Stretching Political Capital

Companies can't have it both ways. They admit they want to do a better job of budgeting and reforecasting, but they appear to be unwilling to make the effort. The big question is why they haven't taken steps to improve, especially since they seem to be aware of the advantages of doing so. Among the answers: All too often, budget revamping isn't as important as whatever current crisis is looming over the company.

"We've found ... that while everyone wants to change, they don't want to spend the time or money to do it," says Tony Masella, partner in the finance and performance management global services line at Accenture in Montreal. "It's become a question of priority. Developing a more effective budgeting and reforecasting process isn't something finance can do alone. They need companywide collaboration and cooperation.

"However, considering all the cooperation and collaboration they had to extract from company managers to meet SOX requirements, the idea of asking those managers to now also revamp their budgeting is pushing it. It takes all of finance's political capital to get the budgeting improvement job done, and they've already spent a large portion of it on compliance. The costs for SOX have been high, leaving managers with less money for budget improvement and a resigned feeling that they're going to have to keep muddling through their spreadsheets for a while longer at least."

Mark Moran, vice president in the strategic leadership practice at Booz Allen Hamilton in Cleveland, Ohio, has additional answers. Beyond the investment in budgeting software, he says, other challenges for improving the budgeting process include making major changes to existing processes and gaining employees' acceptance of the new budgeting system. "Those are difficult obstacles. Instead of tackling them and trying to make sweeping overhauls to the budget, companies are trying to simplify their existing process and focusing on the few key performance indicators that are the most important and dynamic to their business," Moran observes.

"For example, the company may want to get a better handle on product pricing, so they'll concentrate their efforts on developing accurate forecasting for that particular objective, rather than trying to forecast everything under the sun." Companies that have tried to create a comprehensive view of factors that will drive future performance have discovered that they need to create a database to keep track of all the information. Capturing all the data, analyzing it and inputting it into spreadsheet-based budgeting tools soon becomes cumbersome, Moran notes.

Sometimes it takes a major structural reorganization to get companies thinking about making a budgeting change for the better. In the case of Occidental Petroleum Inc., one of the world's largest oil companies, the switch to a more responsive budgeting system was part of a large restructuring effort following a merger.

"In 2002, we went through a major acquisition and grew from 6,000 cost centers to 26,000 cost centers, so that huge increase in budgeting complexity was an extra incentive for us to make the shift away from spreadsheet budgeting," says Brendan Austin, manager of business analytics in the firm's Houston-based oil and gas division. "We chose a software solution from Applix, and once people figured out how much time they could save with it, they embraced the software quickly. Now we can look at our actuals versus our budget to reforecast whenever it's necessary. Before, it took three to four days to create a reforecast, whereas now it's downloaded and the numbers are automatically calculated."

Occidental's current three- to four-day average for elapsed time between deciding to reforecast and completing the forecast is in line with the period chosen by 23 percent of the $1 billion-plus companies represented in the survey. However, as graph 6 illustrates, 59 percent of that group requires one to three weeks of turnaround time.

Stumbling Over Performance

For a budget to be effective, it should mesh smoothly with a company's strategic plan. However, the 2005 survey shows most organizations have not been able to closely integrate the budgeting process with scorecards and metrics management. Overall, only 15 percent say these elements are closely integrated. That figure holds true among the $1 billion-plus companies. And, significantly, almost a third of those organizations, the highest percentage to answer this way among all survey respondents, indicate their scorecards and metrics are not integrated. (See graph 7.) "The first step in improving reforecasting is the integration of budgeting, planning and costing into one global system," says Laluyaux.

Ultimately, one of the benefits of integration is gaining a single view of enterprisewide information at any given time. "We have a global IT budget replete with different country locations, currencies and time zones, so we were looking for much tighter control over it than the several versions of the truth our spreadsheet-based approach was giving us, particularly since IT represents our second-largest expense area," says Janis O'Bryan, CIO and senior vice president of Dallas-based Hudson Advisors LLC, a commercial mortgage servicer and real estate asset manager with 1,000 employees worldwide.

"After implementing our budgeting/forecasting solution from Hyperion in 2003, [the IT department] gained one version of the truth," O'Bryan continues. "IT began to feel they had ownership of their budgeting and forecasting numbers because they had information right at their fingertips in real time, all the time. Before, it would take us as long as two weeks to do a reforecast, and now we can do it in a matter of minutes. It's made employees more accountable for IT spending, and our entire company focus in terms of performance is much more forward-looking now." She adds that the interface of the system that her firm chose resembles Excel, so it was easier for employees to begin using it.

Nonfinancial performance metrics such as customer satisfaction, product or service quality, and employee turnover also have an important role to play in the budgeting process. Including them helps companies understand their business's future direction, thereby enabling them to produce better forecasts. However, awareness of the importance of incorporating these indicators into the budget continues to be weak. In 2003, only 29 percent of survey participants said that they included a range of nonfinancial measures and business drivers in their budget model beside their line-item costs. In 2005, that percentage is practically unchanged, at 30 percent. (See graph 8.)

Smaller Is Better

Do smaller companies face different problems than larger organizations when it comes to improving their budgeting and reforecasting? Sanjeev Aggarwal, senior analyst for small and medium business strategies at Boston-based Yankee Group, believes that functions within larger companies are likely to be more insular, making change across the enterprise more problematic.

"Even if companies keep using spreadsheets for budgeting, smaller companies may be able to plod along more successfully than larger ones, since their number of cost centers and departments isn't so huge," Aggarwal says. "What's needed, regardless of the size of the company, is more education about what budgeting applications can do; many managers still don't even know what kinds of budgeting tools are available."

The 2005 survey shows that larger companies don't take significantly longer to sign off on the budget or to reforecast than smaller companies. But larger companies are more likely to develop unrealistic forecasts that they subsequently miss than their smaller counterparts are. In fact, 76 percent of the $1 billion-plus companies blamed inaccurate and overly aggressive forecasting for their off-track budget, compared with 54 percent for the $100 million to $1 billion category and 48 percent for the under $100 million category. Large companies also have a greater desire to reforecast at least monthly (51 percent), compared with the medium-size organizations (37 percent) and smaller businesses (43 percent).

Different Strokes for Different Folks

As the survey clearly shows, companies are intensely interested in improving their reforecasting ability. How they aim for that target depends on their business model. Speed, frequency and accuracy can be weighted differently. For some organizations, reforecasting faster isn't as important as creating more accurate, detailed forecasts the first time around. That was a goal at Lions Gate Entertainment Corp., an $800 million independent producer and distributor of motion pictures, home entertainment and television programming in Santa Monica, Calif.

"We typically forecast up to 1,000 titles, and each title has some individual attributes peculiar to it alone. With the solution we're using now, we can add much more detail to each forecast than we could in the past," says Ulrik Knap, senior vice president of financial planning and analysis, whose company installed OutlookSoft software in the fall of 2001. "We can take up to two weeks if we need to do a reforecast, but having that deeper level of forecasting granularity was the real key for us. What we have is a pretty intuitive tool. It's managed by my department, with minimal IT involvement."

Not all companies have the same urgency about forecasting and reforecasting frequency, either. "We construct a matrix for client companies that evaluates the amount of their business volatility in relation to their cash flow constraints," says Jeff Sealy, principal consultant for The Business Solutions Network in Atlanta and an implementation expert for ALG Software. "For instance, a utility company typically is flush with cash and has little change in demand over a six-month to 12-month period. So they're probably not going to be as concerned about monthly forecasts as a start-up tech company that has a lot of business volatility and severe cash flow constraints, requiring them to be precise with their monthly forecasting."

Taking the Plunge

What will motivate companies to improve budgeting and forecasting in the future? In the end it will probably come down to fear of losing ground to competitors who've already made their upgrades and are producing better budgets and forecasts as a result. Businesses may be more willing to change if they view budgeting as part of a larger grand plan to become a performance-driven enterprise and if they can see how budgeting improvements drive performance results. Whether they will be able to make such sweeping alterations within the next few years is anyone's guess, but based the lack of movement between our 2003 and 2005 surveys, the odds are against it.

Methodology Thirty thousand surveys were sent in March and April to a segment of Business Finance readers who expressed a specific interest in business performance management. A total of 264 valid and complete responses were received. All major industries were represented in the survey, with manufacturing (20 percent of respondents); finance, insurance and real estate (16 percent); and computer and software services (14 percent) leading the way. Sixteen percent of survey respondents represent organizations with annual revenues of $1 billion and higher; 29 percent work for $100 million to $1 billion companies; and 55 percent are employed by companies with under $100 million in annual revenues. How Does Your Budgeting and Reforecasting Process Stack Up? If you'd like to see how your budgeting and reforecasting efforts compare with those of your peers, you can do so easily. Just go to www.bfmag.com/budgeting [1], register for the Business Finance/ALG Software Budget Reforecasting Survey and complete a brief questionnaire. You will receive a free benchmark report comparing your data with that of the overall universe of respondents and of companies in the same revenue category as your organization.