from annual budget to rolling forecast - karine cochet
TRANSCRIPT
COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION
Karine Cochet, FP&A leader, APACAPRIL 19th, 2013
From Annual Budget to Rolling Forecasts
Agenda
Alcatel-Lucent:
Overview and challenges
Former Budget Process – Assessment
Budget Process as it should be
Exploring Budget Process Enhancements
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Exploring Budget Process Enhancements
Driver-Based Forecast
Rolling Forecast
Alcatel-Lucent:
Enhanced Budget Process: where are we?
Alcatel Lucent – WHO WE ARE?
1000+ CUSTOMERS(NETWORK OPERATOR)
1M+NETWORKS
500K+ CUSTOMERS(ENTERPRISE)
My
computer
My
storage
My
communications
150+ COUNTRIES
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~72,000employees
2012
revenues
€14.4b
2012
R&D/Sales
16.1%
Intelligent
Network
My
media
My
gaming
2012
Adjusted
operating
margin
−1.8%
Alcatel Lucent – WHAT WE DO?
PRODUCTSInnovation
R&DSERVICES
System specific
DELIVER
products
INSTALL
INTEGRATE
TEST
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MANUFACTURE
SOLUTIONSArchitecture
Design
Customized
products
accessories
tools
TEST
MAINTAIN
OPERATE
Alcatel Lucent and the Planning process
ANNUAL
COMMITMENTTOWARDS OUR
CREDITORS
GUIDANCE TO
MARKET
COMMITMENT
TOWARDS OUR
SHAREHOLDERS The Annual Budget is a mandatory
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ANNUAL
BUDGET
COMMITMENT
TOWARDS
OUR
EMPLOYEES
COMMITMENT
TOWARDS
OUR
CUSTOMERS
is a mandatory exercise
• Time Consuming, not enough time left for analysis
• Manual and labor intensive process: hundred of spreadsheets, difficult to update, subject to errors, heavy to consolidate, costly process
• Too many details, a lot of wasted energy and a false sense of security
• Tied to a rigid calendar, creating an inappropriate annual mindset and current year focus while business is an ongoing operation
Former Budgeting Process - Assessment
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� When finally completed, it is already out-dated
• Lack of ownership of operational managers, they see no benefit and follow the process against their will
• Finance does much of the work, no buy in from the business
• Process is way too linear, lacking dynamic interaction between Strategy / Operations / Business, and opening the door to budget gaming / target negotiation
In a world of increasing competition and changing economic environment, companies need a better way to predict the future, more agile, more flexible, more focused, more reliable
Planning process should raise questions and provide answers that are core to the business
What planning process should we use?
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• What drives performance in our market? In our operations?
• What is our strategy?
• How much investment should we dedicate to new initiatives?
• What are the key performance indicators that would best measure progress towards strategic goals?
1. Align with the Business Priorities:• Start with the strategic plan• Engage at the executive level• Measure what is critical to the strategy• Validate goals against key metrics/market data• Clearly communicate the metrics
2. Increase collaboration among functions: involve all department
How should the planning process work?
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2. Increase collaboration among functions: involve all department managers and get more accurate forecast (engaging those closest to the information)
3. Be timely: get information in the hands of business owners quickly and regularly
4. Adapt, be flexible: revisit as often as necessary, run multiple scenarios, be ready for the unexpected
Benefits of a driver based forecast:
• Increased accuracy
• Reduced cycle time
• Limited interpretation
• Improved collaboration (same language as the business owners)
• Aligned with the business strategy
Implement driver based forecasting
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• Aligned with the business strategy
Key prerequisites:
• Identify and manage the true business drivers
• Focus on activities - not financials
• Include key non-financial drivers
Driver based forecasting - examples
# of Cards# of Active
CardsMonthly Billing
Annualized Revenues
� Demographic� Market
penetration
� Promotions� Substitutes
Average Spending � Income� Credit limits
� Seasonality
Credit Card business:
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Installed Product Base # of calls
per type of request
Hours required
Person Hours
requiredNew Product
Sold� Type of call:
warranty, technical support, training..
� Average call length depending on type
� Service Level Agreements
� Peak Volume Call
Customer hotline business:
• Balance Detail with Value
• Target Accounts that have material impact and high variability
• Combine Statistical and Judgmental methods:
Build a Financial Model (1/2)
Pros Cons
Statistical>Visualize patterns found in historical data and build predictive models
• Objective• Uses drivers• Models multiplerelationships
• Complex to build and to maintain
• Assumes information can be quantified
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• Regularly re-examine models by examining forecast accuracy
predictive models (regression, time series…)
relationships quantified• Assumes that some past patterns will continue in future
Judgmental > Use judgment to choose variables, build structural equations, and adjust the model predictions
• Easy to set up• Handles novel situations (official announcement, “street” talk…)
• Open to bias• Drivers not proven
• Run “what if” scenarios
• The whole point is not necessarily to predict nearly 100% accuracy but to call to action with informed decisions
• Resources for capital projects and operational expenses can then be reallocated and new performance targets set
• Shift from Linear Process to a Continuous Cycle
Build a Financial Model (2/2)
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• Shift from Linear Process to a Continuous Cycle
Monitor, Report and Analyze
Review and Set Strategy
Planning Input and
Collaboration
Allocate resources and
Execute
• A rolling forecast is a process in which key business drivers are forecasted on a continual basis, not associated with a specific financial year
• Expands forecast horizon beyond current fiscal year
• Scenario based: uses various assumptions to anticipate bottom line impact
Moving to a rolling forecast
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• Predictive: recommendation is to have at least quarterly reviews of the process and run scenarios, use the added information to reduce, but not to replace annual budget process
• Fine-tuning the models can be challenging:
The difficulty is to re-inject Actuals and understand variances to adjust Forecasting… without getting lost in a rear-view mirror
Driver-Based Rolling Forecast – Challenges (1/2)
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• Information System may be a hurdle:
Having the right tools, end to end, avoiding heavy manual data collection and scenario handling
• Change management is required:
Limit “budget gaming”, target negotiation mindset and adjusted projections to fill the gaps.
Promote collaboration, knowledge sharing and transparency on assumptions & dependencies
Driver-Based Rolling Forecast – Challenges (2/2)
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assumptions & dependencies
� Embed forward-looking attitudes into the culture, create a consistent focus on the business issues, rely consistently on forecast intelligence to make managerial decisions
This requires strong Buy-In from management and discipline from everyone
Nowadays, corporate culture tends to focus on quarterly performance
It is essential to incorporate long term implications, foster innovation and growth
Incorporate a 3-5 year outlook in the planning process:
• Better focus on market conditions and strategy
Long Term versus Short Term?
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• Better focus on market conditions and strategy
• Give business owners an opportunity to project themselves into the long-term future
• Build a consensus around corporate strategy and execution
• Build foundation for future planning
What is the situation in Alcatel Lucent?
Emerging
• No formal planning process
• No planning tools• Inadequate
Developing
• Inconsistent process
• Basic tools (e.g. Excel)
• Ad hoc spreadsheets
Defined
• More standard processes
• Some integration across Business Units
• Reliance on ERP system as planning tool
Advanced
• Enterprise-wide processes
• Use of web-enabled budget tool
• Rolling forecast and other advanced processes
Leading
• Planning process fully integrated with strategy
• Real-time forecasting and performance monitoring
• Compensation linked to results
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communication• Purely financial
plan
spreadsheets• Highly manual
process
planning tool• Little analytic
� Harmonizing system >> One ERP� Introducing one common forecasting tool� Introducing Rolling Forecast� Some model based scenarios, but still very manual
Still too detailed bottom-up approachSometimes lacking discipline in data collectionNot yet real time nor integrated with strategy
Current processes
and philosophy
must evolve
ADDRESSABLE PIPELINE
ORDERS FORECAST
SALES FORECAST
ORDERS FORECAST
MARGINS FORECAST
ORDERS FORECAST
HEADCOUNTS/FIXED COSTS FORECAST
CASH FORECAST
INVENTORY FORECAST
A strong process but too manual
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By product, segment, customer:• Market share• Trends• Reputation,
investor perception
Addressability still rather empiric
� Systematic
By product, segment, customer:• Delay from
Qualification to Contract
• Win/Loss ratio• Probability to win
Long run forecast thru models but empiric, not formal, lacking methodologyShort-run forecast is 100% manual and detailed by opportunity
� Systematic
By product, segment, customer:• Backlog/book ship
conversion ratio• Typical project
schedule - Revenue recognition rules in line w/ T&C
• Adjusting lead time to Demand Plan
By product, segment, customer:• For recurrent business:
historical trends adjusted with expected Cost Improvement / Price Erosion / Specific Provisions linked to T&C
• For key deals: detailed P&L analysis
� Systematic
Still too empiric, methodology not formal enough
� Systematic� Handled centrally
Conclusion for Alcatel Lucent
• Monthly Forecast Process is clearly embedded in the culture but remains too manual and cumbersome
• Improved agility with a strong methodology, practice alignment, converting understanding & assumptions into rules, and regularly challenging some long time habits
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�Still some changes to implement before having a real
Driver-Based Rolling Forecast tied to our Strategy…
And now: tell me about the situation in your company??