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Adaptive Insights held its annual user group meeting recently. A theme sounded in several keynote sessions was the importance of finance departments playing a more strategic role in their companies. Some participating customers described how they have evolved their planning process from being designed mainly to meet the needs of the finance department into a useful tool for managing the entire business. Their path took them from doing basic financial budgeting to planning focused on improving the company’s performance. This is one of the more important ways in which finance organizations can play a more strategic role in corporate management, an objective that more finance organizations are pursuing. Half of the companies participating in our Office of Finance benchmark research said that their finance organization has undertaken initiatives to enhance its strategic value to the company within the last 18 months.

We believe that presenting its software as an aid to make the planning process more strategically valuable is a product strategy that is essential for the long-term success of planning software vendors. It was a theme in Adaptive Insights’ recent release of its Adaptive Suite and revenue planning software.

vr_ibp_planning_software_provides_faster_answers_updatedCompanies do many kinds of planning, not just budgeting. They plan sales, they determine what and how they will produce products or deliver services. They plan the head count they’ll need and how to organize distribution and the supply chain. They also produce a budget, which itself is a financial plan. The planning process involves discussions about objectives and the resources and tactics that people need to achieve them. Our benchmark research finds that dedicated applications are more effective tools for planning than are desktop spreadsheets (which nevertheless are still the most widely used technology for planning). For example, dedicated planning software is more able to get to underlying causes behind variances immediately during a performance review meeting. Users can apply the information that’s in the application when reviewing results and adjusting goals and objectives to reflect changes that have taken place in the business. The research shows that organizations that use dedicated software more often can get to the underlying details of the difference between plans and actual results and therefore are more able to make fast decisions about what to do next. Spreadsheets are inherently less capable of drilling down into underlying details.

Adaptive Insights has a suite of planning, analysis, reporting and consolidation applications that mirror the evolution of the business planning category. I coined the term “integrated business planning” more than a decade ago to describe an approach to planning that brings together financially focused budgeting and forecasting activities with various stand-alone functional planning efforts. The objectives of this approach are to provide senior executives with a comprehensive view of future expectations for their business; to set a baseline for performance measurement; to assess performance relative to these baseline objectives; and to periodically adjust objectives and resources in a coordinated, strategic fashion as conditions evolve. Integrating the business planning activities of the various functional groups within a company is best accomplished by providing a single planning environment in which each group can plan its part of the business the way it prefers, compare its actuals to plan using preferred analytical methods and easily report and communicate results within the group. Each planning process can be loosely coupled in that the cadence, items, measures, dimensions and other planning elements fit the needs of that specific part of the business. At the same time, because all planning takes place in a single environment, it’s easy to bring together the necessary information from each of the individual business unit plans to create a consolidated, forward-looking view of the company. It’s also easy to provide control and consistency across planning units by ensuring, for example, that all plans use the same projected benefits costs, commodity prices, exchange rates and other elements that will affect all parts of the organization. Our benchmark research on next-generation business planning finds that companies that integrate their planning by directly linking plans get better results: Two-thirds that have direct links said they have a planning process that works well or very well compared to 40 percent that copy and paste information and just one-fourth that have little or no connection between plans. Well-executed planning is the best way to get everyone onto the same page to ensure that the company is organized in executing the plan. Setting and to a greater degree changing the company’s course require coordination. It enables understanding of thevr_NGBP_02_integrated_planning_works_better impact of the policies and actions in one part of the company on the rest of the company. Information technology has the potential to make business planning more useful, and to help improve a company’s performance and increase its competitiveness.

From a financial management standpoint, it’s essential to be able to project pro-forma balance sheets and cash flows. When all operational planning is feeding the core business model, the future state of a company’s balance sheet and cash flow can be more realistic than when it is only loosely connected. Moreover, it’s possible to quickly and accurately compare the impacts of various operating scenarios on the company’s finances, assess the impacts of various financing alternatives and project how different capital market conditions will affect the company’s overall financing costs across multiple operating scenarios. All of this is possible using spreadsheets, but doing so is far more time-consuming (and therefore impractical) and potentially much less accurate.

Another reason why a dedicated planning application a better planning environment than desktop spreadsheets is that it facilitates the separation of planning into things and the financial aspect of those things: a unit-times-rate structure. While financial planning focuses on money, the rest of the business plans mainly in terms of things: units produced, head count at various pay grades, tons of raw materials and production yields, to name just a few. Having the ability to model units and currency amounts separately makes it far easier to measure performance in ways that are meaningful to each part of the business. In its most simplistic form, it helps planners determine immediately and unambiguously whether variance between the plan and actual results was driven by units, a price or cost variance or both.

Our research on enterprise use of spreadsheets shows that companies that use spreadsheets for forecasting, planning and budgeting usually spend much more time in analyzing and reporting results than users of more appropriate tools do. Dedicated software automates this process, enabling finance departments and other functional units to spend less time on repetitive tasks while providing accurate and consistent information to executives and managers. Adaptive Insights recently added to its suite Office Connect, which facilitates creating and updating reports in Microsoft’s Excel, Word and PowerPoint vr_NGBP_09_spreadsheets_dominant_in_planning_softwareapplications, enabling departments to operate more efficiently and speed the availability of performance reports. For example, using the software, standard monthly tables and charts can be instantly updated each month to speed the production of spreadsheets, narrative reports or presentation decks for monthly board meetings.

I have long advocated the use of dedicated planning applications rather than desktop spreadsheets for handling planning processes. The inherent technology limitations of spreadsheets make them a poor choice because they consume time needlessly and prevent organizations from being able to forecast, plan, analyze and replan effectively. Yet spreadsheets remain the leading technology used for planning. Our recent planning research finds that, across 11 different types of business planning, on average seven out of 10 companies use spreadsheets. I recommend that all midsize and large companies consider replacing spreadsheets with a dedicated planning application that provides a unified environment for planning across the entire enterprise. Midsize companies and midsize divisions of large enterprises should consider Adaptive Insights for this role.


Robert Kugel – SVP Research

Price and revenue optimization (PRO) software uses analytics to help companies maximize profitability for any targeted level of revenues. PRO utilizes data about buyer behavior to gauge individual customers’ price sensitivity and predict how they will react to prices. It enables users to charge buyers who appear to be less sensitive more than those who appear more price-sensitive.  PRO is a significant departure from inward-focused, single-factor pricing strategies such as cost-plus pricing or, in the case of financial services, risk-based pricing (using a borrower’sVentanaResearchLogo300px credit score, for example). Instead it offers a multifaceted customer-centric analytic approach to pricing built on analysis of large sets of data.

Price and revenue optimization is a natural fit for the application of big data analytics. Our benchmark research on challenges in big data shows that three-fourths of companies are addressing more than 10 gigabytes of data per day and 10 percent are deal daily with a terabyte or more. Financial services companies in particular can benefit from big data analytics because their core products are essentially numbers. For them, analytics involves sifting through large data sets to collect characteristics of consumer behavior that will enable them to identify customer segments and quantify their price sensitivity. These complex calculations require software designed for the purpose. Big data analytics software can help users  manage more granularly the process of defining offers to customers (and the levels of discretion they allow to account managers and sales people to set prices) as well as the terms and conditions of the transaction. Upon identifying characteristics that influence buyers’ price sensitivity companies then combine the most relevant factors to present a price that will enable them to optimize revenue and profits from those customers.

Nomis Solutions provides PRO software and services to financial services companies, including banks, automobile credit providers and credit card processors. In past years at its annual user conference, the company has focused on the science and technology behind its product, as I’ve noted. Those sessions were useful in providing attendees with a deeper understanding of “the why behind the what” of the applications’ capabilities.

Taking a somewhat different approach this year’s conference focused on the challenges that the financial services industry will need to address over the next several years and how information technology generally – and price and revenue optimization software specifically – can help these institutions address them. Presenters at the Nomis Forum covered three main issues facing financial services businesses:

  • Increasing velocity and volatility of interest rates
  • Disruptive sources of competition in financial services
  • Expanded regulation of financial services businesses.

Those charged with setting prices in financial institutions have been operating in a relatively benign environment for the past few years. Interest rates in many of the developed world economies have remained relatively steady and low in inflation-adjusted terms by historical standards; this simplifies the pricing of loans and credit. The recent environment of low interest rates and low volatility has muted the need for the capabilities found in PRO software, although financial services companies that have deployed PRO have improved their results measurably. However, it’s likely that the interest rate environment will transition to a more dynamic phase within a few years. Technology can enable financial institutions to operate more effectively in that kind of interest rate environment, helping financial services companies be more effective when interest rates begin to rise and fluctuate. It can do so by enabling them to automate analytics and reporting as well as facilitating management of the related data. This makes it easier for a financial institution to adapt fast to a challenging atmosphere and set prices in a way that best matches its strategic objectives (such as to be a market share leader in specific product categories or to maximize returns on risk-weighted assets). Using price and revenue optimization rather than simplistic risk-based pricing can provide a competitive advantage in achieving higher returns on assets and lower costs of capital.

However, such technology may present challenges to established financial services organizations. As it has been in many industries, it is becoming a disruptive force, especially as innovators use the Internet and evolving computing devices to change the competitive landscape. The financial services business is feeling the impact of new approaches to traditional methods. Deposit banks, mortgage companies and other lenders as well as major credit card companies all face challenges from entrepreneurs seeking to supplant established business systems. There are new formulations of finance in areas such as peer-to-peer lending (for example, Lending Club), purely online banking establishments, mobile payments systems (such as Apple Pay) and crypto currencies (Bitcoin). To date these new formulations haven’t achieved significant penetration, but when technology-driven market disrupters arrive, Andy Grove’s cautionary advice – “Only the paranoid survive.” – is worth heeding. The upstarts have attracted substantial amounts of investment capital, giving them parity with established players in terms of a low cost of capital and the ability to keep trying.

In assessing the challenge from disruptive innovators, Nomis founder Robert Phillips insisted that financial services incumbents are not defenseless. They are able to match innovators in matters of convenience and (to some degree) cost, two areas where companies such as Amazon, Netflix and online travel booking services were able to use these aspects to quickly displace well-established companies. Existing financial institutions have been adopting technology by developing it internally or by acquiring technology-enabled disruptors. For example, in the United States the camera-equipped smartphone took advantage of the 2003 law that eliminated the requirement that physical checks must be returned to their makers to enable people to “deposit” checks into their account without having to go to a bank or an ATM. Traditional financial services companies have heavy compliance costs and considerable overhead that give upstarts and advantage, but they also have some advantages of scale.

Philips cited two major areas of competitive differentiation. One favoring new entrants and the established organizations. Incumbents are most vulnerable to disruption because typically they are slower in reacting to customers and ponderous in managing processes. Retail and small business banking is a consumer market, and today consumers in developed countries increasingly want transactions to be fast and hassle-free. On the other hand, incumbents have a wealth of information about their about customers, their assets and their past behavior that they can use to optimize pricing in every aspect of their business as well as to improve their customers’ experiences. Using software to manage rates charged or offered is a way to quickly provide quotes to prospective borrowers and depositors while providing effective controls on how front-line representatives set rates. Upstarts that have less of this information available will have to rely more on risk-based pricing.

Increased regulation since the 2008 financial crisis is another major challenge for financial institutions in the developed world. Its purpose has not just as an attempt to prevent future debacles but, particularly in the United States, to promote fairness. For cultural reasons, demanding different prices from some customers or raising prices during periods of peak demand is a sensitive topic in many developed economies. Tightly regulated financial services companies are more vulnerable to charges that some protected groups are hurt in the price-setting process and therefore subject to fines and demands for restitution. One advantage that companies using PRO software have in defending against charges of unfairness is that it makes the price-setting process transparent and based on objective measures related to their willingness to pay.

Price and revenue optimization is a strategic business technique that has conclusively demonstrated its value in travel and leisure, retail and industrial businesses. It is steadily gaining traction in financial services. Yet from discussions with existing users I find that it is rarely easy to implement from a management and process standpoint. One important reason is that the results of the analysis of customer behavior often defies common sense. The use of big data analytics to assess and quantify the drivers of customer decision-making enables a company to apply a more nuanced view of the often complex factors that influence customer decisions. From this analysis it can segment its prospects more accurately than by using simplistic assumptions (that is, what “everybody knows” to be true). For example, it may not be necessary to offer loyal customers the lowest price. Other inducements may be more important to them and may even be costless to the financial institution or seller – for example, maintaining an ongoing relationship or not having to spend time shopping around. Indeed, one advantage of PRO is that it’s often counter-intuitive and therefore offers strategies unavailable to less well informed competitors. PRO also is an operating methodology so it’s not easy to implement the management and process changes necessary to utilize the technique, especially in larger organizations. Nonetheless, companies that recognize its advantages and put it into practice can obtain a competitive advantage over competitors that aren’t able to overcome institutional inertia.

I recommend that companies, especially those in the financialvr_business_analytics_01_why_financial_services_use_analytics services industry, explore the benefits of using price and revenue optimization tools. It is worth remembering that technology has long been a driver of innovation and change in financial services. Our research on the use of analytics in banking and financial services shows that financial services companies are looking for analytics that will improve their decision-making and business processes as well as enhance their operational efficiency. They want analytics to enhance their competitiveness and provide a strategic advantage. PRO is a technology-driven technique that can underlie a more intelligent and strategic approach to pricing.


Robert Kugel – SVP Research

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