IBM Cognos TM1: The Swiss Army Knife of Technology Used For Profitability Modeling & Optimization

Yes, IBM Cognos TM1 is like a Swiss Army knife – it has capabilities to do a lot of different things extremely well. One of the practices it’s being utilized for with incredible results is an emerging, but no so well understood, practice entitled profitability modeling and optimization. The power of IBM Cognos TM1 is the primary reason this practice has emerged. Companies adopting IBM Cognos TM1 as the technology of choice for this practice is the primary reason they’re thriving moving from ‘also rans’ to industry leaders. Still, this post is less about IBM Cognos TM1 and more about the process, Profitability Modeling & Optimization.

When talking about profitability modeling & optimization it’s more illustrative to start with the ever-important strategic element of price. It’s that set amount that can make or break a product or service or even the company’s acceptance by the marketplace. Price, of course, is most often set by what the market is willing to pay for this product or service. A lot of factors can go into your pricing strategy including things like the brand equity and image of the product or service (Think Tiffany’s), expected sales volumes (Think economies of scale), competitive factors (Only game in town?), or if it’s a new category being created. Of course, we know that companies profit by selling this product or service at a margin greater than its cost. Then, a profit is turned.

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Now, what you do with those profits is then up to the company to decide. Do you reinvest those profits? Most do. If so, how do you allocate them across the business for the most profitable return? Maybe you even want to release some of them to shareholders via dividends? What about making acquisitions? These are important decisions to make based on what the future needs of the business are. This is a good problem to have.

Enter Profitability & Optimization.

To sustain competitiveness in the marketplace organizations must be able to model their profitability to maximize profits and optimize the components to profitability that incur costs. Most companies are performing some form of profitability and optimization activities everyday. The BIG difference is that some are much better at it than others. Why is this? What separates them from the others? It comes down to the best-in-class organizations investing in their people, the related processes, and a capable technology.

Ask yourself the following questions:

• What degree of insight do you have into product, customer, and market profitability?
• How timely and reliable is this information?
• Is the information in one system or do you have to make phone calls, send emails, query multiple databases and compile it together into a spreadsheet to make sense of it and even then it’s incomplete?
• Can you perform ad hoc analysis on that information to answer questions about the data to complete a thought process or run a scenario?
• Are you able to quickly understand anomalies/outliers in historic data?
• Are you able to quickly explore cause and effect?
• Do you understand the drivers that both impact and are impacted by price & cost?

Now, how would your colleagues in Sales, HR, Marketing, IT, Operations, etc. answer these questions?

It’s critical to know that every area of the business is looking at some element of profitability. Running scenarios, what if, and profitability analysis with a 360-degree viewpoint of the data is the lifeblood of value-added analysis for making smarter decisions which, if done effectively, translates into better corporate performance. Without better insight and understanding of the information derived from profitability modeling and optimization, business users are forced to go on their gut and/or out of date information — or, worse, they’re waiting until they do get the information they need before they can act…tick, tick, tick. Time is money.

If you and the rest of the workforce don’t have this information at your fingertips don’t fret because you’re not alone. However, things are changing. Companies today are investing more and more into this practice area as technology has caught up in a way that’s allowing for massive data volumes to be sliced-and-diced in seconds for this very purpose.

Now is the time to act. The technology is there so I’d ask why isn’t your organization there too. Hustle up. I know a lot of companies that are doing this practice very well – and some that aren’t unfortunately. They’re the ones looking to leverage IBM Cognos TM1 to put them on the path to better PM&O.

If you want to know more about this subject feel free to email me to discuss further.

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Tim O’Bryan
Email: tim.obryan@us.ibm.com
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