fwo_deloitte perspectives on budgeting and planning

Perspectives on Budgeting and Forecasting

Agenda

Planning, Budgeting and Forecasting Processes

Tool Landscape

Contacts

2Copyright © 2009 Deloitte Development LLC. All rights reserved.

• 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)


• Integration of Performance and Risk Management is a growing trend

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


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)

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


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

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


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

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


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)

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


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

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)


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

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:


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

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


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

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


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

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


• 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

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 -


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


• 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


• Overall Process owner• Develops approaches,

deliverable standards, timeline

• Develops deliverables within:

• Timeline/Approach• Guidelines• Deliverable designs

Model Description

Corporate Planning Role

Divisional Planning Role

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


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

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


• 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

Vendor Overview - Cognos

Cognos is a leader in the business intelligence and analytics space coupled with business performance management capabilities


• 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


‒ 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

Vendor Overview - HyperionHyperion is a leading player in the Business Performance Management space


• 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,


• 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

ContactsVic KatyalPrincipalDeloitte & Touche [email protected]

Jeff TorstensonSenior ManagerDeloitte & Touche [email protected]


mailto:[email protected]

mailto:[email protected]

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