CORPORATE PERFORMANCE MANAGEMENT EXPOSED

Challenges associated with planning, budgeting and forecasting are not technical in nature. Rather, they stem from confusion around methodologies, poorly defined scope, and poor execution of strategies formulated in ivory towers that were poorly communicated to the remaining organization. The objective of CPM is to increase the efficacy of strategy through identification and execution of relevant actionable tasks. Logically, the first part of any CPM process is to create a plan that is consistent with the organization's mission statement, and defines the key drivers of success.

Corporate planning lays out a framework by which an organization can be more competitive by adapting to change and driving change of its own. By definition, a plan is the expected outcome based on data, which in turn produces a set of operational plans. An operational plan answers questions to who does what, where, how and when. Therefore, a successful plan is one that includes data from cross-functional areas, financial and non-financial areas of the organization, into one centralized data store. This data is used to identify weaknesses in the status quo, need for resources, and various scenarios that could occur. Then, the plan is effectively communicated across functional areas, which makes the corporate plan directly relevant to the entire organization. In fact, many organizations fail to break down corporate strategy across the organization, which in-turn fails to make plans directly relevant at each level (corporate, business-unit, team, and individual). This is why a good plan has the following:

1. An integrated approach that obtains input from all sectors of the organization (Finance, HR, Sales, Manufacturing). An integrated approach whereby all departments are pulled into the decision-making process makes any plan realistic as it obtains the “buy in” of all departments. Moreover, direct input from all areas of the business gives the planners a complete view of the current state that allows them to identify risks, pitfalls, and weaknesses to their current business model.
2. Identified resources for implementing change and handling change. This may be some combination of human resources and raw products that directly influence production. For instance, a company that relies heavily on Indonesia for timber would have been directly impacted by the tsunami in 2004. As such, by virtue of employing scenario planning the company could have mitigated the risk of losing its primary supplier in Indonesia by having secondary suppliers in North Carolina, perhaps at a higher cost. Thereby limiting their own exposure to exiguous factors that are simply uncontrollable and unpredictable, and coming up with viable alternative plans.
3. An iterative decision-making process where managers are able to evaluate their decisions. This in essence translates to a business intelligence (BI) solution that captures and reports on relevant information for management who can then leverage several tools that are at their disposal – balanced scorecard, activity based accounting, six-sigma among others. These tools rely on an integrated framework of data. Planners rely on historical data BI to review what was done in the past, which is analyzed for impact, effectiveness and efficiency. Allowing the planner to prepare operational plans, assess the resources needed to support the plan, and lastly draw up a budget to cover the work outlined in the plan. Therefore, it is imperative to prioritize objectives not just to identify them. Moreover, these priorities will have to be revisited on a quarterly basis to ensure consistency with the corporate strategy and current business climate.

Budgeting is a financial by-product of the planning phase and can often be more iterative than the plan itself. Therefore, it is imperative that the integrated framework that was used during the planning stages is effectively communicated with a complete set of priorities; creating a single link between planning and budgeting. To create this link, a sound budget rests on two major pillars:

1. Insight into the past – Admittedly, looking backwards does not allow a driver to predict upcoming challenges. For instance, recent interest rates have been especially favorable to borrowers; however, with upcoming hikes repayment calculations will need to be reworked with the increased cost of borrowing money. However, a good look into the past highlights key drivers that created or stunted growth, thereby forcing analysts to ask themselves how to allocate assets more efficiently, rather than how to spend remaining funds. The caveat here, however, remains that past numbers should not be allowed to hinder new strategic initiatives that are part of the plan. The budget should support the plan, not drive it.
2. Comprehensive list of questions that comes out of the planning phase. Again, this point relies heavily on an integrated historical data that allows the analyst to ask what-if questions by slicing and dicing terabytes of data. Since the position of analyst is not an IT profession, these applications need to be easy to use, and provide easy access to detailed and accurate data from anywhere. Moreover, integration of tools like balanced scorecards and strategy maps will make the application easier to use by the executive team. This in-turn translates analysis into definition of actionable tasks for the team.

Forecasting is a process that takes information from a company's strategy and business environment and develops future outcomes for the organization. Planning and forecasting have similar functions; nevertheless, there is a subtle distinction between the two, as a result forcing them to be treated as separate strategic initiatives. Planning furnishes operational plans and strategies, whereas a forecast estimates the results given a plan.

For instance, taking the current low-interest rates environment, a real-estate professional may forecast that home prices will dip when the cost of borrowing money increases. Moreover, she may forecast that 1 out of every 10 new homes built will remain unoccupied for a year or more based on different inputs, forcing the real-estate prices to drop further. A plan would suggest that she gets her clients to sell their homes now rather than wait for a better offer. She may further advise them to wait for a downturn in the market to repurchase new homes at a lower price in the next year or two. This example is not intended to be real estate advice; rather it helps illustrate the difference between a plan and a forecast. Best practices for forecasting vary by industry. However, there are some principles that are universally applicable.

1. Set standards across your organization to ensure that each department subscribes to the same methodology of setting classifications for data input and forecasting methodology. There needs to be standardized inputs for data – format, granularity, similar facts to allow easier integration and analysis of data. More importantly, there are several forecasting models used in the industry (i.e. linear, object etc), the organization needs to agree on forecasting method to ensure all areas are on the same page.
2. Environment assessment is a brainstorming session among area experts to determine realistic plans for changes to environmental factors. These factors are macroeconomic issues (global conflicts, recessions, major changes in legislation) that can impact the business landscape. In an increasingly globalized marketplace, these exogenous factors can wreak havoc or worse yet destroy a business if not properly understood and addressed.
3. Industry assessment is a brainstorming session among industry experts that helps identify plans for changes in the industry. The brainstorming needs to be forward looking and not focused to what the industry is currently doing. One of the key areas that should be introduced is collaborative planning sessions with your vendors, partners, and other supply chain business partners. These sessions can help manage stock based on product demand levels. In addition to your own corporate actions, competitor's reactions to your strategy should be addressed and understood.
4. Forecast results would then be produced by leveraging the forecasts that were put out of the aforementioned steps. One such output would be a profit and loss sheet for vested parties; another product of the forecasting sessions should be business (and sector) growth models given the environment and industry forecasts. Needless to say, the forecast results should indicate best-case scenario and worst-case scenario with more realistic graded results in between.

In conclusion, planning, budgeting, and forecasting have been part of the business world in some form from the first sales transaction in human history. The sophistication of tools and methodologies available today, however, makes strategic planning more powerful, and easier to understand, allowing managers to define strategies quickly and identify opportunities early. In most corporations and government agencies, there is a heavy reliance on spreadsheets to create the corporate plan. This process makes for very cumbersome, time consuming, and highly inaccurate data, thereby rendering planning, budgeting and forecasting less than optimal for corporate budget and strategy. Emailing a manually updated excel spreadsheet each month to each manager is not an effective or reliable solution for disseminating the corporate strategy as it shifts focus from the mission statement to more germane tasks. The strategies outlined in this article, along with an integrated BI approach limits the exposure to data inaccuracies, and dependence on IT departments for reports and analytics. Moreover, an integrated solution allows senior managers to navigate through their organization's data assets to identify weaknesses and opportunities for growth - thus making the planning, budgeting and forecasting process more robust and fruitful.

Written by Sanjeev Vohra, Data Management Group Consultant