April 28, 2015

Enterprise Irregulars

Why Modeling Cloud Matters in EPM and Operational Planning

Two weeks ago, Host Analytics launched an amazing new product called Modeling Cloud.  Built by an elite team of some our most experienced developers, Modeling Cloud represents a breakthrough in cloud enterprise performance management (EPM).

In this post, I’ll discuss why Modeling Cloud matters to customers, to the market, and to the company.

Why Modeling Cloud Matters for Customers

  • Ability to build non-financial models. Planning and budgeting tools are built for planning and budgeting.  As such, you want them tied to the general ledger (GL) so, for example, you can easily get actual vs. plan for periodic reporting.  But that requires a level of financial intelligence that can become cumbersome; in a typical planning system every line needs to tie to an account in the GL, be a debit/credit account type, be associated with a legal entity, and have an associated currency.  That intelligence, which is so wonderful when making budgets, becomes baggage when you just want to build a model — for example, of bookings capacity given productivity and ramping assumptions, or new sales model given advertising spend, conversion, trial, and purchase rates. That’s why most models today are built in Excel and completely disconnected from the financial planning system.
  • Ability to integrate non-financial models. The problem with departmental Excel-based modeling is that everything ends up disconnected from the central financial planning.  Consulting can tell you what happens to billings if you hire 5 more consultants in the East and sales can tell you what happens to bookings if you hire 6 more salesreps in the East, but you need to start mailing spreadsheets around if you want to see the financial outcomes (e.g., revenue, EPS) of such changes.
  • Enterprise-wide scenario analysis. The beauty of connecting departmental modeling to the corporate financial plan is that you can perform enterprise-wide sensitivity analysis.  Say we’re thinking of making a big Eastern region push next year.  When the models all tie to the financial plan, we can see the financial outcomes for the company associated with such a push, and what it means to setting expectations with board and Wall Street.  This captures the real spirit of what is often called driver-based planning.
  • The bookings-to-revenue bridge. Models can help the finance team better forecast revenue because sales tends to be bookings-oriented whereas finance is revenue-oriented.   Everyone knows that given a pipeline of 100 opportunities there can be scores of combinations where sales hits the bookings target, but each one produces different revenue depending on the composition of the orders.   This is also, more subtly, true of sales expense because any given combination will consist of a given set of deals, for a given set of products, by a given set of saleseps, and each product may have different incentives on it, and each salesrep may be in a different stage of acceleration in their compensation plan.  By modeling bookings and doing scenario analysis of various combinations of orders, finance can better predict revenue, expense, and ultimately EPS.  In a world where a minuscule EPS miss can knock off 20% of a company’s valuation in a heartbeat, this is a critical capability.

Why Modeling Cloud Matters to the Market

  • Cloud penetration.  EPM is under penetrated by the cloud, with cloud-penetration of less than 5% today.  That means that 95% of all EPM systems sold in 2014 (between $3-4B worth) were on-premises.  By comparison, sales force automation (SFA) is about 50% cloud-penetrated.  While cloud-based planning and budgeting tools have existed for over 5 years, most cloud vendors are still working on completing their suites, with a handful introducing consolidation only in the past one to two years, and just two vendors offering a modeling engine in the cloud.  While it’s not the only factor hindering cloud penetration, rounding out cloud EPM suites will definitely help accelerate moving EPM to the cloud.
  • Market penetration.  Cloud aside, EPM is an under-penetrated market, overall. A recent survey by Grant Thornton, 40% of companies reported that they weren’t using any EPM system, relying only spreadsheets for FP&A work.  This implies the $3-4B EPM market could nearly double simply by better penetrating target customers.  And the best way to penetrate these companies is not by attacking Excel, but instead to bring an intelligent Excel strategy that makes it easy to import and build both budgets and models that are connected to the financial planning system.
Read More:  http://www.enterpriseirregulars.com/88906/modeling-cloud-matters-epm-operational-planning/