How Leading Finance Organizations Are Improving Their Financial Planning Effectiveness

8/10/2019 How Leading Finance Organizations Are Improving Their Financial Planning Effectiveness

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2008 Wellesley Information Services. All rights reserved.

How Leading FinanceOrganizations AreImproving Their

Financial PlanningEffectiveness

Aju AsarIBM

1

How Many of the Following Statements Do You Agree With?

Planning process i s viewed as one of the most valuablemanagement processes

Sr. management has confidence in the outputs o f boththe planning and forecasting process

It takes less than 60 days to complete the process

Plans clearly identify the expected impact on keymeasures on all major in itiatives

Sandbagging of plans and forecast is virtuallynonexistent

Technology has been fully leveraged to improve both theefficiency and the value of planning

A new forecast developed on demand within 24 hours

2

What Well Cover

Understanding the world of p lanning

Unlocking the value with finance transformation

Exploring the planning model Improving the process

Incorporating people, systems, and data

Analyzing customer experiences

Wrap-up

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3

The World of Planning

New products and services

A new product is launched every three and a hal f minutes

Bankruptcies

Over 39,000 companies fi led for bankruptcy in 2005 and thenumbers are still on the rise

Earning estimates

30% of public companies missed their earning estimates in2004-2005

Restatements and fraud

Accounting restatemen ts of over $1,100 in 2005 and s ti ll on ri se

Between 2002 and 2006, over 1,000 convictions in corporatefraud cases

Source: David A.J.Axson, Best Practices in Planning and Performance Management(Wiley, January 2007).

4

External Forces of Change

Better-informed customers

Changing market and business models

Structural change in business economics

Regulatory revolution

Growth through acquisitions

Redefining asset values

Changing delivery channels

Compressed cycle times

Right technology

5

The Internal Challenges to Face External Changes

Planning model

Performance management framework unclear, KPIs no t link edto strategy, targets unclear, roles no t well-defined

Process

Not integrated, often viewed as corpo rate compliance, focusedon consolidation and validation, manual, low levels ofcollaboration, input rather than driver-based

Systems

High reliance on Microsoft (MS) Excel, multiple applications, nocommon data store, no integrated tool set

People

Game playing, inadequate links to incentives, dysfunctional

behavior associated with legacy culture

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6

Tactical Challenges Compounded with Internal Challenge

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From the Mind o f the CFO

CFOs cite six key factors as causing their currentplanning processes to lack value

Lack a well-defined strategy

Lack of linkage between strategy and operational plan

Lack individual accountability of results

Lack meaningful measures

Lack pay for performance

Lack data availability

Freeing up t ime and resources wi ll better enable the

management of core value drivers

8

Why Planning?

To direct and enable the entire organization to transformits vision into value

Maximizing value creation across the entire enterprise

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9

Why Is Planning and Forecasting Important Now?

Strategic perspective

Predictability and responsiveness

Improved integration

Anticipate and respond qu ickly to change

Be agile and able to react quickl y to changing market andcustomer demand

Decision making Shift focus from data preparation to analysis and action

Variable

Reduce costs

Focused

Enhance capabilities

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Why Is Planning and Forecasting Important Now? (cont.)

Tactical perspective

Wealth of business data to be exploited from ERP

Shared Services centers have been established removing muchof the routine transactional processing from the residualfinance function

The outsou rcing of key processes and departments has furtherreleased resources and focused functions on value addingactivity

Technologies are now in place to properly support the vision o fenterprise-wide, distri buted, collaborative planning processes

11

What Well Cover






Wrap-up

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12

Role of Finance Transformation

To deliver a finance function at optimal cost, automatingand standardizing processes as appropr iate willcapitalize on economies of scale cost

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Context for Transformation

Organization

What role does finance play in the business?

How should finance be structured to support the businessmodel and future strategies?

Process

How can overall process performance be optimized?

Technology

How should technology be deployed to enable and adapt to theprocess and organizational changes?

14

Where Do We Start?

Optimize decision

support

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15

What Is a Good Plan?

Should answer key directional questions

Where are we going?

How are we going to get there?

What happens if things do not turn out as planned?

Should answer key situational questions

How will the organization maintain current operations?

How will it improve the efficiency of current operations?

Which new initiatives wil l the organization implement?

Should be focused

Key performance drivers that have economic relevance

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What Is a Good Plan? (cont.)

Should link strategies to activities

Should be explainable by cause-and-effect relationships

Should be measurable

An act iv ity can be co rrelated with the success o f an objec tive

Should include assignments for accountability

To empower, reward, and have control of the resources toensure the delivery of the activity

Should be built on fact-based assumptions

Assumptions should cor relate to the set of corporate ob jectives

17

Transformation Steps

1. Comprehensive process assessment

Internal assessment

External analysis

Synthesis of findings

2. Objective-based process redesign

Process reconfiguration

Internal executive alignment

3. Controlled rollout on process changes

Gradual phase-in

Change management and training

4. Process reinforcement and evolut ion

Performance tracking

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18

What Well Cover



Exploring the planning model

Improving the process


Analyzing customer experiences Wrap-up

19

Why Use Planning Best Practices?

Argument for developing a best practice-driven culture

Minimize inefficiency and waste

Simplify core business processes

Redefine the standard of excellence

Can drive competitive advantage by applyingbest practice

From one industry to another industry

From one process to another

From same industry and process, but gaining advantage

through superior execution

20

Best Practices Framework

Emerging Planning, Budgeting, and Forecasting (PB&F) better practices exist across five key dimensions

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21

Planning Model Approach

Top-down

Will work only if the measures and targets are clearlyunderstood and there is trust, understanding, and collaborationacross and throughout the business

22

Planning Model Approach (cont.)

Bottom-up

A typ ical problem with bot tom-up p lanning is that en terpr isevalue and performance targets are often unclear and the focusbecomes more on just managing silo variances

23

Planning Model Approach (cont.)

The most effective companies have adopted a hybrid ofthe two processes (top-down and bottom-up)

Targets are set by corporate and cascaded to the regions anddivisions

Regions and di visions do the first level of planning to meet thetargets and gain agreement from co rporate

Region and div ision p lan targets are cascaded down to theoperations and functions

Functions do the bottom-up plans to meet the region targets

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Planning Model Strategic A lignment and Planning

Strategic alignment Corporate objectives, goals, strategies, targets, and measures

are clearly linked and cascaded throughout an organization

Accountab il ity i s c lear ly def ined and al igned wi th the businessmodel

Strategic planning A strateg ic plan should permeate the organization down to

day-to-day activiti es via tactical and operational plans Factor the impact of ris k on the assumptions, initiatives, and

targeted results

Employ scenario-based, rather than singl e point

Outcome of strategic planning should be based on what-ifanalysis based on di fferent scenarios (ideal, worst case, bestcase, etc.)

Focus on non-financial measures that are qualitative in nature

25

Planning Model Targets

Should be derived by balancing in ternal capabili ty andexternal expectation

Should be relative rather than fixed, to maximizeopportunities and overcome the fear of ethical challenges

Should be represented as a balanced set of fi nancial andnon-financial metrics

Should not be adopted as a substitu te of strategy

Should act as a driver for :

Eliminating plan submiss ion iterations and re-work Establishing a stronger link to performance and compensation

Adopting st retch targets in support of cont inuous and leanimprovements

26

Planning Model Time Horizon and Execution Framework

Define the right time horizon

Normal cycle of product development and selling

Lead time required for making resou rce allocation decisions

Execution framework

Organizations should choose a framework to manage strategyexecution to understand the strategic goals, objectives, andmeasures in defining the critical suc cess factors and valuedrivers (e.g., balanced scorecard)

The most effective companies are focused on execution

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27

What Well Cover







28

Integrate Planning, Budgeting, and Forecasting

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Process

Plan based on how the business is managed

Segment the business appropriately

For example: For plans developed in matrix organizations,(i.e., if the matrix i s a geographic or market sector) separateplans and planning processes along each dimension thatmay be appropriate, and then integrated into one final plandocument

Transfer pricing

Adopt transfer pricing to be compet it ive in the market place aslong as the allocation or transfer pricing mechanism does notparalyze and obstruc t clear thinking

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Budgeting and Forecasting

Budgeting approach

Budget should be designed with reference to the strategic plan

Start with business drivers

Forecasting approach

Use a continuous roll ing forecast updated quarterly based onactual revenue and spend from previous mon ths

Deploy driver-based models Focus on key performance drivers, eliminating unnecessary

details

Emphasis on analysis (why and what if), insight, and judgment

Use forecasting as a risk management tool

31

Case for Rolling Forecast

Typical annual budget

Internally focused, historical perspective, bottom-upplan development

Multiple iterations of detailed budget preparation

Focus on only cur rent year

Typical rolling forecast

Forward look ing, more market-based, external focus,top-down planning

Less overall effort

Planning horizon refocused to look ing beyond year end (e.g.,18 months)

Smoothes resource needs throughou t the year

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Level of Effort

Focus on planning contents

Limit information to what is necessary to make decisions andevaluate performance

Rationalize and decrease total number of pl anning line items(< than 100)

Plan for items that have factors, such as:

Materiality f actor

Volatility factor

Accountabil ity

Tip

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33

Planning Cycle Frequency and Earning Guidance

Planning cycle frequency

Organizations predictive capability defines the most practicaltime horizon

The normal cycl e of product development and selling withinthe industry

Lead time required for making major resource allocationdecisions

Best practice cycle time for planning process is 45 days

Minimize the number of iterations to two

Earning guidance

Recommend providing a range of earning guidance instead ofpoint estimates

34

Resource Allocations and Scenario Building

Resource allocations Link resource allocation decisi on framework with the forecast

review process (at least quarterly)

This integrates projects and initiatives along with everyforecast to capture potential opportunities

Scenario building Use driver-based models to update monthly o r quarterly as part

of rolling forecast based on actual revenue and spend

Non-financial data is modeled to model financial data

Quantitative measures

Consumption or productivity rates

Share allocation rules and utilize modeling tools to support what if analyses

Span time periods

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Analy tics and Report ing Strategy, and Risk Assessment

Analy tics and reporting st rategy Focus on relationships, not organization structures

Report on key performance indicators that are aligned to

business objectives Should be a function of the roles and responsib ilities of the

recipients, goals and p lans of the organization, and the actualresults received

Integration with transaction systems

Real-time incorporation of events

Risk assessment Recogni ze risk th roughout the planning and management

reporting process

Should not be based on the comfort factor or the availability ofinformation and should be driven by the risk profile of the

tactics being considered

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Best Practice Process Metrics

< 8 weeks8-12 weeksAnnual p lan complet iontime

+/-1%+/- 3%Forecast accuracy

1:1.51:1Value-added ratio


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People (cont.)

Accountabil it y

Clearly delineate which planning actions occur at whi ch levelof responsibility

Accountabil ity factor can work eff ic ien tly and ef fec tivel y only i fthe empowerment factor is aligned

Incentive alignment

Best practice organizations align incentives to reach optimalperformance, rather than negotiated fixed targets

Decouple sho rt-term incentive plan from annual business plan

Should be designed to drive desired behavior execution ofstrategy

Workflow

Leverage a streamlined and discipl ined approval process

40

Systems and Data

Single integrated planning model

Adopt a techno logy package that can integrate ef fec tively w iththe strategic and operational planning processes

Design sol utions in the context of how information is used

One version of the truth

Use a common pl anning sys tem to enable enterprise-wide,end-to-end planning and performance management solu tions tosuppor t one version of the truth across the organization

Driver-based scenario modeling

Capable of automated group and business modeling driver-based, scenario, what-ifs linked to PB&F processes

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Systems and Data (cont.)

Access and audi t trial

Automated au thor izat ion and audi t t rai l

Single sign-on to PB&F tools w ith role-based security

Common data definitions

Effective planning demands a common l anguage for thedifferent elements of the plan to be integrated successfully

Clear data management processes to ensu re integrity

Drill-down capability

Drill-down and drill-through capability into the transactionaldetails as well as the enterprise-wide planning system toanalyze the cause scenarios

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BI Integrated Planning

Al lows for the ease of use of p lanning in the SAPNetWeaver BI environment, while being fully integratedwith SAP NetWeaver

BI Integrated Planning allows for : Enhanced user productivity, lower training costs

More flexible and user friendly user in terfaces; common UIfor planning and reporting

A Web-based planning modeler to al low for the creation andmodification of any type of plan

Faster implementation and lower maintenance costs

Reduced number of customizing objects (e.g., variables,hierarchies, one layout for report ing and planning , etc.)

Better performance

Reduced data redundancy (e.g., calculated key figures andcurrency translation) via the use of SAP NetWeaver BIsOLAP features

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BI Integrated Planning (cont.)

Source: SAP

44

Applying Best Pract ices

Identify practices that are most appropriate foran organization

External operating environment

Internal structu re and processes

Centralized vs. decentralized

Maturity level

Management styl e

Organizational risk profile

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Applying Best Pract ices (cont .)

Identify an opportunity for improvement From informal observation to a continuous and sys tematic

measurement process

Determine if the opportunity is attractive Critical step to move forward

Apply ROI methodolog ies to val idate the opportuni ty

Investigate the causes of shor tfall in performance Distinguish between symptoms and root causes

Identify best practices that can be applied to address the rootcause

Implement the change Translate best practices identified to practical applications

within the business

Commitment to act should be matched with a appropr iateallocation of resources

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Increasing Shareholder Value

47

What Well Cover






Wrap-up

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A Leading Automotive Company

Industry challenges

Growing industry

Unpredictable revenue shifts

Sensitive to geography/economy fluctuations

Background: Followed a traditional planning process

Spending estimates and budgets updated once a year

Resulted in infrequent updates of forward-lookinginformation

Incentives linked to budget performance

Prevented assessment of true resource trade-offs

Complex inter-company transfer processes

Non-value add activities

Issue

49

A Leading Automotive Company (cont .)

Challenges Longer planning cycle

Multiple iterations

Long range plan was not integrated with the budgets

Data overload is sues

Too many variables tracked

Some data gathered too frequently

Inefficient forecasting

Non-value add inputs to proj ections

High update costs and multipl e forecasts partly due to

non-standardized data Inadequate guidance

Inability to translate strategic plans to budgets or forecaststo specific actions

50


Solution Transformed the planning process wi th the objective of better

aligning activities with strategic objectives

How did they do it? A new focus by product l ine

Reduction in non-value add negotiations

Focused on the essentials based on:

Economic relevance propo rtion affected in thefinancial s tatements

Forecast more frequently for those variables that are of

economic relevance

Variability how often, how large, and how predictable

Forecast more frequently for those variables that are of

high variability

Solution

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How did they do it? (cont .)

Adopted ro ll ing forecas ts

By business unit with an 18-month horizon that provided atimely unbiased view of expected spending ov er next 18months

Budgets were augmented from the rolling forecast

Quarterly reviewsAt the end of each quarter, helped to int roduce forums to

discus s variances from last budgets or forecasts and statusof new initiatives

Operating plans

Contained revenue and spending proj ections for a full yearto set guardrails around servi ce levels and costs setexpectations

52



Accountabil ity

Clear responsibi lities established between business uni tsand corporate finance

Departments focused on variables with in departmentalcontro l and corporate focused on variables that are notwithin firms immediate control

Realigning incentives

Focused compensation system to long-term performancediscou rage forecast gaming

Standardized tool s

Adopted SAP Int egrated Planning so lution as s tandardizedenterprise planning tool

53


Outcome: First they transformed their philosophy andprocess into a new culture, then they imp lementedtechnology to support the culture and process Planning processes aligned with strategic objectives shorter

planning cycles

Changed the mind set from how they are doing against abudget to what they are doing to drive business forward andwith what actions they are linked

By eliminating budgets, the organization was able to operateleaner and be more adaptable in its support of action planning,resource allocation, and co-ordination of activities

Abil ity to engage success fu lly i n target sett ing and l inkingincentives to actual performances

More accurate outlook of earnings

Relative targets helped to maximize revenue relative to market

opportunities

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Media and Entertainment: Driver-Based Planning

Industry challenges

Rapid investment response

Background: Followed a resource-intensive planningand forecasting process

Monthly business results review not linked to forecasts

Was focused on the act of forecasting, not the output

Limited focus on drivers of performance

Long-range planning not linked to annual plan

Planning focused within business units spreadsheetapplications

Issue

55

Media and Entertainment: Driver-Based Planning (cont.)

Day-to-day challenges

Time-consum ing, iterative, bottom-up process completedby Business Unit (BU) planning staff

Process re-invented annually

Target ranges not agreed to upfron t by co rporate centerand BUs

Detail-oriented process drained resources

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How did they do it?

Adopted a hybr id approach plann ing

Top-down with bottom-up revisions

Scenario-driven contingency plans were introduced toimprove quality and speed of decision

Adopted a dr iver-based forecast ing solut ion

Non-financial drivers that are quantitative in nature, such asvolumes (number of sales units), assumptions are used toproject revenues and expenses

Streamlined details to focus on performance drivers

Standardized forecasting methodologies across simi larbusinesses based on common performance drivers

Identification of performance drivers support ed collaborative,

upfront target-setting between business un its and corporate

Solution

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Targets

Output of driver-based models from divi sions was used as abasis for targets for business units

Target ranges were later agreed upon based on analysis ofdrivers and scenarios

Upfront target-setting between business units and corporatewas established with the collective understanding andupfront agreement of BUs key performance drivers

Adopted SAP-BPS Solut ion

Business Planning and Simulation (BPS) solution was usedas the planning tool for the enterprise

Standardized planning t emplates to load, model, project andanalyze performance across the enterprise

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Outcome: Drivers run horizontally across organizations

Shortened the forecasting cyc le, increasing process efficiency

Budget was driven off the rolling forecast

Better and faster responses to reforecast scenarios

Dynamic projection helped to incorpo rate risks andopportunities

Better visibility to cos t and revenue drivers

59

Critical Success Factors

Do not count on a silver bullet

Approach the program in stages

Plan comprehensively Dedicate the resources

Build commi tment through involvement

Gain momentum quickly

Change management a constant propeller

Do not let technology take over

Don't

Forget

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What Well Cover







61

Resources

David A.J Axson, Best Practices in Planning andPerformance Management(Wiley, January 2007).

Planning, Budgeting, and Forecasting: A Best Practices

Snapshot(APQC, August 2006).

www.apqc.org/portal/apqc/ksn?paf_gear_id=contentgearhome&paf_dm=full&pageselect=detail&docid=138781

62

7 Key Points to Take Home

Get the basic fundamentals right execution is key

Best-practice organizations planning, budgeting, and

forecasting processes fit their organizational cultures Relative targets overcome the dangers of f ixed targets,

which can sub-optimize performance and lead toethical challenges

Al ign incent ives to reach optimal performance ratherthan negotiated targets

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63

7 Key Points to Take Home (cont.)

Use performance systems to understand facts andcause-and-effect relationships

Should be viewed as an enabler of a sound PB&F Model

Continuous rolling forecast provides forward visibility

Budgeting should be an if-required component

Value accuracy over precision

64

Your Turn!

How to contact me:

Aju AsarSr. Managing Consultant

IBM Global Business [email protected]

(503) 332-6997

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Notes:

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Documents

How Leading Finance Organizations Are Improving Their Financial Planning Effectiveness