New survey data reveals problems in budgeting, planning and forecasting and ideas to strengthen those processes. Early movers are gaining competitive advantage.
Cathy Jorgensen, director of performance management for Fortis Health, no longer uses the "B" word. Jorgensen and her department helped the Milwaukee-based health insurer, a subsidiary of $40 billion financial services company Fortis Inc., advance its performance management processes to the point where terms like "rolling forecast," "planning" and "single performance management application" have made "budgeting" obsolete. In that respect, Fortis Health is perfectly unrepresentative of most companies, including those which participated in the 2003 Business Finance/ALG Software Budget Reforecasting Survey.
The majority of respondents use budgets, but they also use pointed language to describe their company's planning processes. "Poor budgets, worthless exercise" is a typical comment. Two simple messages course through the 100-plus candid remarks survey respondents provided: The budgeting process takes far too long, and the end result is stale by the time it is completed. Businesses need more agile forecasting and reforecasting capabilities, but the organizational barriers to those capabilities are formidable. Judging from the responses, generating a brighter budgeting and forecasting future will require companies to make significant behavioral and procedural changes and upgrade their tool set.
Asked why their company's budgeting process veers off track, survey participants responded with blunt comments, including "poor strategic planning," "robs management of opportunity to take corrective actions," "lack of confidence in budgeting process leads to apathy," "minimal buy-in," and "assumptions are too aggressive." Other responses, such as answers to the question of how ineffective budgeting affects the organization, read like the barbs of a Letterman Top 10 list (think "Top 10 Reasons Companies Lose Value"), except that they're more dispiriting than humorous: "decreased morale, cash flow issues and problems"; "constant disappointment and subsequent reforecasting"; "deferred capital acquisition and expansion plans"; "earnings surprises"; ... and the number one result of ineffective budgeting and forecasting processes: "Bad decisions are made!"
Improving the speed and quality of decision-making is the core mission of business performance management software. Jeff Polner, senior director of financial systems and analysis for Primedia's consumer and media magazine group in New York City, notes that effective performance management processes and tools can help reallocate financial planners' and analysts' time from compiling data and building reports to addressing why variances occur. "That's what they're paid to do, yet at most companies they're left with a fraction of time to answer the question 'why?' " Polner says.
"Ultimately, management decisions are being made based on the answer to that question," he adds. "The more time you have to answer it, the more informed your decisions are going to be and the better chance you stand of making the right decisions." But before finance executives and managers can spend more time on "why?" they need to understand the current state of budgeting and forecasting and the barriers to progress within their organization.
Too Long, Too Clunky
Half of the organizations represented in the Business Finance survey require two to four months to produce and sign off on their annual budget (see graph 1, below). The larger the organization, however, the longer the budget process stretches. Fifty-one percent of respondents from $1 billion-plus companies reported that the process takes between three and five months, while 28 percent indicated that it lasts more than five months.
Herman R. Heyns, a London-based partner in Accenture's finance and performance management service line, reports that those figures jibe with his firm's work in the field. He identifies shortcomings related to processes, tools and people as primary causes of unwieldy budgeting time frames.
"Most companies have really got it wrong," he says. "They start off with a bottom-up budget process and then provide feedback on a top-down basis. And they go through multiple iterations preparing the budget in that manner." Companies that use a top-down target-setting process which aligns with the strategic plan can quicken the development of their budget by 30 percent to 50 percent, Heyns says.
Seventy-five percent of survey respondents reforecast during the fiscal year. Among these organizations, the largest portion (41 percent) reforecast on a quarterly basis (see graph 3, below). However, among $1 billion-plus companies that reforecast, the largest portion (40 percent) do so on a monthly basis. That figure, when coupled with the fact that the average large company requires three to five months to prepare its budget, presents a telling picture. "It suggests that by the time the initial budget goes live, it should already have been reforecasted three to five times," points out Frederic Laluyaux, senior vice president of North American operations for performance management software vendor ALG Software in Atlanta. "And it demonstrates that the value that business managers place on the initial budget is very limited."
Because of the prolonged economic uncertainty of the past two years and the intense scrutiny financial reports are under in the post-Enron era, companies' need to reforecast has soared. Nearly two-thirds of survey respondents indicated that their organization has generated a reforecast on demand, in most cases due to marketplace or macroeconomic factors. However, companies don't generate reforecasts as frequently as respondents want them to. Why? Because compiling new cost estimates requires too much of cost center managers' time (said 29 percent of respondents), administering and consolidating the reforecast takes too much of finance staff's time (24 percent), or management resists the amount of time required to do the reforecast (23 percent). (See graph 5, below.)
A useful first step for increasing reforecasting frequency is simplifying the process. Polner's unit within Primedia reforecasts monthly, but he emphasizes that this is a "very, very scaled down overhaul of the P&L." His group uses the monthly reforecasts to keep tabs on advertising revenue. Polner compares the reforecasting process to "painting with a broom" -- rough but effective.
Survey respondents described a wide variety of reforecasting practices. Forty-three percent of large organizations have more than 500 cost center managers, while 50 percent of midsize organizations rely on fewer than 50 cost center managers. However, managers at large enterprises require, on average, far longer to reforecast their costs. Fifty-six percent of large-company cost center managers need three days or more to reforecast costs, while 60 percent of midtier companies' managers complete their recalculations in two days or less.
Like many other companies represented in the survey, LSI Logic Corp., the $1.5 billion semiconductor manufacturer based in Milpitas, Calif., used to face reforecasting challenges daily. However, the company revised processes to instill in its budget managers greater accountability and ownership. Now, notes controller Pamela McBride, those managers request more frequent reviews and updates. "To handle the time commitment," she says, "we have found it necessary to work closely with the managers, address only significant issues and drive to intelligent changes. I don't care how good your software is, you need good people to use the systems correctly."
Companies also need to select metrics that ensure their reforecasts are accurate. Fifty-five percent of survey respondents reported that their forecasting process includes temperature checks of nonfinancial metrics and business drivers (see graph 6, below). LSI Logic monitors several operational areas, including personnel and utilization of equipment.
At Santa Clara University in California, director of budgeting Dennis Roberts says one of his chief concerns is identifying what information is most important to the people who use the organization's PeopleSoft budgeting application. "We have a good idea of the key measures we think people should look at," Roberts says, "but we don't position our perspective as gospel." Instead, Roberts and his staff preach the importance of communication. "We get key users in here with us, bounce ideas off of them and find out what information they'd like to see," he adds. "It's definitely an ongoing process."
Bypassing the Barriers
The agility of the reforecasting process depends on the number of metrics or drivers it reviews. Too much information -- a common side effect of newly implemented budgeting and forecasting technology -- often slows reforecasts. Heyns recently worked with a client in the utility industry that was asking managers to gauge 250 business drivers during its budgeting and reforecasting pro-cesses. "We analyzed those drivers and identified 12 that truly drove business performance," Heyns says. Afterwards, the company's planning processes delivered greater clarity and demanded substantially less effort. "Many organizations start with the technology first," Heyns notes. "They try to implement a piece of technology to cope with 250 drivers and, frankly, it falls into disuse because it's just too complex for people."
Spreadsheets remain the software tools used most frequently, by far, in the budgeting process. Seventy-three percent of survey respondents use Microsoft Excel as their primary budgeting tool, while the second most commonly mentioned software vendor -- Hyperion -- was identified by only 13 percent of respondents (see graph 7, below). Steve Player, managing director of Dallas-based The Player Group and the North American director of the Beyond Budgeting Round Table, believes the fact that spreadsheet usage is so high "creates huge opportunities" for improvement. "Reforecasting and remaining flexible in the spreadsheet environment requires a significant amount of internal controls," he says. "Given the rules within Sarbanes-Oxley and the heightened pressure to make earnings forecast, there's a huge risk factor in relying that heavily on spreadsheets."
Nothing is inherently wrong with spreadsheets. But, says Polner, Microsoft Excel is a two-dimensional solution for a multidimensional challenge. "You never will completely remove Excel, and that shouldn't be the intention," Heyns says. "But you should use different technology for the 80 to 90 percent of the process that can be standardized." Polner, for example, swears by Applix's TM1, an online analytical processing (OLAP) tool.
Companies' overreliance on spreadsheets remains an intimidating barrier to improving budgeting and reforecasting. Yet the barriers that survey respondents -- and vendors and consultants we interviewed -- identified most frequently are cultural. Software can vastly accelerate budgeting and reforecasting pro-cesses, but humans remain responsible for quality improvements. That's what McBride is getting at when she points out the need for good people. Likewise, it's what Roberts touches upon when he speaks of shaping budgeting into an "ongoing part of the financial planning process, as opposed to a single-point event."
Many managers and employees retain an event-based understanding of budgeting. It's not difficult to see why. "People are very often evaluated against the budget," says Laluyaux. "That's why it is a very touchy subject. It makes change more difficult." Change will remain difficult as long as key portions of employees' compensation are hitched to annual budgets. As Heyns notes, that flawed budgeting approach is "imprinted in their DNA."
A Healthier Approach
If that's the case, Fortis Health and its performance management department deserve recognition for possessing healthier-than-average genetics. Jorgensen recounts how the company moved its traditional budgeting culture to a system of rolling monthly forecasts that extend four years out. Today, Fortis Health forecasts at the divisional, cost center and general ledger account levels. The company's transition to its current process is interesting on several counts, most notably because of the emphasis Fortis Health placed on the cultural dynamic of change.
Four years ago, the company conducted little, if any, forecasting and used Excel to assemble its annual budget. Jorgensen says executives decided to move away from their "high-level annual budget mentality" to a forecasting mind-set, and the CEO and CFO knew they needed to "talk the talk."
As a first step, the company instituted monthly forecasting -- still using Excel. After a year of helping the rest of the company acclimate to that shift, the performance management department intro-duced a separate budgeting tool, which Jorgensen says was well-received. A year later, the company began forecasting more than one year out.
"At the end of that third year," Jorgensen recalls, "we sat down and said, 'OK, we have some issues. We have a business that is growing and management that needs information that we can't produce with the tools that we have in a reasonable time frame. To meet current -- much less future -- demands, we need one integrated application.' "
That discussion led Fortis Health's performance management and IT departments to ALG Software's Predictive Planning package. "To get approval to proceed, we went back to everyone and said, 'Here is what we've achieved that you have told us you're happy with. Here's what you've told us you want to be able to do. We can't do all of those other things without these tools.' "
After gaining approval for the purchase last fall, the performance management department spent the next six months preparing for the implementation and building expectations. "We took every chance we had to meet with internal customers to show them how the tool would improve their jobs," Jorgensen says. "We created anticipation and excitement in looking forward to this new application. On the other hand, we also have to manage those expectations, which are very high." Fortis Health launched the new system in March. Throughout April and May, the company ran Predictive Planning side by side with its three-headed performance management tool set (Excel, the budgeting tool, and an activity-based costing application it implemented after purchasing the budgeting software). In June, Predictive Planning replaced all three of the older tools.
So far, Jorgensen's high expectations have been met. Since its parent company still completes an annual budget, Fortis Health must compile budget figures. "Whenever they tell us they need a budget, we can give it to them," she notes. "It doesn't need months of planning anymore." She also reports that terms like "variance reports" now appear in the vocabularies of supervisors in the company's corporate services area. "They know why their actual expense for the month varied from what they had forecast," she says, "and they know what to do to change it."
The bottom line on selling the benefits of more-sophisticated forecasting and planning processes and tools to the rest of the company, Jorgensen says, is simple: Answer the question "How is it going to help me?" To do that at Fortis Health, she and her team exposed the weaknesses of their company's inflexible budgeting processes. "If you're having a good year, sticking to your budget may harm your ability to meet customers' needs," she says. "And that's not the way business should work. You need to be able to respond to your customer and to the environment."
It took Fortis Health two annual budgeting cycles to effect the cultural change that Jorgensen describes. But the hard work paid off. Jorgensen nods her head knowingly when hearing some of the anonymous complaints survey respondents submitted. "We heard the same things here five years ago. That was our old world," she says.
MethodologyThirty thousand surveys were sent via e-mail in March and April to a segment of Business Finance readers who expressed a specific interest in business performance management. A total of 305 valid and complete responses were received. Respondents' titles broke down as follows: CFO, 18 percent; vice president/senior vice president/finance director, 19 percent; controller, 17 percent; department manager, 28 percent; CEO/president/COO, 6 percent; treasurer, 1 percent; and other, 10 percent. Seventeen percent of survey participants work for companies with annual revenues of $1 billion and higher, 32 percent work for $100 million to $1 billion companies, and 51 percent represent enterprises with less than $100 million in annual revenues. All industries were represented in the survey, with manufacturing (21 percent of respondents), wholesale/retail (11 percent), and financial services (11 percent) leading the way. |