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.
I further referenced how the CFO’s financial function is increasingly contributing its skills and capabilities beyond financial reporting to performing as a strategic advisor and facilitator. In this blog I will discuss issues, needs and solutions related to strategy execution and how IBP is part of the solution.
Measurements are key to aligning employees with the strategy
My career spans 40 years, and I began it as a headquarters strategic planner in the early 1970s for a large US conglomerate with over 50 divisions. In those days we created forms at headquarters and annually mandated the divisions to complete them as a first draft. They were ten year strategic plans, and after they were completed we would skeptically interrogate the divisions’ staffs about their plans as if we were law enforcement officers.
That was then and today is now. That method for strategic planning is archaic and no longer applicable. Why? With today’s increasing volatility, uncertainty, Internet-led communications, and globalization removing trade barriers each new day requires frequent strategic adjustments to anticipate continually changing customer needs, disruptive new technologies, and counter-tactics by competitors.
To complicate matters the frustration that executives have is comparatively less with their strategy formulation, which many executives are reasonably good at, and more with strategy execution. Organizations struggle with aligning the behavior and priorities of their managers and employee teams with the leadership’s usually well-formulated strategy. Organizations strain to determine what correct performance measures, popularly referred to as key performance indicators (KPIs), to select and assign to managers to hold them responsible and accountable including setting target levels for the KPIs. They strain to determine if they can even afford the executive team’s strategy!
To further complicate matters, measurements are not about just monitoring the dials of a strategic balanced scorecard and its cascaded performance measures displayed in operational dashboards. The challenge is with moving the dials. This involves selecting the projects and initiatives as well as the core processes to improve with actions to achieve the organization’s strategic objectives.
IBP provides the capabilities to integrate strategic, operational, and financial objectives and plans. It resolves issues arising when non-integrated plans are produced in silos (e.g. operations, sales, and marketing). When plans are not integrated it is likely the financial projections will be imperfect. Quite simply, they are not in sync.
One aspect of IBP is it links the strategy to the budget, which is rarely the case given the way organizations typically create budgets with rolled-up consolidations of cost center spreadsheets. IBP provides modeling tools to test and validate reality with illusion.
Key concepts with targets, forecasts and plans
Before describing how IBP supports strategy execution, some key concepts are needed.
Targets are what we would like to happen; these are initially created by producing a forecast. A forecast is what we believe will happen. And Plans are then what we intend to do to with actions and changes to strive to achieve our targets.
Affordable strategy execution begins with the executives defining a set of causally linked strategic objectives. A one page strategy map diagram is today commonly accepted as the means to do this. Today’s software technology replaces PowerPoint strategy diagrams for this, and much more (a topic with which I will conclude this blog). Forecasts of demand (e.g., sales volume and mix) that IBP forces to be consistent as a single source are combined with identified projects, initiatives, core process improvement actions to achieve the linked strategic objectives.
Several critical steps next take place. KPIs are selected to monitor the progress towards accomplishing each strategic objective, and aspired targets are set for each KPI. At this point, however, the formulated strategy is still just a hypothesis. The CFO’s finance function should next ideally validate if the combinations of spending (i.e., for demand-driven production and the strategy, risk-mitigation, and capital projects) will meet the expected enterprise profits desired by the executives. IBP enables the integration to perform this financial validation test.
IBP reconciles aspirations with reality
When the financial validation step just mentioned is taken, typically the desired profit level will not be attained, and wishful thinking will not solve this. Now the fun part begins. With next generation budgeting, forecasting and planning tools revised plans and changes in assumptions can be made. Analysts can determine where productivity improvements are needed and where customer product mix and volume needs to be changed. And those are only two revisions of many options.
This type of analysis cannot be done with spreadsheets or operational transaction-based software. It cannot be done if silo systems operate in isolation of each other including disparate data sources. IBP enables timely modeling, what-if scenario analysis, and sensitivity analysis to link the resulting revised strategy to the budget. And, of course, budgets become obsolete soon after they are created, so driver-based rolling financial forecasts with updates to all the variables, especially the forecasts, has become the new norm for the CFO’s financial function.
What lies ahead?
Have I yet mentioned business analytics and Big Data? No, but I will now. Earlier I wrote that strategy diagrams and KPIs should be enabled with software, not in PowerPoints and cumbersome table reports. With IBP, for example, correlation analysis can be applied to prior period KPIs and measure the explanatory value that KPIs have on other KPIs they contribute to and influence. This validates the quality of the KPIs selected. If the correlation is low then select better KPIs that as their target levels are achieved, via aligned employee behavior, the result will then be the strategy execution better matching the formulated strategy the executive team is seeking. Strategy execution then becomes a scientific laboratory as well as it should.
And with in-memory chip computer power vast amounts of Big Data can be modeled at substantial levels of detail.
As I wrote in my initial blog for this IBP blog series, IBP is no longer a “nice to have” but rather a critical “must have.” I’ll be continuing this discussion in my next blog on this topic, in which I shall look at on product, channel and customer profitability analysis.
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, Methodologies, Risk, and Analytics and Predictive Business Analytics.