Treasury and Cash Strategies
CHAPTER 5
World-Class Enterprise Performance
Management Drives More Than Twice
the Shareholder Return
While top performers use EPM to drive higher stock prices and dividends, many typical
executives ignore shareholder value in strategic planning.
www.CFOProject.com/20351
E
xecutives can more than double
their company’s equity market
returns and drive higher stock
price, larger dividends and significantly
lower operating profit volatility by improving enterprise performance management
(EPM) capabilities, including planning,
functions fail to deliver timely, relevant
insights into their customers, competitors, market and business environment.
Therefore executives at these firms are
less able to align operational activities
to support strategic corporate goals.
World-class companies are defined for the
cal companies in their industry. In addition, these top companies outperform
the equity market returns seen by typical
companies in the Dow Jones Industrial
Average. The Hackett research identifies an array of practices that companies
rely on to achieve world-class EPM per-
Companies with world-class EPM performance
generate considerably higher equity market
returns, including stock price increase and
dividends, than typical companies in their industry.
budgeting, forecasting and reporting, to
world-class levels, according to research
from The Hackett Group.
At the same time, Hackett found that
typical companies are, to a large extent,
“flying blind” due to poor EPM performance. Despite the fact that they spend
more than twice as much as world-class
companies on planning and performance
management processes and operate with
more than twice the staff, their planning
purposes of this paper as those that perform in the top quartile across an array
of efficiency and effectiveness metrics in
Hackett’s benchmark.
Hackett’s research, which analyzed
detailed benchmark findings from more
than 200 large companies, found that
companies with world-class EPM performance generate considerably higher
equity market returns, including stock
price increase and dividends, than typi-
WRITTEN BY
Bryan Hall, The Hackett Group
Bryan Hall is a managing director and finance practice leader for The Hackett Group, a strategic
advisory firm. He has more than 20 years of finance and accounting, systems and consulting
experience in the energy, consumer products, manufacturing and service industries. Mr. Hall’s
consulting experience has focused on the transformation of the finance function through more
effective planning, working capital management, business process re-engineering and operations improvement engagements. He holds an M.B.A. from Emory University and is a Certified
Management Accountant.
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formance, including focusing on fewer
budget line items and making greater use
of online reporting tools. They produce
reports faster than typical companies, and
company management has much greater
confidence in the reliability of forecasting
and reporting outputs.
Twice the Spending,
Half the Return
World-class EPM organizations deliver
2.4 times higher returns than the industry-relative three-year average indexed
equity market returns of typical companies (see Figure 1). They also perform
more consistently, with year-over-year
operating profit volatility (over a threeyear average) significantly lower than the
33 percent seen by typical companies. In
addition, management at companies with
world-class EPM organizations are 37
percent more likely to place a high degree
of reliability on forecasting and reporting
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WhIte PaPeR
2.50 –
2.00 –
2.40
1.50 –
1.00 –
0.98
0.50 –
Peer Group
World-Class
Source: © 2006 The Hackett Group Book
of Numbers™ Research Series: World-Class
Enterprise Performance Management: 2006
Best Practices and Performance Metrics
fIguRe 1 Industry relative, three-year
average indexed, excess return, 2005
outputs than at peer-group companies, a
key metric in assessing the value of analysis performed.
World-class EPM organizations achieve
superior performance despite the fact
that they spend only about half of what
typical companies do in this area. These
companies have 45 percent lower business analysis process costs than their
peers, and 53 percent lower planning and
performance management costs (see
Figure 2). They also operate with only 11.4
individuals on their planning and perfor-
mance management staff per $Us billion
of revenue, which is 57 percent fewer than
peer-group companies.
The Hackett group has identified certain practices that play critical roles in
helping world-class EPM organizations
outperform the competition. Worldclass EPM organizations frequently use
top-down budget targets established by
corporate, rather than a traditional bottom-up approach. World-class companies
also focus on materiality by reducing the
number of line items in their budgets,
relying on 37 percent fewer line items
than peer-group companies, and are 44
percent more likely than most companies
to be using rolling forecasts, either as part
of the annual budgeting process or as a
replacement for it.
The use of online tools to distribute
or access standard reports is another
proven practice leveraged by world-class
companies. Enabling Web-based report
viewing leads to more real-time information exchange and offers a competitive
advantage in rapidly changing markets. In
addition, world-class companies generate
53 percent fewer reports per $Us billion
of revenue than typical companies. These
companies understand that by reducing complexity and focusing on the right
operational business performance drivers,
they can dramatically reduce the time and
expense of report generation while pro-
0.20% –
0.20% –
0.15 –
0.15 –
0.15%
0.11%
0.10 –
0.10 –
0.07%
0.06%
0.05 –
0.05 –
Peer Group
World-Class
Peer Group
World-Class
Source: The Hackett Group 2006 Book of Numbers™ Research Series: Best Practices and
Performance Metrics of World-Class Enterprise Performance Management
fIguRe 2 Cost differential for Business Analysis and Planning and Performance Management
viding decision makers with more relevant
and timely information.
shareholder value analysis is also a key
approach used by world-class companies
to enrich the information and data provided for decision support. shareholder
value analysis, which deals explicitly with
the cost of equity capital in return calculations, provides a broader economic rationalization of business success. Incorporation of all costs, both explicit and implicit,
into the decision-making framework
ensures adequate returns to the providers
of capital. World-class companies use this
approach in the development of strategic
plans markedly more often than the peer
group (83 percent versus 66 percent).
In general, world-class companies incorporate more forward-looking analysis
into their performance reports. rapidly
changing market dynamics create risk,
and basing decisions solely on historical
information is insufficient for predicting
likely future performance. It is this realization that has led the best companies to
develop balanced scorecards and other
business performance frameworks to
provide managers with historical information (financial and operational results)
combined with additional business performance driver data – which is more
predictive in nature – and externally oriented measures of relative performance.
Hackett found that world-class companies
have nonfinancial information embedded
in their performance reports more often
than typical companies. They also spend
more time on proactive analysis and less
time explaining what happened in the
past. This proactive bias translates into 31
percent more reports and commentaries
that address future improvement actions
or potential opportunities.
One of the most important considerations for companies is weighing the
trade-offs between practicing fiscal discipline and allowing sufficient financial
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World-Class Enterprise Performance Management Drives More Than Twice the Shareholder Return
CHAPTER 5
Treasury and Cash Strategies
flexibility to take advantage of new opportunities or deal with a downturn. Worldclass companies are more likely to tie a
comprehensive investment/debt strategy
to the company’s overall operating and
strategic plan, which gives them sufficient
lead time to procure the required capital
budgeting purposes opens the organization to potential process breakdowns.
Given their propensity for errors, coupled
with the ease with which users can edit and
change formulas and assumptions, using
a spreadsheet as a stand-alone budgeting
tool makes creating “one single, reliable
of top-down target setting supported with
technologies that provide on-demand
access to information.
The Hackett Group’s certified practice
of top-down target setting, in conjunction
with more evolved bottom-up planning,
will dramatically accelerate the budgeting
These companies have 45 percent lower
business analysis process costs than their peers,
and 53 percent lower planning and performance
management costs.
to fund key strategic goals and operating
plans. This is true for 83 percent of worldclass companies versus 59 percent of typical companies. All companies should align
their investment/debt practices with the
business environment that shapes their
overall strategic plan.
Another theme common to world-class
performance is complexity reduction, in
both processes and technology. In EPM,
this translates into world-class companies
being 29 percent more likely to generate business performance reports from a
single database. A single data repository
reduces errors and allows managers to
spend less time searching for information
and more time on analysis.
Finally, all companies in the study still
widely use spreadsheets as a stand-alone
budgeting tool. Using spreadsheets for
p156
version of the truth” difficult. So it is significant that, while more than half of typical
companies report high use of spreadsheets
for budgeting, world-class companies are
19 percent less likely to do so.
Looking Ahead
Further inroads are expected to be made
by streamlining and simplifying the budgeting process. World-class EPM organizations will continue to reduce the number
of budgeted line items down to the critical
few that are truly required for measuring
an organization’s progress against strategic objectives. The leaders will further
ensure that selected budget items articulate key business drivers while providing
for a better understanding of current and
expected performance. They will also slash
budget cycle times through increased use
cycle. In addition, with this approach, planners can more easily hit clearly defined
targets and align the budget much more
closely with strategic objectives. Businessunit executives or leaders of corporate
services (such as finance) will spend less
time on multiple budget iterations. Top
performers will further reduce the budget detail throughout the organization,
ensuring driver-based planning and budgeting processes at the business unit and
regional levels.
Lastly, Hackett expects world-class EPM
organizations to continue de-emphasizing
the budget in favor of driver-based rolling
forecasts. Closer cross-functional collaboration and the synchronizing of different
performance management models will
lead to greater accuracy and reliability
from the forecasting process. n
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