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The Profitability Perspective: How Automated Reporting Drives Better Decisions
Data Management And Analysis Report is also known as :
Data Management And Analysis Report,
Profit Report,
Non Profit Report,
BI Reporting,
Profit Loss Report,
Non Profit Annual Report,
Management Practices,
Data Management And Analysis Tools,
Statistical Analysis Report,
Trend Analysis Report,
Automated Reporting Drives ,
Profit Financial Reporting,
Automating Reports,
Automated Expense Reporting,
Expense Report Software,
Perspective Profit Loss,
Accounting Perspective Report,
Profitability Perspective Report,
Report ROI Improved Decisions,
Return On Investment ROI,
IDC SAP.
In This Special Study
IDC recently completed a survey of 600 worldwide respondents on issues around
profitability reporting ? enterprise requirements, users of information, and technology
system support. This special study highlights some key survey findings, which
collectively show that profitability reporting is increasing in importance and the use of
technology and more sophisticated costing and reporting solutions is high on the
agendas of many companies.
Survey Demographics
IDC’s profitability study surveyed respondents globally, representing the United
States, the United Kingdom, Western Europe, and Japan. Respondents represented
various functional areas of the organization, primarily finance but including sales,
marketing, and operations as well. There was equal representation of small, mediumsized,
and large organizations as well as respondents from seven industry segment
groups ? financial services, manufacturing, services, retail, healthcare, utilities, and
government/education.
Situation Overview
Highlights
Driving sustainable growth requires profitability-focused planning and performance
management. Organizations must look beyond traditional cost-cutting measures and
margin management to increase profits and focus on optimizing customer and
product mix, set competitive pricing strategies, and embark on lucrative channel
strategies.
IDC research shows that most companies have some type of profitability reporting, as
indicated in Figure 1. However, as we dig deeper, we find that companies are
investing a lot of effort to produce this information and that there are limitations to the
information companies currently compile that may be having a significant impact on
decision making.
Figure 1
As we explore the details uncovered in the IDC profitability study, our analysis shows
that there is a misalignment between the importance of profitability information to the
enterprise and the methods and supporting systems used to produce that information.
In particular, spreadsheets serve as the "system of record" for organizations,
providing high-level results but falling short of requirements for deeper analysis to
support real decision making. Spreadsheets limit the ability to increase the frequency
of reporting and respond to management requests for information, and they pose a
significant risk of error - all factors that inhibit a sustainable profitability reporting
process.
The good news is that company investment plans for profitability reporting show that
many organizations are prepared to invest to improve that information.
Analysis of Profitability Reporting Trends
Profitability Reporting: An Important Process with Significant
Limitations
While profitability reporting is an integral part of information delivered to management
teams and field personnel for over 70% of companies surveyed, virtually all of those
companies cited limitations in their current profitability reporting processes, as
indicated in Figure 2.
Figure 2
In the areas of both statutory and management reporting, IDC finds that organizations
are being asked to report more frequently and with more details than ever. The result
is that organizations are feeling the burden of processes that are based upon
excessive manual effort. As management makes more demands for detailed
information, organizations cobble together information from disparate systems. When
it comes to profitability, cost assignments are many times only as good as general
ledger accounting results, with no real sophistication that can help organizations see
where profits are being earned and opportunities lie.
Some companies have realized that the key to success is to leverage technology to
integrate information and develop a repeatable model for profitability reporting that
facilitates decision making; those companies that have already made an investment
cite fewer limitations than those that haven’t.
Improving Profitability Information Step by Step
As organizations realize the disconnect between the current manual effort to produce
profitability and a resulting lack of timeliness and accuracy of information, it is clear
that profitability reporting processes are ripe for improvement, which was echoed
loudly by survey respondents, as indicated in Figure 3.
Figure 3
One of the key drivers of improvement is the fact that companies are moving toward
more sophisticated costing practices. While some adhere to strict activity-based
costing or full absorption costing methodologies, the majority tend to use a
combination of several methods (see Figure 4).
Figure 4
Many organizations start by modeling costing in spreadsheets, but they soon realize
this process is not sustainable. As organizations endeavor to better understand and
assign costs, general ledger systems and even more formal business intelligence (BI)
reporting systems do not deliver the granularity organizations require to determine
true profitability. As a result, finance spends a lot of time cobbling together information
- using a grassroots approach to developing information that provides key insight
across the organization.
Profitability Insight to Finance ... and Beyond
Because finance is the gatekeeper of financial information and is in the best position
to calculate profitability information, it almost always owns reporting. However, from a
decision-centric point of view, that information must be delivered to key stakeholders
across the organization for it to be meaningful. Our study confirmed the importance of
this information to groups outside of finance, as shown in Figure 5.
Figure 5
As we look at the users of profitability information within the context of decision
support, it becomes clear that organizations need several views of profitability.
Figure 6 demonstrates the various views of profitability and their importance to survey
respondents.
Figure 6
Key external go-to-market decisions that organizations make based upon profitability
data include customer-based decisions, such as highlighting those customers that are
most profitable or represent the best chance for upsell opportunities, and more
dynamic pricing decisions, as shown in Figure 7.
Figure 7
Just as important as the external decisions are the internal decisions enterprises must
make, such as product strategy and investments based upon the most profitable
products or adjacent markets. Providing incentives for employees to sell profitable
products or focus on the right customers requires accurate supporting information
(see Figure 8).
Figure 8
Meeting Profitability Reporting Needs with Technology
The range of systems users employ to support profitability reporting includes the most
simplistic reporting as part of the general ledger, attempts at more refined results
using BI reporting tools, or attempts at complexity by modeling costs in Excel.
However, implementing dynamic decision support that impacts the bottom line
requires complexity and sustainability for which more purpose-built technology adds
real value - hence the evolution of cost and profitability solutions including activitybased
costing software. Figure 9 illustrates the range of solutions companies are
using today to support profitability reporting.
Figure 9
For those organizations claiming adoption of activity-based costing, users of Excel
are five times greater than users of purpose-built activity-based costing/profitability
management solutions. Companies attempting a more rigorous costing methodology
typically embark on this project using Excel, and as complexity grows, the ability to
adjust to changing market conditions and refine models as required becomes
cumbersome.
Future Outlook
More than 60% of survey respondents plan to improve their profitability reporting by
making technology investments over the next two years. However, organizations
recognize the importance of their current systems as an information source and are
considering current systems within the context of future investment, as indicated in
Figures 10 and 11.
Figure 10
Figure 11
IDC finds that there are several obstacles to organizational plans to improve
profitability reporting, as indicated in Figure 12. Historically, more sophisticated
cost and profitability reporting was prepared manually by finance on an infrequent
basis. Organizations find it hard to make the leap from an initiative conducted by
just a few employees to making a software investment. This mindset is changing,
and organizations are embarking on broader BI reporting strategies and looking at
profitability as an element of sustainable management reporting. Solutions on
the market have evolved over the past several years, and IDC sees this software
segment rapidly evolving into the category of enterprise software. End users are
just becoming more aware of the purpose-built profitability solutions available on
the market today. A more robust set of delivered applications is evolving to
support profitability that will enable organizations to leverage the information in
their existing systems, apply more accurate costing practices, and produce more
accurate and timely profitability reporting at the customer, product, and business
segment levels.
Figure 12
Essential Guidance
Organizations that have moved away from high-level, point-in-time profitability
reporting that is limited by spreadsheets and have made an investment to automate
profitability reporting readily report ROI related to improved decisions and manual
workload reductions that far outweigh any investment in software. The benefits of
having information that expands the organizations’ understanding of where profits lie
12 #213429 ©2008 IDC far outweigh the costs, and an investment in technology is an investment in accuracy;
a sustainable, repeatable process; and the ability to deliver information to support true
day-to-day decision making. As organizations strive to respond to market dynamics
with refined pricing strategies and focus marketing campaigns, a fact-based
foundation on which to make these decisions is key.
Copyright Notice
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approval from the appropriate IDC Vice President or Country Manager. A draft of the
proposed document should accompany any such request. IDC reserves the right to
deny approval of external usage for any reason.
Copyright 2008 IDC. Reproduction without written permission is completely forbidden.