In today’s competitive global market, providing managers with accurate insights into profitability by products, standard service lines, distribution channels, customers and other dimensions of business is essential to agile and effective decision-making.  Yet many organizations struggle to create the visibility and transparency for these insights either due to the lack of time, technology, perceptions it is too complex to do, or executive support.

Addressing this challenge was the focus of a recent OneStream-sponsored webinar titled “How to Enhance Business Insights and Agility with Effective Profitability Management.”  The featured speakers were Gary Cokins, Founder and CEO, Analytics-Based Performance Management LLC and Linda Hellebuyck, Corporate Controller at Henniges Automotive.  Read on to hear the highlights of the webinar or watch the replay to see the details.

Cost Allocations and Profitability Management Best Practices

Gary Cokins is an internationally recognized expert, author and speaker on enterprise and corporate performance management (EPM/CPM) methods including measuring and managing customer profitability (using activity-based costing principles). He has over 30 years of experience in the field and has authored several books on these topics.

Mr. Cokins started his presentation off with a review of the basics of activity-based costing (ABC). His key message here is that when CFOs and Finance teams “allocate” indirect expenses (i.e., overhead) to products and standard service-lines, they spread it like “butter across bread”.  And in doing so, CFOs violate cost accounting’s universal “causality principle.”  Activity-based costing (ABC) resolves this by “tracing and assigning” expenses based on cause-and-effect relationships for how products and service lines consume work activities, which in turn consume the expenses of resources (e.g., salaries, supplies, utilities, etc.).

If we roll back the clock to the 1950’s, when direct labor and materials represented the majority of expenses in an enterprise, broadly averaged cost allocations for the indirect expenses was acceptable. But in today’s world, where indirect expenses represent most of the expenses in an enterprise, the averaged cost allocation approach can lead to large flawed and misleading cost errors.  

evolution of business

Mr. Cokins went on to highlight the value of ABC in service-based industries, such as insurance and banking.  Allocating expenses such as salaries, equipment, travel, supplies and occupancy to the various costs of work activities that occur in a department, such as claims processing, enables a clear view into which groups of customers are consuming relatively more versus less resources and their expenses.

GL to Data Base

He then reviewed the steps required to effectively implement ABC – allocating expenses from resources (e.g., GL accounts), to the costs of activities, and then to cost objects such as products, service lines, projects, and customers. While applying an ABC-based approach to cost allocations can take more time and effort than performing the traditional but simplistic cost allocations, the benefits are worth it. ABC provides CFOs and Finance teams, and more importantly line managers, with a clear view into which products or services are truly adding to bottom-line profits and which are detracting from profitability – and also a view to what are the drives causing the costs.

The Power of Customer Profitability

Mr. Cokins went on to highlight the importance of understanding distribution channel and customer profitability.  The value of a company is a function of the value it gets from its customers – therefore understanding which customers, or segments of customers, are adding value versus reducing value is critical to driving long-term stakeholder financial value including for shareholders and business owners.  Citing several examples from Jeffrey Colvin’s book “Angel Customers vs. Demon Customers,” his message is that by fully understanding customer profitability, CFO’s can help Sales and Marketing to better target customers.  This means answering questions like:

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When these questions are answered, organizations can more effectively target the types of customers they want to retain, grow, and acquire; and also make the pricing or customer services changes required to convert less profitable and even unprofitable customers to be profitable customers.

In concluding his presentation, Mr. Cokins provided some guidance on how organizations can overcome the resistance they may encounter when implementing ABC, including technical, misperceptions of excess complexity of ABC, and organizational behavioral barriers. He said, “It is better to be approximately correct than precisely inaccurate”.

Product and Customer Profitability at Henniges Automotive

After a brief introduction to the capabilities OneStream’s Intelligent Finance platform provides to support customer and product profitability, Linda Hellebuyck joined the discussion to highlight the approach Henniges Automotive has taken to understand product and customer profitability.

Henniges Automotive is Leading global supplier of highly-engineered automotive sealing and anti-vibration systems with operations in 8 countries, including 19 manufacturing plants and 4 technical centers. After selecting and implementing OneStream to replace Hyperion Enterprise for financial close, consolidation and reporting – the Henniges team extended their use of the OneStream platform into several additional processes, including Product Line Reporting.

Henniges

The challenge here is that Henniges produces thousands of automotive products that are very customer and vehicle specific, and as a result, profitability can vary significantly between products.  So it’s critical to understand profitability at a customer, platform (vehicle), and product level.  Using manual processes and Excel spreadsheets for this type of analysis was very painful, with 80% of the effort going into collecting the data and 20% on analyzing it.

By moving this process into OneStream, Henniges was able to harmonize, store, allocate, and aggregate the data at a detailed (part number) level enabling the Finance team to:

To accomplish this, the Henniges team leveraged many capabilities within the OneStream platform, including its extensibility.  This enabled the team to set up two cubes within a single application, one for financial reporting and another for profitability reporting.  While the two cubes share several common dimensions, the Profitability Cube has additional dimensions such as Customers, Products, Parts, and Platforms designed to support profitability reporting and analysis.

Profitability Reporting

According to Ms. Hellebuyck, “Because it’s one application, we can share both metadata and data across the two cubes, making cross-cube comparisons easy. In other multi-product solutions, marrying the consolidations data with the part-level analytical data would be significantly more complex.”

Learn More

Leveraging OneStream for financial and profitability reporting has yielded several business benefits to Henniges, and other customers.  This includes the ability to collect data faster and on a more frequent basis – moving profitability reporting from an annual to quarterly or even a monthly exercise.  The solution provides deeper insight into what pieces of the business are producing (or not producing) bottom-line profits – and to why. This insight helps managers make more informed decisions in areas such as quoting, commercial negotiations, rationalizing which customers to devote more effort on, and implementing cost improvement initiatives.

To learn more, watch the replay of the webinar or contact OneStream if your organization is ready to raise its game when it comes to understanding profitability by products, customers, channels or other dimensions of your business.

“Setting profitability objectives is not the same as managing profitability”, said Robert Kugel from Ventana Research in his 2020 analyst perspective1. And he’s right. In practical terms, there’s a very distinct difference between the two. Why?  Because companies that can navigate the increasing complexity in their businesses by understanding revenues and costs across their products, customers, markets or channels will – and do – gain significant competitive advantages.

This level of analysis involved with several layers of complex allocations can be difficult for some organizations – especially those with disparate corporate performance management (CPM) legacy systems or those working in Excel, given the widely known limitations of spreadsheets. For many, the indirect costs (e.g. Rents, Utilities and Marketing) as a share of overall costs are growing, particularly for organizations with shared services models. The focus on customer service and experience has also become imperative, especially because maximizing customer satisfaction can result in some businesses losing control over direct costs.

In essence, to preserve margins and ensure profitability and longevity, organizations must have the right tools in place to fully understand and continuously monitor their business processes.

According to FSN’s 2020 report on The Future of Analytics in the Finance Function, as many as 40% of organizations are technology constrained and lack the analytical tools to fully exploit their existing data. OneStream has the power to release those constraints. How? By unleashing Finance teams from fragmented CPM and manual processes. More specifically, OneStream offers profitability management as part of a unified, Intelligent Finance platform that supports financial consolidation, financial, statutory, and management reporting, planning, forecasting and analysis.

Align Customer & Product Analytics with Financial Results

OneStream’s Intelligent Finance platform blends financial and operational data to enable users to create and share insights into key drivers, such as customer and product profitability (see Figure 1). The platform also allows users to see how profitability varies by region or channel.

Using built-in, self-service reporting and analytics, users can leverage OneStream’s integrated allocation model to identify which areas of the organization are adding value vs. which are detracting value. This model, through those capabilities, immediately empowers Finance teams and their business partners with the insights and awareness required to effectively take action and ensure the optimal financial outcome.

Product and Customer Profitability
Figure 1: Product & Customer Profitability in OneStream

Here are a few of OneStream’s key capabilities for profitability management:

Profitability Analysis
Figure 2: Profitability Analysis in OneStream


Profitability Management in Action

Henniges

Global automotive parts manufacturer Henniges implemented OneStream to meet all its financial reporting & analysis requirements – including those for profitability management – in one application. Leveraging the OneStream platform, Henniges can now collect data more quickly (day 4 vs. day 16) and more frequently allowing them to shift from quarterly profitability reporting to a monthly process. The OneStream solution also provides Henniges management with deeper insight into what pieces of the business are producing (or not producing) bottom-line profits.

Key Takeaway

Profitability management is a crucial component of effectively managing and driving the performance of your organization. In times of increasing complexity, it’s more important than ever for your organization to have an in-depth and full understanding of all revenue and cost drivers.

OneStream will empower your Finance team with the detailed insights required to lead at speed, drive decision-making and deliver sustained profitability across the enterprise.

Learn More

To learn more, click here to download our Conquering Complexity in Profitability Management Solution Brief. And feel free to contact us if you are ready to gain improved analytical insights into your business.

1 – Robert Kugel’s Analyst Perspectives – Profitability Management is a CFO Imperative

Providing strategic insight into profitability for P&L owners is a primary focus for enterprise Finance leaders. This includes visibility of where costs are excessive, where the margins are largest and where opportunities exist to increase revenue. Unfortunately, this is not always as straightforward as Finance and business unit leaders would like it to be.

Legacy Solutions Increase Complexity and Reduce Accuracy

Why is this? Well, many organizations currently use spreadsheets or fragmented, legacy applications to analyze their profitability. Managing profitability across an organization with these fragmented tools is challenging and complicated by multiple factors such as significant differences per region or business unit. Without a single source of truth, there is a significant risk of error and this risk is especially prominent when disparate spreadsheets are used to collect and analyze profitability information.

When developing and managing profitability models, these complexities make it difficult to change parameters or adjust the analysis and frequently limit the extensiveness and accuracy of the model. Finance teams are often forced to spend excessive time administering and maintaining models which limits their availability to focus on business decision guidance.

Conquering Complexity in Profitability Analysis

At Agium EPM, we have developed a profitability analysis model in OneStream’s Intelligent Finance platform that conquers the complexity Finance teams face in their analysis. Our main goal was to provide a flexible, user-friendly interface that empowers users to easily adjust and update their information to achieve higher accuracy and deliver powerful profitability insights. To enhance this ease-of-use, model calculations are built-into the system, so business-level users do not have to interact directly with the calculations and are protected from making changes to the model itself. With this method, profitability analysis modeling can be more sophisticated than with other tools while preserving an elegant user experience.

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Figure 1 – Allocation Dashboard

Empower Business Users with the Profitability Analysis Dashboard

The interface consists of a dashboard (see Figure 1) where predefined parameters can be adjusted. Depending on the business requirements, these can vary from one parameter to a completely driver-based model. However, this is all configured to be easily manageable by users with access to the Profitability Analysis Dashboard in OneStream.

The organization can choose to either provide this level of access for headquarters only or to the lowest level of the business unit. This flexibility enables organizations to empower business unit leaders and provide them more tools to accurately analyze their profitability.

Integrate Profitability Analysis with Financial Reporting

While the solution can be a standalone model, it can also be integrated with financial reporting. In that way, the analysis can be done on the latest actuals and can be used to generate best/worst case scenario comparisons. Allocations can be executed on demand by users or be calculated along with the regular consolidation process of the organization.

allocation-1

Figure 2 – Allocation Audit Table

Either way, you always have the latest outcomes and up-to-date actuals. This speed in analysis enables relevant outcomes for decision-makers. Additionally, the model can be extended with audit trails (see Figure 2), specific security settings and additional reports.

Lead at Speed with Profitability Insights

With the profitability analysis model completely configured and integrated into the OneStream platform, users can conquer complexity in profitability management. They can easily change parameters via dropdowns and are empowered with an in-depth understanding of the profitability impact of changes in pricing, sourcing, service lines and product mix strategies when conducting profitability analysis and what-if scenarios.

For example, our client Carbery Food Ingredients implemented OneStream and Agium’s profitability analysis model to replace more than 15 spreadsheets that were linked together to produce management reports. And they did this while creating a process that is completely transparent, using the OneStream Marketplace solution Workflows. This project management solution enables Carbery’s Finance team to delegate tasks, manage progress and provides complete accountability with built-in audit trails.

To learn more about Agium’s profitability analysis model and how customers are empowered in profitability management, visit the Agium Profitability & Management Reporting page. To learn more about how the OneStream platform empowers Finance teams to lead at speed contact OneStream today.