The Revolution in Planning

Secrets from the front lines in the struggle to remake the budgeting process.

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No one said reengineering planning and budgeting would be easy. It’s just that no one thought it would be so tough, either. Indeed, the last plank in the finance redesign process is turning out to be a lot more difficult, time-consuming, and expensive than companies ever imagined. But that hasn’t stopped a multitude of firms from making the effort.

In fact, when CFO magazine first addressed this topic (see “21st Century Planning,” February 1998), only a handful of companies were embarking on planning overhauls, and not one was close to completion. Today, the route is crowded with companies as diverse as Texaco, Fujitsu, Sprint, Nationwide Financial Services, Nortel Networks, Owens Corning, and Xilinx. Many are now two to three years along in the process, and several have preliminary successes to report. Still, no one claims the exercise is pain free. “I wouldn’t recommend that anyone undertake such a project without courage and fortitude. One can’t overestimate the amount of effort required,” says Mike Upchurch, vice president of finance and information management for the consumer services group of Westwood, Kansas-based Sprint Corp., which has been reengineering planning for three years (see “Sprint Retools the Budget Process,” September 1997).

Everyone agrees that the main goal is admirable: devise a seamless, faster system of top-down planning and budgeting that links performance to strategic vision. It also makes perfect sense: eliminate multi-iterative budgets that waste time and rarely reconcile, and replace them with continuous plans that are owned by department heads, not finance.

But as with many admirable goals, the devil is in the execution. For one thing, there are fewer best practices that are directly transferable from company to company than there were with reengineering, say, accounts receivable. Second and even more problematic is that planning pervades every corner of the organization and is steeped in a tradition of negotiation. As Greg Vesey, former director of business systems at Texaco Inc. and now assistant to the chairman, told CFO last year, “Planning is the most political of all processes that fall under the finance function.” Little wonder that some companies, such as National Semiconductor Corp., have given up entirely and returned to their previous planning methods (the company’s new CEO put a stop to the redesign). Or that experts estimate that as many as 50 percent of companies that attempt such reengineering fail.

Companies warn that success in this area requires endless patience, protracted communication with employees, investment in new data-gathering tools, and time–three years or more. It also requires finance to evolve from being a reporter to being a facilitator of the process–a difficult undertaking for many. But companies that succeed in revamping this process firmly believe they can accurately assess strategic decisions based on metrics intrinsic to the business.

The Impetus For Change

No one disputes that the traditional exercise of corporate budgeting is a lot of sound and fury signifying nothing. “It’s a wasteful effort, driven by a phenomenal amount of detail that generates precisely the wrong numbers,” says David Axson, managing director at AnswerThink Consulting Group, in Hudson, Ohio. It’s also frustrating for finance executives, says Anita Tilley, a principal with KPMG Peat Marwick LLP, because “they can’t get increased revenue or decreased expense from their current process.”

Only 12 percent of CFO readers surveyed in 1998, in fact, thought their budgeting process was completely reliable, while 90 percent labeled it “cumbersome.” And it’s easy to see why. At Nationwide Financial Services Inc., for example, “Managers would do their budget and roll it up to department directors, who would submit it to the senior managers, who would say it was too high and then kick it back down,” says John Davis, financial operations officer at the Columbus, Ohio-based company, which has been reengineering planning for the past two and a half years. “We’d go through this exercise several times, up and down, and just keep cutting until someone felt good.”

The problem was that no one really felt good. “The administrative aspects of budgeting consumed us,” admits Kevin Parker, senior vice president of finance and administration at San Jose, California-based Fujitsu Computer Products of America, with more than $1 billion in 1998 revenues. “We had a web of Excel spreadsheets located on our network server where we put all this data in and tried to get a budget out of it. It took at least eight weeks from start to finish. We just had to change things.”

The incentives for change, however, go beyond frustration. At many large companies, for example, overhauling planning is often linked to another trend–the installation of ERP systems. Numerous companies, in fact, have realized that leveraging the data from their multi-million-dollar ERP systems involves a planning application. “Companies have found they need to take ERP one more step to get the business intelligence information out,” says Tilley. And that extra step, she adds, is an improved planning process.

Wall Street, however, is also indirectly driving the current rush to reengineer planning–a rush that has spawned at least one planning boutique and has encouraged all of the Big Five to develop separate planning practices. Many companies in the pre­initial public offering stage, for example, want a system to manage expectations. “Companies about to go public want to come up with their own expectations so that they can explain variances to Wall Street,” says Lawrence Serven, author of Value Planning and a principal at The Buttonwood Group, a Stamford, Connecticut-based consulting firm. An integrated planning system allows companies to do that, he adds. What’s more, he says, companies that have consistently missed earnings projections, such as Sunbeam, Venator, and Crown Cork & Seal, quickly realize that they need a planning process to accurately communicate to Wall Street.

Finally, market pressures dictate that businesses plan better. At Nortel Networks Corp., a Toronto-based global telecommunications equipment supplier, with $17.6 billion in 1998 revenues, “we have short windows of opportunity and short time frames to market,” explains Peter Browne, vice president, business planning and analysis. Yet the company’s traditional process “reflected where we were five years ago, when we could take as much time as needed to perfect a product. Today, customers want the product immediately; we had to change the planning processes to satisfy that need.”

In Search Of Simplicity

Whatever the trigger, most companies are looking for simplicity in the process.

Take Nortel’s experience. Like other companies reengineering planning, Nortel originally performed a strategic plan on an annual basis in the first quarter. “We would then carve out an annual operating plan, which went out four years,” says Donald Mackinnon, former director of business planning at Nortel, who is now vice president of finance at Bell Canada. “In the fourth quarter, we’d begin the budgeting process for the next year, which was a bottoms- up exercise, heavily churned, recycled, and reiterated to get to a plan that was acceptable to management. That took us a good four to five months. Then, in April, July, and October, we’d develop a forecast of where the business was compared with our goals for the year. In addition, within each quarter, we’d ask department heads to give us a monthly view to the end of that quarter.”

Two years ago, in an effort to stop the madness, Nortel’s finance group reviewed the process. The team–composed of about 20 finance professionals–quickly realized that the current process involved a series of discrete events that did not respond to its changing customer needs and market opportunities. “They were financial exercises, not business exercises,” Mackinnon says.

To streamline the process, Nortel first brought in KPMG Peat Marwick in 1997. One key recommendation involved the volume of information in the budget. In Nortel’s old planning environment, the company would prepare profit-and-loss statements with up to 100 line-item details. After examining the numbers management mainly relied on to run the business, the company whittled it down to 8, including cost of sales and research and development.

Tying those targets into the strategic plan is now a continuous process that starts when a senior management group at headquarters defines the business objectives and communicates them to the presidents of Nortel’s two operating lines. The dialogue continues on down through the five presidents within the operating divisions, to the general managers, department heads, and so on. Then, says Browne, “we take the strategic objectives and turn them into tactical objectives, and at the same time come up with a plan that meets the financial performance expectations.”

The result has been a newfound nimbleness. “Our culture is predicated on action now,” says Browne. “By linking our planning process to an ongoing validation of strategic directions and near-term financial dynamics, we can adjust direction to drive growth.”

Less Is More

The concepts of nimbleness and parity permeate most planning overhauls and help explain why many companies are embracing both balanced scorecards and rolling forecasts. Indeed, 46 percent of the companies in a 50-company Hackett Benchmarking Solutions study are installing balanced scorecards to identify the key drivers of their business. Another 22 percent have rolling forecasts.

Nortel, for example, performs a rolling four- quarter review twice a year instead of a calendar-year exercise. “The company doesn’t cease operations at the end of the calendar year, so why should the planning exercise?” says Mackinnon.

Similar thinking exists at San Jose­ based Xilinx Inc., where forecasts are completed before a quarter is over, taking pressure off finance, which is typically tied up closing its books. Previously, the $660 million developer of programmable semiconductors would wait until it closed the books on a previous quarter before it conducted a forecast. “Instead of forecasting in the latter part of April, after the first quarter has concluded, we’re done with it by the end of March,” says Kris Chellam, CFO and senior vice president of finance.

Such continuous forecasts typically revolve around a handful of performance measures that are identified early in the planning process. “You want to build your business plan- -the tactical initiatives–around truly useful indicators,” says AnswerThink’s Axson, adding that earnings per share or profitability do not tell a company’s whole story. “If a customer rings up the company and complains, that is a leading indicator. Yet, most companies don’t recognize the impact of that until the customer takes the business elsewhere.”

Nationwide Financial, for example, uses a balanced scorecard of a dozen measurements that tell a truer tale of the company’s progress than the traditional budgeting system does, contends Tim Murphy, vice president of strategic marketing. Included in the scorecard are traditional financial measures, such as return on equity, as well as such nonfinancial measures as customer retention and back-office productivity. Originally in a manual mode, the scorecard has been automated and resides on the company’s intranet site.

Sprint is forecasting now around a set of eight key performance indicators, which include number of sales and installed accounts, and plans eventually to translate this companywide. “By analyzing these, our forecasting is much more accurate–plus or minus 3 percent versus 10 percent,” says Mike Upchurch.

Freeing Finance

Who owns the budget is a central–and sticky– question in planning redesign. For finance, which typically owns budgets, the answer involves relinquishing control and assuming the role of facilitator.

At Xilinx, for example, Chellam says, “It used to be that no matter what the general managers budgeted, finance would cut the number. That’s not OK anymore. Finance now asks, ‘What are your base business needs and the critical projects you want to undertake that are currently underfunded?’ and works with general managers to get these projects funded.”

Transforming finance employees into analysts involved physically relocating eight finance personnel into the business units, says Chellam. The employees chosen, he says, “had to have a certain affinity for the business side.” In other words, “they had to be able to live in a world of constant chaos.” And within that world, he continues, they have made significant contributions, such as focusing the business units on “the key value proposition in this industry, which is new- product development.” In addition, they are invaluable compilers of competitive intelligence (a key component in any strategic plan), going so far as to meet with analysts. How does he know it works? “The general managers love it,” he says.

Nationwide Financial has also gone the analyst route. In the fourth quarter, unit heads develop tactical objectives based on the strategic plan, and then work with finance to forecast the costs involved. “We’ve come up with a concept we call our ‘current expense level,’ in which finance and unit heads figure out how much it will cost us to stay in the businesses we’re in at the same amount of volume and providing the same service,” says Murphy. “Once we figure that out, we extrapolate from it to determine how much money we will need to spend additionally to achieve our tactical targets.”

Consultant Serven warns, however, that not everyone in finance can act like an analyst. “For people brought up through traditional ranks, this is a new world,” he says. “Many finance employees have been able to justify their existence by checking journal entries,” he explains, adding that those employees will “naturally push back.”

Hot Potato

Push back is even more pronounced among the new owners of the budgets–the business-unit heads. “This is a process that finance owns at many companies, so it is difficult to convince department managers they must now take charge,” says David Axson. Besides, says Serven, “ownership implies that managers can no longer say, ‘This is not my number.'”

Overcoming such resistance involves first communicating that department heads do own the numbers. At Fujitsu, says Kevin Parker, “We set aside time at the beginning of the process for each product unit head to come in with a single sheet of paper summarizing the critical assumptions in his or her budget. We then hash these out.” The assumptions may focus on such things as expected market growth or major account wins. “And, together, we gain a shared vision about what these mean to the budget,” Parker explains, adding that the process has helped to halve Fujitsu’s planning and budgeting process from six weeks to three.

Experts agree, however, that ownership is only truly achieved once incentive compensation is integrated into the plan. “The whole process lacks meaning if people don’t have skin in the game,” says Serven. Yet, few companies complete this step, says KPMG’s Tilley, because “hitting paychecks is such a very emotional issue.” In fact, only 55 percent of respondents to CFO’s survey said that strategic goals cascaded down into individual objectives, and less than 50 percent said performance targets were clearly linked to senior- and mid-manager pay.

For the companies that do take this crucial step, the advantage is readily apparent. Parker says Fujitsu’s system of linking up to 40 percent of compensation to results “gets managers to focus on their individual businesses.” And Nationwide Financial’s Murphy says their policy of linking compensation directly to the scorecard “instills that these are performance commitments, not just numbers.”

Still, most firms can relate to Sprint, which “hasn’t cracked the formula yet,” says Upchurch. “Right now, we’re saying that if we generate higher returns through better forecasting, and that increases our stock price, every employee who has stock participation in this company wins.”

Is it worth it?

Ultimately, redesigning planning and budgeting is like climbing a mountain: Each time you get to what you think is the summit, there’s another summit.

“As companies dig into this, they realize the issues are bigger than they thought,” says consultant Serven. “They start by redesigning their budget format, which leads them to think about strategic assessment, then about a strategic plan. This leads to performance management, the human resources model, incentive compensation, and so on. And as they take these steps, it doesn’t get them where they want to be.” Little wonder that projects are taking two and three years and that most companies are not done.

Tilley, however, believes that the key is to start small. Companies can achieve preliminary success in three to six months, she says. In that time, she explains, “a company can develop a rudimentary skill set by leveraging a metrics-based approach to planning. For example, in most industries, 7 to 10 key operating metrics directly drive financial results.” And achieving such success, she adds, can lay the groundwork for “performing a full-blown balanced scorecard” or at least give “a cost/benefit justification for a longer project.”

Either way, the exercise is not cheap. Nationwide Financial, for example, spent $1.2 million in hard costs on its redesign, a price tag covering hardware, software, and business analyst expenses. These exclude the soft costs associated with the time devoted to the project by finance, marketing, and the cross- functional teams. Chellam says Xilinx spent about $500,000 on hard costs. Other companies preferred to keep this information proprietary.

As for measurable impact on shareholder value, that is hard to decipher. Fujitsu firmly believes that its 30 percent annual growth rate since undertaking its reengineering is evidence of success. But most companies point to reduced budgetary cycle times as proof the system works. Nationwide Financial, for example, has reduced its budget time to “a few weeks instead of three to four months,” says Murphy, who estimates that “the savings in this area exceed what we spent in hard costs.” Xilinx reduced its budgeting process from five weeks to three weeks, saving at least $1 million, Chellam says.

Such milestones are impressive quick hits, comments Tilley, adding that it will take another two years for “shining success stories.” In the meantime, it’s the intangible benefits of improved decision-making and strategic alignment that companies say make the journey worth it. Says Fujitsu’s Parker: “We have significantly transformed the way we run our business. Everyone is in sync, focused on what needs to be accomplished, and motivated to get there.”

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THE TECHNOLOGY PIECE

It’s key to reengineering planning, but not the solution.

Two fundamental characteristics of successful planning are standardizing data and sharing it in real time with the right people. However, that’s where a lot of companies trip up.

Part of the problem is that many budgets and forecasts are developed from multiple stand- alone spreadsheets that are populated either manually or with extracts from transaction and general-ledger systems. Compounding matters is that terminology often differs from division to division. “In the past,” says Mike Upchurch, vice president of finance and information management for Sprint Corp., “all the units had their own P&L formats, and they were so different you couldn’t compare one to another.”

Experts say that the best solution is a single planning and reporting system enterprisewide. Yet, according to Hackett Benchmarking Solutions, only 24 percent of companies have such a system.

The benefits of consolidating budgeting and reporting systems, however, cannot be denied. Owens Corning, for example, recently spent a year implementing a $75 million SAP system that included a planning application. “As part of our planning and budgeting overhaul, we went from 200-plus different data systems to fewer than 10,” says Domenico Cecere, former CFO and currently president of the $4 billion North American building-materials division of the Toledo-based manufacturer. The result has been an elimination of multiple data inputs and a shortening of the close. “We used to close the books and take five or six days to analyze it, then give direction to the organization on what needed to be changed and ask for a forecast. That has gone away. Closing the books doesn’t matter now to managers; it’s just a financial function.”

Moreover, says Cecere, by standardizing data and choosing the right information to standardize, the company has gained a competitive edge. “I’m dealing with data that is close to the market,” he explains, adding that “I can get on my PC with 80 facilities and tell you exactly what my sales and profits are that minute. I know who I’m doing business with and making money with. We now spend our time on our customers, instead of on these data-input exercises.”

The demand for tools to eliminate such waste has never been higher. ERP vendors, such as SAP and PeopleSoft, have responded by adding planning applications to their systems. And planning-software leaders, such as Hyperion, Comshare, and Oracle, are being challenged by a plethora of smaller vendors.

Still, success in planning reengineering is not all technology driven. “It all depends on what your definition of success is,” says Lawrence Serven, a principal at The Buttonwood Group. “If it is simply to consolidate departmental budgets, then you can buy a Hyperion or Comshare solution and in six months say you are done.” To do this right, however, says Peter Browne, vice president, business planning and analysis, at Nortel Networks Corp., “you need to tackle the process first, and then address the systems.”

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