Abandoning traditional budgets beefs up value

By Dana Bacciocco, Associate Editor

Excel might just be too one-dimensional for the sophisticated organization. Face it, it’s a spreadsheet not a planner. It’s imperative for organizations to align strategic planning with budgeting and remake the animal to survive in a more challenging market. Making the numbers is becoming more than just making up numbers. Planning and budgeting is a value proposition.

“It’s one of the hardest financial processes to actually significantly change or reengineer. So the only way that you’re able to do it, in most companies, is to basically blow up what you had. And by that I’m saying-opposed to looking at accounts and balances, or for example the GL, which is what is reflected in a plan-blow up that architecture,” said Stephen McMinn, Partner in Accenture’s Finance and Performance Management Practice. Companies should be focusing on value.

Ninety percent of CFOs think their current planning and budgeting process is sub-optimal because it does not focus on shareholder value creation, according to the study “Driving Value Through Strategic Planning and Budgeting,” developed by Accenture and Cranfield School of Management.

Accenture’s “planning for value” concept is not completely new, but has taken a great leap in the past few years because of economic “unpredictability fueled by an electronic commerce environment; volatility in capital markets affecting stocks, and the emergence of new technologies impacting almost every area in business.”

“This is a concept that has taken off across industries, and in the past year and a half especially, in utilities and energy companies,” according to Stephen Lis, Partner, PwC Consulting, Financial Management Solutions. “Part of that is the whole impact of deregulation and competition and focus on shareholder value.”

Furthermore, the old technology in place supports the old customs, not a new vision with updated business models and changed markets. Companies have not really evolved their systems to support evolved business models. A revised approach girded by new technology can change routine, flat, planning by changing the performance management culture of the organization.

Lis said that the rubber meets the road in the execution of planning for value when you “One, somehow get it ingrained in your culture and take it out to the operating people to get them to buy into it and, two, have the technology to be able to do it.”

Marching to a deregulated drum

Deregulation is forcing utilities, among other industries, to acknowledge instead of ignore one of their long-time constituencies, consumers. Making and supporting rate cases and performance management systems for boards, regulators, and governmental entities is becoming old world for utilities.

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The most likely energy and utility candidates for value-based planning are those with diversified businesses, even those with a significant unregulated side. And while many utilities may believe they are engaged in a new planning and budgeting process, it is a question of detail-how many line items are really still there.

Companies watching and living under encroaching deregulation into telecom, energy and other industries are recognizing that existing planning and budgeting frameworks are losing relevance. Utilities are recognizing that a customer-focused planning architecture is a key area in terms of ability to enhance performance management systems. Utilities are ripe for a value proposition that will help manage and measure their business.

“The companies in the industry sectors that need this value-based approach to planning the most are the ones that have been in regulated environments,” said McMinn, “because their architectures are all around return on investment, and that has a very heavy cost focus versus value focus.”

Utilities may think they are riding the wave of advanced financial planning, but drilling down a few levels shows that operations still thrives on details. In moving toward a plan for value, it may be prudent to maintain the ability to manage details that operations may need, but also embrace and implement the link to strategy.

Utilities are not yet integrated, though. “If you went out and surveyed, I suspect that well over 50 percent of the utilities out there would tell you they’re doing that. But if you really got in and looked at it, you’d probably find that they are doing high-level, top-down planning, but they’re also still doing detailed budgeting. The two don’t necessarily integrate,” said Lis.

Irrepressible technology One of the most significant changes in planning and budgeting is the software. “The biggest catalyst for this change is clich

The technology has arrived-coming from mainly niche players and some focused ERP folks. “And the interesting thing about the technology is it may enable you to do both the high level value-based planning but also some of the detailed budgeting and forecasting that the more regulated side would really want to rely on,” said Lis.

Web-based application packages are well suited to the new planning characteristics, according to GIGA Information Group. Unlike transactional applications, “planning and budgeting applications emphasize flexible modeling and reporting tools more than out-of-the-box functionality.”

GIGA published a short paper this year of who’s who in vendors offering Web-based budgeting and planning solutions suitable for the trend in decentralized business operations. Here’s what they said:

  • Adaytum has strong momentum in the large company planning and budgeting market. Its core offering, e.Planning, has a collaborative Web client for end users and uses industry standard relational databases on the back end.
  • Hyperion’s Planning is a server-centric, Web-based system that drives collaborative, integrated, event-based planning processes.
  • Comshare has a mature budgeting and planning product re-architected for the Web, with a relational database on the back end, and graphical maps defining roll-up structures.
  • OutlookSoft’s Web-based Financial Planning and Analysis has a Microsoft Excel user interface delivered via the Web; it includes a portal-like display component as well.
  • Closedloop Solutions offers a Web-native product suite that uses an ongoing process based on frequent, real-time updates-a significant change from periodic budgeting processes.

SAP and PeopleSoft have new Web-based planning modules that bolt on to their ERP system. SAP has SEM-Strategic Enterprise Management; and Peoplesoft has EPM-Enterprise Performance Management.

“Emergence of those technologies is giving companies a real chance now to articulate and be able to deploy a different type of planning architecture that better fits into the overall performance management structure that they’re trying to create,” said McMinn.

The politics of finance

One theme of Accenture’s study was that budgets cannot control and motivate at the same time. If companies focus around processes in developing financial plans, it takes the politics out of the system and incents plan execution. Traditional planning and budgeting is often fraught with gaming and sandbagging, and tends to promote turf wars among the diverse set of stakeholders in an organization, since rewards are tied to achieving numbers.

On the other hand, true process decentralization should increase participation, but requires a modified mindset in departments including but not limited to finance. Appropriate technology raises the participation level in the process. But it must be accompanied by support of top management.

Getting departments and people on board is as easy as aligning the stars. “And the stars align when you have very top-down driven CEO/CFO commitment behind blowing up what you have today,” said McMinn. Any new approach must address the compensation model that’s tied to dollar achievements-the root of politics.

“The whole emphasis is focusing on the business and it’s key drivers rather than detailed financial projections,” said Lis. “But that said, you’re actually taking the concept to an industry that for the past 50 years has kind of lived and died on detailed budgeting. It’s a regulated return. So you know what your profit is and how well you managed your budget is really your excess on the return. The big issue here is cultural.”

And it’s not that difficult to convince top-level management to embrace a new approach. When they see how strategy does not map up with behavior-controlling spending in the organization is not congruent to encouraging and rewarding behaviors that create value.

As an organization moves away from detailed budgeting, accounting and financial activities, it is important to move toward collaboration-moving business planning and forecasting, thus ownership, into the hands of business owners. If the shift is incomplete, it won’t reach to the heart of the business. “Collaborative planning and really moving it out of the financial arena into the business arena is a key point from an execution perspective,” said Lis.

“I could tell you in most organizations today, there is not a clear linkage between strategy, there’s not a clear linkage between target setting, there’s not a clear linkage between budget development, there’s not a clear linkage between performance management. It’s a very disjointed process, said McMinn.

The planning for value framework (see Figure) addresses the full integration of the strategic planning, target setting, budgeting, forecasting, and performance reporting processes. Accenture believes process, technology and organizational improvements, supported by an appropriate performance management framework is a proven way to help maximize economic and non-economic capital in an organization.

For more information on the Accenture study, send requests via e-mail to Tanya Tyler-Gordon at TANYA_TYLER-GORDON@nyc. bm.com. Lis can be reached at stephen.c.lis@ us.pwcglobal.com.

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