MANAGING A
PROFIT-FOCUSED
ENTERPRISE
IN HIGH
DEFINITION
™
This ar ticle discusses techniques for bringing
high definition to your Pr ofit-Focused Enterprise.
J O H N B A K E R , B A R T S TO E H R , A N D M A R K W R I G H T
Final ly, hig h-definit ion technolog y
a n d a m a n a g e m e nt f r a m e w o r k h ave
ar r ived for financial execut ives, marketing executives, and others who need
to manage a Profit-Focused Enterprise™
delivering the HD experience. Depending on the maturity level attained w ithin
the framework, organizations can expect
to increase profitabilit y by .5 to 2.5 percent of revenue or more.
The paradigm shift
.......................................................................................
H
igh-definition technology
is used to bring informat ion ( such a s pic t u re s ,
words, and numbers) into
sharp focus, which enables
us to truly immerse ourselves in the experience. Our executives want that same
experience when it comes to understanding cost and profitabilit y w ithin their
ow n organizat ions. For too long , they
have been forced to work with “blurr y”
repor ts w ithout impor tant details because they were simply not available —
largely due to technolog y. Much of the
truly informative data is either buried in
the details (to which they do not have
access) or not in digital format — like on
a clipb o ard or in s omeone’s head (to
which they also do not have access).
Telev ision — what an amazing invention! Since it was first made available to
the general public in the 1920s, it was used
as a deliver y mechanism for adver t ising, a source of enter tainment, and to
prov ide news. Br inging enter tainment
M A R K W R I G H T i s a p r i n c i p a l s a l e s c o n s u l t a nt f o r e nt e r p r i s e p e r f o r m a n c e m a n ag e m e nt ( E P M ) w i t h O ra c l e C o r p o rat i o n a n d
i s p r i m ar i ly fo c u s e d o n p rof it a b i l it y an d co s t i n g . He h a s o ve r 2 0 ye ar s of e x p e r i e n ce an d i s co n s i d e re d an i n n o vat o r an d t h o u g ht
l e a d e r i n p ro f i t a b i l i t y s o lut i o n s . He c a n b e re a c h e d at m a r k . a . w r i g h t @ o r a c l e . c o m .
BA RT S TO E H R , s e n i o r p ro du c t s t rat e g y d i re c t o r f o r O ra c l e , h a s b e e n re s p o n s i b l e w i t h i n h i s 2 0 - y e a r c a re e r f o r l e a d i n g a l l
a s p e c t s o f p ro du c t s t rat e g y, p ro du c t d e ve l o p m e nt , b u s i n e s s d e ve l o p m e nt , a n d p ro du c t d e l i ve r y f o r O ra c l e’s b u s i n e s s a n a ly t i c s
p ro du c t s , w i t h s p e c i a l i z at i o n i n c o s t a c c o u nt i n g a n d p e r f o r m a n c e m a n ag e m e nt . He h o l d s a d e g re e i n e c o n o m i c s f ro m P r i n c e t o n Un i ve r s i t y a n d c a n b e re a c h e d at b a r t . s t o e h r @ o r a c l e . c o m .
J O H N BA K E R i s d i re c t o r o f a n a ly t i c s w i t h i n O ra c l e’s g l o b a l b u s i n e s s a n a ly t i c s p ro du c t g ro u p. Jo h n h a s a b a c k g ro u n d i n b o t h
f i n a n c e a n d I T, c o nt r i b ut e d t o t h e b o o k O r a c l e E s s b a s e & O r a c l e O L A P- T h e Gu i d e t o O r a c l e’s Mu l t i d i m e n s i o n a l S o lu t i o n , a n d
h a s s p e nt t h e l a s t 1 5 y e a r s h e l p i n g c u s t o m e r s a c h i e ve va lu e f ro m t h e i r e nt e r p r i s e p e r f o r m a n c e a p p l i c at i o n s . He c a n b e re a c h e d
at j o h n . f a u s s e t - b a ke r @ o r a c l e . c o m .
Reprinted with permission from Cost Management Magazine
SEPTEMBER/OCTOBER 2014
COST MANAGEMENT
39
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TO MANAGE
A PFE IN HD,
A PRAGMATIC
PLAN IS
NEEDED —
A STRUCTURED
FRAMEWORK,
IF YOU WILL.
and news to our living rooms from around
the world was amazing, but the picture
qualit y was mediocre at best. As television became a commercially viable standard in many households, technolog y
b egan to move at a fairly r apid p ace ,
b r i n g i n g l a r g e i mp rove m e nt s t o t h e
masses. We progressed from a view ing
exper ience of grainy, black-and-white
pictures to ones of color ; from tubes to
plasma and LED, and eventually to the addit ion of more pixels on big ger screens
until we reached the highest level of lifel i ke c l a r i t y a n d d e f i n i t i on . O r s o w e
thought. Moving to digital transmission
formats now supports superior picture and
audio combinations for a truly, in-yourface, body-shaking experience. And, as
might easily be predicted, the last movie
you saw at an IMAX 3D®, or even in 4D
at a theme park, w ill be in our future living rooms. One day we will be completely
i m mers e d a nd have t he tot a l s ens or y
experience at home.
High-definition costing and profitability
So how does this relate to managing a
Profit-Focused Enter prise (PFE)? With
similar dynamics to TV’s evolution, companies are star ting to experience similar advances in technolog y. This enables
our finance departments to have increasingly clearer v iews into the profitabilit y
and cost of their organizat ions, and a
better understanding of what customers,
products, and ser v ices are driv ing business for ward or into the ground. It isn’t
that companies haven’t been focused on
running profitably all these years; they
have indeed been in pursuit of delivering sup er ior ret ur ns to shareholders.
What’s changed is the technolog y used
to probe ever deeper into the data beyond
statutor y, black-and-white, gross margin financial statements and into many
more dimensions — HD attributes and
the textures of true costs and revenues
that align for a very precise picture of how
profits are actually made. These technolo g i e s a re p owe r f u l d at ab a s e s t h at
house detailed data about the company’s
operations and finances. This includes
s o f t w a r e t h at g u i d e s a f i n a n c e u s e r
through mounds of data in various data-
40
bases to create business rules that ultimately transfor m the data into meani n g f u l , n e ve r- b e f o r e - s e e n p i x e l s o n
ac t ionable , H D prof it a nd lo s s s t ate ments, and high-speed ser vers to crunch
t hroug h mi l lions of c a lculat ions dictated by these business rules. As might
easi ly b e predic ted, the har vest ing of
more and more data related to — but
not owned by — companies (also known
as big data) w ill bring even more richness to be immer d in when pursuing
even higher-definition profitabilit y.
e
Now, how is it done ? L e t’s bre a k it
dow n into four components:
1. the PFE™ framework;
2. maturit y assessment;
3. sharing the HD experience; and
4. big data for the 4D experience.
The Profit-Focused
Enterprise™ framework
To manage a PFE in HD, a pragmatic plan
is needed — a structured framework, if
you w ill. A PFE™ is one that that uses the
same profit information across the entire
enterprise to create strategies for day-today decisions. To use the same information, you need a standardized, repeatable
framework to get you there. Oracle has
developed a repeatable framework that
is both simple and pragmatic for organizations struggling w ith execution.
The PFE f ramework is div ided into
fou r pro ce s s e s : ( 1 ) prof it clu s te r i ng ,
(2) revenue attainment, (3) operations
opt imizat ion, and (4) res ource alig nm e nt . S t e p s t w o, t h r e e , a n d f o u r a l l
rely on the profit cluster ing step (see
Exhibit 1).
S t e p o n e : P r o f i t c l u s t e r i n g. Profit clustering is the core foundation of the framework. B efore strategies and init iat ives
a r e d e ve l op e d , e x e c u t i ve s mu s t f i r s t
understand who, what, how, and where
profits are generated. This is done by
segment ing profitabilit y into clusters,
such as customer, product, service, channel, supplier, warehouse, process, flow path,
sales person, and other indust r y-specific dimensions, using a powerful allocation platform such as Oracle Hyperion
P r o f i t a b i l i t y a n d C o s t Ma n a g e m e nt
(HPCM). This analysis enables the enter-
Reprinted with permission from Cost Management Magazine
COST MANAGEMENT
SEPTEMBER/OCTOBER 2014
PROFIT-FOCUSED ENTERPRISE
Step 2:
Best Practices
Step 1:
Benchmarking
Profit
Clustering
Foundational
POV Assessment
Revenue
Attachment
Customers &
Products
Step 3:
Best Practices
Operations
Optimization
Step 4: ROI
Investments
Resource
Alignment
Capital & Period
Expenses
Quantified
Benefit $
Policies &
Processes
pr ise to b enchmark memb ers of each
cluster against each other to determine
best practices.
E xe c ut ive d a s hb o a rd s s how i ng t he
t op, m i d d l e , a n d b o t t o m p e r fo r m e r s
quickly enable analysts to identify opportunities. Segmentation also enables comp a n i e s t o a n a l y z e p r o f i t a b i l i t y by
combining dimensions such as the most
profit able pro duc ts to the most profitable customers and channels. This combined dimensionality ensures executives
are confidently making the best decisions after examining all points of v iew.
Profit dashboards are delivered to each
decision-maker : sales, marketing, supply chain, procurement, operations, etc.
T he t y pic a l profit dashb o ard des i g ns
contain three core elements: profit curves,
s t r at e g i c p r o f i t a n d l o s s s t at e m e nt s
(P&Ls), and benchmark analy tics.
• Profit curves are graphs that show
accumulated profitabilit y by dimension. The ver tical axis represents
net profitabilit y and the horizontal
axis represents the repor ting
dimension (customer, product,
channel, sales person, zip code,
etc.). Data points are sor ted from
left to right on the axis, show ing the
most to the least profitable members (i.e., customers). The average
company w ill show a line representing profitable members as the first
20–30 percent, marginal members as
the next 40–60 percent, and least
profitable members as the remaining 20–30 percent. (See Exhibit 2).
• Strategic P&Ls are management statements that show the profit details
of the profit cur ve dimension being
analyzed. Unlike financial P&Ls
that are focused on statutor y
dimensions such as cost centers,
accounts, legal entit y, etc., strategic
P&Ls prov ide a pragmatic v iew for
executives to understand the relationships among customers, products, channels, suppliers, and supply
chains, etc. These statements show
“actionable” profit levers that allow
decision-makers to drive profitabilit y decisions (See Exhibit 2).
• Benchmarking analytics allow decision-makers to compare profitable,
marginal, and poor-performing
members against one another to
determine best practices. A properly
designed benchmarking process w ill
contain filtering capabilities by
dimensions that allow executives to
quickly identif y, compare, and
inquire into anomalies.
Profit clustering requires the combination of all three dashboard elements
to identif y profit oppor tunities or initiatives. For example, imagine a grocer y
retailer pulling up a produce profit graph
Reprinted with permission from Cost Management Magazine
PROFIT-FOCUSED ENTERPRISE
SEPTEMBER/OCTOBER 2014
COST MANAGEMENT
.......................................................................................................................................................
EXHIBIT 1 The Profit-Focused Enterprise™ Framework
41
.......................................................................................................................................................
EXHIBIT 2 Profit Curve and Strategic P&L
and drilling on the negative par t of the
p r o f i t c u r ve t o s e e w h at p r o du c e i s
destroy ing profits. After hovering on the
tail of the graph, it is determined that tomatoes are losing money. After drilling on
tomatoes, a strategic P&L shows the revenue, volume, cost of goods sold (COGS),
and all actionable profit levers from the
supplier to the store shelf. After adding
another store to the dashboard to compare tomatoes, it is also determined that
the customer ser vice profit lever at store
one is much higher than at store two.
Why? A st rateg ic init iat ive is created,
and it is revealed that tomatoes at store
on e a re of te n s tore d 2 4 hou rs longe r
before being stocked. This 24-hour storage period indirectly caused excessive
bruising, spoilage, customer complaints,
and eventually product returns.
Step two: Revenue attainment. Revenue
attainment initiatives steer the enterprise
to focus on customers and products. The
importance of this step is to grow revenue profitably versus unprofitably. Executives begin by looking at existing customer
best practices, targeted marketing, market basket analysis, product best prac-
42
tices, pricing considerations, buying trends,
seasonality, and product-subsidizing strategies. This new information is then used to
identify new customers with similar demographics and buying behaviors. Customers
are often clustered into groups such as
top, medium, and low priorities, so marketing budgets can be directed toward the
most profitable opportunities. Initiatives
addressing current customer segments
can be initiated by benchmarking the top
customers against the poor- and marginally performing customers.
Step three: Operational optimization. Operational optimization is achieved by understanding all the profit levers associated
w ith revenue attainment. This is similar
to t he “m atching pr inc ip a l” t au g ht in
Accounting 101 for period expenses, but
i ns te ad it a l i g ns co s t s to op e r at i on a l
d i m e n s i on s . For e x a mpl e , w a re h ou s e
expenses are sometimes reported below
gross margin when looking at product
profit abi lit y. “Profit abi lit y matching”
assig ns warehouse profit levers to the
products based on metrics such as time
and product. Profit levers such as picking , packag ing , and shipping are then
Reprinted with permission from Cost Management Magazine
COST MANAGEMENT
SEPTEMBER/OCTOBER 2014
PROFIT-FOCUSED ENTERPRISE
PFE maturity assessment
So now you have a framework, but how
can it be implemented and used by managers and directors who have not been
asked to think or work this way before?
Culture change is often a difficult road
blo ck for execut ives want ing to make
profit decisions differently. One of the
bi g ge s t ob s t acle s is conv i nc i ng m a n agers, who operate in depar tmental or
product silos, to consider new technolog y, processes, and ideas and to share
their data and collaborate.
Senior execut ives, sales, market ing ,
and operations all have different business agendas and want profit information in ways that best suit their functions.
Sometimes poor decisions are made in
an effort to support a ver y specific objec-
tive. A common example is the sales funct ion, where compensat ion is based on
revenue alone w ithout regard for profitability. Conflicting agendas such as these
often cause profit erosion due to the lack
of profit transparency. One way to determine if profit erosion is occurring is to
perform a PFE maturity assessment.
A PFE maturit y assessment is a highlevel rev iew of how advanced an entit y
is w ith regard to the information it uses
to make profit decisions. This rev iew is
a simple barometer to determine if a systematic framework is a feasible solution
wor th pursuing. Each profit decision a
company makes is based on some readily available infor mat ion. The t y pe of
information used determines the maturit y level of the entit y.
There are four PFE maturit y levels:
1. revenue only ;
2. gross margin only ;
3. net margin only ; and
4. net margin (+).
The first three levels are self-explanator y by t heir names as t he mat ur it y
definition.
The revenue only level focuses on sales
subledgers, invoicing, and point-of-sale
systems because aggregate revenue information is easily assessable. If a company
pr imar ily uses revenue alone to dr ive
customer st rateg ies, then its matur it y
level is considered low due to the lack of
t r ansp arenc y into profit abi lit y. Many
publicly traded companies focus on driving revenue (top line), assuming that the
net margin naturally follows. Unfor tunately, they fall into the trap of driv ing
revenue unprofitably because they sell
products that are losing money, and thus
net income percentages stay the same or
even decrease.
The most common maturit y level is
g ross marg in only because it matches
the corresponding COGS to the revenue
generated by the customer. This information is generally easily assessable as
well because statutory regulations require
entities to track CO GS for financial and
tax-reporting purposes. Many enterprise
resource planning (ERP) software packages contain programs that match revenues to CO GS. If ent it ies have older
legacy systems, internal IT depar tments
Reprinted with permission from Cost Management Magazine
PROFIT-FOCUSED ENTERPRISE
SEPTEMBER/OCTOBER 2014
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aligned to the appropriate product. The
profit levers used in this example to move
products through the warehouse are compared to other produc ts to deter mine
non-value-added or best practices. Other
initiatives considered in this step may
include build versus buy decisions, outsourcing, policy reengineering, shared
ser vices consumption, vendor best practices, supply chain best practices, and
transportation.
S t e p f o u r : R e s o u rc e a l i g n m e n t . Resource
alignment is the final step in the framework. After identif y ing who, what, and
where to achieve profit enhancements,
the next logical phase is to realign capital and period expense resources to the
most profitable oppor tunities. Management initiatives are created that connect
resources such as information technology, customer service, engineering, facilities, stores planning, warehouse, etc. to
the profitable customers and products.
Why are the least profitable seg ments
consuming the most expensive information technolog y resources? Why not
shif t the resources to more profitable
segments for expansion? The same holds
true for capital expenditures. Why not
d ive rs i f y a nd move e qu ipme nt , l a nd ,
buildings, etc., to segments that are more
profitable? Retur n on invest ment calculations are created by segment to show
the best use of investments dollars.
COST MANAGEMENT
CULTURE CHANGE
IS OFTEN A
DIFFICULT
ROAD BLOCK
FOR EXECUTIVES
WANTING TO
MAKE PROFIT
DECISIONS
DIFFERENTLY.
43
.......................................................................................................................................................
A PROFITFOCUSED
PERSPECTIVE
TRULY
PERVADES
ALL DECISIONMAKING ROLES
IN THE
ENTERPRISE.
44
can usually w rite programs to compare
net revenues against COGS by customer.
This level is significantly more accurate
than the revenue only maturity level, but
it also lacks full transparency of all costs;
therefore, many entities fall into the same
trap as the revenue only level.
The third matur it y level, net margin
only, requires organizat ions to match
all costs to the revenue dimensions consuming the cost. Of ten, the ter m “cost
to ser ve” is used to track the expense
levers to the revenue. The most common t y pe of expense matching is t y pically the waterfall allocat ion methodolog y that allows back-office operations
such as maintenance, accounts payable,
customer ser v ice, administrat ion, etc.
to be tracked to depar tments that interac t w ith customers and produc ts. For
example, if a maintenance depar t ment
suppor ts a warehouse that hosts a product, then the maintenance costs flow to
t h e pro du c t a n d on to t h e c u s tom e r.
C omp a n i e s t h at p e r for m h i s tor ic a l ly
above their peers traditionally understand
the net profit of their products or serv ices by using the waterfall methodolog y, w hich is more accur ate t han t he
gross margin only level of matur it y.
L a s t ly, t he le a s t com mon but mo s t
desired level of maturit y is net margin
plus (+). This is an extension from the
prev ious net marg in level, but it goes
beyond the analysis of only one dimension. This level allows the organization
to pivot profitability 360 degrees through
multiple dimensions. A company begins
analysis in one dimension and then
cascades to other dimensions to understand the fully loaded costs associated
w i t h g e n e r at i n g p r o f i t s . W hy i s t h i s
impor tant? Imagine deriv ing a strateg y
to eliminate a pro duc t that is consistently losing money in favor of a product that has a high profit margin. Before
pulling the trigger to eliminate the product, one last analysis shows that the most
profitable customer is the majorit y purchaser of the losing pro duc t. Fur ther
analysis shows that the remaining customers are ver y profitable w ith the same
product. Now imagine eliminating the
product, making the most profitable cus-
tomer mad, and losing the other profitable
customers as well.
D e p e n d i n g o n t h e m at u r i t y l e ve l
attained within the PFE framework, organizations can expect to increase profitabilit y by .5 to 2.5 percent of revenue
or more. So which PFE matur it y level
reflects your current operations?
Sharing the HD experience
Each member of the family has needs
and wants with respect to HD television,
and the same can be said w ith respect to
cost and profitabilit y infor mat ion for
different members of an organization.
So far, we have been focusing mainly on
the financial side of the equation for the
chief financial officer (CFO) and other
financial managers. But a profit-focused
perspective truly per vades all decisionmaking roles in the enterprise. For example, v iew ing profit through the lens of a
chief marketing officer (CMO) will enable
him or her to make better, more informed
decisions on who to attract, who to retain,
a n d w h o to i g n ore . A c u s tom e r s ke w
analysis w ill help to shar pen the focus
for the CMO and add more pixels to the
analysis when making decisions on which
markets to play in and what kinds of customers he or she wants to attract.
Over the last decade, there have been
several studies completed and ar ticles
written by various business management
lu m i n a r i e s o n t h e p r a c t i c a l s t e p s o f
achiev ing a financial mo del based on
customer profitability. Most suggest that
a go o d first step is to per for m a customer profitabilit y skew analysis (see
Exhibit 3). In fact, from years of research,
it has become conventional w isdom that
for many companies, 10 percent of customers are creating greater than 100 percent of their profit (the rest are either
breaking even or losing money). But it
is also w idely acknowledged that ver y
few companies can repeatedly perform
a detailed customer profitabilit y skew
analysis that is accurate.
C u s t o m e r p r o f i t a b i l i t y s k e w a n a l y s i s. In
a hi g h-definit ion world, a wel l-bui lt,
scalable, and transparent allocation platform such as Oracle HPCM is necessar y
to build a detailed skew analysis (by cus-
Reprinted with permission from Cost Management Magazine
COST MANAGEMENT
SEPTEMBER/OCTOBER 2014
PROFIT-FOCUSED ENTERPRISE
Ignore for now?
FIX!
$ Profit
Protect
Focus on the Right Customers
Profit Decile
Focus Effort on Highest Payback
tomer, product, or other dimensions and
attributes) and to ensure that a company
knows where to focus its effort. It will also
ensure that organizations can regularly
p r o du c e a d e t a i l e d s ke w a n a l y s i s o n
demand.
To complete the cost analysis process
with accuracy, complex, multi-step cost
allocation models are required. To be credible, these allocation models must be able
to demonstrate true cause-and-effect relationships between cost contributors and
consumers. A credible and well-designed
allocation model uses many levels of allocation and can require the computation
of millions of individual allocation links.
The relationship of accuracy and credibility to computation size typically makes
the calculation of cost analysis models
seem like a daunting operation.
However, performance improvements
throug h s of tware and hardware al low
for sophisticated cost analysis models
w ith significantly reduced calculat ion
times. Ver y large customer profitabilit y
models that represent a P&L statement
for each customer based upon each customer’s unique financial and operational
t r a ns a c t ion h i s tor y a re n ow re a l i s t i c
options. The underly ing data scale for a
c u s tome r prof it abi l it y mo del for a ny
given monthly snapshot can be measured
in hundreds of millions of records. Databases for model storage and data comput at ion a l low customer profit abi lit y
skew analysis to benefit from the performance and scalabilit y enhancements
to tackle these large-scale data loading,
computation, and quer y workloads.
The benefits of having a truly reliable
and credible source of customer profitabilit y analysis are immediately obv ious to the business managers that begin
using the infor mat ion to b etter fo cus
their organizations on pursuing highreturn market segments, repairing poor
performers, and examining new spaces
from which to har vest additional profits. Having seen the benefits of customer
profitabilit y analysis, these users t y pically hunger for more granular or more
situat ion-specific analysis that y ields
even better results.
Satisf y ing the demand for timely, relevant, and detailed profitabilit y repor ting can become a challenge as the
management audience grows and becomes
more sophisticated. A well-built, scalable, and t ransparent al lo cat ion platform can certainly bring a 3D experience
to the finance department, but also to marketing executives, sales, customer relationship managers, and more.
Big data for the 4D experience
Big data has been gett ing a lot of hy pe
over the last couple of years, but many
believe w ithout deliver ing a great deal
of value. It is impor tant to look beyond
Reprinted with permission from Cost Management Magazine
PROFIT-FOCUSED ENTERPRISE
SEPTEMBER/OCTOBER 2014
.......................................................................................................................................................
EXHIBIT 3 Customer Profitability Skew Analysis
COST MANAGEMENT
45
.......................................................................................................................................................
DEFINING
WHICH
ELEMENTS
WITHIN THE
OCEANS OF
DATA ARE
IMMEDIATELY
USEFUL HELPS
A BUSINESS
OPERATE MORE
EFFICIENTLY.
46
the headlines and establish just what is
m e a nt by b i g d a t a a n d w h a t c a n b e
achieved by using it.
Paul Sonderegger of Oracle said that
the world is mak ing a dig it al copy of
itself and that 80 percent of all that data
has been created in the last two years. Is
this the definition of big data? Some of
what has been created already clearly is,
and the first par t of our definition for
big data is ver y much about the sheer
volume of data, but this is not the end
of the stor y. Another par t of our definition is the variet y of data. Variet y adds
another level of complexit y — just
because one has a lot of data does not necessarily mean it is all big data. Think of
credit card transactions; millions of them
a re h app e n i n g cons t a nt l y, but t h i s i s
structured data w ith the same t y pe of
information. Big data is about the integration of different t y pes of data: structured (like the credit card transactions
o r d at a f r o m a d at a w a r e h o u s e ) a n d
unstructured data (such as social media
posts, text, or pictures). The third par t
of our definition of big data is the speed
of data, or velocit y. Here, we are looking beyond batch processes into the realm
of near real-time data, real-time data,
and constant streams of data.
It is only when these three V’s come
together (volume, var iet y, and velo city) that we truly have a definition of what
big data is. Each par t adds complexit y
and makes it harder to deal w ith, hence
the lack of penetration into mainstream
business. Until there is a way to use this
quag mire of big data to gain business value, big data is not going to evolve
b eyond an interest ing concept or a
way of stor ing large amounts of data.
To ensure it is useful, a fourth V is needed
— value.
Big data can help w ith understanding
the real nature of profit abi lit y for an
organizat ion. Big data can be mined for
the appropr iate att r ibutes that define
profitability and/or cost behavior, determining the causality of events and therefore greatly enhancing allocation models.
D e f i n i n g w h i c h e l e m e nt s w i t h i n t h e
oceans of data are immediately useful helps
a business operate more efficiently. Big
data cannot operate in a silo, and prof-
itabilit y applicat ions cannot operate in
a silo.
B i g d at a n e e d s t o b e l i n ke d w i t h
advanced data discover y tools and techniques (for example, Oracle Endeca) to
help dive into the data and find the useful elements. This env ironment must be
linked w ith profitabilit y and allocation
tools to realize the true potential of big
data. Companies can then use these discoveries and insights to help drive defensible, realistic allocations and to inform
their business intelligence strategies. Big
data does not replace a traditional data
warehouse, but instead supplements it.
These discoveries will help to define new
subject areas that are appropriate to move
from the unstructured world of big data
into the cont rol led, curated, cleansed
env ironment of the data warehouse for
use in ongoing management repor ting.
Wouldn’t that bring high definition to the
data warehouse!
Imagine if an electronics distributor
was to promote the latest smart TV using
three months of free access to movies.
The distributor could use information
from social media to monitor the sentiment around the offer and to target specific demographic groups. The distributor
could bring data from the sales systems
to monitor any change of volume in sales
as well as the renewal rate for the movie
package at the end of the offer period. If
the distributor was running a single offer,
this would be enough — it could monitor increased revenue and change in profit.
Did the increase in people taking the offer
track with the increase in renewal rates,
too, or did profit stay level? Using advanced
allocation systems, the distributor can
ensure that any increase in costs — shipping, installation, help desk, etc. — are correctly allocated to the product and the
offer across multiple products, channels,
customer segments, and packages. This offers
insight that helps to determine the correct mix going forward to ensure that the
distributor is increasing sales to its most
profitable customers, rather than to those
for which the organization is really at the
break-even point or worse.
Correctly incor porating big data can
help move you from a high-definition
3D experience to a 4D experience. 1
Reprinted with permission from Cost Management Magazine
COST MANAGEMENT
SEPTEMBER/OCTOBER 2014
PROFIT-FOCUSED ENTERPRISE
The components for managing a PFE are
becoming more and more sophisticated
— most of us are already out of the blackand-white reporting era and at least seeing results in focus and in color (or w ith
some color). Taking the next step in the
management reporting evolution is up to
you. To see results in high (or higher) definition, consider using the PFE™ framework. To really shar pen focus, consider
including a maturit y assessment in conjunction w ith the framework.
For the full 3D experience, consider
add i ng a c u s tomer prof it abi l it y ske w
analysis to the mix. This informative lens
on the business w ill enable marketing
execut ives, sa les execut ives, and customer relat ionship managers to really
fo c u s on w h ich c u s tomers to at t r ac t ,
which customers they need to work w ith
differently to make them profitable, and
which customers are not ideal for the
company to deal w ith.
Finally, to experience the fourth dimension — to get a life-like, in-your-face, bodyshaking experience — consider adding
big data into the mix as a credible source
of behavioral information to truly understand and act upon profitability and cost
information.
These four components w ill prov ide
you w ith the abi lit y to manage a PFE
w ith amazing definition. Now, it’s up to
you. What kind of “v iew ing” experience
do you need? 2 n
NOTES
1
Where 4D TV refers to the added dimensions of
smell or movement/touch; in this case, it refers to
the addition of public sentiment or other big dat a
that was previously unatt ainable.
2
IMAX is a registered trademark of IMAX Corporat i o n ; P r o f i t - Fo c u s e d E n t e r p r i s e ™ Tr a d e m a r k b y
O r a c l e C o r p o r a t i o n ; P r o f i t - Fo c u s e d E n t e r p r i s e
Framework ™ Trademark by Oracle Corporation.
Reprinted with permission from Cost Management Magazine
PROFIT-FOCUSED ENTERPRISE
SEPTEMBER/OCTOBER 2014
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Conclusion
COST MANAGEMENT
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