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Major Miners

The concept of collaborative budgeting may be both a great idea and a royal pain. But it doesn't look like it's going away anytime soon.

Budgeting and planning software has gotten a whole lot better over the past few years. Most B&P applications are now Web-enabled, which means finance executives can access the programs from practically any location. Almost all the programs slot seamlessly with ERP systems. The latest crop of B&P software is also more powerful than earlier incarnations, and is therefore able to parse gigantic data sets. Many of the applications feature real-time transaction updates.

In fact, about the only thing B&P software doesn’t come with is a radio button that says “Reformat Employee’s Brain.” That’s too bad. The fact is, it’s not particularly easy to get workers to change their views of what the budgeting and planning process is. And as experts note, you don’t get the full benefits of many budgeting and planning programs if you don’t get employees thinking differently about the budgeting and planning process.

Management types are certainly thinking about that process. “Budget and planning is a hot topic,” says Daniel Weinfurter, CEO at Parson Group, an operational consulting firm, “because the annual review process is under review.” Until recently, a company’s divisional budget coordinators handled all things related to the budget, and systematically delivered a single line entry to the finance department. It takes some serious reprogramming — the mental kind — to get finance employees interested in helping create that number.

What’s more, some corporations are now planning to roll out business planning software packages that connect more than 1,000 seats with collaborative applications. Putting a thousand employees to work on a single corporate budget sounds like a swell concept — for an Irwin Allen movie. In the real world, CFOs keen on rolling out collaborative planning programs need to do some serious planning of their own. The trick, according to John Van Decker, senior program director for consultancy Meta Group Inc., is getting workers to see budgeting and planning as a comprehensive business planning process — not an exercise in front-end data delivery.

Not Your Father’s Budget

If the concept of collaborative budgeting is both a great idea and a royal pain, it doesn’t look like it’s going away anytime soon. According to Paul Hamerman, analyst and director at Giga Information Group in Cambridge, Mass., the market size for B&P software licenses grew to $300 million in 2001.

Currently, there are two types of B&P applications on the market. Thin-server software (where most of the application logic resides on a user’s computer) is better suited for a more traditional cost-management budgeting process, says Giga’s Hamerman. Buyers of thin-server B&P programs usually view budgeting as a seasonal — and deadline-sensitive — task. For these users, the budgeting process typically involves brief periods of high demand for system resources.

On the other hand, companies that create rolling budgets usually purchase transaction-oriented, thin-client applications (where the application logic resides on the server). Why? Because rolling budgets require more frequent updates to predict financial results on a real-time basis. While thin-client B&P applications tend to eat up less system resources, they generate a lot of data. That means CFOs must invest in capacious — and expensive — storage systems to get the most out of the applications.

Few small corporations have the financial wherewithal to invest in those sorts of information repositories, known as data warehouses. And implementing and maintaining B&P software can get pricey, with ratios of licenses-to-implementation fees ranging anywhere from 3:1 to 0.5:1. Not surprisingly, big corporations have been the ones mostly gravitating toward real-time, companywide B&P programs. Meta’s Van Decker says such apps, also called enterprise business planning (EBP) software, can help finance chiefs better correlate expenses to revenue forecasts.

CFOs at a number of larger companies say they’ve been able to improve the accuracy of their forecasts by fostering internal partnering and collaboration. Expect to see that spirit of cooperation extend outside company walls, as well. Indeed, within two to three years, Van Decker predicts a raft of big companies will begin rolling out scalable EBP solutions linked to trading partners. The thinking: Knowing the forecasts of suppliers helps companies create more-realistic budgets.

Rolling, Rolling, Rolling

Until recently, CFOs could barely rely on the forecasts coming from their own operating units. After closing the books, finance department workers would often make like the Spanish Inquisition, meticulously probing managers about budget variances and line-item rekeys. Mike Sherratt, CEO at application vendor Armstrong Laing Group (ALG), says the introduction of collaborative budgeting software has redefined the finance department’s role in the process. Sherratt believes the programs make budgeting more visible to employees. When the budgeting process becomes more visible, CFOs spend less time playing numbers-cop. Instead, Sherratt says finance executives are freed up to act as operations advisors and management accountants.

One example: Teaming up with operations managers allows accountants to identify the back-office repercussions of increased sales — but from a resource standpoint, rather than an earnings management perspective. For instance, suppose the new Spider-Man movie boosts the sales of a company’s super-posable Spider-Man action-figure toys. What kind of impact will the increase have on fulfillment, return logistics, and customer service? And if those action figures are low-margin products, when do the increased sales pay for the increased back-office costs? “A traditional or dead budget can not handle this type of modeling or collaborative data gathering,” argues Sherratt.

Indeed, collaborative B&P software can bring actual excitement to the budgeting process — a development that surely ranks right up there with the invention of chocolate pudding and the Demerol drip. By Weinfurter’s lights, the 12-month budget process works fine for capital planning. He believes that a more dynamic budget is needed to respond to the realities of the marketplace, however.

As Weinfurter also notes, many public companies were heavily involved in ERP deployments a few years ago. Now, CFOs at many of those companies are realizing the next step is to mine the data collected by these systems — and to use that data to forecast and plan.

That’s exactly what finance managers at Western Digital Corp. are doing. Three years ago, executives at the Lake Forest, Calif.-based computer hard-drive maker replaced disparate departmental spreadsheets with a Web-based reporting system designed by Cognos. The program provides real-time, self-service information to the company’s management team. Eighteen months later, the company eliminated its annual operating plan, choosing instead to use a continuous rolling budget. “We’re never comparing results to old operating plans that were set months ago,” says corporate finance director Tami Vienna. Moreover, management-level executives aren’t squirreled away for months working on the annual plan, asserts Vienna.

Wolfgang Nickl, senior director of demand finance at Western Digital, says there’s another benefit to a rolling budget. A more frequent forecasting cycle, he points out, helps company management respond to market pressures by reducing cash conversion cycles and cutting operating expenses.

Data, Data Everywhere

Of course, finance executives at hard-drive maker Western Digital are probably not lacking for cheap storage capacity. For managers at smaller companies, hybrid budget software can be a less-costly alternative to real-time B&P systems requiring data warehouses. In essence, these applications lie somewhere between fixed budgeting software and real-time, transaction-based apps.

Sharon Garris, budget manager at Children’s Hospital of the King’s Daughter in Norfolk, Virginia, swears by flexible budgeting. Using a program designed by SRC Software, Garris is able to update the hospital’s annual plan by adjusting the budget for occurrences that create wide budget variances.

One for-instance: If the company’s fixed budget is calculated based on 20 patient days in the hospital, and the actual count rises to 25 patient days, budget variances will crop up in everything from staffing to lab work to medication costs. A flexible budget allows Garris to centrally adjust the budgeted patient day allocation. This, in turn, adjusts all tangential targets, leaving only true variances to ponder. “Because the data is all in one place,” Garris notes, “I can close my books in 10 days.”

The quick turnaround means the Children’s Hospital budget manager can spend her time on more important pursuits — such as assessing the total expense of a specific procedure, or identifying low-margin procedures that can be reduced through community education. “I work with hospital directors to turn data into meaningful information and effect change before the month ends,” she says. “I consider myself a business analyst.”

That’s part of the lure of B&P software. Less scut work often leaves more time for contemplating big-picture items. But Oscar Munoz, CFO of AT&T’s Consumer Services, notes that such contemplating tends to involve synthesizing all sorts of information. “The information increases the odds that you’ll make a good business decision,” he believes.

True, but only if everyone buys into the program. “It’s critical for operations people to understand the market intelligence that the financial data represents,” claims Munoz, “because they need to gauge their performance.” If the head of marketing runs a $100-million ad campaign, for example, that manager needs to be able to quickly access the before-and-after revenue numbers — not the financial metrics and data — to figure out if the campaign worked. That’s a ton of information. It’s also the type of easy-to-use report a B&P system can generate at a click of a button, says Munoz, who uses Eyeris software for budgeting and planning.

As with operational managers, though, it can be tough selling this sort of collaborative budgeting concept to higher-level managers. As Munoz points out, the old budgeting process often created an adversarial relationship between the finance department and operations managers. Thus, a CFO has to spend a lot of time soothing the worries of the company’s business leaders. Otherwise, some executives end up thinking that the collaborative budgeting process is actually intended to make them look bad. Generally, such thinking ends all hopes of true collaboration.

Marie Leone is a senior editor at CFO.com.

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