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Profitability Modeling and Oracle

Guest post by
Shruti Jain, Senior Associate Consultant, Infosys

 

Measuring profitability and costs are fundamental to the planning and strategizing of any business. The key question here is what is profitability modeling and how does it helps in formation of business strategies?

Profitability models can be used for evaluating investments in new projects, new products, and impact of new taxation laws or new regulations introduced in the business environment. It can be used for what-if analysis of evolving company strategies.

Profitability modeling is in essence forecasting the costs and profits in any business. However, the next question here is which profitability model is most suitable to my business. The appropriate profitability model to be applied to a particular business is primarily based on the industry dynamics and the business model itself.

Simple profitability modeling is based on historical data, financial modeling and trend analysis. However, in changing business environments where the scale of businesses have multiplied, the pace of changes are faster, variables are newer and scenarios are fresh with no prior data to analyze and model, analytical models are taking the lead.

Oracle provides two analytical products for profitability management. One is Oracle Hyperion Profitability and Cost Management (HPCM) and the second product is specific to the Financial Services Industry called Oracle Financial Services Analytical Applications Profitability Management (OFSAA PM).

Let's analyze these products from a financial services perspective.

Profitability of banks or financial services is the determinant of how much risk a bank can take on its books and as risk is directly proportional to returns in banking, it is directly proportional to banks profitability and hence the returns to the shareholders. Solvency factors like liquidity, capital adequacy and market volatility are unique to the financial sector and impacts it's standing more than any other industry. As risk is an unavoidable part of banking, any profitability analysis without considering the risk aspects is incomplete. OFSAA Profitability Management has a competitive advantage here as it can bring together information from OFSAA FTP, OFSAA Basel 2 and OFSAA economic capital which are all built on top of a single FSDW data model design specifically for financial services industry and hence provide risk adjusted profitability measures OOTB.

Profitability models in other industries is driven more by investments, suppliers, raw materials, manufacturing operations, marketing and sales. Here cost and profit allocation between different cost and profit centers for various activities are more clearly identifiable and activity and consumption based costing is more often required. HPCM scores here as it provides a flexible allocation engine for both cost and resource/revenue allocation. It supports multiple methods including Activity Based Costing, custom allocations, standard costing and Time Estimations. HPCM also have an edge as it is based on Oracle Essbase which is industry's leading OLAP server supporting faster, easier and more powerful multidimensional analysis and scenario modeling. Banks and financial services which have simple ABC costing need can opt for HPCM product as well.

Both the solutions coexist in the financial services space and customers opt for one or both depending on their needs.

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