Business Intelligence Network - The Vision for BI and Beyond

Corporate Performance Management Exposed

Published: January 26, 2006

Increased regulatory environments mandate financial transparency and near flawless execution of corporate strategy.

Corporate health assessment applications have become critical to the existence of organizations and are no longer simply part of a company’s competitive strategy. Increased regulatory environments mandate financial transparency and near flawless execution of corporate strategy. As a result, inquiries from company boards, the SEC and stockholders keep CFOs on their toes to satisfy inquiries quickly and accurately. Software companies have responded by offering a plethora of products to assist with planning, budgeting and forecasting and linking those processes with strategic goals under the umbrella of Corporate Performance Management (CPM). These products have generated both tremendous excitement and confusion in the corporate world. This article will help to define guidelines on how to plan, budget and forecast effectively.

Challenges associated with planning, budgeting and forecasting are not technical in nature. Rather, they stem from confusion concerning methodologies, poorly defined scope and poor execution of strategies formulated in ivory towers. Even worse, these strategic initiatives and tactical activities are poorly communicated down the chain of command. The objective of Corporate Performance Management is to increase the efficacy of strategy through identification, execution and communication of relevant actionable tasks. Logically, the first part of any CPM process is to create a plan that is consistent with the organization's mission statement and defines the key drivers of success.

Corporate planning lays out a framework by which an organization can be more competitive by adapting to change and driving change on its own. By definition, a plan is the expected outcome based on data which in turn produces a set of operational plans. An operational plan answers the tactical questions (like who does what, where, how and when). Therefore, a successful plan is one that includes data from cross-functional areas, namely, the financial and non-financial areas of the organization, into one centralized data store. This data is used to identify weaknesses in the status quo, the need for resources and the various scenarios that may occur. Next, the plan is effectively communicated across functional areas, which makes the corporate plan directly relevant to the entire organization. In fact, many organizations fail to consider corporate strategy across the organization. Because of this, they fail to make plans directly relevant at each level (corporate, business-unit, team, and individual) of their organization. This is why a good plan has the following:

1. An integrated approach that obtains input from all departments within the organization. An integrated approach in which all departments are included in the decision-making process makes any plan realistic because it obtains the “buy-in” of all departments. Moreover, direct input from all areas of the business gives the planners a complete view of the current state. This allows them to identify risks, pitfalls and weaknesses in their current business model. 
2. Identified resources for implementing and handling change. This may be a combination of human resources and raw products that directly influence production. For instance, a company that relies heavily on Indonesia for timber would have been directly impacted by the tsunami in 2004. By asking what to do if all the suppliers in Indonesia would be impacted by some major changes, the company could have mitigated the risk of losing its primary suppliers. Thereby limiting their own exposure to scarcity factors that are simply uncontrollable and unpredictable, and coming up with viable alternative plans. 
3. An iterative decision-making process where managers are able to evaluate their decisions. Essentially, this translates to a business intelligence solution that captures and reports on relevant information for management, who can then leverage several tools that are at their disposal—balanced scorecard, activity based accounting, six-sigma, etc. These tools rely on an integrated framework of data. Planners rely on historical data (business intelligence) to review what was done in the past, which is analyzed for impact, effectiveness and efficiency. This allows the planner to prepare operational plans, assess the resources needed to support the plan and create a budget to cover the work outlined in the plan. Therefore, it is imperative to prioritize objectives, not just to identify them. Moreover, these priorities must be revisited on a quarterly basis to ensure consistency with the corporate strategy and current business climate.

Budgeting is a financial by-product of the planning phase, which can often be more iterative than the plan itself. Therefore, it is imperative that the integrated framework used during the planning stages is effectively communicated with a complete set of priorities; creating a single link between planning and budgeting. To create this link, a sound budget rests on two major pillars:

1. Insight into the past. Admittedly, looking backwards does not allow a driver to steer the ship straight, nor identify upcoming challenges. For instance, recent interest rates have been favorable to borrowers; however, with upcoming hikes, repayment calculations must be reworked to address the increased cost of borrowing money. However, looking into the past highlights key drivers that created or stunted growth, thereby forcing analysts to ask themselves how to allocate assets more efficiently, rather than how to spend the remaining funds. The caveat here, though, remains that past numbers should not be allowed to hinder new strategic initiatives that are part of the plan. The budget should support the plan, not try to drive it.
2. Comprehensive list of questions from the planning phase. Again, this point relies heavily on integrated historical data that allows the analyst to ask what-if questions by slicing and dicing terabytes of data. Since the analyst is not an IT professional, these applications must be easy to use. They must also provide easy access to detailed and accurate data from anywhere. Moreover, integration of tools, like balanced scorecards and strategy maps will make the application easier to use by the executive team. This, in turn, translates analysis into a defined set of actionable tasks for the team.

Forecasting is a process that takes information from a company’s strategy and business environment, and develops future outcomes for the organization. While planning and forecasting have similar functions, there is a subtle distinction between them. Planning furnishes operational plans and strategies, whereas a forecast estimates the results given a plan.

For instance, taking the current low-interest rate environment, a real estate professional may forecast that home prices will dip when the cost of borrowing money increases. Moreover, the real estate professional may forecast that 1 out of every 10 new homes built will remain unoccupied for a year or more based on different input, forcing real-estate prices to drop even more. A plan would suggest that current clients sell their homes now rather than wait for a better offer and then wait for the downturn in the market to repurchase new homes at a lower price in the next year or two. This example is not intended to be real estate advice, but rather to help illustrate the difference between a plan and a forecast. Best practices for forecasting vary by industry. However, some of the principles that are universally applicable include:

1. Set standards across your organization.  By doing this, you can ensure that each department subscribes to the same methodology of setting classifications for data input and forecasting methodology. There needs to be standardized inputs for data – format, granularity, similar facts to allow easier integration and analysis of data. More importantly, there are several forecasting models used in industry (linear, object, etc.). The organization must agree on the right forecasting method to ensure that all areas are on the same page.
2. Environment assessment.  An environment assessment is a brainstorming session among area experts to determine realistic plans for changes to environmental factors. These factors are macroeconomic issues (global conflicts, recessions, major changes in legislation, etc.) that can impact the business landscape. In an increasingly global marketplace, these external factors can wreak havoc, or even worse, destroy a business if they are not properly understood and addressed.
3. Industry assessment. An industry assessment is a brainstorming session among industry experts that helps identify plans for changes in the industry. The brainstorming needs to be forward-looking and not focused on what the industry is currently doing. One of the key areas that should be introduced is collaborative planning sessions with your vendors, partners and other supply chain business partners. These sessions can help manage stock based on product demand levels. In addition to your own corporate actions, competitors’ reactions to your strategy should be addressed and understood.
4. Forecast results. Forecast results are then produced by leveraging the forecasts that resulted from the aforementioned steps. One such output would be a profit and loss sheet for vested parties; another product of the forecasting sessions should be business (and sector) growth models given the environment and industry forecasts. Needless to say, the forecast results should indicate best-case and worst-case scenarios with more realistic, graded interim results.

In conclusion, planning, budgeting and forecasting have been part of the business world (in some form) since the first sales transaction in human history. The sophistication of tools and methodologies available today, however, has made strategic planning more powerful and easier to understand. This has allowed managers to define strategies quickly and identify opportunities early. In most corporations and government agencies, there is a heavy reliance on spreadsheets to create the corporate plan. This process leads to very cumbersome, time-consuming and highly inaccurate data. As a result, this creates a less than optimal planning, budgeting and forecasting environment for corporate budgeting and strategy development. Emailing a manually updated excel spreadsheet every month to each manager is not an effective or reliable solution for disseminating the corporate strategy, since it shifts the focus from the mission statement to more germane tasks.

The strategies outlined in this article, along with an integrated business intelligence approach, limits the exposure to data inaccuracies, and dependence on IT departments for reports and analytics. Moreover, an integrated solution allows senior managers to navigate through their organization’s data assets to identify weaknesses and opportunities for growth. This makes the planning, budgeting and forecasting process more robust and fruitful.