I recently had the opportunity to run some roundtable discussions on best practices in profitability and cost management with financial executives attending the CFO CPM Conference in Philadelphia and CFO Rising East Conference in Orlando. The attendees represented companies in different industries ranging from manufacturing, to transportation, real estate, insurance, telecommunications and healthcare.
The premise for the roundtable discussion was this; For most organizations, aggressive cost-cutting and management were critical to remaining profitable while top line revenue was flat or shrinking during the recession. However, now many organizations taking a more “surgical” approach to profitability and cost management, by understanding which products, services, customers and channels are truly profitable and which ones are draining value from the business. In these roundtable sessions we discussed best practices in profitability and cost management, including how to accurately allocate revenue and costs to individual product lines, services, customer segments, locations, channels and other lines of business in order to improve decision-making. Here’s a summary of the feedback I received from attendees at these sessions:
At what level does your organization analyze and manage profitability? The answers to this question varied by industry and company: Insurance - region, state and products. For example:
+ Real Estate Brokerage - offices, products
+ Healthcare Providers – hospitals, business units, departments, services, patients
+ Healthcare Insurance – products, markets, customers
+ Transportation/Freight – ship level, market (car rentals), customers
+ Manufacturing – location/site, products, major customers, projects
+ Retail – store level, regions
+ Telecommunications – business units, products
Are there any regulatory requirements driving detailed allocations of revenue and costs in your industry or organization? Based on the roundtables, the primary industries where there is a regulatory driver behind cost allocations and profitability analysis are Telecommunications, and Healthcare. (The latter as a result of the Healthcare Reform legislation and need to report on Medical Loss Ratios)
How are allocations performed to distribute revenue and costs down to the appropriate level in the business? What allocation techniques is your organization using? Here the participants indicated they are using a variety of techniques ranging from standard costing based on headcount, square footage, and revenue contribution to activity-based cost drivers and allocations for certain areas, such as customer service.
How frequently are detailed cost allocations performed? The frequency of allocations varied across individual companies. Some are performing this task on a quarterly basis, some semi-annually, one bi-weekly, and most of the participants are doing detailed allocations monthly. One company, in Transportation, mentioned they were doing this on a daily basis, running detailed P&Ls for each of their ships (pretty impressive).
What tools are used to perform the allocations and report on profitability at the line of business level? The tools used to perform detailed allocations, cost and profitability analysis included spreadsheets, ABC tools, multidimensional OLAP tools (i.e. Oracle Essbase), and in some cases, the general ledger system.
Who consumes the profitability reporting in your organization? The consumers of this information varied by industry and company, for example:
+ Insurance – product line managers, actuaries, regulators
+ Real Estate Brokerage – branch managers (with compensation linked)
+ Healthcare Providers – doctors, marketing campaign managers
+ Manufacturing – senior management, controllers, sales managers, business unit leaders, operations managers
+ Telecommunications – finance, business unit leaders
Is profitability reporting and management linked to the annual budgeting process? The answers to this question were more varied across the participants. Some leverage this information in their long-term strategic planning process, some link to their annual financial budget, and some are just starting to create a link to their planning processes.
Overall I was impressed with the feedback I received from participants in these sessions. Every company who participated was performing cost allocations and analyzing profitability at some level other than the corporate summary. Some were doing this at a very detailed level (i.e. daily ship P&L), and others at a more summarized level but looking to get more granular over time. I was also impressed with the frequency of profitability reporting, with most of the participants doing this on a monthly basis, some less frequently. And it was clear that the information being generated was actively shared and utilized beyond the finance organization to business unit leads, product managers, sales managers and other line of business decision-makers.
Areas for improvement that most participants identified included moving this process from spreadsheets to analytic tools and applications designed to automate and support detailed allocations and costing on a more frequent and repeatable basis. The good news here is that there are a number of packaged applications available in the market designed to support detailed allocations of revenue and costs. These applications include powerful reporting and analysis tools to provide insights and support improved decision-making regarding resource allocations, product/service mix, pricing, customer service and campaign strategies. Some of these are available as standalone solutions, while others are delivered within Enterprise Performance Management (EPM) application suites and provide seamless integration with EPM planning and reporting applications.
For more information about the profitability and cost management applications offered as part of Oracle’s EPM solutions please go to www.oracle.com/epm.