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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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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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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
10
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
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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Role of Finance Transformation
To deliver a finance function at optimal cost, automatingand standardizing processes as appropr iate willcapitalize on economies of scale cost
13
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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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
16
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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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
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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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
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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
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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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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
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
32
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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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
35
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
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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
41
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
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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
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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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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
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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
A Leading Automotive Company (cont .)
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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A Leading Automotive Company (cont .)
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
A Leading Automotive Company (cont .)
How did they do it? (cont .)
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
A Leading Automotive Company (cont .)
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
56
Media and Entertainment: Driver-Based Planning (cont.)
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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Media and Entertainment: Driver-Based Planning (cont.)
How did they do it? (cont .)
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
58
Media and Entertainment: Driver-Based Planning (cont.)
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
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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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
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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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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
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Your Turn!
How to contact me:
Aju AsarSr. Managing Consultant
IBM Global Business [email protected]
(503) 332-6997
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