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.
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 (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.