Advanced Analytics Support for BBI’s Principles and Processes

July 30, 2020

By Alan Dybvig, Managing Partner at Dybvig Consulting

FP&A Tags

This is the fifth article in a series of eight articles devoted to the wide variety of benefits provided to the firm by the next generation budget, the Operational Budget (OB), and its associated Operational Income Statement (OIS).

The first four articles were:

Part 1: How predictive and prescriptive analytics create the Operational Budget (OB)
Part 2: OB’s benefits for the budgeting process
Part 3: OB works: Test Case shows the firm left a profit upside of 50-150% on the table last year
Part 4: OB’s benefits for the rolling forecast process

This article will focus on how the Operational Budget’s advanced analytics supports seven of the Beyond Budgeting Institute’s twelve principles and management processes.

This article has three sections:

Operational Budget’s support for seven of the BBI’s adaptive management model (BBM)’s twelve principles
how the OB enhances BBI’s cost management/resource allocation and dynamic forecasting capabilities by integrating them
conclusion including future articles.

Operational Budget’s Enhancements for BBI’s Adaptive and Agile Management Model (BBM)

The beyond budgeting philosophy is expressed in twelve principles and processes devised by the Beyond Budgeting Institute. Quoting from Steve Morlidge’s The Little Book of Beyond Budgeting: “The key traits of all mature beyond budgeting businesses share, without exception, were flexible business planning processes and a devolved organizational structure, in place of the fixed annual budgets and functional hierarchies of traditional businesses.”

Described below in italics in Table 1 is how the Operational Budget’s advanced analytics support seven of the BBM’s twelve principles and processes. The other five are left in place for completeness.

Leadership principles	Management Processes
1. Purpose - Engage and inspire people around bold and noble causes; not around short-term financial targets. There is no cause more inspirational than focusing on what provides value to the firm’s customers, its activities (aka, processes, operations, flow). And not, as the traditional budget does, on the firm’s organizational structure, i.e., departments. Part 1 article for details.	7. Rhythm – Organize management processes dynamically around business rhythms and events; not around the calendar year only. The Operational Budget is necessarily dynamic because it is updated immediately when one or more of its underlying assumption(s), i.e., events, occur. For example a new forecast, a slip in a new product’s introduction. This is an excellent quantitative way to coordinate activity/process interactions dynamically. See (9) below and Part 2 article for details.
2. Values – Govern through shared values and sound judgement; not through detailed rules and regulations.	8. Targets – Set directional, ambitious and relative goals; avoid fixed and cascaded targets.
3. Transparency – Make information open for self-regulation, innovation, learning and control; don’t restrict it. Operational Budget is a quantitative model of the entire firm’s activities/processes; that’s as transparency manifest. Further, the OB’s functionality includes a programmatic variance analysis that allows the accountable teams to self-regulate/learn. Specifically, the teams make changes in the operational budget’s cost or response functions when the variance analysis indicates changes are required. So, there is none of the opaqueness and rapid obsolescence of the traditional budget. See Part 2 article for details.	9. Plans and forecasts – Make planning and forecasting lean and unbiased processes; not rigid and political exercises. As described in (7) above and (3), the Operational Budget and its associated forecast are always current. It is updated when ANY assumption(s) change(s) occur or the variance analysis requires it and a new forecast is created. This extends the BBI’s dynamic forecasting process from being only initiated by a new forecast to being also initiated by ANY event. This triggers an update to the OB, as described immediately above. See Part 2 article and Part 5b article for details. Also, no bias is possible because the Operational Budget is a model whose structure and data have been agreed to by all the relevant staff and management.
4. Organization – Cultivate a strong sense of belonging and organize around accountable teams; avoid hierarchical control and bureaucracy. The accountable teams own their activities/processes in the Operational Budget; there is no hierarchical control of them. Also, they are visible to all appropriate staff across the entire enterprise. See (3) above. Thus, it allows the teams to dedicate resources to them and not to the budget.	10. Resource allocation – Foster a cost-conscious mindset and make resources available as needed; not through detailed annual budget allocations. The Operational Budget is responsible for the monthly allocation of all the costs of the firm’s COGS and SG&A resources required to make and fulfil the OB forecast which has the best possible profit. This assures that resources are always in place to achieve that profit. See the final paragraphs of Part 1 article for details. This will be discussed in more detail in the Part 5b article. In addition, these allocations honour all constraints. Examples include customer service level, raw material suppliers, DC locations (throughput and inventory), green implications including energy or carbon, transportation links and procurement availability limit.
5. Autonomy – Trust people with freedom to act; don’t punish everyone if someone should abuse it.	11. Performance evaluation – Evaluate performance holistically and with peer feedback for learning and development; not based on measurement only and not for rewards only.
6. Customers – Connect everyone’s work with customer needs; avoid conflicts of interest. Conflicts of interest are reduced because the Operational Budget provides a single quantitative view of the firm’s activities/processes which are owned by the accountable teams. They, collectively, are what provides value to the firm’s customers. See (4) above.	12. Rewards – Reward shared success against competition; not against fixed performance contracts.

Figure 1

How the OB enhances the BBM’s cost management/resource allocation and dynamic forecasting processes by integrating them

BBM’s cost management and resource allocation are the same process. This process is triggered by a dynamic forecast. And dynamic forecast and dynamic resource allocation are closely related.

How does the BBM address the cost management issue? In summary, the techniques include:

“burn rate” guidance (operate with full authority within this activity level)
unit cost targets (you can spend more if you produce more)
benchmarked targets (e.g., unit costs below the average of peers)
profit targets (spend so you maximize your bottom line)
no target at all (monitoring cost trends and intervening only if necessary)

For more details, please see "How to Manage Cost Without a Traditional Budget" article by Bjarte Bogsnes.

In addition to the five techniques described above, the Operational Budget (OB) provides the firm with significant additional benefits:

The OB’s resource allocation is the most profitable: The Operational Budget allocates the costs of all the firm’s COGS and SG&A resources that are required by month to make, fulfill and support the OB’s new, most profitable forecast. Further, these resource allocations include all capacity and constraint considerations. For more details, please see the last several paragraphs of the Part 1 article for details.This contrasts with the Beyond Budgeting Management Model (BBM) which, when profit is used to allocate resources, it is done by individual P/L owners and is not the most profitable allocation.
Integrated dynamic forecasting: Currently, as described above, within the BBM the cost management/resource allocation process and dynamic forecasting are separate processes. With the Operation Budget, they become a part of the same process which creates the most profitable outcome. Also, a new forecast is dynamically created when OB’s quarterly variance analysis requires changes in the OB’s model’s structure.
Broader industry appeal: All of the above is particularly important for BBI clients in the manufacturing, consumer packaged goods, technology and similar industries. This is because, unlike the BBI cost management examples typically cited (e.g., oil/gas exploration which is largely investment-driven and not operating cost-driven and banking/service industries), these industries have complicated operating-cost driven physical global supply chains that require cost management modeling beyond the five techniques described above.

Conclusion

As described above, the Operational Budget provides advanced analytical support to seven of the BBM’s twelve principles and processes. This is possible because the Operational Budget is a prescriptively quantitative model (see Part 1). It is not competitive with the BBM; rather the OB’s advanced analytics complements the BBM.

This complementary support provides more value to the firm than either model can provide by itself. This complementarity is similar to what the Operational Budget provides the rolling forecast and the zero-based budget.

The next three articles will discuss:

how the Operational Budget can improve the zero-based budgeting process,
benefits for two functions outside finance (i.e., S&OP/manufacturing and sales/marketing’s ROI) and a cross-functional application of the OB application to scenario planning.
The concluding article will describe how the Operational Budget integrates two of M&A’s current, separate advanced analytical techniques for an enhanced analytic result.

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