What's needed is a better capability to understand the pulse of the organisation - not only what is going on financially, but in terms of operations and compliance -- actionable management information to guide operational and financial decisions. Developing a strategic performance management approach drives sustainable performance by aligning the activities of the management team and employees with corporate strategy.
Corporate Performance Management (CPM) is a framework that integrates strategy with business operations. It gives management a prospective and real-time picture of what is actually going on across the value chain and provides a robust platform to support future growth. It helps executives address the fundamental business questions of:
- How are we doing?
- What should we be doing?
The benefits of CPM have been elusive since the term was first coined over a decade ago. Often seen as a CIO responsibility for reporting and analytics, and a CFO responsibility for budgeting and planning, point solutions have failed to deliver the true benefits of CPM.
As a consequence, many organisations are still using Excel for budgeting, planning and forecasting, reporting and analytics.
According to research undertaken by Deloittes in 2014, in excess of 63% of the survey respondents use Excel exclusively or primarily to undertake one of the most important tasks for an organisation.
What are the alternatives to Excel that can provide and support the budgeting, planning and forecasting cycle within organisations?
Every organisation, public, private or NGO, has to prepare budgets and plan for the future. Ideally they should also revisit remaining budget periods in light of actual performance and forecast what changes, if any, should be applied to the original budget to reflect the best view of the future. Only by making budgeting, planning and forecasting part of the DNA of an organisation will it effectively and efficiently survive in the post global financial crisis economy.
Volatility is the new normal
Examples from 2014 highlight how volatile and unpredictable the global market is. At the beginning of the year very few would have forecast oil prices to halve before the year was out; yet they did!
Similarly, and closer to home, on the back of a record year in 2013, few New Zealand dairy farmers would have expected to see their profitability and cash flow threatened by a 50% reduction in whole milk powder prices, but it happened.
But it’s not just the oil traders and the dairy farmers who are affected by these seismic shifts. For many organisations, significant changes in raw material costs, in either a positive or negative direction, can dramatically impact profitability. Being able to understand the financial impact of change and model alternative scenarios provides a sound basis on which to take appropriate action.
Being prepared for change: where is the budgeting, forecasting, and reporting process heading?
The short answer? It is heading away from an annual, finance imposed and led, morale sapping exercise. A time during the company year which as often as not turns into a multi-party negotiation in which finance, operations and general management are challenged to remember that the strategic goals of the organisation should be paramount, rather than individual incentives.
The ‘new normal’ business environment needs a new and enhanced approach to understand, identify and plan for a volatile, changing business environment.
- Increased frequency, ideally rolling, forecasting
- Greater insight into historical performance and external factors
- Deeper integration with transaction systems such as ERP or HR
- Enhanced automation to reduce manual entry, and use predictive analytics
- Wider collaboration among a broader base of contributors to the process
Conceptually, this is not new. Organisations have been wrestling with the challenge of managing their way through ups and downs for decades. In its simplest illustration, management is characterised by addressing a few key questions, which constitute a management cycle. The frequency with which organisations complete the cycle is driven by the ‘heart rate’ of their business. A retail organisation, or one engaged in e-commerce may find that each cycle is measured in a few months. An organisation such as an airline or a university on the other hand may find that their cycle time is much longer, although elements of their plan may require monitoring and analysing on a more frequent basis.
Analytics to support budgeting and planning
Organisations are now in a position to do a much better job of understanding and communicating what has happened historically, thanks to the rise of business intelligence.
- Query and reporting tools are becoming ubiquitous
- Data marts or warehouses more common
- Static dashboards are expected
But penetration is still lower than it should be, and using analytics to understand why things have happened as opposed to just knowing that they have is still more unusual than might be expected. It is in many cases rather akin to driving with a misted rear-view mirror.
Management cycle meets business intelligence
Business intelligence has provided organisations with the tools to monitor, report, analyse and communicate what HAS happened in the business. Organisations have become more aware of the value of being able to use factual information rather basing decisions on raw data or gut instinct.
If we lay the functionality and deliverables of business intelligence over the management cycle, we can see that business intelligence can provide deep and highly visual functionality to help organisations understand and communicate performance against plan. In many organisations, gathering and storing cleansed data to support the provision of business intelligence has provided a single version of the truth widely shared across the organisation improving both the quality and speed of decision making.
Amongst those decisions will be ones which set stakeholder expectations for the future as part of the budgeting and planning process. There is a Chinese proverb; "Consider the past and you shall know the future" credited to Confucius (551 BC - 479 BC), which leads to the consideration of how…
In Part 2 I will look at why business intelligence and budgeting and planning should be considered natural bed fellows within an organisation’s IT environment, consider why sharing data between BI and budgeting and planning aids accuracy and integrity, and demolish some myths around predictive analytics.