best practices in driver based planning

8/13/2019 Best Practices in Driver Based Planning

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2008 IBM Corporation

Best Pract ices in driver-based planning

Stephen Brook

Manager, IBM Cognos Innovation Center

EUR/USD - Last 2 Years

Volati l i ty and Uncertainty are Now Bu siness as Usu al

30%swing

Similar volatility in

Commodity prices

Real estate

Consumer spending

Employment

Source: http://uk.finance.yahoo.com/q/bc?s=USDEUR=X&t=2y&l=on&z=l&q=l&c=


2/36

Could w e have been better prepared?

Why didnt we have fast, relevant information thatwould have enabled us to respond more quickly andeffectively?

Why didnt we see the patterns, trends and

forecasts that would have enabled us to take theright strategic decisions?

Why didnt we know which business segments werecreating value and which werent so we could betterallocate our resources?

And why didnt we know how to cut costs withoutcutting value?

Source: Jeremy Hope, 2009, How Performance Management can help you to Navigate through Turbulent Times


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4/36

73% of s urveyed com paniesneed morethan 3 mon ths to

complete the annual budg et.*

* Hackett Group 2008

Only 24% are sat isf ied w ith the eff ic iency of the pro cess

Is management satisfied with theefficiency of the budgeting process?

* Hackett Group 2008

%


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But the budgeting process at most

companies has to be the most ineffective

practice in management. It sucks theenergy , time, fun and big dreams out of

an organization. (...) And yet (...)

companies sink countless hours into

writing budgets. What a waste!

Jack Welch, 2005

Discussion Planning & Bud get ing chal lenges

Please describe some of the challenges you face andopportunities for improvement

Examples from other companies include:

Cycle times

Labour intensity

Integrity of data

Number of iterations

Cross-functional visibility

Insight and linkage to strategy


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Techniqu es for driv er-based planning

Re-visitaccountability

Focus onthe realdrivers

Core vsdiscretionary

cost

Knowwhere youare today

Know whereyoure going

Consider riskand projects


Re-visi t accountabi l i ty


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Expenses have been g rowin g in recent years

Targets and

incentivesBudget

contracts

Balancedscorecards

Risk models

Management Contro l

10-20% of cos tsStrategy

Alignment

Execution

Micro-management

Accountablefor budgets

More planners, target setters, inspectors, controllers, complianceofficers, internal auditors, risk managers, project teams, consultants,

analysts and advisers

Controlsystems

Source: Jeremy Hope, BBRT

Control

It starts with a simple thing

Accountabil ity

Transparency


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The emerging acco untable and transparent or ganizat ion

Executiveteam

Regions, Brands/product groups,

Customer segments - each with P/L Account

Support

ServicesTeams

Strategy, Finance,

HR, Marketing & IT

Supply chain, New productdevelopment, Production &

Logistics

OperatingProcessTeams

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Aim to create as

many VCTs as

possible (keep

sub-dividing and

adding new

ventures)

Each VCT is

based on a clear

market niche or

customer value

proposition

SSTs and OPTs

serve VCTs

Aim to reduce

size of SSTs and

OPTs over time

Customeraccountability

flows in red lines

Relativeimprovement

accountability in

blue dots


Performance Management tools s upport n ew accountabi l i ty f lows

Executive

team

VCTs use KPI dashboards, balanced scorecards,

rolling forecasts, EVA models and ABC models

VCs are based on lean principles and also use value

stream mapping

Support

Services

Teams

Operating

Process

Teams

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

SSTs use KPI dashboards

and benchmarking tocontinuously improve

OPTs use lean principles and tools (such as

six sigma) to continuously measure and

improve end-to-end process performance

Customer

Customer

CustomerCustomer

Customer

Customer

Customer

Customer

Customer

Customer

Many tools can

be used at the

team level without

fear of being used

for top-down

control

All tools and

controls are

embedded in a

web-based

enterprise-wide

corporate

performance

management

system

ET maintains

coherence at alltimes

Integrated, enterprise-wide

Information systems



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Know where you are today

Management repo rt ing is o ver del iver ingon qu ant i ty and u nder del iver ing o n qual i ty

Average length ofmanagement report

Data points

Average amountof informationincluded thatmanagers find useful

30-40 pages

12,000-15,000

5%

Quantity Quality

n = 158Source: CFO Executive Board (Session FourHigh Impact Controllership: Architecting the Data Pipeline for Business Impact, Finance Leadership Academy, 2007)

MonthlyPerformance

Report

18


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What does this report tel l you about expenses?

5,8254,5253,900-6252,500Net profit

11,17547510,1009,6258,500Total costs

1,750501,8001,7501,500Administration

37525400375350Technology

85050900850800Accommodation

3,3001002,5002,4002,250Marketing

90050700650600Travel & entertaining

4,0002003,8003,6003,000Salaries

Sales, General & Admin

51.52%-12.28%48.28%36.00%39.29%GP %

17,000-5,00014,0009,00011,000Gross profit

16,000-1,00015,00016,00017,000Cost of sales

33,000-4,00029,00025,00028,000SALES

ActualVarianceBudgetActualBudget$000s

Last YearThis YearNext YearBudget for 200X

How is this organisat ion performin g?

790,000

14

45 Days

8.5

19.8m

Target

823,533

16

41 Days

8.6

23.6m

Actual

Overhead Expenses

Headcount

Inventory

Customer Satisfaction

Sales

StatusKPI


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Make Report in g Relevant to Decis ion Making

Drive Understanding and Act ion


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Know where you re going

Once per year?


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Plans detail how youwould like the future to look

Forecasts describe what the futurewill most likely look like

Budgets detail how youdeploy your resources to get there

The Budget..many th ings to many p eople

Goals andstrategic guidelines

Budgeting processSet targets/ incentives

Allocate resources

Coordinate plans

Variance controls

Keeping

on t rack

Reforecast

Separate

Step 1

Improve

Step 2

Targets

and

Rewards

Planning

andforecasting

Resource

allocations

Measuresand

controls

Medium-term

Aspirational

Relative

Rolling views

Few lines Driver-based

Dynamic

Draw-down

Relative

KPIs

Trends

Relative improvement

Source: Jeremy Hope, 2009, How Performance Management can help you to Navigate through Turbulent Times, Paper #3

Break free from the budget conflicts


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The rolling review and check-plan-act cycle

Fast KPIs

Nature &

Frequency of

Demand

Rolling Forecasts

Peer

Comparisons

(+Gaps)

Act

Check

Forecast

Plan

Value Centreteam

Strategy

Actuals

1st Review

Annual

Plan /Budget

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

AnnualPlanx+1

Year x Year x+1

2nd Review

3rd Review

4th Review

Forecast

Cont inuou s or event-driven planning


Focus o n the real drivers


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Busin ess planning proc ess steps

Financial

Target

Trend rate, extrapolation

TargetFinancial

Plan

Tactical

Plan

Financial

Plan

Evaluateoptions

Model thefinancialoutcome

Are these tactics sufficient?

Example custom er support c entre expense plans

Y0 Y1%Uplift

Y0 Y1A B C D

Sustain currentoperations

Improve currentoperations

New ventures orinitiatives

Compliance trainingfor existing staff

Cross-sell training -more products to

existing customersTemporary staff tocover new product

launchUpgrade knowledgemanagement system

+5%

A

B

C

D


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Expense plan

Revenue plan

Sales Call

VolumesHeadcountRequired

New Products

Existing Products

Time toresolve

Training

IT investment

Manage pro cesses and act iv i t ies (cost d rivers)rather than funct ions and bu dgets

EXAMPLES OF BACK OFFICE PROCESSES

Processing a sales order

Receiving payment from a customer

Paying a supplier Completing the month-end close

Approving an investment proposal

Preparing a budget or forecast

Managing a performance review


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Example - Statement of Procurement Costs

50010,50010,000Number of inspections

Volume of business-5004,5005,000Number of Purchase Orders

-802,0102,090TOTAL COSTSDisruption caused by fire-20380400Expenses

Disruption caused by fire-40660700Salaries

Warehousing costs

-10160170Expenses

Fewer inspections20440420Salaries

Quality Assurance

-10100110Expenses

Overtime-20270290Salaries

Purchasing

VarianceBudgetActual

Primary reason$000s$000s$000s


Now lets look at the same costs through the lensof a process map with cost drivers

Purchasing

Start PlanProcurement

Purchase parts

Certify Vendor Inspect parts

Receive parts Store parts End

Quality

Assurance

Receiving

Inspec?

15MINS 30 120 20 20 10

$140,000 $400,000 $260,000 $300,000 $190,000 $800,000Total Cost

TOTAL TIME 215 minut es: TOTAL PROCESSING COST: $2,090,000

N/A 400/$1000 5,000/$52 16,000/$18 10,000/$19 16,000/$50Units/cost

N/A N/A 15% 25% 10% N/AErrors

6 Activities (cost drivers)



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Quest ions

Why spend on planning when orders can be deliveredwithin 24 hours?

Why not pre-certify strategic suppliers?

Why not agree block contracts with key suppliers thatcan be used without issuing purchase orders?

Why not find root causes of PO/inspection errors andeliminate them?

Why not train warehousing staff to handle inspectionsand abandon QA department?

What is best practice cost and why dont we setbenchmark goals based on them?

Revised procurement forecast based on cost drivers

33.5%29.4%21.1%10.5%Cost reduction (Year on Year)

248.7347.5368.8412.3467.5522.5522.5522.5522.5Total costs

140.0200.0200.0200.0200.0200.0200.0200.0200.0Cost of inventory activities

$35$50$50$50$50$50$50$50$50Average cost

400040004000400040004000400040004000Number of inventory activities

75.093.8100.0106.3112.5122.5122.5122.5122.5Cost of deliveries/inspections

$12.0$15.0$16.0$17.0$18.0$19.6$19.6$19.6$19.6Average cost

625062506250625062506250625062506250No of deliveries/inspections

26.333.833.836.050.065.065.065.065.0Cost of purchase orders

$35$45$45$48$50$52$52$52$52Average cost

75075075075010001250125012501250Number of purchase orders

015255075100.0100.0100.0100.0Certify vendor costs

05.010.020.030.035.035.035.035.0Planning costs

BPFQ+4FQ+3FQ+2FQ+1Q-1Q-2Q-3Q-4Procurement ($000's)

BP=Best Practice


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Dist inguish co re and discret ionary cost

Operat ional gearing h eightens cost pressure

40Fixed Cost

Variable Cost

Discretionary Cost

-10%

Margin

30

20

10

40

27

14

9

100 90

-30%

Revenue


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Manage pools of discret ionary expenses using rol l ing forecasts

CORE EXPENDITURE- managed through ratio

and benchmark KPIs

DISCRETIONARYSPENDING

COMMITMENTS -actively managed

AVAILABLERESOURCES -

continuous forecastupdates

Time

Resources UNCOMMITED

EXPENSE POOL -AVAILABLE OPTIONS

Some marketingConsultingProject spendingCapital expenditure


Enable access to funds ei ther direct ly or through p eer groupassessment

DISCRETIONARY EXPENSES:

All expenses NOT essential forrunning the business including:

Some marketing 50m

Consulting 25m

Project spending 20m

Capital expenditure 90m

Method 1: Direct accessunder a threshold (say100K) PROVIDED theyfollow decision rules

Method 2: Over athreshold teams mustapply for spendingapproval but decisionmade by VC leaders

Local Team


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Tact ical planning ident i fy ing potent ia l savings

List potential tactics

Screen the mostpromising

Watch for infeasibilities

Benchmark to identifyopportunities


Consider risk and projects


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Do cu rrent performance m anagement pract ices have a

bl ind spot that exposes the enterprise to risk?

PerformanceManagement

RiskManagement

Historical View Sense and RespondAnticipate and

Shape

Current uncharteddanger?

Organizations are notseeing or preparingfor many future risks

UNCHARTEDDANGER

Performance

Risk

We are here

Finances Top Areas of ImportancePercent of Highly Important Responses

Source: IBM Global Business Services, The Global CFO Study 2005, The Global CFO Study 2008

As a wh ole, Finance places a lower prior i ty o n sup port ingand measur ing r isk but i t s growing

The importanceplaced on supporting

enterprise risk isgrowing

Performancemanagement tops

agenda

Performance management

Risk management

40%

69%

66%

82%

2005 2008


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Formal risk

management is stillfairly immature

Finance execut ives do not see al l the unc harted d angers

UNCHARTEDDANGER

Managing risk is alower priority

Risks are prevalentand the majorityare nonfinancial

Reducing old risksoften creates new

ones

Risk is not includedin planning

Performancemanagement

Riskmanagement

40%

69%

66%

82%

2 00 5 20 08

Performance management

Risk management

40%

69%

66%

82%

2 00 5 20 08

32%

17%13%

17%

13%

8%

32%

17%13%

17%

13%

8%

Political / Geopolitical Change ofgovernment-and minority

governments

Grants and budgetchanges

Constantchange of ministers

Federal Accountability Act

Terrorism

Strategic

Industry consolidation andglobalization

Error-filled release ofsoftwareupgrade

Change in core productdemand

Cancellation ofmajor customercontracts

Performance standards andservice quality

Financial Currency exchange rates

Interest issue and increasingreserves

Accuracy of realistic balance sheetreporting

Ability to manage cash

Non-transparent markets Economic recession

Energy and commodity costs

Operational Hurricane Katrina

Data center outage

Delivery risk

Blastfurnace cold run

ERP application crash

Plant disaster causing productionstoppage

Legal &Compliance Fraud

Productliability claims

Missed timeline for legal changes

Embezzlementofparts

Safety of goods or products

Environmental / Health

WestNile Virus

Safety crisis

Compliance with environmental standards

SARS Food sanitary managementproblem

Climate change

Environment pollution

45%

51% 53%

59%57%

52%52%

43%

30%

40%

50%

60%

70%

Under$1B $1-$5B $5B-$20B Over$20B

Formal riskidentification

Routinemanagementreporting includes risk

Riskidentificationand managementreporting

45%

51% 53%

59%57%

52%52%

43%

30%

40%

50%

60%

70%

Under$1B $1-$5B $5B-$20B Over$20B

Formal riskidentification

Routinemanagementreporting includes risk

Riskidentificationand managementreporting

Impactof AddressingRisks

Area New RiskAddressedRisk

Creditdefaultswaps

Automatedtechnology

Mergers&acquisitions

e-Business

Outsourcing/offshore

Creditrisk

Manual processingerrors

Productlineexpansion,reducedcosts

Channel conflictsmanaged

Risinglaborcosts

Legalrisk

Catastrophicsystemfailure

Integrationchallenges

Exposuretowidespreadfraud&securityr isk

Qualityissues, knowledgeretention,informationsafety

Impactof AddressingRisks

Area New RiskAddressedRisk

Creditdefaultswaps

Automatedtechnology

Mergers&acquisitions

e-Business

Outsourcing/offshore

Creditrisk

Manual processingerrors

Productlineexpansion,reducedcosts

Channel conflictsmanaged

Risinglaborcosts

Legalrisk

Catastrophicsystemfailure

Integrationchallenges

Exposuretowidespreadfraud&securityr isk

Qualityissues, knowledgeretention,informationsafety

Integrat ing risk management into planning p rocessesrequires a number of act ions

Key Recommendations to Integrate Risk into Planning Processes

Planning Budgeting

ReportingForecasting

CPMProcesses

RISKADJUSTED

RISKADJUSTED

RISK

ADJUSTED

R

ISK

ADJU

STED

Consider traditional & non-traditional risks andprioritize based on value drivers

Correlate independent risks Factor in the compounding

effect of risks

Conduct risk scenarioplanning

Adapt budgets to reflect risk-adjusted planning and factorin risk mitigation costs

When incorporating risks,balance between central and

local / unit level responsibility

Enhance reporting to moveup the maturity model of riskreporting

Include key risk indicators,key failure modes &algorithms / rules for trackingrisks

Drive preventive andcorrective actions

Create a rolling forecast ofrisks

Incorporate the impact ofupside and downside risk(s) onrolling operating forecasts

Source: IBM Institute for Business Value


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Risk-adjusted planning ou tput can inform the budg et ing

process

CPMProcesses

RISK

ADJUSTED

Planning Budgeting

Output

Risk-adjusted Planning Output

Source: IBM Institute for Business Value

Determine the impact ofdownside and upside riskevents

Build in cost for riskmitigation strategies

Risk-adjusted Planning Output Risk-adjusted Budgeting Implication

Strategic objectives and measuresadjusted for:

Potential new risks based onaddressing old risks

Activities to prevent risk events oraddress impacts of risk events

High priority risks basedon value drivers

Take a port fo l io approach to investment

Executive

team

All resources are either drawn down by VCs or allocated to

them

VCTs can make opex and capex decisions within a

threshold

VCTs have incentive to continuously reduce resources

Support

Services

Teams

Operating

Process

Teams

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

Value center

SST costs are regularly

benchmarked with best practices

VCTs are customers who can

demand SSTs reduce costs

ET acts as aventure

capital

provider

always

prioritizing

resources to

best

opportunities

OPT costs are regularly

benchmarked with best practices

VCTs are customers who can

demand OPTs reduce costs

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

As many valuecenters as

possible arecreated based onmarket niches

All capital is

allocated based

on value centerperformance

Whatever thelatest plan says,

teams respond toprevailing demand

Portfolio

Management


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Techniqu es for driv er-based planning

Re-visitaccountability

Focus onthe realdrivers

Core vsdiscretionary

cost

Knowwhere youare today

Know whereyoure going

Consider riskand projects


The role of techno logy

How technology can facilitate a continuous, driver-based approach to planning and monitoring


27/36


28/36

It s about mor e than Finance

BeyondFinance

67%Finance33%

HumanResources

Sales Planning

Prod. & Distrib.

MarketingOther

FinancialStatements

ExpensePlanning

Capital& Initiative

Top planning areas from a survey of 75 customers

Support ing c ross- funct ional processes: Performance Bluepr ints

SalesPlanning &Forecasting

INTEGRATEDFINANCIAL

STATEMENTS

ExpensePlanning &

Control

CapitalExpenditure

Planning

HUMANRESOURCES

SALESFINANCEFINANCE

OPERATIONS,MARKETING,

ETC.

DepreciationExpenses

Reports

Income StatementsBalance Sheet

Cash flow

Financial Ratios

CapEx

Operating

Expenses

Headcount& CompensationExpenses

Revenue

Plan

MarketDemand

WorkforcePlanning


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Linkage of sales to planning & b udget ing proc ess

To what extent the business entity's "perform planning/ budgeting/ forecasting"system links with the sales s ystem.

Fully integrated, 7%

Strong interface, 16%

Weak interface, 4%

No linkage, 73%

Source: IBM Benchmark Wizard

Benefits of real-t ime collabo ration

Faster sense-checking

Formaliterations

Real-timecollaboration

Better capacity planning Rapid what if analysis

Cope with late-breaking changes


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Driver-based planning wi th IBM Cognos solu t ions

Demonstration

Smarter Expense d emo

TM1 Contributor 9.5 + Scorecarding demo

Shows driver-based expense planning forCustomer Support centre

Shows linkage between Revenue planning and

Expense planning Shows linkage of business unit strategy

through to execution & tactics


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Proof points

There are two things about a budget: one is that it

predicts the future, and does a particularly poor job

of that, but secondly, it defines a measure of what

is good. If you make budget, thats good. And if you

dont, youve done a bad job. Unfortunately, trying

to predict the future and define what is good are two

fairly different processes. With the rolling forecastsin the IBM Cognos system, we have a better way to

predict the future, keep it relevant and meaningful.

John Landis, CFO, Foster Farms


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Next steps how to get started

UAP: Dr iv ing Performance in Turbulent Times

Within two weeks, UAPhad canceled $2 millionworth of POs forproducts that weren'tneeded. Cover Story: PerformanceManagement Links

Strategy And OperationsBy Doug Henschen,InformationWeekNov. 22, 2008

David Wheat,Director of Decision-Support Systems


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Test ing th e value of current management inform at ion

t0t-12

VariableSG&A cost

as % ofRevenue

t-6 t+3

Relevant ratio

Trend

Tolerance

!

Early alert

!

Call to action

Forecastimpact

Uti l i ties up du e to

end of f ixed pr ice

contract last month

Additionalcontext

Source: Beyond information to insight: the promise of management reporting by David Axson (an IBM Innovation in Action White Paper)

Cri t ica l ly examin e transact ion volum es keydr ivers of cost

Revenuedrivers

Costdrivers

Expenseforecasts

# New product launches # Marketing events # Promotions # Web site visits # Web site downloads # Sales calls # Existing customerrepurchases # Satisfied/dissatisfiedcustomers

# Customercontacts/visits # Deliveries # Customer complaints # Sales/purchaseorders, invoices andpayments # Credit checks # Sales people # Support people # Training days

Salaries Marketing Travel Accommodation Technology Administration


34/36

App raise your curr ent planning proc ess

How long?

How many iterations?

How useful to the business?

IBM Cognos Performance Bluepr in ts

Expense Planning and Control

Sales Planning & Forecasting

Integrated Financial Statements


35/36

Next Steps ...

Come and talk to us

Download our white papers

Contact our local team

More info?

Contact Info:

[email protected]

New website:

www.ibm.com/cognos/innovation-center


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Copyright IBM Corporation 2008 All rights reserved. The information contained in these materials is provided for informational purposes only, and is provided AS ISwithout warranty of any kind, express or implied. IBM shall not be responsible for any damages arising out of the use of, or otherwise related to, these materials. Nothingcontained in these materials is intended to, nor shall have the effect of, creating any warranties or representations from IBM or its suppliers or licensors, or altering the terms andconditions of the applicable license agreement governing the use of IBM software. References in these materials to IBM products, programs, or services do not imply that theywill be available in all countries in which IBM operates. Product release dates and/or capabilities referenced in these materials may change at any time at IBMs sole discretionbased on market opportunities or other factors, and are not intended to be a commitment to future product or feature availability in any way. IBM, the IBM logo, Cognos, theCognos logo, and other IBM products and services are trademarks of the International Business Machines Corporation, in the United States, other countries or both. Othercompany, product, or service names may be trademarks or service marks of others.

best practices in driver based planning

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