Economic cataclysms have a knack of identifying chinks in a company's armor. Processes reveal their flaws within an organization like cracks in a building's foundation. So it was that the global economic storm of recent years uncovered strategies around business planning that were inflexible and inadequate for the challenges of today.

But according to new research from Accenture, the most effective and dynamic planning approaches are ones that make real-time adjustments based on external factors, use sophisticated analytics to improve the allocation of capital and resources and broadens the planning perspective to include intangible investments.

Scott Brennan, a partner with the firm, recently sat down with Business Finance to discuss why budgeting and forecasting models matter more today than ever, how they have evolved and why companies often struggle to institute a successful program.

Business Finance: How did the Great Recession change the way companies think about budgeting, planning and forecasting?
Scott Brennan: If you go back, for years, companies ran their annual processes as a mechanical and routine annual exercise. It was something they had to do. When we were coming out of the downturn, we had been doing this survey and we found out that, as you would expect, about two-thirds of the companies surveyed reported that their planning accuracy had diminished horribly, which was really characterized by economic volatility. So the Great Recession is causing them to think. Some companies asked if it is worth doing planning. But, in our opinion, that's the absolute wrong way to think about it. Now, more than ever, what they need to do is think about how you can improve the planning process through volatile times, to be able to master a forecast even when volatility is present.

BF: What are the hurdles for companies today in appropriately and accurately forecasting their business performance?
SB: Volatility is a huge one because historically they've relied on historical numbers to predict their future. For a lot of companies, it's been looking at what happened last year and planning accordingly. But what we're seeing is companies need more powerful analytic capabilities to model their business and revisit the assumptions in that model more frequently. To do it more frequently, you're going to need to have driver-based models, those what-if drivers that would predict your business.

To give you an example, commodity prices have been swinging wildly. So for a utility company, they need models that will be able to predict the different spots for coal price futures along with all of the other variables in their business. It's not just trying to forecast accurately. It's trying to identify what gaps are going to be created by the current economic conditions and what you can do to continue to hit your numbers.

BF: Given the idea of global marketplaces, where companies more and more are selling to and sourcing from multiple markets around the world, what is the most prudent way that you see to execute planning and budgeting and forecasting?
SB: I have a couple of thoughts on that. One, these truly global companies need to get on a common process, with a common timeline and common language around what is planning, what is budgeting, what is forecasting and what is the sequence of events that we're going to go through as a company. For example, when do we set targets? When do we cascade those targets down? When is each business unit going to come back with their plans? You have to answer those questions in a consistent manner so that the organization can make good, global resource allocation decisions.

The other thing is they really need to push down in through their organization to business managers some of these forecasting decisions. Companies need to have a model built where they can engage people that are close to the customer, people that are close to suppliers.

BF: What is the role that sophisticated analytics are playing in today's planning and forecasting strategies?
SB: Some of the traditional analytics that companies use is they'll have a corporate model where they'll be able to look at the impact of an acquisition, the impact of a divestiture on my balance sheet and my income for next year. Or they might be look at models that can take changes in interest rate curve and calculate the impact of refinancing debt in the long-term versus short-term and what that will do to the bottom line? That's kind of what I would say entry level basic analytics where they've systematized, test and back-tested assumptions like that.

What companies are doing now is they're mining external data. So you could imagine an auto manufacturer, for example, buying or somehow securing information on what you and I might be doing on an auto website. If I'm going out on some website like Edmunds and I'm starting to look at big cars or small cars, blue cars or white cars and what option packages I'd like, that's all very valuable information. Sophisticated companies are getting that data and building that into their production plan so they have the right inventory for the customers because they've got to plan this out a year or more in advance. They're mining external data and then building that into more sophisticated forward-looking models.

BF: What are the challenges or hurdles you've seen companies face in implementing successful forecasting and planning strategies?
SB: I've seen two hurdles: one in technology and one in change management. The first one is having the right tools and the right models that reflect a company's business and can engage people all throughout the organization. The second hurdle is to change the mindset and the behavior of various parts of the organization to engage in the process, convince them that there's merits in spending time to put together a robust forecast so that we can identify the gaps that we might have in revenues or expenses and make the necessary adjustments.

BF: How viable is it to stop budgeting altogether versus simply modifying the current approach?
SB: A traditional budget has two purposes. First, to allocate resources so a company can get the highest return on those resources. Secondly, a budget is used for management control. The first one is very relevant and needs to continue. We need to effectively allocate resources as a company but in a more dynamic way. The second one, we need to change. Using a budget to control a behavior sets a false ceiling and a false floor.

What I think companies need to do is continue to use a budget-like process to allocate resources but as far as controlling, they need to be using long-range plans, relative measures and balanced scorecards to put the governor on behaviors. It's kind of a blend of the rolling forecast in a budget.

To learn more, read Brennan's article In Volatile Times, Traditional Planning and Forecasting Falls Short or watch his video interview Blowing Up the Forecasting Process.