Driver based planning and Rolling Forecasts have been two of the hottest subjects in Financial Planning & Analysis in recent years. Fueled by the need for directional insight and agility, most FP&A teams are now considering these modelling techniques to be must-haves for their organisation.

Even though these concepts represent obvious choices for better predictive planning, many companies are still finding it challenging to implement them successfully. This is troubling, especially as the next frontier of prescriptive (AI) planning is already upon us. Falling too far behind could be a real problem.

So why are so many companies still struggling to master Driver based planning and Rolling Forecasts?

Dialling in the right level of calibration

A common problem many organisations encounter when implementing Driver based planning / Rolling Forecasts involves establishing the right calibration level. Organisations often want enough sophistication to take action. Yet, at the same time, they don’t want to take on too much complexity for fear it will reduce their ability to remain agile or run rapid what-if scenarios.  

As a result, FP&A teams often fall into goldilocks thinking, where the model shouldn’t be too complex yet not too high-level either. Unfortunately, this can often be the worst place to be as it’s not strategic enough to grow the business yet not tactical enough to manage the business moving forward.       

Standing in the middle of the court

The best way for organisations to avoid standing in the middle of the court (a no-no in tennis) is by clearly drawing the line between Strategic vs Tactical planning.  

The better we are able to detect this line, the better we are able to avoid straddling it. Of course, this doesn’t mean that we should focus on one approach over the other. Nor does this mean that we can forgo strong integration between Strategic and Tactical Planning. Rather, what is critical to realise is that trying to use a one-size-fits-all solution for two distinct planning processes is invariably going to limit your capability and efficiency over time.    

By segmenting out Strategic and Tactical planning, organisations can focus on addressing the people, processes and technology that are uniquely different between Strategic and Tactical planning, regardless of the fact that both approaches rely on Driver based planning and Rolling Forecast constructs. 

The two-model approach is the norm

For organisations thinking about implementing a new Driver based planning / Rolling Forecast solution, it’s important to realise the fact that most companies continue to maintain separate tactical and strategic models regardless of the technology available to them. Trying to move towards a single model approach is simply not the norm, despite the suggestions or ambiguity made by experts and software vendors.

Some software vendors will go as far as suggest that organisations can add Strategic Planning later once they have successfully implemented tactical planning. However, based on my experiences, these organisations rarely realise any meaningful benefit down the road.

The real differences between strategic and tactical planning

The number of time periods (duration) and the amount of line item detail are two obvious visible differences between strategic and tactical models. However, it’s important to realise that these are merely the visible effects of two completely different processes.

Here are 5 concrete signs you should look out for when drawing the line between optimal Strategic and Tactical planning.

1 – When you’re looking to grow value, not find efficiency

True strategy, is all about exploiting new markets and opportunities by breaking down boundaries and creating barriers for others to follow. This is what shareholder value creation is all about, establishing higher cash flow returns than your competitors and continuing to maintain that advantage over longer periods of time.  

On the other hand, Tactical planning is all about hitting or exceeding targets based on the limited resources available to you in the most cost-efficient way possible. It’s about managing issues as they come up and executing the strategy in an efficient manner.

2 – When you need to evaluate multiple outcomes simultaneously

Strategy is not about planning for a single outcome, rather it’s about opening the discussion up to understanding multiple opportunities and tradeoffs and then using that data to influence peers based on discussion and debate.  

On the other hand, Tactical planning may require multiple reforecasts over time, but the objective should remain singular in nature (hit the target with a high degree of certainty).

3 - When the underlying strategy or approach is highly unique

When you’re forced to copy another company’s strategy under the same constraints with no meaningful differentiators, then you're only hoping to win is via efficiency.  

This is, by definition, another form of tactical planning. Rather than using your own Strategic plan, you’re essentially borrowing the strategic plan of your competitor. In this case, you don’t need to think strategically at all. You simply need to focus on execution, and there is a big difference between the two. Unfortunately, too many companies rely on operational efficiencies to run their business. 

4 - When the workflow rules are not pre-defined

Strategy is about influencing others based on your own perspectives and beliefs. It’s about building consensus across peers, which requires free-flowing discussion and debate around alternative ideas and scenarios. In order for this process to occur, users must be free to establish their own workflow rules in an ad-hoc and highly collaborative way. The workflow pattern in Strategic planning often resembles a network map (pattern) where distinct peer teams interact with other peer teams in order to gather critical insight and achieve buy-in in order to establish a unified Strategic plan.

Tactical planning tends to leverage pre-defined workflow rules that often mirror hierarchical org charts within the organisation.   Furthermore, Tactical planning is heavily reliant on the submission/approval process as part of an overall highly orchestrated and rigid communication process. 

5 – When you’re dealing with uncertainty, not probability 

Strategic planning is full of uncertainty. Yet literally anything is possible with the right level of investment, effort and time. This is quite different from the term “probability”, where resource limitations reduce the number of potential outcomes enabling modellers to think in terms of either discrete or continuous distributions.  

What makes planning under uncertainty so unique is that it is best evaluated based on an effective discussion and debate across a series of alternative outcome combinations. This requires not only having the ability to quickly reconfigure alternative scenarios but also requires modellers to invite peers and subject matter experts to suggest alternatives and/or provide critical feedback to weed out risky or less advantageous options. This is the cornerstone of a highly functioning strategic planning process.  

On the other hand, Tactical planning benefits greatly from assigning probabilities to short-term targets. This helps manage short-term risk and enables companies to apply the proper short-term resources most efficiently.      

Conclusion

For organisations looking to get the most out of their Driver based planning and Rolling Forecasting initiatives, it is critical to realise that these terms apply in both Strategic and Tactical planning. Yet the people, processes and technology applied to these two domains are quite unique. Developing a one-size-fits-all answer two these distinct areas is where many FP&A organisations go wrong. 

Creating an environment that incorporates both strategic and tactical planning as separate, yet highly integrated processes is how organisations get the most out of their financial planning efforts.

The article was first published in Prevero Blog