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Top 7 Trends in Enterprise Performance Management

July 10, 2015
Thanks to new technologies, EPM is emerging as a way to improve a company's economic health through better cost management and accounting.

Throughout my career I’ve observed numerous management fads appear and then fade away as a temporary craze. An example is “management by objectives (MBOs).” I’ve also watched managers excitedly jump onto these new bandwagons only to be disappointed when they haven’t lasted. In some cases, though, what begins as a good idea actually sticks and becomes a trend, which is what I’ll describe here for management accounting.

1. Expansion from product to channel and customer profitability analysis

Activity-based costing (ABC) traces expenses into cost with resource and activity drivers and provides much cost visibility that is traditionally hidden. Sadly, many organizations continue to use a single indirect and shared expense “pool” that allocates resource expenses into costs based on a single cost factor, which violates cost accounting’s causality principle. The result is products and service-lines are simultaneously over- and under-costing because allocations always have a zero sum error. It’s baffling how accountants can accept this deficient practice when ABC is a better alternative.

Today customers view the offerings of suppliers in most industries as commodities. For example, most banks offer similar checking and deposit services. Consequently, the importance of services rises, which results in a shift from product-driven differentiation toward service-driven differentiation to differentiated customer microsegments in order to gain a competitive advantage.

The objective for the marketing and sales functions should no longer be solely about increasing market share and growing sales but about growing profitable sales. That requires tracing expenses below the product gross profit margin line, including channel distribution, selling, marketing, and customer service costs to serve.

Trend number 1 is that management accounting must help the sales and marketing functions. A company needs to know the best types of customers to retain, grow, win back, and acquire—and those who aren’t.

2. Management accounting’s expanding role with enterprise performance management (EPM)

Enterprise performance management (EPM) can be defined as the integration of multiple methods (such as strategy maps, balanced scorecard, performance measures, driver-based budgeting, lean management, and customer relationship management) to achieve the executive team’s strategy, improve control, and increase financial profits—all through making better decisions. The output of a management accounting system is always the input to use in gaining insights and managing activities and operations.

Trend number 2 is about integration. The various components of EPM are like gears in a machinethey are interconnected.

3. The shift to predictive accounting

A gap is widening between what management accountants report and what managers and employee teams want. The gap is being caused by a shift in managers’ needs – from needing to know what things cost (such as a product cost) and what happened to a greater need for detailed information about what their future costs will be and why. The past reflects decisions already made. Decisions that will be made are the ones that impact the future.

The value-add, utility and usefulness of accounting information increases, arguably at an exponential rate, as one shifts from financial accounting (i.e., for regulatory compliance) to cost reporting to decision support with cost planning.

When the cost reporting shifts to decision support with cost planning, analysis shifts to economic analysis. For example, one needs to understand the impact that changes will have on future expenses, so the focus shifts to the needed changes in resources and their capacities. This involves classifying the behavior of resource expenses as sunk, fixed, step-fixed, semi-variable, variable, and discretionary with changes in service offerings, volumes, mix, processes, and the like.

Trend number 3 reveals a major transition from management accounting for reporting costs and profits to managerial economics for decision support and analysis that impact the future.

4. Business analytics imbedded in EPM methods

Business analytics and Big Data are hot topics. They are here to stay because complexity, uncertainty, and volatility are on the rise. Today the need for analytics may be the only sustainable long term competitive advantage. This is because the traditional generic strategies, like being the lowest cost supplier or product or customer differentiation, are vulnerable to agile competitors who can quickly match a supplier’s price or invade your customer base.

Business analytics can generate questions, stimulate more complex and interesting questions, and have the power to answer the questions.

Trend number 4 recognizes that progressive accounting functions now realize that competency and capabilities with analytics provides a competitive edge.

5. Co-existing and improved management accounting methods

There are debates in the management accounting community about what is the most appropriate costing method. There can be rival camps such as lean accounting and activity-based costing (ABC) advocates. The solution is accept having two or more co-existing management accounting methods. There can be different costs for different purposes used by different types of managers and employee teams.

Trend number 5 demonstrates that the more progressive CFOs and their management accounting staff are considering the various needs of different types of managers in their organization.

6. Managing IT and shared services as a business

It is human nature that when something is free one doesn’t care how much one consumes whatever the item or service may be. There is a trend toward using management accounting for internal chargebacks (like an invoice) from internal service providers to service users. Line-item IT charge back invoices create a service provider a market for pricing. This information also serves for establishing what are effectively “transfer prices” based on cost consumption rates for service level agreements (SLAs).

Trend number 6 is for management accounting to support internal IT and shared services to be managed as a business.

7. The need for better skills and competency with behavioral cost management

An evolving trend is that activist management accountants, those who are promoting progressive methods as described in the trends already mentioned, are encountering obstacles to get buy-in and acceptance of their ideas. They are realizing they need to improve their behavioral change management skills and capabilities.

Today’s primary barrier is no longer technical, such as “dirty data” and disparate data sources. The barrier is social, behavioral and cultural. There are many examples of this type obstacle, including people’s natural resistance to change; not wanting to be measured or held accountable; fear of knowing the truth (or of someone else knowing it); reluctance to share data or information; and “we don’t do that here.”

Trend number 7 requires change agent management accountants to motivate mid-level managers and other “champions” to demonstrate to their co-workers that progressive management accounting and EPM methodologies make sense to implement.

Future Trends?

This article has been a journey describing seven current trends. Few organizations are pursuing all seven, but years from now the successful organizations will be well along the way with all of them. Will there be future new trends? Of course. If you care to know what my crystal ball is showing me, keep your eye on the role that technology, such as in-memory chip technology with analytics at the “speed of thought,” will bring.

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