The finance department had traditionally relied on historical data, textbook-adoption calendars, and pipeline information from the sales force to construct its budgets. But by early 2009, it needed to look outside the business for clues about its future. “We needed to find out more about how our customers were being impacted [by the recession],” says Hughes. “They were missing billions of dollars in tax receipts and they were still trying to educate kids.”
This realization led to a quest for new inputs to the budget that executives hoped would give them better insight into what to expect in the year ahead. The finance and strategy teams began scouring news reports for information about states’ budget woes. Finance staffers studied GDP data and state and local tax data, and compared them with historical textbook-sales information to help predict sales. The company also dedicated a group of employees to analyzing federal funding and grants to determine where states would — or wouldn’t — be getting their funding.
The finance team learned that it needed to move to “an entirely new level of scenario analysis,” says Hughes. “Now, we think about whether certain states may just decide not to buy social-studies books this year,” a possibility that, when the company relied more heavily on traditional textbook-adoption calendars, was unthinkable. By taking a broader view of the drivers of demand for its product, the company has been able to develop a variety of new scenarios for its five-year plan.
As jarring as the recession has proven to be, the old routines and ways of thinking about annual planning will likely take time to fade. Nonetheless, many CFOs are energized by the adjustments they’ve made, eager to think about how best to adapt their planning processes to the uncertain recovery, and encouraged by their organizations’ greater understanding of the value of the budget. Turns out that a near-death experience was just what budgets needed to infuse them with more life.
Kate O’Sullivan is senior editor for strategy at CFO.
If the budget’s gone, what happens to the pay that was tied to it?
Because employee compensation is often tied to budget targets, the recession-induced perpetual misses that characterized the past two years were undoubtedly frustrating for many workers. “If you’re not updating budgets and doing scenario analysis on a regular basis, you’re reporting back to folks as to where they should have been on a number that may have no relevance,” says Janice DiPietro, national managing partner, consulting, at executive services firm Tatum. “It can have a demoralizing impact on the organization.”
To avoid that, and to drive managers to pursue new goals, many finance chiefs and other senior managers have had to figure out how to adjust their compensation targets. Kurt Kuehn, finance chief at UPS, helped his company move away from its traditional annual budget and focused managers on maintaining operating leverage instead, urging them to find ways to cut costs as revenues declined. As a result, he says, “flexible targets came into play. We were asking whether people were successful in adapting their operations to match [current] revenues,” rather than how they performed versus increasingly unrealistic budget targets.
Managers at companies that adopt a more flexible, rolling approach to planning will need to think about how to provide meaningful incentive pay, says Steve Player, program director of the Beyond Budgeting Roundtable. Rather than tying compensation to a static budget, Player recommends measuring performance on metrics such as performance compared with peer companies, performance versus selected economic metrics, ability to hit cash-flow or ROI targets for a given project or business unit, or performance versus colleagues. — K.O’S.