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Best EPM software integrates finance, operations

Enterprise performance management only works if finance and operations talk to each other, according to one expert consultant.

I recently had the opportunity to speak to a group of companies, most of which had recently purchased enterprise performance management (EPM) applications. The vast majority answered affirmative to the following question: "Did you hear the term ’fully integrated’ from more than 75% of EPM companies?"

It's a term that is widely used in EPM circles, but often with different meanings, not to mention liberal interpretations. The result is confusion about what "integrated" really means, what it's worth and how it can support leading practices for planning and managing a business.

The importance of EPM integration

Why is integration so important? Because it's the means by which organizations achieve key planning and performance management (PPM) objectives, such as improved planning and forecasting accuracy, financial and operational data consistency, cross-functional coordination and optimization, and forward visibility into risk. Integration can also reduce planning and budgeting cycle times.

The problem is that organizations aren't always achieving these PPM objectives, despite investments in EPM and business intelligence (BI) technology. Understanding how integration issues contribute to this situation starts with an understanding of the different types of integration: technical, financial and operational.

Technical integration has become an important consideration for selecting EPM applications. It refers to the ability to easily move data in and out of EPM platforms, as well as between applications that comprise them.  This involves automating connections between:

  • Applications within the EPM platform
  • EPM and BI and reporting tools
  • EPM and ERP applications, by way of predefined extract, transform and load (ETL) logic
  • EPM and other applications, such as customer relationship and supply chain management

Beyond lower costs, integration provides the foundation for a single source of data that is readily available to users through common user interfaces. These are important factors that shape decisions for IT professionals about their EPM and BI strategies.

Financial integration describes the ability of EPM software to support such financial processes as developing planned or actual financial statements (income statement, balance sheet and cash flow) as well as planning, budgeting, forecasting and consolidation. It also enables companies to use EPM software for detailed budgeting and forecasting of such processes, including payroll, fixed asset management and travel expenses. Balanced scorecards and activity-based costing also become feasible.

In recent years, financial integration has also come to include the ability to support driver-based planning, a term used to describe the means of deriving financial plans from underlying operational activity. But companies have found these processes difficult to establish, which has brought operational integration to the foreground.

Operational integration refers to the ability to bring together finance and operations to support more effective planning and performance management. The objective is to ensure that financial plans are executable, and to optimize the performance of the business entity as a whole -- in other words, to expose and address potential risks.

Examples of key integration points that comprise such integrated processes include the ability to:

  • Drive payroll budgets from staff plans, where skill and head-count requirements are derived from revenue and demand plans.
  • Base capital budgeting on capital planning, which focuses on the profit, cost and cash impact of potential investments  derived from analysis  of as-is and future processes across a spectrum of scenarios.
  • Translate functional budgets into productivity (i.e., cost per outcome) targets that span across functions and entities.
  • Automate integrated reconciliation -- a process used in sales and operations planning (S&OP) -- to reconcile operational forecasts to annual plans, budgets and financial forecasts.
  • Forecast cost of sales and expected production variances based on planned bill of materials and routing changes that result from S&OP processes.
  • Forecast purchase plans by vendor and material, along with purchase-price variances and commodities, as a natural by-product of the above.
  • Support direct cash flow and foreign currency planning, the latter being the process of quantifying cash, receivable and payable positions by country to identify exposed foreign exchange positions.

At this level of maturity, there is little difference between financial and operational planning processes. The processes share the same models, data and applications.  The net result is that financial and operational plans are always in sync.

Integrated models the only good choice

The ability to support such operational integration is driven by one primary factor: the maturity of the modeling logic that connects financial and operational plans and forecasts. More mature EPM applications employ embedded and industry-specific modeling logic, which is shared between financial and operational applications on a single platform. The absence of such logic is one of the primary reasons why organizations fail to achieve their PPM objectives. This is especially true for larger organizations, where the logic gaps impede the ability to manage complexity.

As organizations seek to achieve their key PPM objectives, they will need to employ more mature planning models and applications. They should focus on deploying EPM applications that support the necessary modeling logic, because that logic is what drives most of the value from EPM  investments. While technical and financial integration will always be essential, what will differentiate EPM applications going forward will be the level of operational integration they support.

About the author:
Dean Sorensen is a management consultant and founder of the IBP Collaborative. Email him at

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