Simplified Financial Planning, Part II: Responding to Market Volatility in Financial Planning and analysis

by Babak Ghoreyshi, Global Marketing Program manager at SAP

In the “5 Advantages of Thinking Ahead” blog, I discussed five essential market advantages that can be achieved with the right FP&A technology and strategic management of KPI’s. Now in this blog, will go deeper into what finance executives are saying about their future FP&A mandate and precisely what kind of technological innovations they will need. The FP&A mandate in the coming years will be for finance departments put the right tools in place now so they can make more substantial contributions to profitability over the next few years. The finance department is becoming a more integral part of business decision making process, participating actively and effectively. That’s what planning and analytics can empower the finance function to do.

A Survey on the Future of Financial Planning and Analysis

The main objective of any enterprise is profitability. Organizations understand that in order to improve accuracy in financial reporting, they must get a better understanding of the business drivers that impact performance. They must also involve more key stakeholders in order to ensure that all essential information is accounted for. Incremental improvements to the existing FP&A methodology haven’t delivered the kind of cost controls that companies need going forward. These pressures call for changes to the FP&A process, as well as the technology that supports it.

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SAP sponsored a global survey, conducted by CFO Research, of 335 senior finance executives earlier this year. The result was a report titled, “The Future of Financial Planning and Analysis: Finance Leaders on Their FP&A Mandate—and the Technology Innovations that Will Help Them to Fulfill It.” The ultimate goal of the report was to gather consensus from finance leaders about how to assist the organization in creating value. Specifically, the survey covered how the advanced techniques and technology in FP&A can factor into the bigger picture of profitability. Here are the top two findings from that original research:

Companies Need to Respond Swiftly to Volatility

Agility is emerging as the defining feature of companies that lead their respective markets. Ramped-up global competition and economic uncertainty may turn out to be persistent, if not permanent, features of this new world. The ability of finance to respond rapidly to changing market conditions came up repeatedly in our survey results. The CFO Research survey, “Future of Financial Planning and Analysis”, revealed that:

  • Approximately 77 percent of respondents identified “greater agility” in responding to market threats and seeing new lines of business have proven to be a critical competitive advantage.
  • Three out of four — 76 percent — senior finance executives said that they believe greater agility in the face of uncertainty will be critical for basic business survival over the next two years.
  • Nearly all — 92 percent — of financial execs said that better speed and responsiveness in the finance function would present the most “substantial, measurable financial benefit” to their organization.

Today, speed translates into tremendous number-crunching power. Access to real time data can empower finance departments with ad-hoc business decisions very quickly through high-performance, collaborative solutions.

CFO’s Must Prepare for Real Time Data

Making business decisions based on historical data was the only possibility in the past, but now, the real time data adds a very different kind of value added features in planning for the future. Today’s competitive landscape demands more actionable, real-time analysis to match the sudden shifts in market conditions. The kind of agility finance leaders are hoping for, will require original solutions. This is not just because of Big Data era. Different data structures, even data in lower veracity or volume can be valuable for the finance department to process, report and extract business decisions from it.

The study from CFO Research found that most CFOs recognize that demands on finance to improve profitability will grow from now through 2017. The hurdle they must overcome is the time it takes to collect, normalize and build reports from the flood of data. The “Future of Financial Planning and Analysis” also reported that:

  • CFOs are being called on to provide company decision makers with clear options and forward-looking insights. They also recognize that they have to provide them faster.
  • 84 percent say that requirements for ad-hoc decision support and analysis from finance will intensify over the next two years.
  • Among the biggest obstacles to offering insights is collecting and compiling data from various, incompatible information systems. By the time the data is merged and normalized, it is no longer real-time data.

The finance function is growing in importance as businesses’ reliable navigation system through tempestuous economic storms. New technology and solutions for FP&A operate as the finance leader’s guide to what’s on the horizon.

Financial Resource Kit

This three-part series will conclude by rounding out the top five findings from the financial executive survey. It will show how financial leaders characterize the role of finance today and the most likely scenarios for the next few budget cycles. You can build your own resource kit starting with the Finance Solution content hub. You’ll be able to read technical documents or watch videos on what’s happening in the world of SAP finance solutions.

How Does Integrated Business Planning (IBP) Support Change Management

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

In my initial blog in this series related to integrated business planning (IBP) I described IBP as seamlessly integrating user interfaces and workflows. IBP links strategic, operational, and financial objectives and plans to improve employee alignment with the executive team’s strategy and financial performance. In my second, third and fourth blogs I discussed, respectively, how IBP is part of the solution for issues and needs related to strategy execution and next to product, channel, customer profitability and operations, processes and productivity improvement and then in my fifth blog of the series to driver-based budgeting.

In this final blog I will discuss issues, needs and solutions related to behavioral change management and how IBP is part of the solution.

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What are the barriers slowing the adoption rate of IBP?

Organizations seem hesitant to adopt IBP. Is it evaluation paralysis or brain freeze? Most organizations make the mistake believing that applying IBP is 90% math and 10% organizational change management with employee behavior alteration. In reality it is the other way around – it is more likely 5% math and 95% about people.

With hindsight, we now realize that past barriers impeding the adoption rate are easily removable. That is, technical barriers such as disparate data sources or low quality “dirty” data now have software solutions like extraction, transform, and load (ETL). Problems like insufficient data are also not insurmountable with a little effort. We also now realize that poor implementation of IBP methods can be knocked down with experienced consultants or better training courses.  Other barriers are misperceptions that IBP methods are too complex or from initial failures with prior pilot projects. But these are not show-stoppers, and they too can be overcome.

What other barrier continues to obstruct the adoption rate of IBP? That barrier category is social, behavioral and cultural. These obstacles include people’s natural resistance to change; fear of knowing the truth (or of someone else knowing it); reluctance to share data or information; and “we don’t do that here.” Never underestimate the magnitude of resistance to change. It is natural for people to love the status quo.

The need for IBP

I have learned that ambiguity and uncertainty should be a business analyst’s friend. Why? If getting answers were easy, a business analyst’s salary would probably be lower!

However, a problem with removing behavioral barriers to deploy IBP is that almost none of us have training or experience as organizational change management specialists. We are not sociologists or psychologists. However, we are learning to become like them. The challenge is how to alter people’s attitudes.

One way to remove cultural barriers is to acknowledge a problem that all organizations suffer from their imbalance for how much emphasis they should place on being smart rather than being healthy. Most organizations over-emphasize trying to be smart by hiring MBAs and management consultants with a quest to achieve a run-it-by-the-numbers management style. These types of organizations miss the relevance of how important is to also be healthy – assuring that employee morale is high and employee turnover is low. To be healthy they also need to assure that managers and employees are deeply involved in understanding the leadership team’s strategic intent and direction setting. Healthy behavior improves the likelihood of employee buy-in and commitment. IBP is much more than numbers, dials, pulleys, and levers. People matter – a lot.

When organizations embark upon applying or expanding its use of IBP, I believe they need two plans: (1) an implementation plan and (2) a communication plan. The second plan is arguably much more important than the first. There are always advocates for a new project, but there are also nay-sayers. Knowing in advance who the nay-sayers are is critical to either win them over or avoid them.

Why does shaken confidence reinforce one’s advocacy?

Here is some disturbing research[1] from the field of psychology that relates to the social barrier. It deals with why people actually hang on stronger to their ideas even after they learn their ideas are proven wrong. Using tests with a control group, the researchers, Gal and Rucker, revealed that the more that people doubt their own beliefs, then paradoxically the more they are inclined to support and lobby for them. The test subjects who were confronted with evidence that challenged and disproved their beliefs subsequently advocated them even more aggressively compared to the control group.

This finding is bothersome because applying fact-based quantitative statistics and logical improvement methods are superior than making decisions based on intuition and gut feel. How can we transform people who are a “Dr. No” into a “Dr. Know”? Shouldn’t executives and managers desire to gain insights or know something about the future before their organization gets there? How valuable should it be to them to know things that their competitors do not know?

Early adopters and laggards

Another barrier involves organizations that are too distracted with problems and prefer to search for quick fixes. The urgent crowds out the important. They do not take the time to solve problems with a better way. In our personal lives, many of us have no problem making everyday decisions, such as whether or not to purchase a smart phone or join a social network. How can we as individuals make decisions so quickly, while organizations often struggle and are slow to react?

The field of marketing scientifically examines influences on the rate of adoption of products, services and technology. Everett Rogers, a business researcher, developed his Diffusion of Innovations model with five categories of adoption: innovators, early adopters, early majority, late majority and laggards. Which category best describes many organizations with respect to adopting analytical methods? My observation is that most fall in the laggards category.

I believe there is the explanation for the laggards is not simply due to resistance to change but rather they are too distracted. There is no doubt that increasing volatility is part of the problem. Examples include changes in consumer preferences, foreign currency exchange rates, and commodity prices. The Internet, global communications, social networks and relaxation of international trade barriers has introduced vibrations and turbulence. But is increased worldwide volatility a good enough reason to not adopt IBP methods?

Organizations that want to move beyond the laggards category must take on the mentality of the early adopters, who understand the importance of IBP to enhance decision making and align employee behavior and priorities to execute the executive team’s strategy. They must be proactive, not just reactive. Most importantly, remember that it’s never too late to go from being in the middle of the pack to taking a commanding lead over your competitors. Organizations that achieve competency with analytics are able to sustain a long-term competitive advantage.   

IBP for value creation

Always remember that in the absence of facts, anybody’s opinion is a good one. And usually the biggest opinion wins – which is likely to be that of your boss or your boss’ boss. So to the degree your executives and work colleagues are making decisions on intuition, gut feel, flawed and misleading information or politics, then your organization is at risk. Does your organization know, or do they think they know? By creating doubt one can overcome resistance to change.

Until an organization gains mastery over validly answering questions and managing its operations with IBP, it will plod along and muddle through improving its performance rather than accelerate value creation.


[1]  David Gal and Derek Rucker; Northwestern University’s Kellogg School of Management; “When in Doubt, Shout”; Psychological Research; November, 2010.

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, Methods, Risk, and Analytics and Predictive Business Analytics.

Simplified Financial Planning, Part I: 5 Advantages of Thinking Ahead

by Babak Ghoreyshi, Global Marketing Program manager at SAP

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Planning is everything, but for many financial executives, planning involves an extremely complex process of predicting metrics and budget impacts of sprawling projects with many moving parts. For the practical-minded finance executive, this leads to an ongoing search for better planning tools delivering faster, more informative reporting solutions that can help them be more efficient in setting and monitoring KPIs and as a result making more effective business decisions.
CFOs in many industries are looking for the right technological solutions to breathe life into their budgets and plans. Current planning, budgeting, and forecasting processes are just too difficult to complete within a reasonable amount of time without disrupting business operations. In addition, enterprises are finding it difficult to get accurate results due to market volatility using their current technology. The following are real-world examples and survey results covering how financial planning solutions are helping enterprises do more in five significant areas.

1. Adapt to Market Conditions

VELUX is a Danish window-maker that needed to adapt to the changing designs, technologies and lifestyles of modern homes and businesses. They found that their yearly budget planning process was not fast enough to accurately provide the insights that they needed to react to the market in a timely manner. They moved from yearly to a repeated monthly business planning by using SAP Business Planning and Consolidation on SAP HANA. They now have a clearer vision of what kinds of windows the market wants, the lifespan of what they produce and economic impacts across the organization.

2. Identify Growth Opportunities

Forecasting should do more than just helping enterprises avoid surprises. Good forecasting can also identify a window of opportunity before it slams shut. Intuitive modeling makes it possible to analyze a variety of complex what-if scenarios at once. Companies that embrace the new planning technology to gain the ability to identify opportunities and react in the most profitable way. That is what happened at Hunt Consolidated Inc. (HCI) when they recognized a growing need for centralized, top-down planning to manage the business as a whole. Using SAP HANA as a platform for Business Planning and Consolidation, HCI was able to run wide-open queries involving hundreds of millions of record objects, rendering what-if scenarios in seconds. This opened up a world of original solutions and opportunities for them.

3. Allocate Resources

Aberdeen’s 2014 Excellence in Financial Management Survey revealed that the top three priorities for finance leaders were:
Conducting assessments of financial processes
Automation of core functions
Promoting collaboration across all finance roles
All three play a part in discovering the optimum pathway for allocating finance resources. Allocation and replenishment assessments allow financiers to identify cost centers that need to be reduced. In addition, these assessments make sure the supply chain is optimized, so the products and services customers need, are available when they want them.

4. Execute Organizational Strategies

CFO’s are searching for self-service technology that allows them to visualize data in ways that are most convenient for them instead of relying on IT. According to Aberdeen’s report on “The Next Generation of Cloud FP&A,” 87 percent of business users in the cloud either have self-service options or would like to get them in the very near future. They need the ability to execute organizational strategies with detailed forecasts using embedded analytics and scenario projections without waiting for help from IT.

5. Increase Profitability

Many finance executives say they need better solutions to face what’s coming next. In Aberdeen’s “The Next Generation of Cloud FP&A,” 37 percent of finance leaders say that their current forecasting and budgeting processes are too long and are resource intensive. Their companies are now searching for a cloud solution that helps them to reduce the operational costs and boost profitability. Cloud-based financial planning and analysis tools are better able to run queries on thousands of variables simultaneously and respond dynamically to real-time data.

The Finance Solution

Finance leaders are searching for the right solutions to deliver better speed and computing power so they can produce results in these five areas. In our next blog, we’ll take a step further by looking at specific technological innovations that deliver results. Another great resource for CFO’s is available now at the Finance Solution content hub, where there is a rich library of researches and insights into the most relevant topics in the world of finance.

How Does Integrated Business Planning (IBP) Support Driver-Based Budgeting?

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

In my initial blog in this series related to integrated business planning (IBP) I described IBP as seamlessly integrating user interfaces and workflows. IBP links strategic, operational, and financial objectives and plans to improve employee alignment with the executive team’s strategy and financial performance. In my second, third and fourth blogs I discussed, respectively, how IBP is part of the solution for issues and needs related to strategy execution and next to product, channel, and customer profitability and them to operations, processes and productivity improvement.

In this blog I will discuss issues, needs and solutions related to driver-based budgeting and rolling financial forecasts and how IBP is part of the solution.

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Problems with the annual budgeting process

There are criticisms with the annual budgeting process. They include it starting months before the fiscal year start and being obsolete a few months after being published; it being disconnected from the strategy; it not being volume sensitive; and it caving in to the loudest voice and strongest muscle of long-term experienced managers who are skilled at padding their projected expenses.

How can budgeting be reformed?

To answer this question let’s first step back and ask some other broader questions. What are the impacts of the changing role of the chief financial officer (CFO)? If the CFO’s function is evolving from a bean-counter and reporter of history into a strategic business adviser and an enterprise risk and regulatory compliance manager, what are CFOs doing about reforming the archaic budget process to be more reflective of forecasted demand and projects?

Progressive CFOs now view budgeting as consisting of three streams of spending converging into a river:

  • Recurring expenses – ongoing resource capacity planning similar to 1970s factory managers projecting the operation’s manpower planning and material purchasing requirements.
  • Non-recurring expenses – the one-time investments or project cash outlays necessary to implement strategic initiatives and risk mitigation spending.
  • Discretionary expenses – optional non-strategic spending.

Within the broad portfolio of interdependent methodologies that make up today’s IBP framework, two methods offer the capability to accurately project recurring and non-recurring spending streams:

  • Activity-based planning – In the 1990s, activity-based costing (ABC) solved the structural deficiencies of myopic general-ledger cost-center reporting for calculating accurate costs of outputs (such as products, channels and customers). The general ledger does not recognize cross-functional business processes that deliver the results, and its broad-brush cost allocations of the now-substantial indirect expenses introduce grotesque cost distortions. ABC corrects those deficiencies. Advances to ABC’s historical snapshot view transformed it into activity-based management (ABM). These advances project forecasts of customer demand item volume and mix and forecast the elusive customer cost-to-serve requirements. In effect, ABC is calculated backward, and named activity-based planning, based on ABC’s calibrated consumption rates to determine the needed capacity and thus the needed recurring expenses. Without that spending, service levels will deteriorate.
  • The balanced scorecard and strategy maps – By communicating the executive strategy and involving managers and employee teams to identify the projects and initiatives required to assure that the strategy map’s objectives, non-recurring expenses, are funded. Without that spending, managers will be unjustly flagged red as failing to achieve the key performance indicators (KPIs) they are responsible for in their balanced scorecards.

The IBP Information Delivery Portal

Today’s solution to solve the budgeting conundrum and the organization’s backward-looking focus is to attempt to create a single IBP platform – together with  its Web-based reporting and analysis capabilities. Speed to knowledge is now a competitive differentiator.

The emphasis for improving an organization and driving higher value must shift from hand-slap controlling toward automated forward-looking planning. With a common IBP platform replacing disparate data sources, enhanced with improved data integrity, cleansing and data mining capabilities, an organization can create a flexible and collaborative planning environment. It can also provide on-demand information access to all who need to perform what-if scenario and trade-off analysis.

For the bold CFOs who are not wary of radical change, continuous and valid rolling financial forecasts can replace the rigid annual budget. Today, organizations need to be able to answer more questions than “Are we going to hit our numbers in December?” That’s not planning but rather performance evaluation. For the more traditional CFO, the IBP platform offers a sorely needed upgrade toward a more high-speed budgeting process.

Additionally, statistical forecasting can be combined with the information on the IBP platform.  This results in customer demand forecasting that seamlessly links to operational systems, activity-based planning and balanced scorecard initiatives.  It provides the ultimate financial view for CFOs s with valuable and needed real-time or right-time feedback to managers as part of this package.

All of this – traffic signaling dashboards, dynamic drill-down, customizable exception alert messaging to minimize surprises, profitability analysis and reporting, consolidation reporting, Excel linkages, multiple versioning and more – is available for decision making from a single shared solution. IBP resolves major problems: lack of visibility to causality, lack of timely and reliable information, poor understanding of the executive team’s strategy and wasted resources due to misaligned work processes.

IBP provides confidence in the numbers, which improves trust among managers. What today will accelerate the adoption of reforms to the budgeting process and an IBP culture – senior management’s attitude and willpower or the information technology that can realize the vision described here? I’d choose both.

IBP as for enterprise wide improvement

As mentioned, integrated business planning (IBP) integrates financial, strategic, and operational information.

In my final blog for this blog series I will discuss behavioural change management needed to get buy-in from managers and overcome human nature’s resistance to change.

 

 

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, Methods, Risk, and Analytics and Predictive Business Analytics.

 

A View into the Future of Financial Planning and Analysis by Finance executives from Asia/Pacific Region

By Pras Chatterjee, Sr. Director Product Marketing, SAP.

Highlights from the latest study by CFO Research and SAP

Leading-edge financial planning systems promise to resolve many of the technical information gaps that have plagued many enterprises. At the same time, finance leaders recognize their own responsibility to gain the maximum value from the robust, real-time analysis these systems can deliver as managers put it to use across the enterprise.

CFO Research conducted a global study sponsored by SAP and surveyed senior finance executives to gain a better understanding of how leading-edge financial planning and business analysis capabilities can support effective decision making. Finance executives from the Asia/Pacific region (including India and Australia) recognize the need to improve their teams’ contributions to high-value FP&A activities will become increasingly urgent in the coming years.  The good news is they appear to feel they have the tools and resources they’ll need in order to fulfill that promise.

In the survey, practically all of the finance executives from the Asia/Pacific region (95%) agree that over the next two years, the demand on the finance function to supply highly responsive, interactive, and flexible business analysis to decision-makers is likely to increase. Nearly as many expected the demand for ad-hoc decision support and analysis to increase (90%), and improving the ability to conduct highly sophisticated, predictive business analysis (e.g., scenario planning, “what-if” analysis, risk modeling) would yield substantial, measurable financial benefit to their company (92%).

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These finance executives believe they are up to the task, however. More than half (53%) of the respondents from the region give the highest marks to their IT systems for financial planning, saying they believe their systems make a substantial contribution to their ability to support decision making. Respondents from Europe and North America, in particular, are much less likely to place themselves in this top tier.

With 95% of respondents from the Asia/Pacific region also agreeing that pressure is increasing on the finance function to improve its contribution to high-value planning, analysis, and decision-support, these executives appear to be better-positioned than most to meet those expectations.

Read the full report here:

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How the Future of Financial Planning and Analysis would look in Latin America

By Pras Chatterjee, Sr. Director Product Marketing, SAP.

Highlights from the latest study by CFO Research and SAP

Finance executives from Latin America (including South America and Mexico) believe that the pressure to deliver clear, actionable business insight to their colleagues is increasing (CFO.com/SAP Research). But do they also feel they have the right tools and resources in order to make good on that promise and their contribution to high-value planning and analysis?

For finance leaders and their teams, the challenge ahead goes well beyond ensuring high-quality, forward-looking information and analysis reaches the hands of decision makers with the speed and interactivity they increasingly demand. In addition to supplying swift, powerful, interactive information and analysis, finance teams will be called upon to make certain that decision makers are in a position to make effective use of that information and analysis.

In the survey conducted by CFO.com, more than nine in ten (93%) finance executives from Latin America agree that over the next two years, the demand on the finance function to supply highly responsive, interactive, and flexible business analysis to decision-makers is likely to increase. Of those, nearly four in ten (39%) expect the increased demand will be substantial—the highest of any region in terms of the intensity of that demand.

At the same time, virtually all of the Latin American respondents (98%) say they could provide substantial, measurable financial benefits to their companies if only they could improve on the speed and responsiveness with which they supply business analysis to decision makers.

These respondents clearly take pride in their responsiveness. Respondents from Latin America lead the pack in their belief that they can respond to a typical ad-hoc request for business analysis within minutes, if not instantly.

They do think they have room for improvement, however, on both the front end and the back end of the data analysis process. More than half of the Latin American respondents (52%) feel strongly that to maximize the benefit of financial planning and business analysis, the finance function needs to spend less time on simply moving the data around—that is, the amount of time, attention, and resources they devote to manually migrating and reconciling data from system to system.

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And even more (61%) agree strongly that improving the finance function’s ability to communicate business analysis effectively—in a way that would allow decision makers to grasp key insights, underlying risks, and assumptions easily—would yield substantial, measurable financial benefits to their companies.

Once they can overcome those hurdles, there appears to be little standing in the way of their aspirations to improve their contribution to high-value planning, analysis, and decision-support.

Read the Executive summary of the report here

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How Does Integrated Business Planning (IBP) Support Process Improvement?

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

In my initial blog in this series related to integrated business planning (IBP) I described IBP as seamlessly integrating user interfaces and workflows. IBP links strategic, operational, and financial objectives and plans to improve employee alignment with the executive team’s strategy and financial performance. In my second and third blogs I discussed, respectively, how IBP is part of the solution for issues and needs related to strategy execution and next to product, channel, and customer profitability.

In this blog I will discuss issues, needs and solutions related to operations, processes, and productivity improvement and how IBP is part of the solution.

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The strategic versus operational view

In commercial companies there are two levers to increase profits: (1) raise top line revenues and (2) reduce expenses. Although a company cannot continue to reduce costs forever to achieve prosperity, there are always opportunities to reduce waste, increase throughput cycle time, improve quality, and consequently improve processes. A top line revenue increase places more emphasis on a strategic view whereas expense reduction places more emphasis on an operational view.

The strategic view is primarily enterprise-wide and involves first “doing the right things.” That is, selling profitable products to customers that are profitable to conduct business with. As described in my prior blog the strategic view is about enhancing revenues and assuring higher profits based on the product’s or service’s value to draw good prices and the considering varying levels of demanding behavior of different types of customers.  In contrast the operational view is not enterprise-wide, but rather addresses individual functions, departments, or business processes. It involves “doing the right things well.” Its intent is less about analyzing profit contribution margins, but rather focuses on improving processes, managing them more efficiently, and optimizing asset utilization all for which to better manage costs.

The operational view for productivity improvement

The pursuit of benefits from the operational view involves quality management, lean management with value stream mapping of processes, activity analysis, cost driver analysis, and scoring activity costs with attributes, such as for nonvalue-added costs. IBP supports all of these endeavors. Here are a few examples:

Quality management – In the 1960s Japanese manufacturers began to increase market share by providing higher quality products. Manufacturers in North America and Europe began to copy some of the Japanese practices. There came a point in time however when senior executives began to question the return on investment with quality initiatives, and this spawned interest in Six Sigma. Six Sigma is a set of techniques and tools for process improvement. It was initially developed at Motorola and soon embraced at General Electric. Six Sigma seeks to improve the quality output of processes by identifying and removing the causes of defects and errors and minimizing variability in processes.  It uses a set of quality management methods, mainly statistical methods, and creates a special infrastructure of people within the organization (“Champions”, “Black Belts”, “Green Belts”, “Yellow Belts”, etc.) who are experts in these methods.

Lean management – In the 1990s lean management stemmed from a method used at Toyota in Japan called the Toyota Production System. Its premise is that by smoothing the flow of work then quality problems are exposed. As they are addressed, waste is reduced and throughput cycle time speed increases. A technique applied is value stream mapping. Lean management amplifies quality management techniques by placing attention on the value add of the steps and work activities belonging to processes.

Cost driver analysis and cost of quality (COQ) – The management accounting function eventually found ways to make a contribution to process improvement. As activity-based costing (ABC) has been embraced, based on cause-and-effect principles, companies benefit from visibility to the cost drivers of making products or delivering services. With accounting information as the operations work force can decrease the quantity, frequency, or intensity of a cost driver (e.g., the number of machine set-ups) then costs can decline. ABC also provided a way to score the work activities displayed in a value stream map as value-added or nonvalue-added (or as a spectrum of value-add) to enable focus based on the magnitude of costs. Progressive accountants recognized they could add another scoring method to classify activities as correct, prevention, appraisal, internal defect, or external defect. This is the basis for measuring the cost of quality (COQ). With repetitive COQ reporting companies can monitor the shift of their costs from the latter to the former of the five COQ classifications as well as reduction of the last four of them.

IBP for productivity improvement

IBP should be viewed as holistic where as an umbrella it covers strategic issues, as described in my three prior blogs in this blog series, as well as operational issues discussed in this blog.

There is some controversy. Just as there is organization chart silo behavior that becomes an obstacle for better integration of how employees should work together there can also be improvement method silos. Some advocates in the lean and quality management communities promote their methods (e.g., fish bone diagrams), as the primary ones to adopt. To their credit, their methods do educate employees on how to think. But IBP’s broader suite of methods aids managers and employees on where to think. As a result IBP provides focus to better address which improvement opportunities will lead to improved troubleshooting for corrective actions. This also includes the broader set of products available now to users to perform their analysis on the different silos of information.  With In-Memory technology it’s easier to consume disparate sets of information into one source as well as analytical tools that provide easy visualization options the convergence of strategic and operational analysis comes together easier.

IBP is for enterprise wide improvement

As mentioned, integrated business planning (IBP) integrates financial, strategic, and operational information. It can help the enterprise integrate all their objectives and ensure synchronization.

In my next blog I will discuss integrated business planning for improved budgeting, rolling financial forecasts, and evaluating proposed business decisions.

 

 

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, Methods, Risk, and Analytics and Predictive Business Analytics.

 

Linkedin contact:

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