The evolution of business performance management (BPM) has accelerated in 2007. Certainly that can be seen through BPM applications' new features, but it's also demonstrated by the rate and nature of vendor consolidation, the types of customers that are pursuing performance management initiatives, and the consultancies that have risen up to assist them. After many years of steady customer growth and the occasional vendor merger, the BPM market in the first half of 2007 saw the pace of these trends skyrocket.

The new generation of performance management software, which I call BPM 2.0, has played a key role in the recent changes in the market. BPM 2.0 applications build on what has gone before -- e.g., budgeting, consolidation, dashboards -- and takes performance management both deeper and wider in the typical enterprise. It dives deeper into finance with customer and product profitability analysis as well as detailed working capital dashboards. At the same time, it provides a more holistic and comprehensive view of the enterprise by offering operational analytics for major functional areas outside finance and providing insights into the cross-departmental impacts of corporate actions. All of this functionality ties into more forward-looking and predictive capabilities that project the probabilities associated with forecasts and potential outcomes.

Because this generation of BPM encompasses functionality outside the traditional realm of performance management, the movement toward BPM 2.0 has spurred some of the vendor consolidation this year. Because it is intended to reach more users throughout the company, it has also placed the onus on vendors to make performance management applications easier to use, easier to deploy, and more cost-effective.

The Changing BPM Customer

BPM software is long past the early adopter/pioneer stage. In the early days of performance management, customers tended to be those with the most pressing needs and a willingness to take risks. Financial services firms and (to a lesser extent) telecommunications companies were some of the first to move forward with BPM. Budgeting was the primary area these companies addressed.

Over the past few years, BPM customers have come from all industries. Budgeting has usually been their primary focus, and they've placed a secondary emphasis on dashboards and the key performance indicators they contain. Despite their diversity of industry, however, the size of BPM customers has tended to fall within a narrow band: the top end of the midmarket to the middle of the enterprise market -- in other words, companies with annual revenues between $500 million and several billion dollars. Of course, there have been exceptions on both the low end and the high end, but the majority of customers have fallen into this range.

That generalization started to change recently, when some of the largest and best-known companies jumped on the BPM bandwagon. What took them so long? For big companies, doing BPM can be very daunting. They have many disparate systems, including complex legacy transactional systems, whose data they need to reconcile before it can be entered into a single performance management system. (For a discussion of some of the complexities inherent in reconciliation of various transactional systems' data, see BPM Bridges G/L (and Culture) Gaps.) In addition to the technical disparities, big companies often comprise many political factions that have differing views on how best to approach BPM, what methodologies to employ, and where to start the project. And due to their very size, many large corporations encompass a degree of bureaucracy and inertia that project leaders have to overcome before they can move forward with an initiative as major as performance management.

But today, the excitement, momentum, and newer capabilities of BPM 2.0 software -- along with the highly visible success enjoyed by some companies that are already using BPM -- are beginning to draw large companies into the fold. And once they decide to take on a performance management initiative, the biggest companies tend to jump in wholeheartedly. For the most part, large companies embrace all of BPM, not just budgeting and dashboards. Aspects of BPM 2.0 such as operational analytics and profitability optimization are of utmost importance to these organizations.

On the other end of the size spectrum, the smallest companies are starting to move forward with BPM as well. Their primary motivation is to move away from the pains of spreadsheet-based budgeting. In many cases, their own growth has made it nearly impossible for them to continue using outdated and chaotic budgeting processes, and the robust, cost-effective solutions that are available today offer an attractive alternative that would not have been an option just a few years ago. In particular, the advent of software as a service (SaaS) technology has reduced demands on the already-taxed IT personnel and infrastructure of these smaller companies. By utilizing a BPM application hosted by a SaaS vendor these companies don't have to worry about installing software, tying up their servers, or managing software upgrades. They can focus solely on configuring and utilizing the application.

How Vendors Are Morphing and Merging

This year has seen an unprecedented amount of activity in the vendor community: major new software releases, significant mergers and acquisitions, and the emergence of new players. We will examine the specific vendor activities in detail in a BPM software buyers guide in Business Finance's January issue. For now, let's take a look at the major trends.

It seems that all vendors got the BPM 2.0 message. They're adding deeper and more forward-looking analysis capabilities, offering a more holistic view of the enterprise, and trying to make their software useful to more people throughout the company. While some added new functionality, such as predictive analytics, to their own products, most purchased smaller, specialized vendors to incorporate BPM 2.0 features into their offerings. The acquired included vendors of activity-based costing, operational analytics, and risk and compliance applications. Profitability optimization is an area in which many BPM vendors partnered with the leaders in the space. Other vendors introduced new product versions that support service-oriented architectures and the previously mentioned SaaS. However, the most major changes in the BPM vendor landscape resulted from a few megamergers that, in effect, remade the industry. The result is a BPM vendor landscape that falls into four main categories.

Tools-only vendors. This first category has been shrinking for years. Most tools vendors have purchased BPM application vendors to expand their performance management-specific capabilities. Most of the tools-focused vendors that remain specialize in one specific capability. Informatica, for example, is known for its extract, transform, and load (ETL) tools. Microsoft has long been a supplier of underlying business intelligence (BI) tools to many companies, as well as several of the BPM application vendors. However, now that Microsoft offers its own performance management application suite, PerformancePoint, it has exited the tools-only category. Although building a custom BPM solution from a set of raw BI tools can result in a highly customized system, it takes longer and costs more than buying a prebuilt packaged application. Considering the robustness of the packaged applications these days, very few BPM customers feel the need to build from scratch.

Packaged application-only vendors. They have deep domain expertise and offer a comprehensive set of performance management functionality, while they avoid diverting any of their research and development dollars to ERP or BI-tools work. Their solutions usually work with multiple underlying third-party databases. Vendors such as KCI and Clarity Systems fall into this group. With their focus on applications, these vendors are able to build robust functionality into their budgeting and consolidation offerings. However, their customers need to figure out how to map data into their BPM application from underlying business intelligence or ERP databases, and vice versa.

Tools-and-application vendors. This has been the most popular category of BPM vendor over the past several years. These organizations provide both. Cognos and SAS are two familiar names in this category. They offer a fairly complete suite of BPM applications, complemented by an underlying toolset that enables customers to expand on what the suite offers, as well as address newer areas such as operational analysis. Some of these vendors have made purchases or announced significant partnerships in 2007 -- most notably, Cognos acquired Applix and SAS announced a major partnership with Teradata. These vendors are ERP-independent, and purchasing a solution from them fits with many organizations' goal of standardizing their core systems around a consolidated set of vendors. While the solutions of the tools-and-application vendors cover a broad range, the functionality and the price that goes with it may be overkill for some prospective customers.

ERP-plus-tools-plus-applications vendors. This final category of BPM vendors has really become viable in the past year. The big ERP players have offered their own versions of performance management for years, but they have met with limited success, even in their installed base. They've recently changed the picture dramatically by purchasing established, successful, independent BPM vendors. This year, Oracle bought Hyperion, and SAP purchased Business Objects and OutlookSoft; last year, Infor combined with Geac/Extensity and Systems Union. Their goal, of course, is to become an all-in-one vendor going from transactions to performance analysis.

The recent acquisitions have strengthened what was traditionally the weakest area of the ERP vendors' offerings. They face the hurdle of integrating the various technologies, but for their ERP customers, they naturally offer a compelling solution and will be even more attractive when the bulk of their integration work is complete. They also must make tough decisions around which modules will have a future and which won't. In these ERP-BPM mergers, the newly combined company faces many instances of duplicate or overlapping functionality among the various components of performance management. Each product in each of these duplications has a loyal customer base. It would be foolish to dilute development efforts by supporting two versions of essentially the same functionality, but deciding which to keep and which to discontinue will be difficult. The other, perhaps even bigger, challenge will be attracting new BPM customers that have not already standardized on the vendor's ERP system. The one sure thing is that their existing ERP customers will have far better options to meet their performance management needs than they had in the past.

Which of these four vendor categories will work best for a particular BPM prospect largely depends on the customer's situation. Does its current BI or ERP vendor offer performance management solutions that meet all of its needs? If so, then it is highly likely to go with that vendor's BPM offerings. If not, the company will probably look to a focused application vendor whose product can sit on top of its existing systems. Organizations that don't yet have a BI or ERP solution in place may select a vendor that offers BI and BPM or adds in ERP as well.

While they evaluate functionality, prospective BPM customers must also consider the question of the road forward. What is the product road map for the companies that have made major acquisitions in the past year? Which modules will be enhanced and which will move into maintenance mode? What about the timing of integration? While most initial messaging from the vendors was that all products would continue to be supported indefinitely, reality is beginning to set in. I have met with several of these vendors, and it is clear that they will soon stop actively marketing some of the overlapping modules. Other modules will be merged together to form a superset of the predecessor applications.

In addition, integration will be a multistep process. One phase will focus on the back-end databases and another phase will deliver a unified front end and common user experience. Some modules will take longer than others to fall in line. Overall, it's probably a 12- to 24-month process from merger to fully integrated solutions. Keep in mind that in some instances the architectures are so different that full integration can't really take place until a major rewrite of the code occurs down the road.

The Effects on Consulting Firms

The growing diversity of BPM customers and changes in the vendor community have had a major impact on the consulting world. Demand for consulting services is way up. On the high end, there is a need for strategic consulting to help large organizations address their complex performance issues. Many of the larger consulting firms are expanding their practices in this area and giving them labels such as "CFO services."

The customer companies that have waited this long to move forward with performance management tend to be risk averse, especially cost conscious, or both. They wait until a technology or methodology is proven and costs have come down before they jump in. They also tend to be particularly interested in avoiding potential pitfalls and following well-established best practices. These organizations often look to consultants that have proven track records in performance management to guide and advise them through the entire process.

Some of the smallest implementers are unable to afford standard consulting services. To get some benefits of a standard consulting engagement, they are utilizing innovative firms that offer phone-based and Web-based hourly consulting services coupled with reusable implementation tools. Companies with even smaller budgets are purchasing in-depth research from advisory firms to attempt to become the experts they can't afford to hire. Very few implementers of performance management software these days are taking the risk of going it alone, which almost certainly involves some costly trial and error.

BPM 2.0 has also had an impact on the consulting landscape. Its deeper financial focus has brought financial management and process consulting firms into the fold. The operational analytics aspects have been a boon to business intelligence consultants, who have spent years developing similar types of solutions. Many of the consulting firms that are new to BPM and are strong in one particular area are partnering with more established BPM consulting firms that cover the basics. The combination enables them to provide a complete solution to their clients.

The implementation consulting area of BPM is also growing. However, it has become much more competitive as a result of all the mergers and acquisitions. In many cases, vendors' internal consultants didn't like where they ended up post-merger. Some of them opted to leave and start their own implementation consulting business around their former employer's products. Now they are competing with that vendor's existing consulting channel. In addition, the consulting firms that supported the ERP vendors' products are now looking to expand into the new BPM products that were recently acquired by those vendors. This creates an even larger group of implementers for these products. This is all good news for customers of these products. A larger pool of implementers means more competitive pricing, a greater likelihood of local support, and more specific industry expertise and best practices to draw upon.

All in all, this is a good time for BPM and a great time to be a BPM customer.

Craig Schiff is CEO of BPM Partners, a vendor-neutral advisory services firm that helps companies maximize the return on their BPM investments.