Most recently, I have been observing significant changes in business models in many organisations around the globe. Many FP&A Board members say the future can no longer be predicted based on only historical data since we are living in the environment of “unknown unknowns”.
“The same companies that vow to respond quickly to market shifts cling to budgeting – a process that slows the response to market developments until it is too late.”
- Jeremy Hope and Robin Fraser, co-founders of BBRT
With analytical driver-based models, FP&A’s processes become more flexible and dynamic. A new generation of systems allows for agility, easy management of FP&A routines and collaborative planning. FP&A systems are now more often managed in the finance department, which helps to eliminate the problems of ‘black boxes’ and heavy reliance on expensive programmers and IT departments.
Today, we are seeing the emergence of a new generation of FP&A professionals, who are different from traditional accountants. These practitioners can see the big picture, understand key business drivers, build models and generate valuable business insights. Most importantly, they can communicate the insight for effective decision-making and also inspire people across the organisation.
The basis for this evolution is a changing business culture. The traditional, outdated budgeting mentality is being challenged more and more. Target negotiations, political games and biased planning processes cost companies a lot of money. These conventional budgeting practices are non-value adding and need to be abandoned if organisations want to stay competitive in this dynamic business environment.
While the process of moving away from a traditional budgeting mentality is painful and slow, it is happening around the globe. The question is, are we ready to abandon the traditional budget completely?
Going Beyond Budgeting
The proponents of the ‘beyond budgeting’ movement are convinced that the budget attempts to fill too many roles, namely:
- Setting targets.
- Resource allocation.
- Performance management.
One of the biggest conflicts of interest lies in trying to combine planning with target negotiations. It is a well-known paradigm: the budgeting process is a process of heavy target negotiations. Targets are linked to remunerations. This makes traditional budgeting a very emotional process: it is a battle for next year’s pay package of the participants. Can it still be objective and unbiased? Probably not.
This is a game, where ‘subjective’ or ‘objective’ are often forgotten. When this subject is discussed at FP&A Club events in different countries, it invariably produces smiles on FP&A professionals’ faces. They can strongly relate this behaviour to inefficiencies in their processes. Unfortunately, this traditional process is still so heavily embedded in business practices around the globe that often it is very difficult to challenge the status quo.
Luckily, change is already underway. More and more, companies are realising that budgeting is out-of-date before its finalisation and, therefore, is not that relevant for business.
Some companies have even started to think about abandoning the budgeting process altogether. Norway’s StatOil and Sweden’s Handelsbanken are among those to have done so, demonstrating that it is possible to survive and prosper without a budget.
However, this cannot happen overnight. Going beyond budgeting requires serious changes in business culture. It is well-known that such changes are the slowest and most painful.
What is Beyond Budgeting?
Bjarte Bogsnes, vice president, performance management development of StatOil, defines beyond budgeting thus: “The main purpose is liberation from dictatorship, micromanagement, number worshiping, calendar periods, hierarchies, secrecy, stick and carrot.”
The main problems of traditional budgeting may be summarised as follows:
- Planning and forecasting are mixed with the target setting process.
- Compensation targets are fixed and heavily negotiated during the planning and budgeting process.
- Budgeting for the year is fixed. It is perceived as the head of each department’s annual allowance. If he/she does not spend this year, that budget can be cut next year.
- The capital budget is set during the budgeting process. It is often fixed for the next financial year (in both projects and money terms). If you see an interesting business opportunity during the year, it may be not considered at all if you do not have the budget for this new project.
Looking at the problems of traditional budgeting, many realise that it does not fit for purpose. Are we ready to abandon it though?
Many FP&A professionals find the idea of abandoning the budget difficult to comprehend. Typical responses include:
- How will we report to the market analysts?
- How will we compensate our sales force?
- How will we control our expenses?
The reality is that the beyond budgeting philosophy does not leave an empty space. Once the budget has been abandoned it gives new management tools that allow companies to overcome inefficiencies and a culture of dysfunctional behaviour.
Beyond Budgeting, Step-by-Step
Basically, the first step should involve separating the three processes that are historically combined in the traditional budgeting routine; namely target, forecast and resource allocation.
The next step should consist of improving each of these processes:
- The target should become more ambitious, but relative. For example, it should be connected to external industry benchmarks. Fixed targets do not support holistic performance management practices.
- The forecast should be driver based and analytical, assumptions should be logical. Only a logical, analytical process can help create an unbiased planning and forecasting process.
- Resource allocation should be flexible, not fixed. If a new opportunity arises during the year, it should not be killed because of the lack of capital budgeting.
The instruments of beyond budgeting are different. In general, it is based on rolling forecasts, balanced scorecards, analytical driver-based models, modern FP&A systems and efficient FP&A departments.
Above all, the most important factor for beyond budgeting is business culture. While some organisations are not yet ready for this change, they may well become so over time and the process will be evolutional.
Many companies are currently in a stage of transition: deeply dissatisfied with their FP&A processes, overworked and bombarded by deadlines, and looking for new FP&A talents that can be difficult to find. They are beginning to take the first positive steps towards a better FP&A business culture: implementing rolling forecasts, driver-based models and modern FP&A systems.
However, the culture is often driven from the top of the organisation. Chief financial officers (CFOs) and chief executives (CEOs) have lived with budgets for too many years.
The simple test in order to understand how embedded the "traditional budgeting culture" in your processes is to ask your FP&A team the following questions:
- Are you ready to challenge your CFO/CEO, when he/she sets unrealistic targets? Are you ready to point out when a plan is biased and not in-line with the trends and driver-based models you have?
- Do you have enough courage and power to eliminate ‘hockey-stick forecasts’ in your company, which often demonstrate how unrealistic and biased the process is?
If you can answer ‘yes’ to the above questions, then probably you are ready for the beyond budgeting journey.
If not, good luck in your search. Please remember though that if you want your FP&A department to become more strategic and influential, you have to challenge the existing status quo.
This article was first published on http://www.gtnews.com and http://www.afponline.org/
You can read more on Beyond Budgeting here.
The world of financial planning and analysis has observed changes of such magnitude that they cannot be described by our traditional statistical and analytical models. In this age of frequent Black Swan events, the traditional business approach to operating on an annual budget and forecast is no longer effective. In order to deliver a competitive advantage to a company, modern FP&A function needs to be flexible and dynamic, be based on sophisticated analytics, examine life-time values of the products and services and encourage business partnering. This significant change in the role of FP&A function requires big cultural shift and modern change management techniques.
Flexible and dynamic planning process
A flexible and dynamic planning process is easily adjustable for different risk and strategy scenarios. It is multidimensional, driver-based, events-driven and activity-based. It uses advanced analytics and is not limited to the accounting period. It encourages collaboration between business functions and allows both top-down and bottom-up approaches to be used in the process.
Following are popular techniques for the flexible and dynamic planning process:
- Risk-adjusted planning
- Scenario planning
- Rolling forecast
- Activity-based budgeting and planning.
The risks enterprises face can destroy or create value. Therefore, successful mitigation of risk is important for the survival of the company. In order to survive in times of extreme changes, organizations need to be very quick and flexible in analysis and planning.
Historically, risk management has been a separate process within the organization, not connected to FP&A function. Increasingly more companies are beginning to incorporate risk information into the planning, in order to evaluate and manage external and internal risk. A risk-adjusted plan is one that responds to changing circumstances, providing the financial capability to react to events in a planned and proactive manner. The time of one static scenario planning has gone forever. The identification of risk scenarios enables the organization to develop risk response plans applicable to many possible events, not just one specific scenario.
Scenario planning is an important technique for flexible and dynamic FP&A process. At the time of rapid change, the technique is used during the planning process to evaluate risks and viability of different strategic alternatives. It is also used for sensitivity analysis. The standard approach of “three scenarios” (best, average and worst) is replaced with multiple on-demand scenarios. To arrive at one summarized view, probabilistic and expected values approach could be used.
Rolling forecasts are a planning method that refers to a process of forecasting trends that may impact your business 4-8 quarters in the future. With rolling forecasts the number of periods in the forecast remains constant and visibility of the business does not stop at year-end.
For example, the idea is to do a new forecast every three months and add another three months to the end of your forecasting cycle on the rolling basis.
A rolling forecast is a better management approach since it gives management a view into the future. According to APQC, use of rolling forecasting can save a median of 25 days on an organization’s annual budgeting cycle. A rolling forecast expands planning horizons and challenges the traditional static budget. More and more companies are introducing RF into their processes, many of them use the process parallel to the traditional budgeting process. However, quite a few organizations have abandoned the old budgeting and planning process in favor of the more flexible rolling forecast.
Activity-based (flexible) budgeting
Activity-based budgeting is a very effective technique for cost management and in the time of global expense cutting this method has become very popular. However, this concept challenges the traditional view of a budget fixed for the year. In an activity-based budget, variable cost is adjusted for the activity level throughout a year and cost managers learn to adjust to the idea that their annual budget is not fixed or based on previous years’ spending. It varies with the level of activity and could be lower or higher depending on the activity level. Therefore, the budget is dynamic, not static. The concept needs to be communicated to departmental managers, and it needs to be controlled and analyzed by finance business partners before it becomes part of the business culture in the traditional budget organization.
Advanced Analytics and Driver-Based models
Oracle recently commissioned a global study investigating the level of management coherence and profit visibility in large companies. The research, undertaken by Dynamic Markets, surveyed 1,500 organizations and found that 82 percent lack a complete visibility of profits, with 40percent suffering impaired financial performance as a result. Oracle explained these figures by the fact that more than half of the study participants used spreadsheets for profitability models.
Many companies have recognized that spreadsheet-based planning methods are inefficient and have moved to specialized planning and forecasting systems. Modern FP&A should be based on a model with formulae tied to fundamental business drivers. Advanced predictive analytics in FP&A model is a source of strong competitive advantage. This is a driver-based model which invokes consistency and participative cooperation across functions in organizations.
Some basic principles of driver-based modeling:
- Concentrate on top 10-15 business drivers
- Analyze and manage the drivers
- Look at their interdependence
- Explain the variances through the drivers
- Update driver-based models on a regular basis
Harmonization of the planning processes
In addition, strategic, operating and financial plans should be harmonized through drivers and ideally reside in one system. They should allow cross-functional collaboration and use automated reports that can quickly generate scenarios and easy multidimensional capabilities. The system should also allow top-down and bottom-up approaches to be used during the planning and forecasting process.
It is extremely important to leverage both approaches in order to harmonize strategic and operational plans.
Expanding time horizons, lifetime value view
The accounting period is an artificial concept which does not show us the whole picture or lifetime value of the product/customer. Accounting treatments such as capitalizations and provisions deplete the real profitability view.
That is why the life-time value analysis technique and rolling forecasts are important methods as they expand the time horizons of the financial analysis. The rolling forecast is an important concept in breaking artificial accounting period views. Survival analysis techniques are becoming very popular in forecasting true future profitability of the business.
Participative planning is growing more important in the organizations in order to implement strategy and improve the level of analysis. An effective planning and forecasting process should involve all key staff to help everyone better understand the drivers and reduce office politics.
Participative planning process helps with the following:
- Risk identification
- Connecting strategy with the operational plan
- Improving communication and understanding business drivers
- Flexibility of the FP&A process: with top down and bottom up approaches.
Such collaborative planning can be accomplished through an iterative process that allows managers to forecast and share alternative scenarios, which are essential given today’s economic uncertainties. Finance also plays the key role in facilitating the coordination of plans across the company, which helps ensure that operational tactics are aligned with financial targets throughout the organization.
The future is unpredictable, the current business environment is harsh, competition is fierce. In these times of change, modern FP&A is both exciting and challenging. It is exciting because it utilises better and more sophisticated tools than previously, can embrace automation and the incredible power of online collaboration. However it is difficult because old finance management practices are still alive: they are inadequate for the modern world, but FP&A professionals continue to live from a deadline to a deadline and have no time to stop, change, re-write, and reconsider.
Analytical transformation reduces finance departments’ costs. e.g. robotics and automation, shared services, centers of excellence have already processes of many finance departments. But what about FP&A? In many cases, it still lives in the 20th century. It is a well-known fact that Excel continues to be the prevalent analytical tool used by finance professionals. The quality of data for FP&A analytics remains poor and the FP&A time wasted on the data reconciliations and cleansing. The financial analysis task thus takes on the form of “firefighting”, leaving no time to re-think and re-design the existing non-value adding processes.
Obviously, changes in the FP&A framework are driven by transformations of analytical procedures in general. For its 10th meeting, held in mid-March 2016, the London FP&A Board embarked on developing the FP&A Analytics Transformation Model.
The meeting was sponsored by Metapraxis, the consultancy, analytics for financial professionals and software provider and, by Michael Page, the specialist recruitment firm, which now provides its offices as the venue for Board meetings in central London and abroad.
20 senior finance practitioners from the UK, USA, Denmark, Switzerland, Ukraine, Germany, and Netherlands came together to brainstorm on the following questions:
- What is advanced analytics for FP&A?
- What are the stages of FP&A analytical transformation?
- How should the FP&A Analytics Maturity Model look?
What is advanced analytics for FP&A?
There are a lot of professional debates about the role and purpose of finance analytics; the marketplace is flooded with alternative definitions of different analytics types. Many advanced analytics definitions come from the IT profession, however these need to be adjusted in order to better address the finance world.
The Gartner model, shown below, presents an overview of different kinds of analytics.
It was agreed at the London FP&A Board meeting that FP&A advanced analytics start from the Insight stage and utilise predictive and prescriptive types of analytics. In other words, FP&A advanced analytics is Proactive and Forward-looking Analytics.
Traditional budgeting and planning analytical processes are still centered around Descriptive and Diagnostic Analytics: the most backward-looking and reactive processes. A good example is the traditional Variance Analysis.
FP&A advanced analytics is based on a driver-based planning and forecasting process. It is important to identify a number of key business drivers: not more than 10 or 20. If effective, the process can describe 80% of the outcomes by only focusing on 20% of the total drivers. The simplification helps to speed up the analytics based decision-making process and to increases its flexibility and agility.
How about the optimization stage of the analytics? Are FP&A departments ready for prescriptive analytics? The London FP&A Board agreed that the foresight stage of FP&A analytics is not generally present in the FP&A departments yet. Some of the board members think that it is not possible to automate complex and strategic analytical FP&A decisions: these complex analytical scenarios should be run by human beings, not machines.
However, there are some routine and repetitive tasks that could be automated in order to release valuable time for the advanced analytics.
FP&A Analytics Maturity Model
The FP&A Analytics Maturity Model, shown below, presents an overview of the three states and 5 stages of the organisational analytical transformation.
There are 3 states of FP&A Analytics Maturity: Basic, Intermediate and Leading. The stages of the maturity could be described as following:
Let us look at each stage in more details.
1. Basic Stage of Maturity
It is described by the following characteristics:
- No formal analytical processes
- No established analytical matrixes and business drivers. The financial model is in the basic or non-existent state
- No BI tool and dedicated planning system
- No business collaboration
An example of organization at this stage would be a business startup, where the processes, models, systems and measures are not yet defined.
It can also happen within a mature organization, when it decides to spin off one of its operations.
2. Developing Stage of Maturity
Characterized by the following
- Inconsistent planning and forecasting processes
- Basic analytical matrixes and drivers.
- Basic planning model and tools (most likely excel-based)
- Basic BI tool
- Minimal and inadequate planning collaboration
- Analytics is mostly descriptive and backward-looking
All organizations will pass this stage in the process of developing their FP&A framework. This is necessary step of development. The desired outcome is for an organisation to progress into the defined and advanced stages of the development process.
Sometimes, an organization can stack at this “developing” state. It happens for reasons of poor management, dysfunctional business culture and inadequate investment in analytics. Such a stall can prevent an organization from unlocking its full potential and competing in the modern world.
3. Defined Stage of Maturity
Currently, many global organisations reside at the beginning of this stage. It is characterized by the following :
- Defined Planning processes
- Defined analytical matrixes and drivers
- Defined planning model and system
- Defined, but disconnected from planning BI-type solution
- Some elements of collaborative planning is present
- There is heavy reliance on IT support
- The analytics types are descriptive (What?) and Diagnostic (Why?)
This Intermediate state of analytical transformation is characterized by relative stability: companies are able to stay in this stage for many years. The processes are stable, but not “best in class”, they are adequate for the traditional budgeting, planning and forecasting process. However, they are arguably highly inadequate for “new world” planning.
4. Advanced Stage of Maturity
Best in class modern planning processes reside at this space:
- Enterprise-Wide planning processes
- Multidimensional analytical matrixes, leading KPI’s and business drivers
- Driver based planning process and flexible planning system
- Advanced BI solution: it is partly connected with the planning process
- Collaborative planning process
- Self-service planning system and process, low reliance on IT
- Predictive analytics (What will happen?)
5. Leading Stage of Maturity
This is the ultimate goal for which organisations should aim.
- Integrated Planning Process (IPP)
- Leading Analytical matrixes and drivers.
- Integrated driver based planning process (both horizontal and vertical)
- Planning system is fully integrated with BI
- Real-time collaborative planning process
- Advanced (Proactive) analytics
Analytical transformation is an ongoing process. We will see more transformation in the future: system implementations, restructuring of processes, re-defining and simplifications of the models, automation of the routine tasks and applying proactive advanced analytics.
Currently, the majority of organizations are stuck at the defined stage with some turning to the advanced for the best in class companies. At the leading stage, all planning processes will be fully integrated, allowing for multidimensional advanced analytical process. This is where FP&A will be able to use big data analytics and fully transform organizational corporate performance management and decision making process.
Financial planning and analysis (FP&A) educational and consulting company the FP&A Trends Group has rebranded the London FP&A Club as the London FP&A Circle. The change was marked by the launch of the FP&A Circle on the 4th of July 2016 on board the historic warship HMS Belfast, which is permanently moored on the River Thames in London. The event was sponsored by FP&A technology group Prevero.
The mission of the FP&A Circle as an educational and networking platform for the professional community. It shares the knowledge that has been generated by London FP&A Board – a collection of senior finance practitioners that generates FP&A insights through discussions and collaboration. It combines the power of thought leadership, innovation and practicality and helps to recognise better practices in FP&A.
30 senior FP&A practitioners attended the launch of London FP&A Circle. These were representatives from different companies and industries including Starbucks, AON, Hutchinson 3G, The Economist, Combined Insurance, Laird plc, Kerry Group, Coats, etc.
FP&A in Post-Brexit Business Environment
The inaugural London FP&A Circle meeting took place less than two weeks following the UK vote for Brexit. In this dramatically transformed business environment the role of FP&A is more important than ever in helping to manage the value of the company. In undertaking this task, the analytical maturity of the company is very important.
As Donald Rumsfeld, former US secretary of state for defence famously proclaimed: “There are known knowns, known unknowns, and unknown unknowns… the unknown unknowns, we do not even know we don’t know them.”
Since Rumsfeld uttered those words back in February 2002, at a news briefing about the lack of evidence linking the government of Iraq with the supply of weapons of mass destruction to terrorist groups, they have been applied to other scenarios. Most recently, they were given yet a further airing following the unprecedented and irreversible British vote in late June 2016 for the UK to leave the European Union (EU).
This event represented a huge geopolitical shift and moved the global business environment into a new phase of prolonged uncertainty and high risk. Suddenly, many organisations found themselves in the realm of “unknown unknowns”.
Many questions are left unanswered. What will be the legal and tax implications of the post-Brexit world? How might business models be adjusted to the new reality? Have companies’ pre-Brexit strategies retained any relevance? These have added to the various existing realities of FP&A transformation, as outlined below:
In addressing these questions the role of financial planning and analysis (FP&A) becomes even more prominent and strategic. As we re-plan and re-forecast quickly in the post-Brexit reality, the flexibility and dynamism make FP&A essential for tackling the “unknown unknowns” that suddenly emerged in the early hours of June 24.
In order to implement the quick, flexible and dynamic processes that have become essential, FP&A needs to go through analytical transformation; moving closer to the leading stage of analytical maturity. That means advancing into the new world of simplified driver-based modelling, advanced analytics and modern integrated planning process. It also needs to ensure finance responsibility for FP&A systems and models.
In other words, modern FP&A needs to be agile and keep in mind the words of Bill Gates: “Success today requires the agility and drive to constantly rethink, reinvigorate, react, and reinvent”.
The FP&A analytics maturity model
The FP&A analytics maturity model was recently developed by the London FP&A Board and provides an easy approach for financial professionals to evaluate their stage of FP&A maturity and where their company should be aiming.
The FP&A Analytics maturity model was presented by Hans Gobin, FP&A director at Laird plc and a member of London FP&A Board.
Participants also heard from Julie Brown, director of resources at the UK social services organisation the Children and Family Court Advisory, aka Cafcass, who described how driver based planning and modelling – an essential element of FP&A analytical maturity – had helped streamline financial planning at her non-for-profit organisation.
A further case study, outlining FP&A analytical transformation in a commercial organisation, was given by Maria Olsson Carroll, head of group FP&A at thread manufacturer Coats Group and a London FP&A Board member. Her previous roles include more than two years as global sales and marketing (S&M) senior business controller and global solution expert at Sony Ericsson.
During her time with the Japanese telecoms group, Sony introduced the Smart Management Dashboard, which provided strategic senior leaders across its global operations with a descriptive and predictive analytical tool accessible on Intranet launch screens, enabling them to effectively manage organisational performance.
Olsson Carroll, who while at the group was closely involved in the process of dashboard implementation across Sony’s operations, described how the dashboard provided “one version of the truth” across the organisation through multiple data sets centralised in a data warehouse and visualised intranet. A variety of data was made easily available, including:
- External data for market share, customer share and value share.
- Actuals, such as volume, sales and gross margin, by product/country/customer.
- Open orders, volume and sales, by product/country/customer.
- Plan and forecast projections, by product/country/major customer.
- Sales and operations planning (S&OP Demand) plan by volume and value, for each product and country.
The ability to provide “one version of the truth” was a critical success factor in supporting the “effortless adoption” of the dashboards, said Olsson Carroll. This was added to by speed in system performance and usability; relevance in providing insights; functionality and clear visibility of trends; and the ability to produce presentation slides at the click of a button.
Sony has enjoyed an analytical transformation as a result of the Smart Management Dashboard project. Firstly, it succeeded in eliminating inefficiency and ineffectiveness, by:
- Validating data and manual manipulations.
- Validating assumptions and drivers in debating the interpretation of projections.
- Using central overlay guestimates to adjust for deviations between top-down trends and bottom-up data projections.
Secondly, the project enabled more time and effort to be spent in:
- Providing quality insight to the right people at the right time.
- Continuous improvements, such as quality of data through improved processes including collaboration and drivers
Strategic, flexible and dynamic FP&A is essential for tackling the “Unknown Unknowns” of the post-Brexit world.
In order to implement these quick, flexible and dynamic processes, FP&A needs to go through analytical transformation moving closer to the leading stage of analytical maturity. That mean advancing into the new world of simplified driver-based modelling, advanced analytics and modern integrated planning process. It also has to ensure finance responsibility for FP&A systems and models.
In other words, modern FP&A needs to be agile, as was previously quoted by Bill Gates, “Success today requires the agility and drive to constantly rethink, reinvigorate, react, and reinvent”.
Future London FP&A Circle Events
The FP&A Circle will hold its next event on October 4, 2016 when the topic for discussion will be the evolution of the FP&A profession. The evening will be organised in partnership with global recruiter Michael Page at the firm’s offices in central London The event will be again sponsored by FP&A technology group Prevero.
London FP&A Board expands globally
London FP&A Board is set for expansion: in addition to FP&A communities in the Swedish capital, Geneva and London, further openings are planned over the second half of 2016 in Amsterdam, Zurich, Brussels, Dubai, Frankfurt, Kuala Lumpur and Singapore.
See the original article in gtnews.
Rolling Forecasts are an essential tool for financial planning and analysis (FP&A), with a potential to radically transform corporates’ traditional budgeting process.
The London FP&A Board of senior practitioners’ most recent meeting focused on why Rolling Forecasts are ideal for financial planning and analysis (FP&A) professionals. It also discussed best practice and the ‘Three Stages of Rolling Forecast Maturity’ model, summarised in this article.
Forecasting is an important process in the FP&A cycle, which assists with looking into the future and managing organisational performance. However, confusion can result from the mixing up of definitions for key FP&A processes. Each process answers a key question, as outlined below in Figure 1:
Figure 1 - Key FP&A definitions
Hockey stick forecasting
Each planning process plays its own separate, distinct role and should not be combined with any other. When the forecasting process is treated as a performance measurement tool, it becomes highly political, non-value adding and inaccurate.
Mixing forecasting with target evaluation processes often happens in organisations, where the target is closely connected to the compensation. Unless this emotional bias is eliminated from the forecasting process, it’s very likely your forecast revenue will resemble a “hockey stick”, as pictured below in Figure 2: low at first (representing the actual results) and suddenly jumping higher (representing the forecast).
Figure 2 - “Hockey stick” forecasting
A forecast helps to shape a different future, so it should be based on analytics and be independent of the target evaluation process.
Why Rolling Forecast?
The number of periods in a Rolling Forecast always remains constant. For example, Figure 3 illustrates a four-quarters rolling forecast.
Figure 3 - Example of a four-quarters rolling forecast
In traditional forecasting, the length of planning process contracts with each quarter into the year and extends beyond the year-end wall.
Bjarte Bogsnes, vice president (VP) of performance management development at Norwegian oil and gas multinational Statoil, compares the traditional forecasting process with driving:
“During the budgeting cycle we shine a strong light into the future,” he suggests. “Then we turn off the high beams and start driving into the next year with low beams only. As we drive on and the quarters pass, the low beams get gradually covered in mud and become weaker and weaker. Is this a safe way of driving in the dark?”
Obviously, the answer is ‘no’ and explains why leading organisations opt to use Rolling Forecasts – the benefits are outlined below in Figures 4 and 5.
Figure 4 - Advantages of rolling forecasts
Figure 5: IBM study demonstrating “measurable” benefits of a rolling forecast
Among the biggest advantages of the Rolling Forecast is that it can help organisations completely abandon their traditional budgeting process. However, having mentioned this advantage at roundtable discussions in several countries, any suggestion that the budget can - and should - be abandoned can evoke fear, rather than enthusiasm. Financial professionals are reluctant to lose the budget as we need it for various reasons: setting bonuses; reporting to market analysts, managing the company’s resources and others.
So are we ready to abandon the budgeting process - or at least to transform it to the more value-adding format? We should be as RFs are the way of the future and can help us on this journey of transformation.
The Maersk Group: from Rolling Forecast to Beyond Budgeting
Matthijs Schot, a group FP&A manager from the Maersk Group, shared his company’s experience of Rolling Forecast at a recent London FP&A Board meeting. He illustrated how cultural, strategic, and operational processes can be transformed into the valuable ecosystem of effective and efficient corporate performance management.
Founded in 1904 as a shipping company, Denmark’s AP Moller Maersk Group is represented in more than 130 countries, with 88,300 employees, and generates annual revenue of US$40bn-plus. In 2010 the group undertook a transformational journey, aiming to eliminate several issues typical of the traditional budgeting process:
- Slow adaptation to changed market conditions.
- Lengthy and costly forecasting processes (detailed bottom up).
- Poor visibility fixed to the current fiscal year end.
- Lack of structure when making investments decisions.
Through collaboration and management discussions, Maersk generated the management process design criteria shown in Figure 6:
Figure 6 - Rolling Forecast design criteria introduced by Maersk Group
Maersk also separated three processes for each purpose in a continuous rolling cycle: quarterly Rolling Forecast; strategy and capital allocation; and target setting.
The transformation created major benefits for Maersk, including:
- A simplified planning process.
- Improved performance discussions.
- Increased visibility.
- Better and faster decision making/action taking.
- Better targets.
- Dynamic capital allocation based on opportunity.
- Increased autonomy and ownership
The heavy budgeting process was completely abandoned and its replacement, the Rolling, is now used for all of Maersk’s market communication processes.
Schot singled-out the following key success factors:
- Executive sponsorship and management buy-in.
- Recognition of the need for change.
- Decentralisation to make better decisions
- Market volatility and business results.
What does Mature Rolling Forecasting involve?
Through collaboration and discussion, the London FP&A Board developed the following Rolling Forecast Maturity Model:
Rolling Forecast: (i) the basic stage
The initial stage of Rolling Forecast is characterised by static planning: as it’s not driver-based it is also not flexible or dynamic.
There are two forecasting processes: traditional and rolling. While the two forecasting processes are run simultaneously, much time is spent managing them.
The level of forecasting detail is high; consequently, no time is left for decision-making process to adjust the course of the directions.
The level of analytics utilised is basic and descriptive. Actuals are not automatically uploaded into the forecasts, as Excel is the main tool used for planning and forecasting. This means the amount of non-value adding work is very high and FP&A personnel have little or no time for analytics.
If the organisation doesn’t progress beyond this stage, the RF becomes an unnecessary burden - merely a time waster and further expensive process. Yet statistics suggest that around one in five RFs are abandoned after the initial implementation. It’s likely the companies weren’t ready for the process and that their culture, people, systems and processes weren’t ill-equipped to move on to the next stage of maturity.
Rolling Forecast:(ii) the intermediate stage
By this stage, the planning model is partly driver-based and has already moved away from the “too detailed” approach of the basic stage. However, static and inflexible planning systems are still partly in use. Consequently, it isn’t easy to generate fast-paced rolling forecasts on demand and to model different scenarios with ease.
There is an average level of collaboration exist, but it is not yet well-developed due to a complexity of the process. Some elements of advanced analytics exist, but they are not fully realised at this stage.
The political acumen of forecasting is still in place because the process is treated as a performance measurement tool. As a result, the emotional side of the forecasting process influences its quality. Much time is spent completing it, leaving no lead time for decision-making and changing the course of actions.
Since two forecasting processes are being run side-by-side, significant time is wasted. FP&A professionals by this stage are overworked and demotivated, with no time for value-adding analysis.
This stage of development is stable but lacks efficiency and effectiveness. In order to realise its full potential, organisations have to progress further into the leading stage of the process.
Rolling Forecast: (iii) the leading stage
This is the Rolling Forecast’s most advanced level: the stage where all the potential of the process is realised through agile and prompt forecasting and planning, quick decision making and better corporate performance management.
The main characteristics of leading Rolling Forecast processes are as follows:
- It is generated through a driver-based model. The level of detail is not overly complex, allowing for quick re-forecasting, easy scenario planning and simple sensitivity analysis.
- As Rolling Forecast is a management tool, the process is not intermingled with corporate performance measurement.
- The forecasting process is a collaborative process; made possible due to the capabilities of the modern flexible system, education and simplicity of the driver-based concept.
- Routine processes are automated, so no time is wasted on unnecessary details. FP&A practitioners have time to analyse and to concentrate on improving the planning processes.
This advanced stage of the Rolling Forecast maturity is what organisations aim for. To reach it, they must be ready to completely re-think their traditional planning philosophies; be open to change in processes, and willing to invest in their people and systems.
The Rolling Forecast is an important modern management process that expands planning horizons, reduces planning cycles, and helps in executing organisational strategies.
Companies will realise the Rolling Forecast's full potential only when they are ready to change. If it is not implemented with thought, it can become another non-value adding process, an expensive time-waster without benefit to the organisation. It is up to each company to decide at which stage of its development it is ready to move into the Rolling Forecast process.
© 2016 London FP&A Board, All Rights Reserved
The concept of Zero Based Budgeting (ZBB) is by no means new. It has been around for almost 50 years and has been used by many commercial and non-commercial organisations whose overriding objectives are to shed the unnecessary expenses.
In a rapidly changing business environment, the traditional, out-dated budgeting mentality is being challenged more and more. While the process of moving away from a traditional budgeting mentality is painful and slow, it is happening around the globe. The question is, are we ready to abandon the traditional budget completely?