The business planning environment

Most people will agree that planning is a vital activity for every corporate body.  It is often carried out according to a management calendar.  Long-range and resource planning tends to take place on an annual basis, forecasting tends to be quarterly, while reporting is monthly driven.  This timetable of planning events was established back in the 1920’s where James McKinsey described budgeting as a way of setting standards of performance and a means of coordinating activities between departments. There’s nothing wrong with this concept of planning, but today’s business is very different from that of 100 years ago.

With the advent of the Internet and e-commerce, physical boundaries have been removed making it relatively easy for competitors to enter new markets with new products in a fraction of the time it took in the past. Consumers now have a 24/7 buying experience where the world is brought into their home with a few mouse clicks.  Companies are able to tailor products for individual needs rather than the mass marketing of generic products found in the last century, all of which puts pressure on manufacturing and those that provide raw materials.

As if this wasn’t enough, social networks and communities such as Facebook, Twitter, Tumblr and LinkedIn are able to exert significant influence over customer purchasing habits based on a range of non-product factors, such as social responsibility and fast changing fashion.

These factors have combined to create a business environment that is complex and fast moving, which in turn has caused a rapid decrease in the time horizon that can be predicted with accuracy. Because of this, traditional planning processes driven by a date on a calendar have become unsuitable for most organisational needs.  Instead, planning now needs to be driven by activities, events and exceptions where just the affected parts of an organisation are involved.  To support this view of planning requires data – both internal an external to the organisation – that is then used to drive planning or review processes with the aim of taking advantage (or negating the impact) of unexpected situations. 

This is what we call ‘data driven planning’.  An approach that covers all aspects of planning (strategic, tactical, financial, operational, etc) and that binds the whole organisation together with a focus on achieving strategic objectives.

Over the next few blogs, we will look at how this can be achieved by describing seven key planning models that every organisation needs to manage and monitor business performance.  We will then go on to describe a data driven architecture for solutions that allow management to continually adapt their plans in response to changing market conditions.
But before we do, let’s first consider the purpose of planning and why it often fails. 

The purpose of planning

Planning is something that every organisation should do as it helps management set the overall direction and outlines the role that stakeholders play in achieving corporate objectives.
In larger organisations, planning takes place under a number of headings that include: 

• Strategic Planning is typically conducted by senior management and takes a long-term view of where the organisation should be, given where the market is heading.  This view contrasts the organisations current capabilities and those of competitors to decide what it has to do in order to achieve its mission in the future.
• Tactical Planning looks in more detail at the activities to be implemented in order to achieve strategic plan goals.  These activities are typically associated with implementing new or changing existing business processes and considers the timing of change as well as the resources required.
• Budgeting is the process by which resources are allocated to ensure the day-to-day operation of the business.  Budgets can be thought of those that support existing business processes (‘business as usual’), and those that are allocated to strategic initiatives.
• Financial / Capital planning, as the name implies, is concerned with the cash/capital requirements of the business and where any shortfalls are to be funded, or surpluses invested.  
• Forecasting is where the organisation gains a short-term view of what is actually going to happen.  It takes into account current sales or income activity and operational expenditure to give a realistic assessment of what the organisation will achieve if the current course continues.
• Operational planning also takes a short-term view and tries to optimize organisational activities.  Production and logistics planning are good examples that recognize business decisions are typically a compromise between efficiency, customer satisfaction, future targets and available resources.

Planning can also be used to minimize the impact (or take advantage) of different tax regimes.  But despite these differences, all types of corporate planning have a common purpose, which is to:

• Model the organisation in a way that can be used to make decisions about resource requirements and how activities are conducted.
• Challenge assumptions on the current mode of operation.
• Prepare management for a range of anticipated futures.  
• Set a clear path through which change can be implemented and monitored for success.

Why planning fails

Unfortunately, corporate planning has a poor track record as was borne out in a survey conducted by Chartered Institute of Management Accountants (CIMA) in the UK and the American Institute of Certified Public Accountants (AICPA) in the US.  In interviews with around 500 organisations, a number of issues were highlighted that included the following:

• Dissatisfaction with the planning process: The way in which planning is conducted was often seen as ‘not fit for purpose’.  With Strategic planning, 53% of respondents said that too little time was spent on this crucial area.  In contrast, 40% said that too much time was spent on the annual process of budgeting where there is “…no integration with goals, objectives and accountability”.
• Issues with the planning culture: Most people involved in planning saw its focus on achieving short-term goals rather than the long-term health of the organisation.  They also saw a lack of accountability as being responsible for poor implementation and a reduced desire to plan properly.  One respondent thought: “Planning should be based on the real numbers and not on what senior management want them to be.”
• Need for a holistic approach. Planning was seen by many to be an isolated process that lacked awareness of how different functions interact with each other.  Similarly there was no discussion on how the budget tied departments together and as a result, there was a lack of “… commitment to the interrelationships required meeting overall corporate goals.”
• Need for better planning technologies/ Over 50% of respondents still use spreadsheets for planning, despite the benefits that can be achieved with modern planning technologies.  As a direct consequence, the planning process was described as being “Too manual” and “Too error prone”.

You can read more about the survey in the book ‘Budgeting, Planning, and Forecasting in Uncertain Times’ that is jointly published by CIMA and the AICPA.
It should be noted that plans are never going to be accurate as the world in which organisations operate is far too complex to implement models that determine every outcome.  If you live in the UK you only have to look at weather forecasts to see that despite sophisticated mathematical models, forecasting the future with any level of detail seems impossible.
Even if an organisation could predict with accuracy, the very act of planning will cause the future to be different from what it would have been!  But that doesn’t mean management should give up on planning, but rather to be aware of where inaccuracies can creep in.

Donald Rumsfield when US Secretary of Defense, was quoted as saying “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.”
In a business context there are four areas of inaccuracy that can affect the accuracy of a plan:

• Known unknowns:  – e.g. competitor actions, political surprises, social attitude, commodity prices - these can't be predicted in advance
• Unknown unknowns:  – e.g. things that cannot be imagined or are treated as a constant such as a breakthrough technology or a paradigm shift in attitude.
• Mistakes:  – e.g. errors that occur within mathematical models of the business.  This can either be down to a coding error or not taking into account the right values such as a tax rate.  
• Personal bias:  This final source of inaccuracies recognise that people selectively use facts to bolster their own view of the future.  

By being aware of these areas, the results produced by a planning model can be better interpreted.  To help negate some of these factors, organisations should produce plans that contain a range of values (e.g. best case, worst case, expected) which can help the reader get a better sense of what may happen.
None of the above issues should be a surprise.  The real challenge for organisations and those responsible for the planning process is on how these issues can be overcome. 

Planning Focus

In developing a better planning process, organisations must first return to the fundamentals of business planning.  This starts out by realising that there are only three things management can control:

• The arrangement of business processes (sales, production, customer service, …)
• The resources (money, people, assets) applied to those business processes
• The volume and quality of work carried out within those business processes 

In looking at business processes, these can be split into:

• ‘Core processes’ that typically consist of linked activities that directly relate to generating revenue; delivering products/services; supporting customers; and developing new products/services.  
• ‘Support processes’ such as those conducted by HR, IT, Finance, etc., who purpose is to ensure the smooth running of the organisation’s core processes.

 
Typical business processes split into ‘Core’ and ‘Support’ activities

Throughout these different activities, outputs will be generated which eventually lead to products and services supplied to customers.  It is hoped by senior management that these final outputs will be sufficient to achieve the organisation’s purpose.

As a consequence, the role of planning is to help manage what can be controlled (business processes, resources, and workload) to produce outputs that will achieve organisational objectives, within an uncontrollable and unknowable external environment.