Ventana Research recently published the results of our Business Planning Value Index Research and I commented on its connection to our emphasis on using software to unify planning processes across an enterprise to improve performance. Since 2007, we have advocated what we call Integrated Business Planning (IBP): a high-participation, collaborative, action-oriented approach to planning and budgeting built on frequent, short planning sprints. Short planning cycles enable companies to achieve greater agility in responding to market or competitive changes.
For as long as I can remember, people have been complaining about their company’s budgeting process. Our Business Planning Benchmark Research finds that fewer than one-half of participants said their company performs its budgeting and planning processes well. On the surface, this is puzzling because technology has made the mechanics of planning and budgeting more efficient. Yet one of the consistent complaints from budget owners is that the process provides little value to them. In their eyes, there is a long list of things that are wrong. Almost two-thirds of those participating in our research reported that it takes too long. Almost one-half said it is not adaptable or flexible enough, it is too political and, in the end, it is perceived as senior management’s budget or the finance department’s budget.
Lately, I have been thinking more broadly about the mission of the FP&A group, looking at it from an outside-in perspective. Beyond FP&A’s traditional role as the corporate middle-manager tasked with executing the budget process and providing financial and management data and analyses to the company, the group’s mission ought to be about serving the budget owner. That is, having planning and budgeting processes that create business value for the budget owner and senior executives as well.
Even when companies adopt dedicated planning and budgeting software, the budget owners — and others outside of the finance department who are involved in the process — often still are not happy. That is mainly because technology has not increased the business value of budgeting, especially to the budget owners and the executives who manage them. Technology helps the CFO and FP&A organization create planning models, produce a detailed budget and analyze “the numbers” with less effort than was required in the past. That is important, but it is not enough.
To make budgeting more valuable to running an organization, FP&A must also model and measure the “things,” or resources, that budget owners use to achieve their business objectives, not just calculate their monetary value. When budget owners plan and budget, they usually think in terms of the things they need to run their part of the organization, such as headcount, advertising campaigns, facilities, laptops and other items. The budgeting system must be able to simultaneously translate this list of resources into accounting line items so the system can aggregate the financial data into an organization-wide budget and financial forecast.
Starting with a list of resources simplifies the process for budget owners; it is a user-friendly approach to budgeting. It lets budget owners think the way they do about their part of the effort — focusing on the things they need — but also enables them to quickly and accurately translate that list into a financial budget to address the needs of the finance department. It is a simple idea, but it takes technology — the right technology — to make it feasible.
Headcount is a good example of how this works. Say a department head plans to keep his or her existing personnel but wants to add a couple more positions during the year to meet the growth plan outlined by the senior leadership team. Rather than scratching around for the right number, the department head builds a headcount plan using a list of existing employees. The budget owner connects this list to the related cost data, such as salaries and benefit costs, and then adds two hires in generic roles. Pay and benefit data supplied by human resources instantly turns that headcount plan into a headcount budget.
So, when it comes time to negotiate the department’s budget, the discussion is not about abstract numbers in a spreadsheet, it is about whether the department needs to add people to handle the increased workload or if, recognizing financial constraints, it can get by without adding one of those positions — or if it could wait until late in the year to add that individual.
The travel budget offers another example. The discussion about this allocation should not only revolve around the cost but also the number of business trips. Is the number too low or too high to achieve the department’s business objectives? Or, in the case of marketing, a results-focused discussion should examine how many leads are needed to achieve sales objectives and how much these will cost — not just fixated on the cost alone.
Creating budgets and plans expressed as things, not just money, also means that as the year progresses, the FP&A group will be able to analyze whether variances were the result of the things that were different or if the costs were different. In other words, it will highlight whether the headcount expense variance is the result of higher-than-expected benefits expenses or because the number of employees is different than was outlined. This approach can speed up the budget process and focuses the discussion in budgets and reviews on business issues and objectives, not just the financial plan. Rather than requiring budget owners to tediously construct a fiscal budget for each of the line items, it is more productive to have them focus on their business objectives and then plan the resources required to achieve them.
Unfortunately, our research finds that 65% of companies use spreadsheets for budgeting. Dedicated planning and budgeting software can be designed to translate required resources into budget line items. This is not feasible using desktop spreadsheets for three reasons. One is that spreadsheets are two-dimensional grids that are well suited for working with accounting data but as a practical matter cannot work with things. Second, the process of aggregating data from multiple business units is too time consuming to be feasible. Third, it is too difficult to control access to sensitive information such as salary and headcount costs.
Planning the resources needed to achieve business objectives in parallel with the budget necessary to acquire those resources increases the business value of the process. It shifts the discussion between executives and budget owners away from abstract financial numbers and back to the things the budget owners need to achieve their objectives. It delineates the things that the budget owner can control from the things he or she does not. For example, a budget containing resource requirements as well as costs focuses budget discussions on business issues, not just spending caps. Questions arise such as, what is the rationale behind cutting the department’s budget? Is it asking for too many people relative to the work that needs to be done? Are the corporate allocations higher than they should be? Are travel costs increasing faster than the value of an additional sales call?
Another important benefit that companies can gain from switching from desktop spreadsheets to a dedicated planning and budgeting application is making planning and budgeting more useful for the budget owner. Increasing the business value of budgeting and planning for budget owners and executives should be a priority for FP&A organizations. Unfortunately, our Next-Generation Business Planning Research finds that 66% of companies use spreadsheets to manage their budgeting process. As noted, desktop spreadsheets have inherent deficiencies that make them unsuitable for the kind of budget owner-friendly budgeting outlined here. Dedicated planning and budgeting software is the right tool for the job. Dedicated software also can provide guidance during the planning and budgeting process as well as useful feedback as the planning period unfolds. It can do so using “things” (headcount, throughput, consumption) as well as money (budget accuracy, profitability) and KPIs (input-output ratios, not just money).
Regards,
Robert Kugel