Perspectives on Budgeting and Forecasting

Transcription

1 Perspectives on Budgeting and Forecasting

2 Agenda Planning, Budgeting and Forecasting Processes Tool Landscape Contacts 2

3 CFO Priorities in 2009 (Gartner survey) Performance Management is a top priority 76% say measuring profitability constraint is top Improving financial processes is a top concern Integration of Performance and Risk Management is a growing trend 3

4 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) Cognizant Technology Solutions (22) Koninklijke KPN NV (23) Telekom Austria AG (24) Constellation Energy Group (25) Fortum Corporation (26) 5 Year Total Shareholder Return vs. Industry Performance Performance Management Related Benefits Experienced By Top Performing Companies Through 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 4

5 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 Financial community Markets and customers Business operations 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 competition for customers impacting retention and pricing Increased pressure and emphasis on profitability and cost reduction Increased need to understand customer and product profitability Need to efficiently integrate new acquisitions and business models Increased need to align business operations with corporate strategy Migration from well-controlled lagging indicators to more leading indicator focus Increased need for accuracy and defensibility of forecasts and budgets 5

6 Ineffective performance management can lead to failure to achieve an organization s strategic objectives Despite acknowledging the desire to better manage performance, organizations continue to struggle with issues that prevent them from achieving long-term strategic objectives Symptoms of ineffective performance management 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 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 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 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 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 6

7 Deloitte s Performance Management Framework 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 Intervention (Forecast) Acting on the information Decision Making, Investigation, Reformulation of strategy, change processes, risk response, start new activity 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 Intervention Analysis 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) External Reporting 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 Forecasting Value Creation Management Reporting Strategy Operational Reporting Planning Budgeting 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 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) 7

8 Our view is that the planning process should raise questions and provide answers that are core to the business 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 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 8

9 Planning/Budgeting is a top-down, bottom-up process with multiple stakeholders Top Down Executive Guidance and Direction Top Down Plan Finalization CFO and Executive Management Create Strategic Plan (e.g., shareholder value, investment portfolio) Define Financial and Operational Targets (e.g., ROIC, ROE, EBITDA Margins) Analyze Consolidated Results (e.g., pro-forma financials, KPI s, risk modeling) Finalize Changes and Approve Plan (e.g., tweek plan; obtain commitment) Start Planning Cycle Financial Planning & Analysis Push Targets Down to Actionable Level (e.g., Communicate targets, assess implications) Business Units 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 Cycle 9

10 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: Leading Emerging No formal planning process No planning tools Inadequate communication Purely financial plan Developing Inconsistent process Basic tools (e.g. Excel) Ad hoc spreadsheets Highly manual process Defined More standardized processes Some integration across BUs Reliance on ERP system as planning tool Little analytics Advanced Enterprise-wide processes Use of web-enabled budget tool Rolling forecast and other advanced processes Planning process fully integrated with strategy Real-time forecasting and performance monitoring Compensation linked to results 10

11 Leading organizations are adopting a number of effective solutions to improve their planning processes and enhance their value Key performance indicators Identification of the most significant measures of business performance Key Benefit: better alignment between strategy and execution Rolling forecasts Expansion of forecast horizon beyond current fiscal year Key Benefit: better insights into market conditions and expected performance Driver-based planning Development of planning models based on major internal and external factors that impact performance Key Benefit: more accurate plans and better insight into performance drivers Capital allocation Focusing capital spend on projects or initiatives that drive value Key Benefit: better return on investment for key initiatives Scenario Analysis Using various assumptions to gauge bottom line impact Benefit: better decision-making that includes consideration of all business scenarios 11

12 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: Typical Annual Budget Typical Rolling Forecast Required Changes 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 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 can be replaced with this... Forward looking, more marketbased, externally-focused, topdown planning Less overall effect Few top-down targets Fewer iterations and less detail churn at sites Fewer data lines sent to 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 but only if changes made... 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 Increased line management focus on quarterly forecasts vs. single event otherwise... A rolling forecast will increase the planning workload With Rolling Forecast, the need for budgeting is minimized or eliminated while producing a more externally-focused, market-sensitive process 12

13 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 13

14 A Range of Operating Models Improving planning & forecasting often requires greater leadership from corporate to facilitate decisionmaking - Immature - - Basic - - Leading Practice - Decentralized Coordinated Center-Led Centralized Model Description Central Group defines Central Group defines schedule only schedule and guidelines Divisions develop all plans Divisions define content & to meet schedule deliverables Central Group defines process, deliverables, schedule and standards Divisions work within approach Central Group responsible for overall plan Divisions provide data and input Corporate Planning Role Sets schedule only Summarizes divisional plans into Corporate Plan Owner of Corporate Strategy outputs Sets schedule and financial guidelines Integrates & coordinates divisional plans Owner of Corporate Strategy outputs Overall Process owner Develops approaches, deliverable standards, timeline Owner of Corporate Strategy outputs Overall Process owner Develops approaches, deliverable standards, timeline Divisional Planning Role Develops all deliverables to meet timeline/schedule Develops deliverables within: Timeline & financial guidelines Develops deliverables within: Timeline/Approach Guidelines Deliverable designs Develops deliverables within: Timeline Approach Guidelines Deliverable designs 14

15 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 Management Space Consistently recognized as the leader in BI analytical reporting Cognos TM1 software provides a real-time approach to consolidating, viewing, and editing data Future Direction SAP planning tool Highly customizable with Excel front end, which simplifies user adoption Built on a centralized services-oriented architecture Leverages Microsoft s Analysis Services (similar to Essbase and TM1) Tightly integrated with MS Office Suite and MS SQL Server Oracle integrated into OBIEE, Siebel, or other Oracle products IBM will likely leave as a stand alone application SAP will incorporate into Net Weaver architecture Will continue to market low cost solution to midmarket 15

16 Vendor Overview SAP BPC Developer and provider of analytic portal-based budgeting, forecasting and reporting Product Offerings 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-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 SAP-BPC SAP-IP Highlights 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 complete Excel integration Reporting is limited and lacks formatting flexibility 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 16

17 Vendor Overview - Cognos Cognos is a leader in the business intelligence and analytics space coupled with business performance management capabilities Cognos Planning Product Offerings Analyst is a localized modeling and analytics product Contributor is a web-based data collection and modeling product Cognos TM1 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) Highlights Cognos 8 allows for integration of Cognos BI products but limited integration of Cognos financial products Ease of developing planning functionality by using builtin-functions (BIFs) or the Analyst product that does not require programming knowledge OLAP engine 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 17

18 Vendor Overview - Hyperion Hyperion is a leading player in the Business Performance Management space Product Offerings 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) Highlights 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, calculations, etc. Server-based processing Fully integrated with Microsoft office through SmartView Web-enabled across products 18

19 Contacts Vic Katyal Principal Deloitte & Touche LLP Jeff Torstenson Senior Manager Deloitte & Touche LLP