Sometimes you just don't have a choice about taking on a challenge. Take the problem that the Stepan Co., a middle market specialty chemicals maker based in Millsdale, Ill., had to confront. Here is a company with sales in the neighborhood of $800 million and an M&A appetite to become a major global player. After a score of strategic acquisitions, it found that its systems no longer provided an accurate view of the state of its enterprise. But given the ongoing integration of its new purchases, it had no stomach for the gut-wrenching implementation that often accompanies an overhaul of financial IT.
German ERP vendor SAP AG offered a less painful alternative with an out-of-the-box enterprise performance management software package that Stepan could introduce one geographic area at a time. Set up in late 2003 and early 2004, SAP's system has already been responsible for cutting 2004 inventories by 10% to 12%; reducing book-closing times from two to three weeks to two to three days; providing employees with up-to-the-minute information on key metrics; and "sharpening the company's competitive edge" with more unified customer and product information, according to Jim Pall, Stepan's vice president for logistics. "The implementation was on time and within budget," says Pall, "and the preconfigured offering was certainly one of the many reasons for that success."
Whether you call it business performance management (BPM) or enterprise performance management (EPM) or corporate performance management (CPM), the integration of organization-wide data to create a performance monitoring system is often presented as a revolution in management, a shake-up of the old corporate paradigm, a transformational moment. In the end, however, it has often turned out to be a major headache for a company's senior finance executives–particularly when a company tries for wholesale change. Those days may be over–thanks in large part to the constraints of the middle market.
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When vendors sold BPM systems to the globe's biggest companies, a buyer's needs and pocketbook usually defined the degree of customization of a product and the timetable of its implementation. In recent years, as vendors felt demand from the middle market for the kinds of functions their BPM systems provided, they had to tailor products to the costs and implementation schedules more resource-strapped companies could handle. This meant solutions needed to cost less, be less customized and be able to be implemented incrementally. In the end, ironically, the new products are also making life easier for the big guys as well. "We're now providing out-of-the-box solutions for customers," says Fred Studer, Oracle Corp. vice president for applications and services marketing. "You can always amend the key performance indicators that are offered, adding or subtracting some to fit your particular business. But the basic ones are there for you already."
For instance, when Stepan approached SAP, the enterprise software vendor was ready with a new "out-of-the-box" EPM package called a "Best Practices" template, specifically designed for chemical companies. "We've got these templates now for six industries: consumer products, high tech, industrial machinery and components, retail, professional services and chemicals," says Marty Etzel, SAP's director of solution management for chemicals, "and we'll be adding 18 more." Basically, what SAP has done, he explains, is to develop, based on its customer experience, a set of some dozen or so key metrics for each industry, which it includes in a DVD-formatted template. "The whole thing can usually be up and running in 15 to 20 weeks," he says, though he adds that the setup is easier to implement for customers who are already SAP's ERP clients.
NOT BITING OFF TOO MUCH
Stepan's is one of many success stories in an area that was once littered with bitter recriminations over staggeringly long implementations and higher-than-expected costs. In fact, according to Jim Sinur, vice president and research analyst at Gartner Inc., a Connecticut-based consultancy, Stepan is part of a huge wave of companies that are implementing BPM strategies–most of them in a piecemeal, operation-by-operation manner using out-of-the-box software systems. Sinur reports that new BPM licenses jumped 16% to $522 million in 2003 from $450 million in 2002, while overall BPM business, including servicing of existing systems, totaled $2.2 billion, up from just $1.2 billion a year earlier. "People are getting more interdepartmental, with the average BPM project now involving three departments," he notes.
On the other hand, the so-called "big bang" approach, where a company-wide BPM strategy is implemented all at once, has become the exception. "Generally, you only see that done by a really visionary company, or by one that has its back to the wall," Sinur says, citing as an example of the latter a manufacturing firm that had lost money for six quarters in a row. "They made a lot of different products and couldn't afford to set up enough assembly lines," he says. "After implementing a full BPM program, they found they could actually reduce the number of their assembly lines and still add products. Now, they've had six profitable quarters."
Delbert Krause, director of product marketing and enterprise planning at Cognos Inc., a leading provider of what it calls corporate performance management as well as other business intelligence products, says that companies are faced with three basic functions they must address to keep their business competitive: reporting, planning and evaluating performance. "The trend these days is for companies to try to solve one of these problems, and then move on to the other two," he says. "Generally, they tend to start with reporting, which after all is the heartbeat of a company."
Wherever a company decides to start, it is widely agreed that the first step in a BPM plan is gaining an understanding of how the company operates and what needs to be measured. "We've surveyed over 140 companies that have implemented BPM, and 90% of them said that they wished they'd understood their business processes better before they started out with BPM systems," says Gartner's Sinur. SAP hopes it is addressing that problem by developing industry-specific Best Practices software packages that use metrics most meaningful for a company's business.
Whichever approach a company decides to take when introducing performance management, there are some important trends to consider. Gartner's Sinur warns that the industry is rapidly consolidating, as evidenced by the recent takeover by leading player Oracle of its competitor PeopleSoft Inc., and could soon shrink from 110 BPM suppliers to perhaps 20. "That means you should be careful whom you go with," he says. Most vendors will eventually be acquired, but some will inevitably go under, he explains, leaving customers stranded, or with "legacy tools that aren't progressing."
As for return on investment, Sinur says that Gartner's research suggests that the average rate of return on a BPM investment is 20% or more. "We can virtually guarantee 15%, which is probably at least as good as your return on basic business operations."
Says SAP's Etzel, "We're telling people that our customers are able to reduce inventories by 10% to 30% and cut 2% to 5% off their supply chain costs in the first year, in addition to the big value of analytics, ease of reporting and visibility of information."
At the end of the day, sometimes a company needs to do it just to stay competitive. "Our BPM investment was relatively small–$150,000 to start and $150,000 for upgrading it," says Brian Reilly, CFO of Allied Building Products Corp., a New Jersey-based, wholly owned unit of CRHP Ltd. in Dublin. Allied bought its BPM from Cognos and implemented it throughout its finance operations. "Cost was never an issue. We were wasting so much money not getting rapid answers that return on investment just wasn't a concern."
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