driver based planning and rolling forecast

Driver Based Planning & Rolling Forecast

A Place to Start & Beyond

Alex Cohen

Impetus Consulting Group

11/20/2015 2

DRIVER BASED PLANNING &

ROLLING FORECAST

A Place to Start and Beyond

Alex Cohen

Founding Partner


@alex_cohen13

11/20/2015 3

ALEX COHEN: FOUNDING PARTNER

Background:

� Over seventeen years of consulting experience in the area of strategic cost management, performance management and business intelligence

� Specializes in Driver Based Modeling with extensive implementation expertise in:� Activity-Based Cost/Management (ABC/M)

� Shared Service Chargeback, Cost-to-Serve� Profitability Analytics� Driver Based Planning� Performance Measurement

� Proven project leader of complex integrated solutions

� Combines technical and functional expertise to design and deliver the right solution for clients

� Regarded as a one of the premier subject matter experts for Hyperion Profitability & Cost Management (HPCM)

� Publishes a blog on advanced planning, profitability and costing principles: alextheallocator.blogspot.com

Industries Experience:

� Data Management� Distribution� Financial Services� High Technology� Media� Medical Technology� Insurance� Pharmaceutical� Retail� Social & Online Media

Technical Skills:

� Hyperion Planning (Certified) & Essbase (Certified)

� Hyperion Profitability & Cost Management (HPCM)

� SAP Profitability and Cost Management (PCM) & Metify

� CRG FlexABM

� Anaplan Solution Architect (Certified)

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• Your Performance is our Focus

• We combine leading Enterprise Performance Management tools and proven methodologies to deliver sustainable value to our clients

• The Impetus team has a proven track record of implementing complex integrated solutions for Planning, Costing and Profitability

• Impetus consultants combine technical and functional expertise to design and deliver the right solution for each of our clients

• Impetus partners with leading EPM software providers ensure the right fit for each clients

IMPETUS CONSULTING GROUP: WHO WE ARE

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• To define what drivers are and how they can be leverage across the organization

• To take practical view of Driver Based Planning and Rolling Forecast and get down to actionable steps to apply these principles

• To debunk the believe that Driver Based Planning and Rolling Forecast are too complicated to implement at your organization

- Provide a few examples of practical models that other companies have leveraged to get started

OBJECTIVES

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• Start with primary drivers of your business, then fine tune the details

HOW DO YOU MAKE DECISIONS ABOUT THE FUTURE?

Image from: moz.com

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CAUSE

EFFECT

WHAT IS A DRIVER?

• Enables us to aligns dollars to business processes based on cause and effect relationships

image from: blog.caspio.com.

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DRIVER BASED MODELING

• A driver based framework aligns dollars to business processes based on cause and effect relationships

• Focused on what an organization does/produces, rather than what it spends

• Multi-causal driver relationships may generate outcomes (i.e. portfolio of drivers)

• Some “gut instinct” hypotheses turn out to be true; others are proven false

Cause Effect

“How” “What”

Drivers Results

Inputs & ProcessesIndicators of

Business Success

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• Most business can identify a handful of key metrics (drivers) which will drive Revenue and Cost:

- The number of new accounts opened by a bank

- The number of widgets ordered and then created by an manufacturer

- The number of units handled by a distribution company will drive capacity requirements

- Headcount

• Some key metrics have a direct effect on product cost while others are indirectly associated (IT, HR, Finance metrics)

• Costs that do have a direct correlation to the end product or services can be analyzed and planning as a unitized measure (also known as a rate) of cost to the key driver:

- End result: Rate * Volume = planned revenue or expense

DRIVER BASED MODELING

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CAUSE

EFFECT

EXAMPLES OF KEY DRIVER

External Focused Drivers:

Financial Services

-- # of New Accounts

-- # of Transactions

-- $’s per late payment

Distribution

-- # of Units Moved

-- # of FTL / PTL

-- # of Miles Driven

-- % of Loss/Damaged Goods

Retail

-- Revenue/Expense by Sq. FT.

-- Margin % by Category

Professional Services

-- # of Hours Billed

-- Prospect Conversion Ratio

Internal Focused Drivers:

Personnel

# of FTE’s --

% of Employees w/Benefits --

# of Contractors --

Technology

# of PCs/Tablets --

# of Servers --

# of Help Desk Calls --

% of Time Spent --

Finance

# of A/P Invoices --

% of Early Term Invoices --

Occupancy

Square Footage --

# of Moves --

image from: blog.caspio.com.

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Business Drivers

Budgeting & Planning

Strategic Decisions

Bench-marking

Process Improve-

ment

Cost Analysis

Profitability & Pricing

Risk

Analysis

DRIVERS ARE THE INTEGRATION POINT BETWEEN INITIATIVES

WHERE / HOW DO WE USE DRIVERS?

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• Focuses on the work that drives the economics of the business

- Customer demand for existing and new products / services

- Production, Logistics and Procurement capacity

- Investments / upgrades in infrastructure / Supply Chain

- New product / service development and rollout

- Disruptions events in the delivery of product / services

- Waste, Damage, Shrink

• A Driver Based approach changes the nature of the conversation between Finance and the broader organization

- Shifts to forecasting key metrics rather than the dollars

• Bottom line: The conversation is about the inputs, not the outputs

– Driver Volumes & Rates are inputs

– Dollars are the output

• Forward thinking, through Driver Based Planning, will enable you to manage your business more efficiently and ultimately give you a strategic advantage

WHAT IS DRIVER BASED PLANNING?

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

# of Units Shipped 267 323 378 437 499 566 638 714 586 657 734 815

# of Miles Driven 1,287 1,895 2,057 2,230 2,414 2,611 2,822 3,046 2,631 2,841 3,066 3,306

Storage Revenue 2.13$ 569$ 688$ 805$ 930$ 1,064$ 1,206$ 1,358$ 1,521$ 1,248$ 1,400$ 1,562$ 1,736$

Shipping Revenue 0.82$ 1,055 1,554 1,687 1,828 1,980 2,141 2,314 2,498 2,157 2,330 2,514 2,711

Total Revenue 1,624$ 2,242$ 2,492$ 2,758$ 3,043$ 3,347$ 3,672$ 4,019$ 3,405$ 3,730$ 4,076$ 4,447$

Warehouse Labor 2.03$ 542 656 767 886 1,034 1,174 1,322 1,481 1,233 1,383 1,544 1,715

Occupancy 0.67$ 179 216 253 293 341 387 436 489 407 456 510 566

Transportation 0.50$ 644 948 1,028 1,115 1,231 1,333 1,441 1,556 1,364 1,473 1,589 1,714

Other COGS 0.13$ 35 42 49 57 66 75 85 95 79 89 99 110

Total COGS 1,399$ 1,862$ 2,098$ 2,351$ 2,673$ 2,970$ 3,284$ 3,620$ 3,082$ 3,401$ 3,741$ 4,105$

Gross Income 225$ 380$ 394$ 408$ 371$ 377$ 388$ 399$ 323$ 329$ 335$ 342$

Gross Margin 14% 17% 16% 15% 12% 11% 11% 10% 9% 9% 8% 8%

Input Calculated Locked

Year 1 Year 2 Year XRolling Ave

$ / Unit

Cost Center View Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Headcount 5 5 6 7 7 8 8 10 10 12 13 15

Salaries 6,323.00$ 31,615$ 31,615$ 37,938$ 44,261$ 45,146$ 51,661$ 51,661$ 64,577$ 65,551$ 78,661$ 85,216$ 98,326$

Bonuses 1,432.00$ 7,160 7,160 8,592 10,024 10,224 11,700 11,700 14,625 14,846 17,815 19,299 22,268

Benefits & Taxes 54.00$ 270 270 324 378 386 441 441 552 560 672 728 840

Occupancy 34.00$ 170 170 204 238 243 278 278 347 352 423 458 529

Stationary 13.00$ 65 65 78 91 93 106 106 133 135 162 175 202

Training 300.00$ 1,500 1,500 1,800 2,100 2,142 2,451 2,451 3,064 3,110 3,732 4,043 4,665

Other Expenses 13.00$ 65 65 78 91 93 106 106 133 135 162 175 202

Total Expenses 40,845$ 40,845$ 49,014$ 57,183$ 58,327$ 66,744$ 66,744$ 83,430$ 84,688$ 101,626$ 110,094$ 127,032$

Inflationary Factor 0.00% 0.00% 2.00% 2.13% 2.13% 2.13% 3.67% 3.67% 3.67% 3.67%

Rolling Ave

$ / Unit

Year 1 Year 2 Year X

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“There is nothing quite so useless as doing with great efficiency something that should not be done at all.”

-- Peter Drucker

YOUR PLANNING PROCESS:

SOMETHING TO THINK ABOUT

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• The process of continuous planning without the boundaries of accounting periods

• Enables organizations to react more quickly to changing trends through greater foresight

• The continuous planning process immediately reflects known changes that will affect the future performance of the organization, such as:

- Sales, Capital Requirements, Capacity, Economic Conditions, Other External Forces

WHAT IS A ROLLING FORECAST?

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Plan

Actuals

Year 1 Year 2 Year 3 Year X Year Y

Annual PlanAnnual Plan

Snap ShotSnap Shot

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• There is no one size fits all

- Find the starting place and level of detail that is right for your organization.

• Focus on the areas that have the biggest impact on the business.

- i.e. what matters most

• How accurate does a forecast really need to be?

- More important to foresee big events happening then to get every detail right

DRIVER BASED ROLLING FORECASTING:

CONSIDERATIONS

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• Develop your plans (Budget, Forecast) at the same level of detail

- With a Driver Based approach, this is far easier than it seems.

• Operating in one Scenario all of the time

- From here, everything becomes a point in time snapshot, taken periodically:

• Remainder of the year + 1 year = Forecast

• Next Year = Budget

• Year 2-5 = Strategic Plan

- What-if can still be supporting through this structure and will be far less confusing


THE PRACTICAL SIDE

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• Unitization is your friend. Use it!

- Where there are drivers there are rates

- End result: Rate * Volume = planned revenue or expense

• Use a tool other than Excel (or bar napkins) to distribute, consolidate, allocate and aggregate information from across the organization

- Avoid fighting through Excel Hell processing data, and focus on analyzing information

- CAUTION: Changing your tool will only get you so far

• The process and methodology should be refined as well


THE PRACTICAL SIDE

11/20/2015 21

Leading Social Media Firm

• Phase 1 in developing their EPM platform

- Started with Planning & Management Reporting

• First steps in Driver Based Planning:

- Leveraged headcount (FTE’s & Contractors) to drive personnel costs

• Twenty-four month Rolling Forecast was enabled by copying last planned period forward automatically

- Adjustments could them be made to both drivers and dollars

STRAIGHTFORWARD BUT EFFECTIVE

Business Drivers


Strategic Decisions

Bench-marking

Process Improve-

ment

Cost Analysis


Risk

Analysis

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National Distribution Company

• Planned a few key drivers

- Sales in Revenue $’s

- Converted to number of cases moved

- All expenses other than labor was tied to a per/case rate

• Steps

- Establish a baseline cost per unit standards which can then be tracked and managed over time

- Input the key driver volumes

- Load the most recent payroll file

- Calculate first pass plan

- Review / Adjust / Repeat as needed

UNITIZE AND PLAN A FEW KEY DRIVERS

Business Drivers


Strategic Decisions

Bench-marking

Process Improve-

ment

Cost Analysis


Risk

Analysis

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National Distribution Company

• Done right, the planning process should move to managing driver volumes and rates instead of dollars.

- Creating dialog around how do we reduce our cost per case or cost per mile is much more powerful in the long run than how do cut expenses by $10M, $20M, or $100M

UNITIZE AND PLAN A FEW KEY DRIVERS

Business Drivers


Strategic Decisions

Bench-marking

Process Improve-

ment

Cost Analysis


Risk

Analysis

11/20/2015 24

Super Regional Bank

• Implementing driver based planning along with detailed profitability

- Allow the business to plan drivers at non-leaf level business dimensions, then push them down

• Process Considerations

- Identified a set (~50) key drivers referred to as “PRIME” to plan

- Allow the business to plan drivers at non-leaf level business dimensions, then push them down

- Extrapolated the remain (~1000) drivers based on historical correlations

“PRIME” DRIVER APPROACH

Business Drivers


Strategic Decisions

Bench-marking

Process Improve-

ment

Cost Analysis


Risk

Analysis

11/20/2015 25

Super Regional Bank

“PRIME” DRIVER APPROACHBusiness Drivers


Strategic Decisions

Bench-marking

Process Improve-

ment

Cost Analysis


Risk

Analysis

ActualFcst

(based on Actuals)Fcst Fcst

FY14 FY15 FY15 FY15

YearTotal Jan Jan Jan

Driver Type Cost Center Product Driver Account FinalPRIME Driver

CorrelationTopDown Final

Correlation

Check

Prime Driver LV Banch #53 Personal Checking Account New Account 1,000,000 125,000 125,000

Detailed Driver LV Banch #53 Personal Checking Account ATM Transaction 4,000,000 4.0000 500,000 4.0000

Detailed Driver LV Banch #53 Personal Checking Account Electronic Funds Transfers 5,000,000 5.0000 625,000 5.0000

Detailed Driver LV Banch #53 Personal Checking Account Check Deposits 2,500,000 2.5000 312,500 2.5000

Detailed Driver LV Banch #53 Personal Checking Account Electronic Deposits 650,000 0.6500 81,250 0.6500

Detailed Driver LV Banch #53 Personal Checking Account Debit Card Transactions 3,300,000 3.3000 412,500 3.3000

Detailed Driver LV Banch #53 Personal Checking Account Online Account Views 850,000 0.8500 106,250 0.8500

Detailed Driver LV Banch #53 Personal Checking Account Overdrafts 80,000 0.0800 10,000 0.0800

Detailed Driver LV Banch #53 Personal Checking Account Closed Accounts 120,000 0.1200 15,000 0.1200

Historical Data Planning Point Calculated Drivers

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• Driver Based Modeling is a framework aligns dollars to business processes based on cause and effect relationships

- Every organization can identify a group of key metrics to server as the starting point for Driver Based Planning

- Organizations can use drivers for many different initiatives including:

• Planning, Costing, Profitability, Benchmarking

• Rolling Forecast is the process of continuous planning without the boundaries of accounting periods

- Enables organizations to react more quickly to changing trends

• Driver Based Planning and Rolling Forecast can be leveraged together in a practical way that is right for your organization

RECAP

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ROLLING FORECAST


What Questions Do

You Have?

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ROLLING FORECAST


Alex Cohen

Founding Partner


[email protected]

: @alex_cohen13

Blog: alextheallocator.blogspot.com

driver based planning and rolling forecast

Data & Analytics