fwo_deloitte perspectives on budgeting and planning
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Perspectives on Budgeting and Forecasting
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Agenda
Planning, Budgeting and Forecasting Processes
Tool Landscape
Contacts
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• Performance Management is a top priority
• 76% say measuring profitability constraint is top
• Improving financial processes is a top concern
CFO Priorities in 2009 (Gartner survey)
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• Integration of Performance and Risk Management is a growing trend
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Top performing companies employ world-class performance management processes
The Sherwin-Williams Company (1) Renault SA (2) Hilton Hotels (3) Continental AG (4) SABMiller plc (5) British American Tobacco (6) Reynolds American, Inc. (7) Nexen inc. (8) KBC Group (9) The Royal Bank of Canada (10) Moody’s Corporation (11) Anglo Irish Bank Corporation (12) Thermo Fisher Scientific Inc. (13) Becton, Dickinson and Company (14) WellPoint, Inc. (15) Humana Inc. (16) Textron Inc. (17) Aktiebolaget SKF (18) Atlas Copco AB (19) Volvo AG (20) Autodesk Inc. (21)
5 Year Total Shareholder Return vs. Industry Performance
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Performance Management Related Benefits Experienced By Top Performing CompaniesThrough the implementation of world-class performance management processes, these companies are able to:
Align corporate goals and business strategy
Make better and more effective business decisions
Effectively communicate strategic objectives throughout the organization
Provide increased visibility into all elements of the plan
Quickly respond to changes in business conditions
Increase accountability to plan accuracy
Tie business strategy to measurements and metrics
Simplify and standardize reporting to focus only on metrics that matter
Autodesk Inc. (21) Cognizant Technology Solutions (22) Koninklijke KPN NV (23) Telekom Austria AG (24) Constellation Energy Group (25) Fortum Corporation (26)
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Many elements of today’s business environment highlight the need for a more effective planning process
Pressures & challenges Impact on current environment
Regulatory Increasing regulatory oversight and scrutiny Increased need for financial transparency
Migration from well-controlled lagging indicators to more leading indicator focus
Financial community
Difficulty in raising capital due to credit market constraints
High returns demanded by investors
Reliance of shareholders and analysts on “forward-looking” projections and indicators
Increased need for accuracy and “defensibility” of forecasts and budgets
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Markets and
customers
Increased competition for customers impacting retention and pricing
Increased pressure and emphasis on profitability and cost reduction
Increased need to understand customer and product profitability
Business operations
Need to efficiently integrate new acquisitions and business models
Increased need to align business operations with corporate strategy
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Ineffective performance management can lead to failure to achieve an organization’s strategic objectivesDespite acknowledging the desire to better manage performance, organizations continue to struggle with issues that prevent them from achieving long-term strategic objectives
No clear accountability of operational managers for targets
Reporting and analysis efforts fail to highlight potential issues in a timely manner
Executive and staff behavior is not in line with
Targets, where set, are not aligned to the strategy and value creation
Long-range planning activity does not relate to the strategy
Resources are bound in projects which are
Symptoms of ineffective performance management
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Executive and staff behavior is not in line with achieving performance measure goals
Data exists across multiple systems with no standard set of business definitions across the enterprise
Inability of existing technology to effectively manage and analyze performance management data
Resources are bound in projects which are not top priority to execute corporate strategy
Strategic objectives, initiatives and individual targets are not aligned nor clearly communicated across the organization
The budget process is time consuming and does not result in the effective deployment of company resources
Tackling the symptoms individually will prevent the resolution of long-term issues. Instead, the root causes should be addressed through the adoption of a performance management framework
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Deloitte’s Performance Management Framework
Strategy
Intervention
Strategy
Intervention
Forecasting
Strategic Planning• Development of vision• Determining strategic objectives• Identifying strategic initiatives• Identifying threats to achieving strategic initiatives• Identify and manage enterprise risks impacting
initiatives• Agreeing on desired results (i.e., performance
measurement targets)• Establishing multi-year, high-level financial and
operational targets
Business Planning• Translation of strategy into annual business unit
Intervention (Forecast)• Acting on the information• Decision Making, Investigation,
Reformulation of strategy, change processes, risk response, start new activity
Forecasting• Understanding the near future• Draws on known facts and realistic estimates rather
than setting a course• Scenario planning and what-if analysis on critical risk
factors• Risk threshold recalibration if needed
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PlanningPlanning
Budgeting
Operational ReportingManagement
Reporting
External Reporting
AnalysisValue
Creation
Reporting• Financial variance reporting and monitoring• Close, management & statutory financial reporting• Risk dash boarding and regulatory compliance reporting• Operational reporting and monitoring (i.e. status of key business plan
initiatives)
Analysis• Analysis of performance measurement gaps• Ad hoc financial analysis • Analysis of systemic and enterprise risk• Analysis of operational progress against
planned initiatives• Determination of corrective actions
Performance Measurement• Reporting and monitoring of key, balanced performance
measures (KPIs and associated KRIs) that reflect desired results of strategic plan
• Communication of results of corporate and functional scorecards (performance and risk) throughout the organization
• Translation of strategy into annual business unit action plans (projects and initiatives)
• Identification of business unit performance measurement targets (i.e. KPIs)
• Identification of risks to achieving performance measures (i.e. KRIs)
• Development of annual operational and capital spending envelopes
Budgeting & Performance Target Setting • Identification and prioritization of capital
projects to develop capital budget• Translation of business plans and capital
budget into operating budgets (based on defined business model)
• Translation of business unit performance targets to operational performance targets (i.e. KPIs)
• Translation of business unit risk thresholds to operational risk thresholds (i.e. KRIs)
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What drives performance in the company’s market and in the company’s operations? ‒ How much should we invest in new products vs. line extensions?‒ How will an ERP impact operational effectiveness and efficiency?‒ Should we hire twenty new sales people or build a new warehouse?
How much investment should be shifted to those initiatives with the greatest promise? ‒ Business sustaining vs. Business growth
Our view is that the planning process should raise questions and provide answers that are core to the business
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What key performance indicators would best measure progress towards strategic goals? ‒ Outcome/Risk Measures – Revenue, Earnings Per Share‒ Process Measures – Cycle Time, Number of Hand-offs‒ Predictive Measures – Unemployment, Consumer spending, Fuel cost, Commodity
prices
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Planning/Budgeting is a top-down, bottom-up process with multiple stakeholders
Analyze Consolidated Results
(e.g., pro-forma financials, KPI’s, risk modeling)
Finalize Changes and Approve Plan
(e.g., “tweek” plan; obtain commitment)
CFO and Executive Management
Top Down Executive Guidance and Direction
Top Down Plan Finalization
Define Financial and Operational Targets
(e.g., ROIC, ROE, EBITDA Margins)
Create Strategic Plan(e.g., shareholder value,
investment portfolio)
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Start Planning Cycle
Push Targets Down to Actionable Level
(e.g., Communicate targets, assess implications)
Create Detailed Plan(e.g., driver based modeling,
approval based workflow, scenario planning)
Validate Plans and Consolidate Results
(e.g., verify plan assumptions, check results
for reasonableness)
End Planning CycleFinancial Planning & Analysis
Business Units
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More standardized processes
Enterprise-wide processes
Use of web-enabled budget tool
Planning process fully integrated with strategy
Real-time forecasting and performance Developing
Defined
Advanced
Leading
Developing a Leading Practice Capability
Companies typically mature from an unstructured planning process toward a more mature and structured process. The development often follows a path such as this:
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No formal planning process
No planning tools Inadequate
communication Purely financial plan
Inconsistent process
Basic tools (e.g. Excel)
Ad hoc spreadsheets
Highly manual process
processes Some integration
across BUs Reliance on ERP
system as planning tool
Little analytics
budget tool Rolling forecast and
other advanced processes
performance monitoring
Compensation linked to results
Emerging
Developing
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Leading organizations are adopting a number of effective solutions to improve their planning processes and enhance their value
Key performance indicators
Rolling forecasts
Driver-based planning
Identification of the most significant measures of business performance Key Benefit: better alignment between strategy and execution
Expansion of forecast horizon beyond current fiscal year Key Benefit: better insights into market conditions and expected
performance
Development of planning models based on major internal and external factors that impact performance
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Driver-based planning
Capital allocation Focusing capital spend on projects or initiatives that drive value Key Benefit: better return on investment for key initiatives
factors that impact performance Key Benefit: more accurate plans and better insight into performance
drivers
Scenario Analysis Using various assumptions to gauge bottom line impact Benefit: better decision-making that includes consideration of all business
scenarios
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Blow-up the Budget!Leading organizations are beginning to move from a rigid, annual budgeting process that typically is painful and causes undesirable behaviors to a rolling forecast:
…can be replaced with this...
…but only if changes made...
• Internally focused, historical perspective, bottom-up plan development
• Multiple lines of targets provided, but not formal firm targets (e.g., revenue)
• Multiple iterations of detailed budget preparation
• Detailed data required at all
• Forward looking, more market-based, externally-focused, top-down planning
• Less overall effect• Few top-down targets• Fewer iterations and less detail
churn at sites• Fewer data lines sent to
corporate
• Changes made to current plan, process and philosophy
• Timely and complete targets• Reduced data elements• Improved data collection tools• Close linkage with other planning
processes• Continuous planning
Required ChangesTypical Rolling ForecastTypical Annual Budget
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With Rolling Forecast, the need for budgeting is minimized or eliminated while producing a more externally-focused, market-sensitive process
A rolling forecast will increase the planning workload
…otherwise...
• Detailed data required at all levels
• Excessive handoffs• Spring and Fall plans are
separate activities• Forecast focus is only on
current year• Fall plan process results in
large spike in workloads• Incompatible systems/software
used throughout
corporate• Tightly linked to strategy• Improved decision support• Planning horizon refocused to
looking beyond year-end (e.g., 15 months)
• “Annual Event” reduced in the Fall so increases continuous planning mind-set
• Improved, uniform I/T tools and infrastructure
• Smooth resource needs throughout year
• Increased line management focus on quarterly forecasts vs. single event
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Rolling Forecast – Leading Practices
• Timely and complete targets• Reduced data elements• Efficient data collection tools• Increased line management focus on quarterly forecasts vs. single event• Expand the scope of forecasts to include financial and non-financial data• 4 or 5 quarters• Simplify and focus forecasts by relying on a few measures/drivers• Assign forecast ownership to operational units
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• Define threshold-level forecasting (i.e., scope and depth of forecast and action planning based on predetermined thresholds)
• Define consistent methodology and timeline to complete forecasts• Automate and leverage (e.g., modeling and scenario analysis) rolling forecasts through
information systems• Link incentive compensation to plan targets and relative value changes
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A Range of Operating Models
Decentralized Coordinated Center-Led Centralized
• Central Group defines schedule only
• Central Group defines schedule and guidelines
• Central Group responsible for overall plan
• Central Group defines process, deliverables, Model
Improving planning & forecasting often requires greater leadership from corporate to facilitate decision-making
- Basic - - Leading Practice -- Immature -
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schedule only• Divisions develop all plans
to meet schedule
• Sets schedule only• Summarizes divisional
plans into Corporate Plan
• Develops all deliverables to meet timeline/schedule
schedule and guidelines• Divisions define content &
deliverables
• Owner of Corporate Strategy outputs
• Sets schedule and financial guidelines
• Integrates & coordinates divisional plans
• Develops deliverables within:• Timeline & financial
guidelines
for overall plan• Divisions provide data and
input
• Owner of Corporate Strategy outputs
• Overall Process owner• Develops approaches,
deliverable standards, timeline
• Develops deliverables within:
• Timeline• Approach• Guidelines• Deliverable designs
process, deliverables, schedule and standards
• Divisions work within approach
• Owner of Corporate Strategy outputs
• Overall Process owner• Develops approaches,
deliverable standards, timeline
• Develops deliverables within:
• Timeline/Approach• Guidelines• Deliverable designs
Model Description
Corporate Planning Role
Divisional Planning Role
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The landscape of PBF tools is quickly changing
Hyperion Planning Cognos Planning BPC PerformancePoint
Offers true out-of-the box system integration
Considered the leader in the Business Performance
Consistently recognized as the leader in BI analytical reporting
Cognos TM1 software provides a real-time
SAP planning tool
Highly customizable with Excel front end, which simplifies user adoption
Built on a centralized
Leverages Microsoft’s Analysis Services (similar to Essbase and TM1)
Tightly integrated with MS Office Suite and
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Performance Management Space
provides a real-time approach to consolidating, viewing, and editing data
Built on a centralized services-oriented architecture
MS Office Suite and MS SQL Server
IBM will likely leave as a stand alone
application
SAP will incorporate into Net Weaver architecture
Oracle integrated into OBIEE, Siebel,
or other Oracle products
Will continue to market low cost solution to mid-
market
Future Direction
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Vendor Overview – SAP BPC
Developer and provider of analytic portal-based budgeting, forecasting and reporting
Product Offerings Highlights
• SAP-BPC (Formerly OutlookSoft)
‒ Current product is basically OutlookSoft 5.0 , designed for consolidation, financial planning, and scorecarding based on a Sequel Server Architecture
‒ Next generation to be released in fall 2008 will include similar capabilities, but be integrated with SAP Netweaver platform
• SAP-BPC
‒ Web centric messaging and portal positioning which supports collaborative, dynamic processes
‒ Provides workflow for managing the submission and approval of budgets, forecasts and plans
‒ Capable of managing complex calculations with
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• SAP-IP (Integrated Planning)
‒ Netweaver based planning product released in Fall 2006
‒ Primary focus is on planning and forecasting
• Though both products provide similar functionality IP is generally considered more robust and scalable, while BPC is consider more flexible and user friendly
‒ Capable of managing complex calculations with complete Excel integration
‒ Reporting is limited and lacks formatting flexibility
• SAP-IP
‒ Robust planning and forecasting capability
‒ Complete integration with SAP Netweaver and BI environment
‒ Highly scalable
‒ Limited installations
‒ Complete dependence on IT for support, no forward deployed or self-service administration
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Vendor Overview - Cognos
Cognos is a leader in the business intelligence and analytics space coupled with business performance management capabilities
Product Offerings Highlights
• Cognos Planning
‒ Analyst is a localized modeling and analytics product
‒ Contributor is a web-based data collection and modeling product
• Cognos TM1
‒
• Cognos 8 allows for integration of Cognos BI products but limited integration of Cognos financial products
• Ease of developing planning functionality by using built-in-functions (BIFs) or the Analyst product that does not require programming knowledge
• OLAP engine
• Distributed architecture pushes real-time processing to
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‒ Real time response to calculations, analytics with write-back capabilities, simple modeling
• Cognos Controller (for consolidation & related reporting)
• Cognos Report Studio and Query Studio (ad hoc querying, production report templates)
• Cognos PowerPlay/Analysis Studio (BI, analysis)
• Distributed architecture pushes real-time processing to the client which may compromise performance of large cubes if client processing limitations exist
• TM1 uses 64 bit technology and stores cube in memory for quick response times
• Integrate with Microsoft Excel, PowerPoint and Word through Cognos Office Connection
• Web or Excel interfaces• Highly configurable and flexible
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Vendor Overview - HyperionHyperion is a leading player in the Business Performance Management space
Product Offerings Highlights
• Offers a suite of solutions for financial management, business intelligence, and data management
• Hyperion Financial Management (for consolidation)
• Hyperion Analytic Services (Essbase)
• Hyperion Planning
• Hyperion Reports
• Hyperion Analyzer (dash board)
• Hyperion Analytic Services (Essbase) is the dominant OLAP engine in financial analytics space offering a powerful and sophisticated multi-dimensional OLAP engine
• Hyperion System 9 serves as an integration platform across all Hyperion products
• Centralized architecture provides simpler administration and deployment of the various products but compromises end-user flexibility in defining rules,
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• Hyperion Analyzer (dash board)but compromises end-user flexibility in defining rules, calculations, etc.
• Server-based processing
• Fully integrated with Microsoft office through SmartView
• Web-enabled across products
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ContactsVic KatyalPrincipalDeloitte & Touche [email protected]
Jeff TorstensonSenior ManagerDeloitte & Touche [email protected]
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