How long does your planning process last? Do you link compensation to planning objectives? Can you perform rolling forecasts? Our recent survey addresses these and other planning, budgeting and forecasting questions to assess the current state of corporate performance management.
When employees walk into the office of James Ryan, CFO of Calence Inc., a company that builds and manages networks in Tempe, Ariz., they're greeted by a white board drawing of a pyramid. The word "knowledge" occupies the top third of the pyramid; it's supported by "data" in the figure's midsection and "process" at its base.
"Everyone wants to rush to the knowledge at the top of the pyramid," says Ryan, "but you've got to drive the process to capture the data first." That wisdom underlies Calence's integrated approach to planning, budgeting and forecasting. It also defines the core strategy supporting successful corporate performance management strategy at leading companies.
To plumb the current state of corporate performance management, Business Finance and OutlookSoft Corp. conducted a survey that explored how organizations manage their planning, budgeting and forecasting processes (see Survey Methodology on page 43). In addition to polling respondents on standard benchmarks such as planning frequency, staff size and closing time, the survey asked whether they use rolling forecasts, what they find to be the weakest links in their company's planning capabilities and how their organization selects key performance indicators (KPIs).
The survey results reveal that despite an increase in the use of budgeting and forecasting technologies, the overarching challenge for companies remains the maturation of the planning culture. That responsibility rests with the CFOs, who should understand the forces bearing down on corporate performance management as they seek to strengthen their company's planning, budgeting and forecasting processes.
Randall Dalia, a senior partner with PricewaterhouseCoopers Consulting in New York City, identifies three forces that directly influence corporate performance management. The first is the growth in intensity of the capital markets' focus on budgeting accuracy. Dalia points out that the ability to make accurate projections and to meet goals is becoming increasingly important. "And that drives a need for more of a real-time planning process," he notes.
The second force, increased marketplace velocity, is linked to the heightened pressures on the planning process. "By velocity, I mean shortened product life cycles, ever-increasing industry and market shifts, new partnerships where there might not have been partnerships in the past, and disintermediation of certain players along value chains and in industry sectors," Dalia says. "I think all of those shifts and the speed with which those shifts happen drive the need for a company to react more quickly."
The third force is the growing availability and sophistication of technology -- surging enterprise resource planning (ERP) functionality, better planning tools, and stronger database and analytical capabilities. At OutlookSoft in Stamford, Conn., for example, managers at all levels receive monthly financial information a day after the books are closed. "That information is available to every manager through the Internet," says CFO and vice president of finance Henry Schaffer. "It doesn't matter where they are; it's available at the same time to everybody. And they have tools that they can use to forecast the next month within five business days. And we roll it up automatically."
Schaffer points to one additional factor that is reshaping corporate performance management. "The board of directors is becoming much more aware of its need to be proactive in the corporate governance area," he says. "That means directors want to understand the pro-cesses that support the business." Part of the CFO's governance responsibility includes delivering that information to directors.
Together, these four forces are pushing companies toward a more proactive, faster planning process. "Most companies are clearly moving away from a once-a-year-type planning process," says Dalia.
Frequency and Length
Large companies are making that move in greater numbers than small businesses, according to the survey (see Planning Frequency on page 38). The largest segment of respondents from small companies still plan once a year, while the largest group from midsize and large companies plan quarterly.
"If they do it once a year, they're basically doing their annual budget," notes Schaffer. "It's so painful and difficult to do it manually or just through spreadsheets that people try to minimize that pain by only doing the budget once a year." Still, someone in the organization has to plan cash flow. (Ring any bells?) "What I've found from talking to clients and others in the industry," Schaffer says, "is that many companies do their massive 'I'm going to get input from everybody' process once a year. And then the CFO or the director of finance keeps a running tally and expectations of where they think the year is going to come in." Of course, those back-of-the-envelope corrections tend to incorporate minimal -- if any -- input from lower and midlevel managers, so they often create friction between senior and middle management.
The survey bears out this disconnect. When asked how their organization's line managers would rate the efficiency of their company's planning, budgeting and forecasting processes, CFO respondents answered much more positively than the midlevel managers who took the survey (see Different Takes on Efficiency on page 38). According to Schaffer, traditional planning and budgeting pro-cesses serve upper-level finance executives well but give line managers inadequate access to timely information. In fact, the survey found room for substantial improvement in providing lower-level managers with real-time data (see Line Manager Access at right).
The data also suggests other areas in which companies can improve. One is speed. Most respondents, regardless of the size of their enterprise, spend four months or more on planning and budgeting each year (see Time Well-Spent? at right). Smaller companies, not surprisingly, spend less time on planning than large organizations.
Almost half of all respondents need six or more days to close their books each month (see Closing Time on page 42). "That data is consistent with what we see in the marketplace," notes Dalia. "The norm would be from five to seven days, and the aspiration is two to three days. Best practice is soft, or a day or less." Those aspirations appear stronger at companies where closing drags on beyond six days. Sixty-four percent of companies in that category plan to reduce their closing time, while only 32 percent of respondents at companies with a five-day close intend to further cut that time.
Leading Indicators Lag
Overall, most respondents are fairly focused in terms of the key performance indicators (KPIs) they monitor for their planning, budgeting and forecasting pro-cesses (see KPI Focus on page 42). The majority track fewer than 10 KPIs. Dalia says this targeted approach is very good, but he encourages companies to strike a better balance in their use of leading and lagging indicators. According to the survey, 48 percent of respondents classify less than 20 percent of their KPIs as "leading." Only 13 percent classify 20 percent to 50 percent of their indicators as leading, and an anemic 4 percent consider more than half to be leading. (Thirty-five percent of respondents said that the question does not apply to their processes.)
Picture a graph in which the horizontal axis runs from internal measures to external measures, left to right, and the vertical axis runs from historical to predictive measures, bottom to top. Dalia finds that the overwhelming number of indicators within most companies fit in the bottom left quadrant of this graph -- they are historical and internal, rather than predictive or external. Metrics in the bottom left quadrant include P&L numbers, the balance sheet and previous years' financial statements.
"We work with our clients to push them toward thinking about certain predictive, external metrics that would actually help give them some foreshadowing of what's likely to be happening in their business," Dalia says. "For example, consumer confidence seems to be a pretty interesting leading indicator of advertising sales. So that might be an indicator someone in the advertising business chooses to look at."
In addition to tracking data-based indicators of future earnings, CFOs must keep tabs on cultural issues surrounding performance management processes. "I've taken a four-step approach that I'm driving as CFO," notes Ryan. "I want to have the right organizational structure -- and that covers both people and reporting. We have an annual planning process that is updated quarterly, so we need to measure that and report from it. 'Organize, plan, measure and report' is my mantra."
Ideally, Ryan and his staff would have taken six months to build a performance management infrastructure, after they gathered suggestions of key metrics from the rest of the organization. Unfortunately, reality interfered with that plan. "We decided on a business intelligence tool that everything else would hang off of, [which has] created a culture where the company is going to one spot," he says. "We didn't want an environment where the salespeople gravitated to their CRM [customer relationship management] tool, while our consultants relied on their PSA [professional services automation] tool. We've created a culture where everyone knows to go to our Web Excel, which goes by our internal nickname of 'My Info.' "
Developing a workable corporate performance management culture is vital. When asked what their company most urgently needs to address to improve planning capabilities, nearly 60 percent of respondents selected "our organization's planning culture." This choice was most popular by a wide margin over "our technology," "our ability to use the technology we have" and "our use of planning best practices," respectively.
To obtain an accurate picture of their company's planning culture, Dalia suggests, finance executives should answer a handful of questions: Is our budgeting process strategic; is it linked with the strategic planning processes of the business? Is it a top-down process with tar-gets that executive management carefully communicates? Or is it a bottom-up process where operational managers drive detailed planning exercises? What's the focus of the planning process? Is it strictly financial, or does it include nonfinancial components?
"For example, do you look at specific key performance indicators like market share and growth?" Dalia asks. "Twenty percent revenue growth against a market growth of 40 percent might not be a tremendous achievement. What level of detail is the company accustomed to planning to? We see companies trying to streamline and simplify. How long does that process take? Finally, how do you link the process with a measurement/rewards system of your company?"
Although Dalia advocates connecting compensation to the planning process, he emphasizes that the budget should not be the only link. It needs to be complemented by other tools and levers in that process. "I believe if you look at compensation programs solely tied to budgets," Dalia says, "you start to lose sight of other very important and external dimensions of your business, such as human resources and customers, for example."
Survey respondents seem to agree. Forty-one percent of all respondents fully link line manager compensation to their attainment of budget objectives, and 35 percent do so on a limited basis.
Once finance executives have conducted a cultural assessment of their company, they should consider budgeting best practices. Dalia sees a high correlation between top-down guidance and quick completion of the budget. "We also advocate that our clients seek a balanced focus around financial and nonfinancial measures, as well as predictive and internal measures," he says. "Finally, I think driving a process that gets completed in a very timely fashion should be an aspiration of any company thinking about modifying its planning culture."
These recommendations click with several activities recommended by the survey results: using rolling forecasts (see Gathering Moss? at left), linking line manager compensation to the attainment of budget objectives, giving line managers access to real-time data, and integrating planning with other performance management processes. All of these strategies rely on powerful, easy-to-use software.
Still, spreadsheets continue to dominate performance management tool kits. A majority of survey respondents identified spreadsheets as their primary planning/budgeting tool, a consistent result across companies of all sizes. Other planning technologies, in order from most to least frequently mentioned, were client/server budgeting solutions, integrated financial reporting/consolidation/business planning tools, ERP-based budgeting software (which placed fourth even among respondents at large companies), and Web-based planning/budgeting applications.
Regardless of a company's technology of choice, the organization must put in place the right performance management processes -- the base of Ryan's knowledge pyramid. "It's kind of a negotiation," Ryan says. "To obtain good data, the organization has to understand the importance of driving information into our system. As long as they communicate their metrics to me and follow the process, I can be held responsible as CFO for all of the reports."