and opportunities?
  • What is the role of scenarios?
  • What role can driver-based modeling and tools play in the forecast process?
  • How do you sell the need for a rolling forecast?
  • What does the business case look like?
  • How can you measure the efficiency and effectiveness of your process?

IT’S YOUR TURN NOW!

If you are considering to make changes to your forecasting processes or if you are working in the IT department supporting Finance, you should join one of these workshops. It is a great opportunity to meet other finance & IT professionals and to get solid ideas. Believe it or not, but we have had several customers attend multiple events. They simply liked the interaction with the other professionals so much and they felt that they got a lot of value out of each workshop. Check out my events page to find out about upcoming dates or simply drop me a note. Hope to see you soon!

A discussion about forecast errors

Forecasting continues to be a hot topic. My recent interviews with Steve Morlidge continues to be very popular. Also, ‘Franz the Frog’ sparked some interesting discussions behind the scenes. Given the strong interest in these topics, I reached out to a friend who has spent a lot of time and effort driving solid forecasting processes.

Please meet Ulrich Pilsl. He provides a different perspective. Ulrich currently works as an Interim Manager in Munich. He spent over 14 years at Softlab / BMW Group (later Cirquent / NTT Data Group). As a member of the executive board, he held different senior executive positions including CFO of a consulting subsidiary and as the Head of Controlling & Business Administration.

Christoph Papenfuss: Forecasting is a key focus area for many finance professionals. But many organizations are struggling to obtain an objective view of the future. What are some of the key problems?

Ulrich Pilsl: The biggest problem I see is complexity. Many companies have bloated processes that are too detailed. It simply takes too much time and people have a hard time differentiating between what is important and what is not. There is no clear focus. Also, management tends to have a hard time managing the process. My advice is to simplify and to get rid of excessive detail. More detail does not create more accurate forecasts. On the contrary: the more detail, the less accurate forecasts tend to be for the above mentioned reasons.

Christoph Papenfuss: What is the main problem with inaccurate forecasts?

Ulrich Pilsl: Inaccurate forecasts lead to a serious confidence problem. Shareholders don’t like surprises. It gets worse when surprises are caused by poor forecasting efforts.

Christoph Papenfuss: Are positive and negative errors equally problematic? Let’s take a look at a typical sales or business forecast. Some people tend to create very conservative forecasts and often end up outperforming. Isn’t this better than creating a very ambitious forecast and then coming in lower?

Ulrich Pilsl: This is an interesting but common situation. First of all, positive and negative errors are equally problematic. Both type of errors can create serious management challenges apart from the already discussed confidence problems. In regards to this specific situation, one might be tempted to say that it is a good thing for a sales person to continuously beat his or her forecast. However, this can create some serious challenges. Let’s take a look at a consulting company. Low sales forecasts indicated low resource requirements. Hiring efforts might be slowed down and the business might quickly end up in a situation where they do not have enough talent available. Business is lost. Customers might loose confidence in us as a trust-worthy business partner. I therefore strongly believe that both negative and positive errors require serious attention.

Christoph Papenfuss: What should the Controller do to help minimize forecast errors?

Ulrich Pilsl: The Controlling department should show some ‘tough love’. They have to challenge the departments to deliver realistic forecasts. We found that it is critical to provide suggestions and to jointly develop scenarios with the business managers. Finance basically acts as a tough but fair coach in the process. This continues in the the monthly and weekly management meetings: We openly discussed the forecast results and challenged the numbers. It is obviously the job of the Business Controller to moderate this process. Last but not least, we found that it sometimes makes sense to create top-down adjustments that reflect upside and downside risk.

Christoph Papenfuss: Based on your experience, does it make sense to measure forecast accuracy? If yes, how often and at what level did you measure accuracy?

Ulrich Pilsl: It depends on the organization. This reminds me of a quote by my former manager who said: “Most companies are over-controlled but under-managed.” A team that understands the value of a forecast will usually deliver solid forecasts. Measuring forecast accuracy won’t necessarily improve it. I do believe, though, that it makes sense to measure it if the organization has challenges with the forecast process. Especially in the case of a management team that does not see the value in the forecast. It might make sense to add an accuracy target to the annual objectives. We had a variable goal “internal quality”. This allowed us to substantially change the mindset of some managers. The goal was set once per year.

Christoph Papenfuss: How do you utilize forecast accuracy measures? Should you communicate the numbers to the organization or is this something that should stay within the walls of the finance department?

Ulrich Pilsl: In my opinion, it does make sense to communicate forecast accuracy to the management team. But it makes no sense to communicate it to the whole organization. The aim is to improve forecast quality and not to blame the management in the organization.

Christoph Papenfuss: What can Finance do to help create a culture where people are happy to create meaningful and objective forecasts?

Ulrich Pilsl: Finance simply has to be the role of a coach and consultant for the business. It is our role to educate and to support the business.

An imaginary conversation with a weather frog

European folklore believed that frogs kept in a glass would be able to forecast the weather. People filled some water in the glass to keep the amphibian happy, and then added a small ladder. A climbing frog would indicate good weather, whereas a frog hanging out in the water would show bad weather. This belief especially stuck with people in the German speaking countries where weather forecasters are typically called ‘Weather Frogs’ (Wetterfrosch). Well, weather forecasters do one thing well: forecasting. They are the true masters and I thought that we could get some insights from one of them. It is frog migration season in Bavaria and I happened to have found one who is willing to talk to me. Please meet Franz the Frog. Franz resides in Bavaria, Germany where people recognize him as a trusted master forecaster.

 

AN IMAGINARY CONVERSATION WITH THE FROG

Christoph: How is life as a master forecaster? Your pictures are every on the side of the roads these days. You must be pretty busy? Spring is known for its volatile weather.

Franz the Frog: All cool here in the pond. Thanks for asking. We were quite busy up until yesterday. That’s when we finished our quarterly forecast. I am looking forward to jumping around for the next few weeks.

Christoph: But wait a second! It’s a volatile climate out there. How can you just sit there, jump around and not forecast whenever things change?

Franz the Frog: Dude, I hear ya’. But the big boss here in the pond decided that 2-3 forecasts per year are totally fine. Plus we have so much other stuff to do. Also, do you realize how much work we have to do to complete a forecast?

A weather frog

Christoph: Sorry, this was news to me.  Then tell me, why exactly is this so much work?

Franz the Frog: Helllllooooooo!!!!! Each forecast starts with us looking at weather patterns for the past five years. Just simply gathering the data that is stored all over our pond takes us forever. Our big boss in the pond also wants us to create detailed variance reports for those years. That takes about a month. To create the actual forecast, we turn over every single leaf in our pond. And we record every little rain drop. That takes a lot of time. Get it?

Christoph: Oh…I see…a lot of detail. But a lot of detail should result in higher accuracy right? My wife Jen complained about your reliability the other day. She claimed that she would not even ‘pack a suitcase for vacation’ using your information. Errr…please don’t shoot the messenger.

Franz the Frog: Watch it, buddy! I will stick my tongue out here in a second. What do you expect? We get paid by our big boss in the pond. If the boss is happy, the flies are happy and we are happy. The boss decided that it’s best for us to provide a forecast that tells you guys exactly what you want to hear. Last year we saw rain coming. Your wife complained that she did not want any rain that particular week. She said:’Ahh, this stupid forecast. Rain is driving me crazy. It should be sunny!!!’. That got my big boss in the pond really upset. And guess what happened: no pay. That made our decision easy: we would eliminate a lot of pain and frustration if we simply forecast what everybody wants to hear.

Christoph: Oh…ok. That is so not cool. Let’s change topics. What type of tools do you guys use to do your forecasts? I mean, we’re in the year 2011 so  I suspect that you guys have some cool tools…like that PC game Frogger?

Franz the Frog: Frogger rules!!! If you like Frogger, you will be happy to hear that we are still using the same platform. No changes. Here, take a look: We have special leaves from a searose that was created in Redmond, WA’. Those leaves allow us to play with the data that we collect. The nice thing is that everybody in our pond has a ton of those searoses flying around. And the other guys love those leaves. The all create their own versions. But do me a favor and DO NOT talk to the green guy over there: he has to collect all the leaves at quarter-end. He hates his job. A bunch of my colleagues sometimes play a joke on him and swap out leaves or hide them. Others change the carefully thought-out leaf structures by ripping a holes in them or by chewing on them. You should see his face when the leaves don’t stack!!! Haha…RRRiibbitt.. Hilarious.

Christoph: Holy tadpole! That sounds like a tough job. Can you trust the data then?

Franz the Frog: Probably not. But hey…that’s the way the pond has been for a long time. It worked in the past it should work in the future, right? We have been around for thousands of years.  And the big boss is happy and we’re getting paid—what’s not to like?

Future Ready? A discussion with Steve Morlidge

Steve Morlidge, Future Ready

The IBM Finance Forum 2011 events have officially started in Europe. These events are designed for Finance professionals seeking to deliver stronger business insight to their organizations. Apart from being a great networking opportunity, we focus on sharing a lot of best-practice knowledge. Customers share their stories. And IBM also bring in great guest speakers like Steve Morlidge who share their tremendous knowledge in the finance area.

Steve MorlidgeSteve Morlidge will be joining many events across Europe this year. He is a true thought-leader in the area of financial performance management. In 2010, he released a ground-breaking book called ‘Future Ready – How to Master Business Forecasting’. Together with co-author Steve Player, Steve shares a lot of valuable knowledge that he gained in over 25 years as a senior finance executive working for international companies like Unilever. He is also an active member of the Beyond Budgeting Roundtable (BBRT).

Steve Morlidge and I were able to talk over the phone right before the first Finance Forum event in Zurich.

Christoph Papenfuss: Many companies are still developing annual budgets. Is this approach outdated or is there a place for the annual budget?

Steve Morlidge: I believe that conventional budgeting is dead, or at least very much on the way out. It takes too long, hinders responsiveness and fosters all kinds of damaging political behavior in enterprises. Companies still need to do things like setting targets, and this may still be called ‘budgeting’, but it is a long way from the traditional process many of us grew up with.

Christoph Papenfuss: What are some of the key issues associated with the traditional forecasting process?

Steve Morlidge: In my view most companies do not understand the difference between budgeting and forecasting. As a result, forecasting is done in too much detail, but not frequently enough. More importantly, the mindset is very often all wrong. Budgeting teaches us that gaps (between target and prognosis) are bad, whereas the primary purpose of forecasting is to detect deviations from plan so that corrective action can be taken; so unearthing such discrepancies should be positively encouraged, not punished.

Christoph Papenfuss: Many people talk about rolling forecasts. Are rolling forecasts a viable approach?

Steve Morlidge: They are, but too often people underestimate the task. In my book, rolling forecasts are forecasts with a consistent horizon: 12 months, 15 months or whatever. As a result, at any one time a significant chunk of the horizon may extend beyond the fiscal year end. Many of the processes upon which forecasting relies – like activity planning and so on – are anchored on the annual budgeting process so sourcing the information you need beyond the financial year end can sometimes be a challenge, unless these supporting processes are remodeled at the same time. Also, conventional annual target setting, particularly if it is tied to incentives, can distort a rolling forecast process to the point that it falls into disrepute. As a result, my advice to people is to fix the ‘in year’ forecast process first, before you tackle rolling horizons and the ‘out year’.

Christoph Papenfuss: We all know the saying ‘You get what you measure.’ Does this apply to the forecasting process?

Steve Morlidge: Absolutely. In fact, if you don’t measure the quality of your forecast process and, most importantly, act upon it, you have no kind of guarantee that the forecast can be relied upon. Proper measurement – closing the feedback loop – is the only thing that separates forecasting from guesswork, and in my book, 95% of corporate forecasts fall into the latter category.

Christoph Papenfuss: Many organizations utilize spreadsheets to manager their forecasts. What role does technology play to improve the forecasting and planning processes?

Steve Morlidge: At one level technology isn’t important at all – the main deficiency with business forecasting is the processes used and the thinking that lies behind it – not the toolset. Having said that, few companies can sustain a successful forecasting process without technology that enables them to streamline processes, provide appropriate modeling capabilities, support rapid reiteration, provide insightful measures, communicate results effectively and so on. Tools don’t make a master craftsman, but without them nothing would ever get built.

Christoph Papenfuss: You will be delivering a keynote presentation at many IBM Finance Forum events. Can you share a few things you will be talking about?

Steve Morlidge: My main message is that the practice of forecasting is broken, not because we don’t have the tools, but because we don’t know how to use the tools we have. I will be sharing what I have learned about mastering forecasting articulated in the form of six simple principles.

You can find out more about Steve on his website: http://www.satoripartners.co.uk. To see a full list of the Finance Forums 2011 events and to sign up, click here.

A conversation with the King of KPIs – David Parmenter

DAVID PARMENTER

Two winters ago, I traveled to Prague to speak at a large conference about Performance Management. As the taxi approached the hotel which was set beneath the breath-taking castle, I felt a sense of excitement: I was just minutes away from meeting a king for dinner. Not any king. Not a member of the scandal-ridden European royalty houses. No, I was about the meet a true thought-leader in the performance management community. His nickname is ‘The King of KPIs’. I am of course talking about the management guru and author, David Parmenter. David was one of the other speakers at the conference and we had the opportunity to exchange some thoughts ahead of the conference.

For those of you who do not know David Parmenter, you are really missing out. David has authored a number of bestselling books like ‘Key Performance Indicators – developing, implementing and using winning KPIs’ and the ‘Pareto’s 80/20 Rule for Corporate Accountants’. He is also a great speaker who truly knows how to inspire his audience.

Earlier this week, I had the great opportunity to re-connect with David Parmenter. He is about to publish a new book called ‘Winning CFOs: Implementing and Applying Better Practices’.

Christoph Papenfuss: David, your new book focuses on providing CFOs with hands-on advice for increasing the performance of their companies. What prompted you to write this book?

David Parmenter: I have been increasingly aware that many CFOs are not finding enough time to keep abreast of best practice.  They are spending a disproportionate amount of their time putting out fires. The “winning CFOs” book is an update of the Pareto book including additional material that a CFO would need to know in order to be a leader and business partner.

Christoph Papenfuss: In the past, CFOs spent a lot of time on developing a detailed annual budgets. But the increasing volatility has shifted the focus away from fixed budgets towards flexible plans and forecasts. Why should CFOs consider moving towards a more flexible forecasting approach?

David Parmenter: As I say in the book, “The standard annual planning process takes too long, is not focused on performance drivers, is not linked to strategic outcomes or critical success factors, leads to dysfunctional behavior, builds silos, and is a major barrier to success. By 2020 there will be few progressive organizations using the annual planning process to allocate resources. Quarterly rolling planning will be embedded and we will; all look back and wonder why we ever did annual planning.  As a CFO you need to be abreast of this change and ensure you are not one of the doubters who claim the “world is flat”.

Christoph Papenfuss: Many business managers are literally afraid to submit a realistic forecast as they fear repercussions in the form of higher targets or poor performance reviews. As a result, we find that many organizations submit forecasts that mirror the plan. What can CFOs do to encourage objective and honest forecasts?

David Parmenter: There has to be a major shift in the way we set up performance based remuneration, away from rewarding progress against a future target to measuring performance retrospectively based on relative measures. Secondly there needs to be a paradigm shift in the way we forecast.  There needs to be a separation of targets from forecasts and a rule that a forecast should tell the truth and not what we want to hear.  Both of these issues are discussed, at length, in the book.

Christoph Papenfuss: Even today many finance organizations are highly dependent on spreadsheets for compiling their monthly forecasts and reports. What is your opinion on that and how do you see this changing in the future.

David Parmenter: Being an expert in Excel is career limiting and should be removed from your CV.  It is like applying for a job as a test driver at Ferrari and having on your CV a gold medal for driving a horse and carriage.  All accountants, including CFOs, need to have on their CV, a statement to the effect that they have a working knowledge of a forecasting software.

Christoph Papenfuss: Many thanks for taking the time, David. We are all looking forward to reading your new book.

You can learn more about David Parmenter and his work on his home page. His new book is scheduled for release on April 5th, 2011.

Behind the scenes – Middle East Cognos 10 launch

Snow. Massive amounts of snow. And it’s really cold. Hmm…Do I really want to leave here? Greetings from Dubai airport. My colleague and I are stuck here right now. Most flights to Europe are delayed due to winter weather. Oh well….the joys of traveling. But this trip was really worth it. We just finished a three-country tour through the Middle East for the Cognos 10 launch. Three days, three cities. Three amazing launch events in Dubai, Qatar and Kuwait. Some of the customers I talked to were wondering what it was like to execute such an event series. Well, here is a little peak behind the scenes.

The amount of work that goes into these large customer events is crazy. Our great marketing teams spend a lot of time arranging locations, speakers, food, drinks and inviting customers etc.. Luckily, I hardly ever get involved in these activities. But let me say that much: I admire my colleagues for consistently doing an amazing job. It really makes a difference. I get to focus on the content and the presentation delivery.

For this particular event series, we had to leave Munich on Saturday evening to get to Dubai in time. The first event started on Monday. Getting up in a new time-zone always hurts on the first day. And so day after day we rush out to the event location early in the morning to setup the room, prepare the laptop, make sure that all the demos are working, check the microphones, upload additional presentations from other speakers etc.. I am always amazed at how much can go wrong with these type of events: The demo that worked in the morning suddenly stops working. The laptop shuts down without notice. The beamer does not receive a signal. Murphy’s Law?

The event in Dubai was a success but I am tired after delivering three presentations. Right after lunch, our team of close to ten people rushed to break down all the banners, pack up brochures, badges, lists etc.. Then off to the airport with a ton of extra luggage in hand. A few hours later, we sit down in Qatar for a quick debrief and discussion of the next event. There is always some tweaking that needs or should happen. Every country is different. Cultures are different. Audiences are different. There is no one-size fits all. Each and every presentation needs to be customized.

The next morning looks similar. Setup at the hotel around 8am, preparations and then another round of three presentations with a few breaks between. Before heading off to the airport with all our extra luggage, a journalist from the Qatar Tribune comes over for a quick interview about the launch. We finally arrive at our hotel in Kuwait around 9pm. Quick shower than out for a quick team dinner at a local place. Back at the hotel I can’t remember my room number and head back down to the reception. Long day.

The 7am wake up call feels like a scene from the movie Groundhog Day. Shower, pack, quick breakfast, taxi to event location, setup the laptop, discussions with the local team and a quick cup of java. As much as most of this is really busy routine work, I always get excited when the event finally starts. Presenting our products and talking to customers is a privilege and it is a lot of fun. Luckily, the Kuwait event was very special again. The audiences in all three countries were great. Unfortunately, I had to leave for Dubai right after the final presentation. On the way to the airport, my colleague noticed that the cab driver was falling asleep. So we engaged him in a discussion even though he did not speak a word of English. The surprises never end. Check-in at the Air Kuwait counter and then a quick snooze on the plane.

Waiting for the flight

8pm…I am checking into my hotel room in Dubai. 8:01pm….I am checking out my mind but I am very grateful for four special days with amazing colleagues & customers. But everything seems like a blur now. Too many impressions to process at this point. But it feels good.

Some final statistics:
Days: 4.5
Total travel time: 32h
Presentations: 8
Tired: Yes!

Business Analytics and the art of cycling

Road biking is a big passion of mine. The other day I was out on a long training ride with a good friend. One of the nice things about biking is that you can talk a lot on those rides. Since we were talking about different aspects of our work, my friend finally wanted to know what was so special about this “Business Analytics stuff”. How do you best explain that to somebody who is only remotely connected to IT, Finance and management? Luckily, I had a great story to tell him. And it’s not just a regular story. It is actually my personal success story in cycling.

HIGH TECH

About a decade ago, modern technology entered the world of professional cycling. Smart technology became available to measure not only the typical parameters of cycling like speed, distance etc.. This new piece of technology was called a “Powermeter”. This high-tech gadget allowed cyclists to measure advanced data such as power output, pedal torque, cadence etc.. Today some of these devices even measure aerodynamic drag.  Powermeters help athletes like myself to learn about themselves and to perform better. Needless to say, I invested in this technology about five years ago. It is a CycleOps Powertap with Bluetooth technology.

THE ERP OF CYCLING

Ok. But what does that have to do with Business Analytics. Very easy. The Powermeter is my transactional system. It records my ‘business’ on the bike. Second by second. Mile by mile. While I am riding, I can check my speed, power output, cadence and many other things. Just like a good solid ERP system. The gadget allows me to manage the operational aspects of my ‘cycling business’, i.e. I can lower my power output, increase cadence etc..

ENTER ANALYTICS

After each ride, I can then download the ride data. There is an extremely awesome piece of software called WKO+. It was created by two smart cycling professionals that have conducted ground-breaking research. This application helps athletes analyze their ride data. The objective is to become smarter (think knowledge about your own body) and to make better decisions about your training. This is basically Business Analytics for cyclists. Let’s take a look at how this works.

THE DASHBOARD

After each ride, I can analyze a Dashboard. This dashboard provides me with an overview of my most important metrics such as power output, mileage, cadence, time in training zones, etc.. There is a daily and a monthly dashboard. This helps me identify potential issues and to check my overall performance and progress. In Business Analytics, we implement dashboards for our executives and managers. The only difference is that they look at different metrics like sales, margins, profits.

WKO+ dashboard
The cycling dashboard from WKO+

ANALYSIS

If I spot something curious, e.g. an unexpected poor performance on a ride, I can immediately drill down to analyze the detailed data from my ride. This analysis contains a detailed report of some metrics and I can visually analyze the ride second by second. Going through the data, I can spot interesting things like power spikes, rest periods etc.. This helps me put the overall picture together of why I performed in a certain way. The analysis also helps me learn more about myself: what are my boundaries, what are my strengths etc.. The same thing is true for Business Analytics. If we spot some problems or opportunities, we perform analysis using our rich transactional data. This helps us identify critical business insight.

WKO+ detailed ride analysis
The detailed analysis of the ride: power, altitude and more

LOOKING AHEAD

Now that I have understood how and why I performed on my bike I can start using this information to plan and adjust my upcoming training plan. There are some smart algorithms in the software that help predict future performance based on past power-output and training load. Using this inside, I can then fine-tune my training plan and hopefully scare my riding friends by outperforming. Many companies leverage Predictive Analytics to make sense of data and to look ahead. They want to identify customers that might be more profitable in the future. They might want to spot opportunities for cost savings. And they use the insights to formulate and update their business plans.

Planning ahead

THE ROI

My friend now understands clearly what Business Analytics is all about. Since I was able to seriously drop him on a climb he was curious about the ROI of this. Well, the technology has enabled me to learn a ton about myself. I know my boundaries and I am able to push myself much further than I ever have. I was able to survive a grueling 7 day stage race across the Alps and all that with a minimum of preparation. All that by being smart about my racing tactics and most importantly about my training approaches. The same thing is true for businesses. I have worked with companies that have literally transformed the way they do business using the insights offered by modern Business Analytics software. This software now represents the central nervous system of these organizations. Why don’t you try that yourself?

If you are interested in learning more about how I use a powermeter during training, please read my personal blog:

An interview about Performance Management

IBM Switzerland conducted an interview with me a while ago. For some reason, a friend of mine stumbled upon this last week. The interview was conducted in German, but I have attached the English transcript produced by IBM. The Podcast appeared on the Swiss IBM website.

Welcome to the podcast on the subject of optimized performance management. In the discussion is Christoph Papenfuss, director of the IBM Cognos Innovation Center. The interview was conducted by Christian Achermann.

Christian Achermann: „Mr Papenfuss, could you provide us with some information about yourself and your function at IBM?“

Christoph Papenfuss: „Gladly. My name is Christoph Papenfuss. I have been at IBM Cognos for six years. I began my career at Cognos in the USA, in San Francisco, where I managed the consultancy business for our customers on the West coast for many years. In this function, I worked actively together with the customers to implement performance management solutions. Two years ago I returned to Europe with my family to set up the Cognos Innovation Center.”

Christian Achermann: „With which difficulties are finance managers currently primarily confronted?”

Christoph Papenfuss: „We are certainly living in turbulent times, there’s no doubt about that. With the collapse of Lehmann Brothers on 15th September 2008 our world changed, and our finance departments were thrown into turmoil. The year 2009 is of central importance with regard to the finance department. If you look around at how companies are reacting to the crisis, you very often see cost management, active cost management, focus on cash-flow management, profitability of various products etc. and of course risk management. When examining the various areas in which companies are currently active, the finance department emerges as the expert in these sectors.“

Christian Achermann: „At the moment, access to the capital market is rather limited. Despite this, financial resources are urgently required. Which demands does a company need to fulfil to acquire financial resources in such uncertain times?“

Christoph Papenfuss: „It is in fact true, that at the moment, it is extremely difficult for certain companies to obtain new capital. A few months ago, I had the opportunity to meet with the CFOs of large German banks. The general tone at this event was that, in the future, banks want to receive completely reliable and sound information from the companies in which they are considering investing. This information must be provided rapidly, and the banks want to be sure that they are investing in a company that is being capably managed. As I said before, companies today must be in a position to provide the figures very quickly in order to fulfil this requirement. The figures must be available for various scenarios, and the investors of course want the figures to be reliable, i.e. so that as far as possible, there are no surprises. This requires very sound reporting and analysis processes; however, the forecasting processes are also highly important, and it is precisely here that performance management is applied.“

Christian Achermann: „A volatile market environment on the one hand conceals risks which need to be identified and managed, and on the other hand also hides chances which should be exploited. In addition, finance and business managers are under great pressure to take better decisions faster. Isn’t there a contradiction here? How do performance management solutions support the creation of well-founded decision principles and the measures defined on this basis?“

Christoph Papenfuss: „The volatile environment does hide risks, but as has been said, it also hides chances. This fact is unfortunately sometimes forgotten. Let’s take the example of options. The greater the volatility, the more valuable they are. It is precisely this current volatile environment that offers very many opportunities to companies. They can strengthen their position in the branch and generally position themselves better, i.e. implement new measures to strengthen the company in the long term. Let’s take a look at the effect of performance management. At IBM Cognos, we assume that the performance management focuses on three critical questions. What do we accomplish and how are we currently doing? Second question: Why is this so? And the third question is: what should we be doing? Should we stay on the same track or should we change something?“

Christian Achermann: „The IBM Cognos software serves to automate and reorganize financial and operational performance management processes. Could you explain this statement by means of an example?“

Christoph Papenfuss: „One of our very good customers approached us. He was confronted with a succession of negative events, and felt compelled to issue a forecast relatively quickly. The process took the following course. The event was registered. The management team developed a forecast: a global forecast for all finance data. This involved the creation of 150 Excel templates, the manual input of current data from the ERP system into the templates, the processing and sending of these 150 templates to the various business units. The finance departments had to sit down together with all the 150 departments and explain to them how these templates worked. Errors in formulae occurred relatively frequently. The 150 templates therefore had to be collected again to correct the errors, and then be resent. Only then did the actual process begin: the time-consuming collection of data as well as the consolidation of the spreadsheets. This can last hours, or even days. Moreover, specific parameters had to be changed as „what-if analyses“ were necessary. The process is extremely time-consuming. With performance management processes, this is a whole new ball game. Here I can manage my models and templates centrally, i.e. I need only change a formula in one place and I can send it automatically and selectively to specific business units. The business units can then process the templates further, and we as the finance department, support them. The data is then automatically consolidated. In this way I can create my analyses very quickly, or examine scenarios etc.; and all this in real time.“

Christian Achermann: „Which innovative solutions can be expected in the future in the area of performance management?“

Christoph Papenfuss: „Generally, I think we will see a significantly greater focus on the end user. It is a fact: today’s end users are highly qualified. They want and need to create analyses and reports very quickly. Today it is neither possible nor desirable to wait days or weeks for the IT department or other departments to create certain reports, carry out analyses for us or develop databases for us. This means, as an end user, I now need to be in a position to create my analyses personally, independently and fast. For this reason, the focus will increasingly be to provide the end user with an increasing number of and more efficient tools in order to fulfill this need. Naturally, you don’t have to look far for the integration of new technologies such as Web 2.0, mobile technologies and others. Over the coming years, many changes are in the offing.“

The new normal?

Over the last 24 months I had the honor of meeting with 100s of customers in over 35 different countries. Many of our discussions evolved around the economic crisis. No matter which country, companies across the globe felt or are still feeling the crisis. Granted: you can’t really compare the Ukraine that was forecast to post a 20% GDP contraction for 2009 with say a Qatar that even during the crisis still managed to grow at over 8 %.  The interesting thing, however, is the fact that almost all companies are struggling with the same basic issues.  And these issues have started building up over the past ten or so years:

  • Increased speed: The speed of business has increased tremendously. Customers require ever more innovation at a faster pace. The Internet has opened up new channels and we need to keep our business open almost 24*7. There is no quiet period anymore.
  • Increased volatility: With speed typically comes volatility. Indeed, reports show that global market volatility has increased tremendously. Just look at the oil price! Further there seem to be a great number of major events that impact certain economies (e.g. SARS, Tsunamis, Swine Flu, Lehman crisis).
  • Increased risk & opportunity: Anybody who is familiar with options pricing understands that volatility creates tremendous risk & opportunity. Companies often come and go these days.

A recent example reminded me of this: The GPS market. Since the early 2000s innovative companies like Garmin, TomTom etc. have grown to multi billion USD businesses within just a few years. One could debate whether these businesses could have grown that quickly 20-30 years ago. In mid-October of 2009 Google announced the availability of GPS like services on their Android-powered smartphones. Indeed, the demos Google revealed showed that consumers can indeed potentially drop their separate GPS unit and rely on their mobile in the future. The effect on the stock price of the GPS manufacturers was dramatic: An average drop of 20% during that particular week. Investors were worried that more and more customers will rely on their smartphones in the future. Speed, volatility – risk, opportunity.

The implications for companies are clear: faster and smarter decision making is required. No longer can we afford to wait for a few weeks to get our sales numbers or to close our books. 6-months planning cycles will leave you behind the competition. 4-6 week forecast cycles will not allow you to react quickly enough to mitigate that risk or to seize that unique opportunity.

Time to upgrade our Performance Management processes & systems!