What’s Broken about Budgeting? – Part 1

By Gary Cokins, Founder of Analytics-Based Performance Management LLC

So tell me, how did your EPM system stack up against the vision I outlined in my last blog? Hopefully you’re in the “exceptional” category, but if not quite yet then maybe I’ve given you a few ideas to think over. I’m switching attention now to focus in on one area of EPM, but because it’s a big area I’m going to split this across two blogs. How many people in your organization love the annual budgeting process? Probably none. The mere mention of the name “budget” raises eyebrows and evokes cynicism. It should. That’s because the agonizing annual budget process may include:

  • Obsolete Budgeting – The budget data is obsolete within weeks after it is published because of ongoing changes in the environment. Customers and competitors usually change their behavior after the budget is published, and a prudent reaction to these changes often cannot be accommodated within it. In addition, today’s budget takes an extraordinarily long time to create, sometimes the process begins six months in advance and in the time taken to finish it the organization may often be reshuffled and resized.
  • Bean-Counter Budgeting – The budget is considered a fiscal exercise produced by the accountants and is disconnected from the strategy of the executive team – and from the mission-critical spending needed to implement the strategy.
  • Political Budgeting – Listening to the loudest voice, caving in to the strongest political muscle and using the prior year’s budget levels as a baseline are not be ideal ways to award resources for next year’s spending.
  • Over-Scrutinized Budgeting – Often the budget is revised midyear or, more frequently, with new forecast spending. Then an excess amount of attention is focused on analyzing the differences between the actual and projected expenses. These include budget-to-forecast, last-forecast-to-current-forecast, actual-to-budget, actual-to-forecast and so on. This reporting provides lifetime job security for the budget analysts in the accounting department.
  • Sandbagging Budgeting – The budget numbers that roll up from lower- and mid-level managers often mislead senior executives because of sandbagging (i.e., padding) by the veteran managers who know how to play the game.
  • Blow It All Budgeting – Reckless “use it or lose it” spending is standard practice for managers during the last fiscal quarter. Budgets can be an invitation to managers to spend needlessly.
  • Wasteful Budgeting – Budgets do nothing to help identify waste, unused capacity, or low productivity because they are not visible from the prior year’s spending. In fact, inefficiencies in the current business processes are often “baked into” next year’s budget. Nor to budgets do not support any form of continuous improvement.

The “traditional” annual budget is ingrained in an organization, yet the effort of producing it heavily outweighs the benefits it supposedly yields. How can budgeting be reformed? Or should the budget process be abandoned altogether because it can drive behavior counter to the organization’s need to rapidly respond to changing goals? How? Because managers will view end of fiscal year fixed targets as a “contract” they need to meet when instead they should be shifting their priorities in respond to changing business conditions. If the budget is to be abandoned, then what should replace its underlying purpose? 

The Evolutionary History of Budgets[1]

Why were budgets invented? Organizations seem to go through an irreversible life cycle that leads them toward specialization and eventually to turf protection. What do we mean by this? When organizations are originally created, managing spending is fairly straightforward. With the passing of time, the number and variety of products and service lines change as well as the needs of their customers. This consequently adds to more complexity and results in more indirect expenses and overhead to manage it.

Following an organization’s initial creation, all of the workers are reasonably focused on fulfilling the needs of whatever led to its creation in the first place. Despite early attempts to maintain flexibility, organizations slowly evolve into separate functions. As the functions create their own identities and staff, they seem to become fortresses. In many of them, the work becomes the jealously guarded property of the occupants. Inside each fortress, allegiances grow, and people speak their own languages – an effective way to spot intruders and confuse communications.

With the passing of more time, organizations become internally hierarchical. This structure remains even as value generating transactions and workflows flow through and across the internal and artificial organizational boundaries. These now-accepted management hierarchies are often referred to, within the organization itself as well as in management literature, as “silos,” “stovepipes” or “smokestacks.” They influence managers to act in a self-serving ways, placing their functional needs above those of the cross-functional processes to which each function contributes. In effect, the managers place their personal needs above the needs of their co-workers and customers.

At this stage in its life, the organization becomes less sensitive to the sources of demand placed on it from the outside and to changes in customer needs. In other words, the organization begins to lose sight of its raison d’être. The functional silos compete for resources and blame one another for any of the organization’s inexplicable and continuing failures to meet the needs of its customers. Arguments emerge about the source of the organization’s inefficiencies, but they are difficult to explain.

By this evolution point, there is poor end-to-end visibility about what exactly drives what inside the organization. Some organizations eventually evolve into intransigent bureaucracies. Some functions become so embedded inside the broader organization that their work level is insensitive to changes in the number and types of external requests. Fulfilling these requests were the origin of why their function was created in the first place. Yet, they become insulated from the outside world. This is not a pleasant story, but it is a pervasive one.

In part 2 I’ll discuss the evolving role of the CFO and ways in which budgets can be reformed.

[1] This section is drawn from Better Budgeting; Brian Plowman; 2004; http://www.develin.co.uk.

 

 

About the Author: Gary Cokins, CPIM
Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949.

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

Are Exceptional EPM Systems the Exception?

By Gary Cokins, Founder of Analytics-Based Performance Management LLC

Last time out I set a challenge for readers of this blog to question the performance management strategies and practices of their own organizations and executive teams. I hope you found this to be a useful and interesting exercise.

Quite naturally, many organizations over-rate the quality of their enterprise and corporate performance management (EPM / CPM) practices and systems. In reality they lack in in terms of how comprehensive and how integrated they are. For example, when you ask executives how well they measure and report either costs or non-financial performance measures, most proudly boast that they are very good. Again, this is inconsistent and conflicts with surveys where anonymous replies from mid-level managers candidly score them as “needs much improvement.”

Every organization cannot be above average!

What makes exceptionally good EPM systems exceptional?

Let’s not attempt to be a sociologist or psychologist and explain the incongruities between executives boasting superiority while anonymously answered surveys reveal inferiority. Rather let’s simply describe the full vision of an effective EPM system that organizations should aspire to.

First, we need to clarify some terminology and related confusion. EPM is neither solely a system nor solely a process. It is instead the integration of multiple managerial methods – and most of them have been around for decades arguably even before there were computers. EPM is also not just a CFO initiative with a bunch of scorecard and dashboard dials. It is much broader. Its purpose is not about monitoring the dials but rather moving the dials.

What makes for exceptionally good EPM is when multiple managerial methods are not only individually effective but also are seamlessly integrated and enhanced through embedded analytics of all flavors. Examples for using analytics to enhance EPM are to perform data segmentation, clustering, regression, and correlation analysis.

Winds section in orchestra

EPM is like musical instruments in an orchestra

I like to think of the various EPM methods as an analogy of musical instruments in an orchestra. An orchestra’s conductor does not raise their baton to the strings, woodwinds, percussion, and brass and say, “Now everyone play loud.” They seek balance and guide the symphony composer’s fluctuations in harmony, rhythm and tone.

Here are my six main groupings of the EPM methods – its musical instrument sections:

  1. Strategic planning and execution – This is where a strategy map and its associated balanced scorecard fits in. Together they serve to translate the executive team’s strategy into navigation aids necessary for the organization to fulfill its vision and mission. The executives’ role is to set the strategic direction to answer the question “Where do we want to go?” Through use of correctly defined key performance indicators (KPIs) with targets, then the employees’ priorities, actions, projects, and processes are aligned with the executives’ formulated strategy.
  2. Cost visibility and driver behavior – For commercial companies this is where profitability analysis fits in for products, standard services, channels, and customers. For public sector government organizations this is where understanding how processes consume resource expense in the delivery of services and report the costs, including the per-unit cost, of their services. Activity-based costing (ABC) principles model cause-and-effect relationships based on business and cost drivers. This involves progressive, not traditional, managerial accounting, such as ABC rather than broadly averaged cost factors applied without consideration of any causal relationships.
  3. Customer Performance – This is where powerful marketing and sales methods are applied to retain, grow, win-back, and acquire profitable, not unprofitable, customers. The tools are often referenced as customer relationship management (CRM) software applications. But the CRM data is merely a foundation. Analytical tools supported by software, that leverage CRM data can further identify actions that will create more profit lift from customers. These actions simultaneously shift customers from not only being satisfied to being loyal supporters.
  4. Forecasting, planning, and predictive analytics – Data mining typically examines historical data “through the rear-view mirror.” Then using hindsight directs attention forward to look “through the windshield”. The benefit of more accurate forecasts is to reduce uncertainty. Forecasted sales volume and mix of products and service are core independent variables. Based on these forecasts, process costs can be calculated from the required resource usage. CFOs increasingly look to driver-based budgeting and rolling financial forecasts grounded in ABC principles to determine future requirements of other dependent variables such as headcount and related spending.
  5. Enterprise risk management (ERM) – This cannot be overlooked when discussing EPM. ERM serves as a brake to the potentially unbridled gas pedal that EPM methods are designed to step on. Risk mitigation projects and insurance requires spending, therefore somewhat reducing resources that could otherwise be directed towards revenue generating activities. Many executives are resistant to anything that impacts profits – and bonuses. So it takes discipline to ensure adequate attention is placed on appropriate risk management practices.
  6. Process improvement – This is where lean management and Six Sigma quality initiatives fit in. Their purpose is to remove waste and streamline processes to accelerate and reduce cycle-times. They create productivity and efficiency improvements.

EPM as integrated suite of improvement methods

CFOs often view financial planning and analysis (FP&A) as synonymous with EPM. It is better to view FP&A as a subset. And although better cost management and process improvements are noble goals, an organization cannot reduce its costs forever to achieve long term prosperity.

The important message here is that EPM is not just about the CFO’s organization; but it is also the integration of all the often silo-ed functions like marketing, operations, sales, and strategy. Look again at the six main EPM groups I listed above. Imagine if the information produced and analyzed in each of them were to be seamlessly integrated. Imagine if they are each embedded with analytics – especially predictive analytics. Then powerful decision support is provided for insight, foresight, and actions. That is the full vision of EPM to which we should aim to aspire in order to achieve the best possible performance.

Today exceptional EPM systems are an exception despite what many executives proclaim. If we all work hard and are smart enough, in the future they will be standard practices. Then what would be next? Automated decision management systems relying on business rules and algorithms? But that is an article I will write about some other day.

In my next blog I shall change focus slightly, to look a little more deeply at the budgeting process, the challenges many organizations face in producing budgets and the possibilities for taking different approaches.

 

About the Author: Gary Cokins, CPIM

Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949.

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

Realizing a Tipping Point for Enterprise Performance Management (EPM)

By Gary Cokins, Founder of Analytics-Based Performance Management LLC 

When should an organization decide to implement one or more components of an enterprise performance management (EPM) system? To answer this we can learn a lesson from Malcolm Gladwell, a social scientist and author of the best-selling book The Tipping Point, who describes how changes in mindset and perception can attain a critical mass and then quickly create an entirely different position of opinion. Let’s apply Gladwell’s thinking to the question of whether the widespread adoption of EPM solutions is near its tipping point or whether we will only realize this in retrospect after it has happened.

Gladwell observed that to determine whether something is approaching the verge of its tipping point, such as an event or catalyst, it should cause people to reframe an issue. For example, in the 1990s just-in-time (JIT) production and inventory control reframed manufacturing operations from classical batch-and-queue economic order quantity (EOQ) thinking to the method based on customer demand-pull product throughput acceleration. So, is EPM reframing organizational challenges and nearing its tipping point? To answer this, we should first acknowledge that EPM is not a new concept that everyone has to learn, but rather it is the assemblage and integration of existing methods that most managers are already familiar with. Collectively, these methods help better manage the execution of an organization’s strategy, planning and analysis functions together with the support of business intelligence tools.

Multiple Tipping Points of Performance Management Components

Enterprise performance management is comprised of multiple methods, all interdependent and interacting. They have been around for some time but what is profound is that we are now experiencing the combined influence of multiple and concurrent sub-tipping points all at once. Ultimately their collective weight is resulting in an overall tipping point for adopting EPM. These tipping points are:

  • The Balanced Scorecard (BSC) – Thanks to successes on how to properly implement the combined strategy map and balanced scorecard framework (and there are plenty of improper implementations), executives are now viewing BSC differently. Rather than the focus of a BSC being a means of reducing the massive number of collected measures (the so-called key performance indicators, or KPIs) and distilling them down to the more relevant few, executives now understand the strategy map and BSC framework as a mechanism for improving strategic execution and performance improvement programs. They are reframing BSC as a way to better execute their strategy by communicating it to employee teams in a way they can understand it, and then aligning the employees’ work behavior, priorities, and resources with the strategy.
  • Decision-Based Managerial Accounting – Reforms in management accounting practices, led by activity-based costing (ABC), may once have been viewed as simply a more rational way to trace and assign increasing indirect and shared overhead expenses to products and standard service-lines (in contrast to misleading and flawed cost allocations based on broad, cost distorting averages). Today, reforms to management accounting practices are being reframed as the essential managerial information necessary to better understand which products, services, types of channels, and types of customers are more profitable or not – and why. There is a shift from less cost control (hindsight cost monitoring to correct unfavorable deviations from expectations) to more cost planning (providing a level of spending supplied to match demands). This is because most capacity spending cannot be quickly adjusted up or down in the near term. This means better capacity and resource planning, understanding of cost drivers, and less historical cost variance analysis.
  • Customer Value Management – Customer relationship management systems (CRM) have been narrowly viewed as a way to communicate one-to-one with customers. However, executives have learned that it is more expensive to acquire new customers than to retain existing ones, and that their products and service-lines have become commodities that offer little competitive advantage. As a result, organizations are reframing CRM more broadly as a way to analyze and identify characteristics of existing customers that are more profitable and valuable, and then apply these traits to formulate differentiated and tiered treatments (such as marketing campaigns, deals, offers, and service levels) to existing customers as well as targeting new customers that possess relatively higher future potential value. This reframing places much more emphasis on micro-segmenting customers and post-sale value-adding services via cross-selling and up-selling. The new recognition is to not just grow sales but rather grow the more profitable sales.
  • Shareholder and Business Owner Wealth Creation and Destruction – The strong force of the financial capital markets to assign financial value to organizations has caused executive teams and governing boards to realize that old, traditional methods of placing value on a company are obsolete. Balance sheet assets now only account for a small fraction of a company’s market-share price capitalization. As a result, executives are reframing their understanding as to how to increase its positive “free cash flow,” the financial capital market’s metric of choice, to convert potential value (ideas and innovation) into realized value (financial ROIs). Consequently, they have reframed a path of continuous shareholder wealth creation governed by customer value management.
  • Advances in Technology – There is now a growing consensus that technologies, such as cloud computing and in-memory computing, are competitive advantage differentiators for those organizations that embrace them. Organizations are reframing their view of technologies as not just being tools but as enablers.

Synergy from the Links Among EPM’s Components

Each of these five tipping points have interdependencies. Transactional systems now provide valuable source data at faster speeds, and EPM methods then transform data into decision-based information. This produces even a higher ROI of an organization’s prior investments in its information technology assets. The tipping point then is the growing demand for EPM solutions as value-multipliers.

 

About the Author: Gary Cokins, CPIM

Gary_Cokins

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.

gcokins@garycokins.com; phone +919 720 2718

http://www.garycokins.com

Linkedin.com contact: http://www.linkedin.com/pub/gary-cokins/0/15a/949

Hear Gary share some of his thoughts concerning EPM innovations and best practices at the SAP Conference for EPM in Chicago, October 13/14, 2014

 

Three Steps to Transform into a “New” Finance Organization

Coffee-break with GameChangers

If you’re not innovating, you’re falling behind. This is true for any industry, but especially finance. The question is how to successfully manage change. It’s easy to get lost in many moving parts and lose sight of the original goal. What steps can you take to adopt innovative practices and remain as efficient as possible? Panelists Rob Kugel, research director at Ventana; Renee Ford, a managing director in Accenture’s SAP practice; and Birgit Starmanns, a senior director in marketing for finance solutions at SAP discuss the prospects of financial innovation – and how to get there – in a recent SAP Game Changers radiocast.

Step 1: Ditch spreadsheets where appropriate

Kugel dives into travel and expense reporting as a prime example of an area made unbearably tedious by Excel spreadsheets. The task is time-consuming for the traveler and just as laborious for the business. He says now is the time to find solutions.

“Software has the ability to be our personal assistant to speed and improve the effectiveness of enterprise processes.” Kugel’s research shows that companies relying heavily on spreadsheets take two days longer on average to close books than companies that use them infrequently. Why?

  • Lack of flexibility means spreadsheets don’t lend themselves to data visualization
  • Time-consuming and error-prone processes lead to mistakes that can affect decades of data
  • On-demand reporting now exists to quickly and accurately pull necessary information

Starmanns agrees, pointing out that by spending so much time consolidating Excel sheets, you’re missing the solid technology foundation that enables advanced analysis.

Step 2: Automate – for better or worse

Ford presents the automation conundrum with a quote from Bill Gates: “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second rule is that automation applied to an inefficient operation will magnify the inefficiency.”

She advocates adopting automation with an open mind as “organizations can use technology to highlight bottlenecks and in some cases where they are really conscious of it, it can propel them forward.” In her opinion, automation should advance finance to a point where the finance function is contributing to the overall organization.

Step 3: Consider your people above all else

Starmanns asserts that “A huge part of implementing any new technology is really that change management piece, and it’s all about communicate, communicate, communicate. Some folks will be more comfortable and can hit the ground running and others… they are almost afraid.”

Ford echoes this sentiment, cautioning that technology is just one piece of the puzzle – it means nothing without capable minds to operate it. It’s important to make sure your workers are ready for the change that’s happening – and prepared to take on the change. You should decide where they need to be with technology proficiency and then get them up to speed.

As tech-savvy millennials start taking on more prominent roles in finance, the panelists think software adoption should become more rapid and intuitive, paving the way for prolific innovation.

Is your finance organization equipped to take these steps? Listen to the full radiocast to learn more.

Integrating Financial Analytics with Operational Transfer Pricing to Optimize After-Tax Profitability – Part 1

From Rob Jenkins, SAP Global Center of Excellence

Benjamin Franklin once noted “In this world nothing can be said to be certain, except death and taxes.” Finance professionals must deal with uncertainty as they model the future and partner with the business to optimize decision making. And while taxes are a certainty, tax jurisdiction and therefore tax rates are a function of how and where a business process is executed and assumptions made by the business. And those assumptions should be well documented for regulatory agencies.

Every for-profit entity’s objective is to deploy capital to maximize the after-tax return on investment. This requires a tight collaboration between financial planning and analysis (FP&A) and corporate tax functions to provide insight into the past and potential economic profit of products and customers and the available possibilities of organizing operations to maximize after-tax profit.

Many companies are in the news for performing “tax inversions” as part of a strategic acquisition of a non-US-based entity due to U.S. rates now exceeding the simple average of other OECD nations by 14.1 points and the GDP-weighted average by 10 points. [1]

Modeling After-Tax Financial Impact of Business Operations
Given the disparity in global tax rates, process and asset location along with transfer prices can have significant impact on after-tax income. Various operating scenarios can result in “profit shifting” among tax regimes and the business analyst can calculate the impact on statutory results by modeling the following:

  • Whether a business activity is active or passive
  • Where activities occur including R&D and “management”
  • The location of intellectual property
  • Placement of debt and borrowing costs (thin capitalization rules)
  • Transfer pricing (inter-company pricing arrangements between related business entities)

Choosing the Right Tool for the Task
A variety of tools are available to enable business users to estimate financial outcomes based on input variables and assumptions about their systemic relationships.

Spreadsheet technology is ubiquitous in finance for ad hoc modeling with some companies building complex, interdependent workbooks with macros for automation and detailed documentation for knowledge management, while others rely on a single subject matter expert to maintain the “black box”. These webs of interconnected cells and sheets are notorious for their error rates and hardwiring with one study finding “errors of at least 5% were found in 91% of all spreadsheets with more than 150 rows.” [2]

My previous blog post, Big Data for Finance, referenced how Big Data and analytics can be utilized to model the future based on historical data relationships and advanced analytic algorithms – though few finance organizations have yet to embrace the suite of predictive analytic tools now targeted at the business user.

Managing the Scope of Planning, Budgeting and Forecasting Systems
However, most finance organizations are using enterprise software applications for planning, budgeting, and forecasting with a large number of firms incorporating driver-based techniques for quantifying revenue forecasts and gross margin (for example, estimated product volume x selling price and standard cost for cost of goods sold).

For planning indirect operating expense including the cost to acquire, serve, and retain customers, the vast majority of companies budget expenses by function, responsibility center, and account, and rely on streamlined allocations to create a pre-tax operating margin view with most management attention focused on “controllable margin.”

These enterprise planning systems are extremely valuable for gathering inputs from decentralized sources, managing workflow, recording audit trails, aggregating actual results, calculating budget variances and reporting multi-dimensional financial statements for management.

Since FP&A teams are traditionally focused on financial reporting aligned with GAAP or IFRS requirements, these planning systems are rarely configured to calculate the detailed dynamics of how hundreds or thousands of shared indirect labor or overhead cost pools are attributed (sometimes in multiple steps) to products or customers based on usage-based drivers or activity-based methods.

Nor do these systems typically account for the tax impact of supply chain logistics, asset location, and transfer prices. Complex driver-based attributions and operational transfer pricing have been the province of cost accounting and tax accounting, respectively, and rely on specific techniques, operational data sets and levels of detail not ordinarily integrated into corporate planning systems.

The result is that most FP&A and tax teams use separate systems to plan and model pre-tax economics at a high-level vs. a granular view of profitability by customer and product vs. the tax impact of how business operations are organized.

So, what’s the solution? In my next blog, I will discuss operational transfer pricing and the rise (again) of profitability and cost management software. Stay tuned!

[1] Tax Foundation, OECD Corporate Income Tax Rates, 1981-2011, http://taxfoundation.org/article/oecd-corporate-income-tax-rates-1981-2011.

[2] http://www.isaca.org/Journal/Past-Issues/2007/Volume-1/Documents/jopdf0606-controlling-spread.pdf

 

Integrated Business Planning: Will Disruptive Tech Help or Hinder?

Coffee-break with GameChangers

“Understand the future that has already happened.” This quote from venerable business consultant Peter Drucker was invoked by Steve Player, North American Program Director for Beyond Budgeting, in one of a series of SAP Game-Changers radiocasts. Three guests visited the program and were asked to offer their thoughts on budgeting and forecasting – and here’s what they had to say.

When it comes to integrated business planning, CFOs might want to decipher and heed Drucker’s advice. According to roundtable experts, it might be C-level executives who are keeping companies behind the eight ball.

Budgeting and forecasting success are dependent upon a comprehensive understanding of the business and a keen ability to predict future trends.

But how do we achieve this? Are disruptive technologies such as enterprise mobility, cloud, and in-memory computing the answer to implementing integrated business planning enterprise-wide?

Jeff Hattendorf, cofounder of IT consultancy firm Macrospect, believes they are. He cautions that strategy and financial planning need to be separate activities. It’s the responsibility of the CIO and CFO to herald the arrival of tools that integrate planning, operations, and finance at an operational level and at a level of detail that line managers can put to good use.

Let Go of the Budget
“In many cases the CFOs tend to be the ones that are holding everybody back,” agrees Player. They become attached to a certain budget and want to quickly close the books, without considering the overall health of the business. But Player says the budget is out of date before it’s even finalized. Placing so much focus on a defunct budget can hinder forecasting and predictive analytics.

Rather than keeping score and getting hung up on meeting a certain number, CFOs should focus on something more strategic and long-term, according to Floyd Conrad, Senior Director of EPM and Finance with the SAP Center of Excellence. He claims it is much easier to create a balanced budget and an actionable strategic plan for a company if you rely on new predictive and in-memory technologies.

Chart a Quest for Vision, Not for Speed
As any executive will tell you, reports don’t become more valuable simply because they run faster. Hattendorf explains that adopting technologies to speed processing should be done within the larger framework of achieving a clearer, more detailed view of business processes.

Player thinks the whole reporting concept should be completely reimagined, since reporting speed dictates how quickly insights are uncovered. The objective should not be finding a quick fix, but preventing problems from occurring in the first place. For example, find out when people need information instead of what kind of information.

For integrated business planning to succeed, CFOs and CIOs need to collaborate more and become early adopters of technology that prepares them for ups and downs in ever-changing markets.

Player is so optimistic, he believes that the notion of integrated planning won’t be a point of discussion in the next five years. It will happen so naturally that no one will consider it newsworthy.

Is that a wager you’d take? Dive deeper into this debate and listen to the whole radiocast.

Forecast with improved accuracy – leveraging BIG Data and Predictive Analytics…What!?

From Jonathan Essig, EPM Solution Director, NTT DATA Enterprise Services, Inc.

The question that has been nagging at me lately is this: why aren’t more finance organizations leveraging BIG data and predictive analytics? Is the answer, they don’t know how? Is it, they can’t pin point the value it will bring? Or even possibly, they don’t really know what BIG data is?

From what I have seen it is a combination of all three but breaking down these barriers can help the office of the CFO leverage these new technologies. Doing so will greatly improve planning accuracy, profitability analysis, and ultimately drive better decision making.

First, what is BIG Data?

For Finance organizations, BIG data can seem intimidating or a bit of a mystery. In fact, it seems as though everyone is talking about it but no one can quite define it.

Simply put, BIG Data means “data sets that are too large for traditional processing…and require new processing technologies”. Many companies have already seen the power of in-memory technologies, such as HANA, demonstrated by retrieving back millions of rows of data in seconds. This is truly impressive, but Finance executives secretly, or not so secretly snicker about what real value that can add for them. Really, it is the insight we can now extract from the increasingly large data sets that holds the opportunity. In other words, what is important is what we can do with the big data – not the big data itself. Applying predictive analytics to BIG Data is one great way to mine your data for value. As finance organizations change their mindset to viewing data as an asset, they will be better positioned to take advantage.

How can Finance organizations use Predictive Analytics?

Predictive analytics enable organizations to leverage big data to develop more accurate and timely forecasts. Specifically, predictive analytics can better analysts’ ability to foresee product demand by customer or by region. The BIG Data used for this analysis can be hidden in many places – CRM, POS system, social media, historical trends, and other macroeconomic data sources.  Predictions from these models can be fed real time into your planning tool and applied as a starting point for a rolling forecast each month.

This means you can see the profitability impact of drivers REAL time and use it to better business decision making! For example, you can model profitability with predicted changes in volume, pricing, raw material costs, inventory, receivable etc and allow management to adjust their strategy before the competition.

Why now and what is the value of Predictive Analytics with BIG Data?

Predictive Analytics has been in the news quite a bit in the last couple years as relates to consumer product companies and targeted marketing.

Companies have hired teams of consultants and analysts to come in and complete regression analysis on their POS data to identify for example, customers whose purchasing habits make them most likely to buy specific products in the future. Not surprising then that sales organizations tend to be earlier adopters than Finance organizations, but this has also been in large part because of the LARGE, measurable benefits they have obtained.

However, in the finance world, the benefits are much harder to measure and it is tough to justify a big initial investment. What we need to do is make the benefits measurable and lower the initial investment.

One of my favorite quotes from Galileo, “Count what is countable, measure what is measurable, and what is not measurable, make measurable.” Well said…

Thankfully, new technologies are bridging part of the gap.

SAP’s newest Predictive Analytics tools have taken the grunt work and hours of statistical analysis out of statisticians’ hands and made this very accessible to the typical business analyst. Predictive tools do this by providing prepackaged algorithms and an easy to use interface requiring no advanced statistical knowledge or programming. Literally with a few days of training, finance teams can analyze historical trends, CRM data, or other macroeconomic data to provide a much more accurate starting point for their forecast. Essentially, allowing them to “measure” and benefit from what was previously very challenging to do so. How do I know how easy these tools are? I have worked hand in hand with SAP developing a predictive planning use case for them and was able to hit the ground running in less than a day – and I am no more technically savvy than your average finance or business analyst.

All of the above are now enabling finance organizations to talk about Predictive analytics and BIG data intelligently and understand the applications.

Another great quote by one of my favorite authors, Oscar Wilde “Experience is the name everyone gives to his mistakes” . Those willing to gain the experience and make some mistakes along the way will be the ones to deliver their organization much greater planning accuracy, unparalleled profitability analysis, and will ultimately drive better decision making.

For more information listen to my latest appearance as guest expert panelist on Voice America’s talk radio, or start getting acclimated by viewing the beta webcast below (use case has been updated and honed since original presentation). Here are some links to follow:

Voice America SAP Radio Financial Excellence talk show

Webcast recording Maximum Agility with Big Data for Finance

Going to SAP Financials in Nice? This blog could get you in the mood.

and finally…another great blog entry on Big Data

 

BIO: Jon Essig is an EPM solutions expert. He has architected many solutions, working with c-level execs, corporate finance, regional business units, and IT to create and implement a company-wide vision. He has delivered analytics, consolidations, and planning across a variety of industries. Jon also has close to ten years of experience as leader in various financial roles including: consolidations, financial analysis, forecasting, audit, SOX, financial closes, and tax. He has a great passion for innovative technologies and is an early adopter and architect of big data and predicate analytics applied to Finance. Jon holds a B.S. in Finance and is a Certified Public Accountant.

Contact Jon: jonathan.essig@nttdata.com | linkedin | @JonathanEssig