Profitability and Cost Management Shared Interest Group

One of the main reasons companies implement Profitability and Cost Management methodologies is to understand what drives their profitability and to identify the customers and products that either contribute to or diminish it.

High-level executives have a clear understanding of the key business questions they need answers to. These questions are critical for making strategic decisions. The challenge now is: how do we make this information accessible to decision-makers?

To achieve this, we must integrate IT into the process. First and foremost, a well-established profitability team consists of a multidisciplinary group of professionals. This includes individuals who understand the business, data analysts, and those with expertise in data management. Crucially, the profitability team benefits significantly from an IT professional who also possesses business acumen-this is a key factor for success.

No model can be built without data. Data is often difficult to process, especially when key business questions require answers at the customer and product level,  specially for companies with high number of customers like banks. Let's assume our Profitability Team has been tasked with building a Profit and Cost Management model. They have already defined their objectives, key business questions, and the framework of what needs to be developed.

With a well-defined design in hand, our IT expert will begin identifying data sources. They will soon realise that information comes from multiple sources-some from databases and others from external files. The challenge will be to integrate all these sources into a unified, reliable dataset.

Raw data is not immediately usable; it requires thorough analysis and refinement before it can support profitability and cost analysis. By collaborating as a team, they will use their preferred platform to transform raw data into a structured model.

There are various methodologies available, such as: Activity-Based Costing (ABC) and Time-Driven Activity-Based Costing (TDABC), and others. At this stage of the process, our IT professional will have a clear understanding of the type of model being built. The next step is to create an initial prototype for review and analysis with the entire team.

If the preliminary results align with the key business questions, the next step is to process data for at least 12 periods. This leads to the most exciting phase-producing a business portfolio with the results, which will be presented to top executives.

The journey from raw data to an insightful business portfolio can take months. However, the long-term benefits of having a model that can be updated on a monthly basis far outweigh the effort. With a reliable and continuously updated model, businesses can make data-driven decisions with confidence.

Do you have stories about your journey from raw data to an insightful Profitability and Cost model?

What are your thoughts on integrating an IT professional in your team?

I appreciate your overview of the process.  It is comprehensive and follows what I would call a traditional path.   My concern is two of your opening arguments:

1. Business leaders know the questions they want answered.    I have found that Business leaders often know the traditional business questions that have been asked, but often don't know the questions that will really drive future value.   Their knowledge is often limited by the traditional financial information they have been using for many decades.  Naturally, educating such senior people is challenge. And you may well have to answer their questions, then lead them to better questions.
2. IT people come first.   The most important element in building an internal decision support-oriented cost and profitability system is understanding the principles of financial internal decision support information and designing a model that supports the resources and activities of the business.  You mention ABC - it has its good points and weak points - do you know what those are?  Do you know what the many, many design options are for an ABC system?   Do your IT people or your vendors?  My experience is they are often focused on "out of the box", and don't really know many design options and are hard pressed to talk about potential weaknesses - if they know what they are.

All that said, any step forward is a good step.  The more you know about the principles of modeling for financial internal decision support, the more likely you are to get the results that will truly change your business.

Would other agree with my issues?   What are your approaches to implementing improved cost and profitability systems?

One of the main reasons companies implement Profitability and Cost Management methodologies is to understand what drives their profitability and to identify the customers and products that either contribute to or diminish it.

High-level executives have a clear understanding of the key business questions they need answers to. These questions are critical for making strategic decisions. The challenge now is: how do we make this information accessible to decision-makers?

To achieve this, we must integrate IT into the process. First and foremost, a well-established profitability team consists of a multidisciplinary group of professionals. This includes individuals who understand the business, data analysts, and those with expertise in data management. Crucially, the profitability team benefits significantly from an IT professional who also possesses business acumen-this is a key factor for success.

No model can be built without data. Data is often difficult to process, especially when key business questions require answers at the customer and product level,  specially for companies with high number of customers like banks. Let's assume our Profitability Team has been tasked with building a Profit and Cost Management model. They have already defined their objectives, key business questions, and the framework of what needs to be developed.

With a well-defined design in hand, our IT expert will begin identifying data sources. They will soon realise that information comes from multiple sources-some from databases and others from external files. The challenge will be to integrate all these sources into a unified, reliable dataset.

Raw data is not immediately usable; it requires thorough analysis and refinement before it can support profitability and cost analysis. By collaborating as a team, they will use their preferred platform to transform raw data into a structured model.

There are various methodologies available, such as: Activity-Based Costing (ABC) and Time-Driven Activity-Based Costing (TDABC), and others. At this stage of the process, our IT professional will have a clear understanding of the type of model being built. The next step is to create an initial prototype for review and analysis with the entire team.

If the preliminary results align with the key business questions, the next step is to process data for at least 12 periods. This leads to the most exciting phase-producing a business portfolio with the results, which will be presented to top executives.

The journey from raw data to an insightful business portfolio can take months. However, the long-term benefits of having a model that can be updated on a monthly basis far outweigh the effort. With a reliable and continuously updated model, businesses can make data-driven decisions with confidence.

Do you have stories about your journey from raw data to an insightful Profitability and Cost model?

What are your thoughts on integrating an IT professional in your team?

Hi, Larry.

Yes, I agree that business leaders are often limited by traditional business questions. Our job is to help them gain a broader view of their financial information.

Regarding IT. I agree that understanding financial principles is crucial. However, in my experience it is also important to have an IT team member who understands these principles. I'm one of those team members. This helps in dealing with IT terminology and process when you are in the model-building phase, especially with high-volume models for companies like banks.

As you mentioned, there are different type of cost methodologies. In my experience I have implemented various methodologies, most recently a capacity modelling.  Choosing the 'right' model, in my opinion, usually depends on business objectives and budget.

I appreciate your overview of the process.  It is comprehensive and follows what I would call a traditional path.   My concern is two of your opening arguments:

1. Business leaders know the questions they want answered.    I have found that Business leaders often know the traditional business questions that have been asked, but often don't know the questions that will really drive future value.   Their knowledge is often limited by the traditional financial information they have been using for many decades.  Naturally, educating such senior people is challenge. And you may well have to answer their questions, then lead them to better questions.
2. IT people come first.   The most important element in building an internal decision support-oriented cost and profitability system is understanding the principles of financial internal decision support information and designing a model that supports the resources and activities of the business.  You mention ABC - it has its good points and weak points - do you know what those are?  Do you know what the many, many design options are for an ABC system?   Do your IT people or your vendors?  My experience is they are often focused on "out of the box", and don't really know many design options and are hard pressed to talk about potential weaknesses - if they know what they are.

All that said, any step forward is a good step.  The more you know about the principles of modeling for financial internal decision support, the more likely you are to get the results that will truly change your business.

Would other agree with my issues?   What are your approaches to implementing improved cost and profitability systems?

One of the main reasons companies implement Profitability and Cost Management methodologies is to understand what drives their profitability and to identify the customers and products that either contribute to or diminish it.

High-level executives have a clear understanding of the key business questions they need answers to. These questions are critical for making strategic decisions. The challenge now is: how do we make this information accessible to decision-makers?

To achieve this, we must integrate IT into the process. First and foremost, a well-established profitability team consists of a multidisciplinary group of professionals. This includes individuals who understand the business, data analysts, and those with expertise in data management. Crucially, the profitability team benefits significantly from an IT professional who also possesses business acumen-this is a key factor for success.

No model can be built without data. Data is often difficult to process, especially when key business questions require answers at the customer and product level,  specially for companies with high number of customers like banks. Let's assume our Profitability Team has been tasked with building a Profit and Cost Management model. They have already defined their objectives, key business questions, and the framework of what needs to be developed.

With a well-defined design in hand, our IT expert will begin identifying data sources. They will soon realise that information comes from multiple sources-some from databases and others from external files. The challenge will be to integrate all these sources into a unified, reliable dataset.

Raw data is not immediately usable; it requires thorough analysis and refinement before it can support profitability and cost analysis. By collaborating as a team, they will use their preferred platform to transform raw data into a structured model.

There are various methodologies available, such as: Activity-Based Costing (ABC) and Time-Driven Activity-Based Costing (TDABC), and others. At this stage of the process, our IT professional will have a clear understanding of the type of model being built. The next step is to create an initial prototype for review and analysis with the entire team.

If the preliminary results align with the key business questions, the next step is to process data for at least 12 periods. This leads to the most exciting phase-producing a business portfolio with the results, which will be presented to top executives.

The journey from raw data to an insightful business portfolio can take months. However, the long-term benefits of having a model that can be updated on a monthly basis far outweigh the effort. With a reliable and continuously updated model, businesses can make data-driven decisions with confidence.

Do you have stories about your journey from raw data to an insightful Profitability and Cost model?

What are your thoughts on integrating an IT professional in your team?

Thank you for your response.   I absolutely agree that having an IT person knowledgeable about finance (and cost and profitability from an internal decision support point of view, in particular) is huge benefit to a team.  

I am curious about your capacity modeling?   Can you share more of the issues you were modeling, your approach, and the solution or outcomes???   I find the connection between operational resources and financial modeling a very critical area for internal decision support enhancement.

Hi, Larry.

Yes, I agree that business leaders are often limited by traditional business questions. Our job is to help them gain a broader view of their financial information.

Regarding IT. I agree that understanding financial principles is crucial. However, in my experience it is also important to have an IT team member who understands these principles. I'm one of those team members. This helps in dealing with IT terminology and process when you are in the model-building phase, especially with high-volume models for companies like banks.

As you mentioned, there are different type of cost methodologies. In my experience I have implemented various methodologies, most recently a capacity modelling.  Choosing the 'right' model, in my opinion, usually depends on business objectives and budget.

I appreciate your overview of the process.  It is comprehensive and follows what I would call a traditional path.   My concern is two of your opening arguments:

1. Business leaders know the questions they want answered.    I have found that Business leaders often know the traditional business questions that have been asked, but often don't know the questions that will really drive future value.   Their knowledge is often limited by the traditional financial information they have been using for many decades.  Naturally, educating such senior people is challenge. And you may well have to answer their questions, then lead them to better questions.
2. IT people come first.   The most important element in building an internal decision support-oriented cost and profitability system is understanding the principles of financial internal decision support information and designing a model that supports the resources and activities of the business.  You mention ABC - it has its good points and weak points - do you know what those are?  Do you know what the many, many design options are for an ABC system?   Do your IT people or your vendors?  My experience is they are often focused on "out of the box", and don't really know many design options and are hard pressed to talk about potential weaknesses - if they know what they are.

All that said, any step forward is a good step.  The more you know about the principles of modeling for financial internal decision support, the more likely you are to get the results that will truly change your business.

Would other agree with my issues?   What are your approaches to implementing improved cost and profitability systems?

One of the main reasons companies implement Profitability and Cost Management methodologies is to understand what drives their profitability and to identify the customers and products that either contribute to or diminish it.

High-level executives have a clear understanding of the key business questions they need answers to. These questions are critical for making strategic decisions. The challenge now is: how do we make this information accessible to decision-makers?

To achieve this, we must integrate IT into the process. First and foremost, a well-established profitability team consists of a multidisciplinary group of professionals. This includes individuals who understand the business, data analysts, and those with expertise in data management. Crucially, the profitability team benefits significantly from an IT professional who also possesses business acumen-this is a key factor for success.

No model can be built without data. Data is often difficult to process, especially when key business questions require answers at the customer and product level,  specially for companies with high number of customers like banks. Let's assume our Profitability Team has been tasked with building a Profit and Cost Management model. They have already defined their objectives, key business questions, and the framework of what needs to be developed.

With a well-defined design in hand, our IT expert will begin identifying data sources. They will soon realise that information comes from multiple sources-some from databases and others from external files. The challenge will be to integrate all these sources into a unified, reliable dataset.

Raw data is not immediately usable; it requires thorough analysis and refinement before it can support profitability and cost analysis. By collaborating as a team, they will use their preferred platform to transform raw data into a structured model.

There are various methodologies available, such as: Activity-Based Costing (ABC) and Time-Driven Activity-Based Costing (TDABC), and others. At this stage of the process, our IT professional will have a clear understanding of the type of model being built. The next step is to create an initial prototype for review and analysis with the entire team.

If the preliminary results align with the key business questions, the next step is to process data for at least 12 periods. This leads to the most exciting phase-producing a business portfolio with the results, which will be presented to top executives.

The journey from raw data to an insightful business portfolio can take months. However, the long-term benefits of having a model that can be updated on a monthly basis far outweigh the effort. With a reliable and continuously updated model, businesses can make data-driven decisions with confidence.

Do you have stories about your journey from raw data to an insightful Profitability and Cost model?

What are your thoughts on integrating an IT professional in your team?