Thorsteinn Siglaugsson

An INSEAD MBA and entrepreneur Thorsteinn has over 20 years of experience in management, consulting and training. He is chairman of Ultima BV, a company specialized in developing driver-based planning and budgeting solutions.

He also runs his own consultancy with a focus on improving business performance, using the Beyond Budgeting approach to planning and budgeting, and the Logical Thinking Process methodology for strategy formulation and improvement programs, both in consulting assignments and corporate training.

Thorsteinn is a member of the Beyond Budgeting Roundtable and a certified expert in The Logical Thinking Process.

 

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The Challenge of FP&A: The Core Conflict

By Thorsteinn Siglaugsson, Consultant / Corporate Trainer / Manager

FP&A Tags: 

In the first part of this discussion, we identified the root cause that prevents FP&A to deliver its full value. In fact, we have identified a core conflict of FP&A. This conflict can be described in different ways. 

We can talk about a conflict between effectiveness and efficiency. We can also talk about it as a conflict between local and global optima - between focusing on the system as a whole and focusing on parts of the system. In this context, we can also talk about functional silos. And in many cases, this tension becomes visible as a conflict between the traditional command-and-control management approach and trusting people to do their best of their own free will.

When we have a long-standing problem we have repeatedly tried to solve without success, chances are behind the problem there is a conflict preventing us from reaching a solution. To get rid of the problem we have to solve the conflict.

The Logical Thinking Process methodology offers an excellent tool that can help us unravel conflicts like this. It is called a Conflict Resolution Diagram, CRL. Like the other steps in the Logical Thinking Process, the CRL, demands precision: it requires that we first state precisely where the conflict lies. The CRL applies only to conflicts where there is a common objective but two conflicting ways to achieve it. The diagram usually contains five entities: The common objectives, two requirements, both needed to fulfill the objective, but which in turn have two opposing prerequisites. 

Using a Conflict Resolution Diagram, our conflict may look something like this:


Diagram 2: The Core Conflict

We read the Conflict Resolution Diagram from left to right, linking the statements using necessity relationships: IN ORDER TO be an effective finance business partner I MUST make sure my time is well used AND I MUST make sure I deliver value. If either of those requirements is missing I will not be effective. Then, IN ORDER TO make sure time is well used I MUST focus on measuring efficiency. But, at the same time, IN ORDER TO make sure value is delivered I MUST NOT focus on measuring efficiency. In other words, we must do X and we must also do the opposite of X. Two objectives we have to fulfill and they are in contradiction to each other. This is why we have a conflict.

What are the assumptions?

What lies behind this conflict are assumptions I have already brought up. Let's add those into the diagram:

Diagram 3: Assumptions behind the Core Conflict

Now we see clearly what lies behind the logical relationships. The next step then is to scrutinize those assumptions. Let's start from the left. To be effective we must use our time well because time is limited and what we are doing takes time. Valid? In most circumstances, we can assume it is. We can usually not expect to have overcapacity in the finance department, and it goes without saying really that anything we do will take some time. So the relationship is valid. 

Let's look at the lower arrow now: To be effective we must deliver value. This is really the definition of effectiveness so it goes without saying. Hence the requirements for being an effective business partner both seem to be valid: We must make the best use of our time and we must make sure we deliver value. 

But what about the prerequisites? Let's look at those now. The first prerequisite is that in order to use our time well we must measure efficiency. The first assumption looks pretty tight. Efficiency is about good use of time – the less time and resources we use the more efficient we are. Secondly, we know that we act based on how we are measured and if efficiency is what matters then we must measure that to maximize it. Looks pretty tight also. Finally, if measuring efficiency really is a prerequisite for using our time well we actually must assume that efficiency is critical to good use of time. That is, without efficiency time is not well spent. Otherwise, measuring it would not be a necessity.

On the lower half, we have the opposite. If we want to make sure we deliver value we should NOT focus on measuring efficiency, and there are four reasons: First, we assume that value creation can often not be measured at all. Secondly, we assume there is no necessary link between efficiency and value - i.e. we can be highly efficient, but not create any value. Third, we assume that a strong focus on efficiency will divert us from focusing on value. Fourth, in some cases, we can even assume that the drive for efficiency directly destroys value. This will happen for example as a result of measurements that are aimed at improving local optima at the cost of global optima.

Are any of the assumptions invalid?

How valid are those assumptions? The first one relates to the way operational experience enables an FP&A professional to bring valuable insights. There is however no direct relationship between the time spent on the shop floor and the value of the business understanding this brings. It is impossible to measure directly. Still, we know it does bring value. 

The second assumption more or less goes without saying: You can be very efficient at doing non-value-adding stuff. Those two assumptions are sufficient to conclude that measuring efficiency is not enough, but they do not suffice to conclude we absolutely should not measure it. 

In order to reach that conclusion, we must bring up an adverse effect – that measuring efficiency is not only useless but actually harmful. This is the third assumption, that focusing on measuring departmental efficiency actually diverts us from focusing on value to the company as a whole. And this is the root of the contradiction.

Now let's think again about the difference between efficiency and effectiveness. What were the key points?

  1. Efficiency by itself brings no value.
  2. Effectiveness brings value.
  3. We can at the same time be highly efficient and totally ineffective.
  4. Efficiency is easy to measure while effectiveness can be hard to measure.

Based on the first two points we can conclude that effectiveness must come before efficiency. Efficiency becomes relevant only after we have made sure what we are doing is actually effective. It follows that efficiency cannot possibly be the only criteria on how well we use our time. This again means there really is no necessary relationship between good use of time and focus on efficiency.

The other issue here is the difference between departmental performance and global performance. The efficiency we measure is the efficiency of the finance department. But a highly efficient department can easily be totally ineffective at delivering value into global decision making. 

FP&A has the potential to add much higher value than it currently does. The conflict between the drive for departmental efficiency and the demand for valuable business insights severely limits this value-creation potential. 

We have found that one of the prerequisites, the one that has to do with efficiency, is in fact not a necessary logical requirement to reach the goal. But at the same time, the focus on efficiency and departmental performance is very deep-rooted in our corporate culture and it is not necessarily clear what should replace it. Therefore unearthing the logical flaw is only the first step towards solving the problem. More work is needed. But the key point is, for FP&A to live up to its full potential, the conflict will have to be solved.
 

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The challenge of FP&A: What limits the value of FP&A?

By Thorsteinn Siglaugsson, Consultant / Corporate Trainer / Manager

The daily routine of FP&A professionals revolves around providing reports and analyses for senior and operational management, to manage core processes such as budgeting, forecasting, cost allocation and consolidation. And usually, they are hard-pressed for time.

At the same time, the key complaint from senior and operational management is that the finance professionals really don't understand the business well enough. That is the people who should be at the forefront of providing insights to support top-quality decision-making lack the understanding required to perform this task. That is a serious issue.

The Challenge of Business Partnering

Ambitious finance people want to be business partners, not just support functionaries. They take time to gain a better understanding of the business, they network with colleagues outside finance, they seek out experienced co-workers in order to learn from them. Some even use their spare time to analyse the business to better understand it.

The concept of finance business partnering reflects the realization that finance professionals could and should add more value, and that value eventually could and should be based on a better understanding of the business. There is a strong drive visible here, lots of discussions, articles, books and interesting endeavors. But unfortunately too little has changed.

Finding the Root Cause

Why is that? The first step is to try and figure out why managers complain about the value finance professionals bring to the table. In this analysis, I use a Current Reality Tree, one of the five tools of a highly effective methodology called the Logical Thinking Process. The purpose of the Current Reality Tree is to identify the root cause of a problem, using sufficiency logic.

We know the complaint: FP&A professionals don't create enough value. When we ask why the answer is they lack an adequate understanding of the business. Too little real exposure to the challenges of operations explains lack of business understanding. Time and capacity are the constraints and at the root lies the focus on departmental efficiency that, as many of us know from experience, plays such a large part in the way we structure and manage our businesses.

Note this is a generic example. The analysis may well vary between different companies. Sometimes it may reveal a vicious cycle, for example when a rigid annual budgeting process drives sandbagging, which then must be justified by an ever-growing number of unnecessary, but efficiently performed tasks.

Diagram 1: Generic Current Reality Tree for FP&A – Example.

The Efficiency Mantra

Preparing reports, building budget templates, responding to demands for analyses are all technical activities. Networking, reading or just walking around the factory in order to better understand the business you work for are not technical activities. It is very difficult to measure efficiency when doing this while it is easy to measure efficiency at pulling together a report. And we like to measure performance.

If you spend a day fine-tuning a cost allocation template no questions will be asked. But if you spend a day in the warehouse, trying to better understand processes and procedures, people are likely to give you a funny look when you get back to the office. No matter if the allocation is not really used for any decisions, while your experience in the warehouse allows you to bring really valuable input that improves decision making.

Since time is usually scarce, finance people try to find ways to increase efficiency in their department. Apart from basic accounting systems, businesses invest in special applications for reporting, planning and budgeting, cost allocation and consolidation in order to speed up those processes. Analytical applications are widely used for the purpose of improving and, up to a point, automating data analysis and variance reporting. 

All of this is meant to improve the efficiency of the finance departments. Reports and budgets are churned out quicker, consolidation and cost allocation are automated, all to save work and minimize the risk of errors. 

Doing the Right Things or Doing Things Right?

But what about value? Does faster report generation make the reports better, provide more valuable insights, help managers make better decisions? Or does it simply lead to more reports, with more details, being generated? Does a better budgeting system make the budget a better management tool, more up to date, more relevant in decision making, or does it just lead to a more elaborate, less relevant budgets? Based on my own experience providing planning and budgeting solutions for almost 20 years, this is unfortunately what happens far too often.

Higher efficiency does not necessarily increase effectiveness. Doing something faster, with more precision, fewer resources or more often adds no value at all unless the thing we are doing is in itself something that adds value. If not, no matter how fast or often we do it, it will just be a waste of time. Efficiency by itself adds no value, effectiveness does. 

We like to measure performance. But effectiveness is not always that easy to measure. If walking around the factory for a few days makes you a more effective FP&A professional, how is this going to be measured? It is not easy. There is no direct verifiable link between the time you spend in the factory and the quality of the insights you provide once you have done this. And there is not even any proof that the better quality of your insights will necessarily lead to better decision making by those who benefit from them. This is not even under your control. In other words, we know a more knowledgeable FP&A professional will add more value. But we cannot really measure it while we can measure how fast they perform a task that in fact adds no value.  And we like to measure performance. It is in fact what an FP&A professional does for a living! But measurements can be a two-edged sword as we will see in the second part of this discussion.
 

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Why Not to Use Spreadsheet-Based Budgeting

By Thorsteinn Siglaugsson, Consultant / Corporate trainer / Manager

Spreadsheets are a great tool to build and maintain ad-hoc calculations, quickly draft a business plan and create good-looking reports. But when it comes to planning and budgeting in a complex business environment the flexibility of spreadsheets is often quick to become an obstacle instead of an asset in your planning process.

What characterizes a good planning, budgeting and forecasting process?

1. A budget should be a management tool

Planning, budgeting and forecasting is an advanced process. If it is supposed to add value to the company it must involve a number of people. For example, the sales planning process has to involve people who know the products and the customers. The production plan must involve the people who understand the, often complex, production capacity, processes and material requirements and planning for general resources must involve the right people.

The budget should not only be a source of an annual report for the board and bank. To achieve this it must be based on assumptions that take into account the external and internal environmental factors and it has to be easy to build scenarios that address changes. This calls for a streamlined process that is not too time-consuming.

2. Accuracy and assumptions

Accuracy is a big part of a good planning and budgeting process. Users should be able to trust the assumptions they use and those must be precise enough to reflect reality. The product mix is constantly changing, for example, so you have to be able to extract the true revenue and cost by product and product line. Furthermore, calculation errors, once they get into your model, will often affect the whole downstream process, igniting uncomfortable questions from experienced board members when you finally get to the all-important board presentation.

3. Workflow is important

As mentioned above it is very important that the people who know the business are involved in the planning process. It is also important and can give companies advantage, to use and advanced tool where the data is stored centrally, and the planners get access to the part of the business they are responsible for. Other important factors are that the tool reflects the workflow and best practices in work procedures, keeps track of who did what when, the status of the planning work and possibility to see the expected outcome. When the planning process has finished it should be easy to transfer the data for use in business reports for comparison.

Now, knowing spreadsheets, how well do they really fulfill all those criteria?

1. Spreadsheets are documents, not a database

A spreadsheet is not a database. Workbooks are documents, stored in your file system, they can get lost, copied and changed and often you end up with multiple versions of the truth. If you want to distribute your work the only way is to create multiple excel workbooks and then spend countless hours consolidating them, with mixed results.

2. Is error checking the best use of your time?

Everyone who uses spreadsheets for planning, budgeting and forecasting recognizes how easy it is for errors to find their way into the workbooks. Once you have an error in a complex workbook, let alone multiple interlinked workbooks, finding and correcting it can be a major headache.

3. A good budget has many levels and dimensions

To build a well-grounded budget or forecast you must be able to base it on sound assumptions. Since spreadsheets do not allow you to drill down, work at multiple levels or with multiple dimensions at the same time, you will have to rely on estimated averages for example when it comes to unit prices, utilization rates or the effects of currency changes or raw material prices to name some examples.

4. Your company is a repository of knowledge – Use it!

No single individual or a single department in a corporation has all the answers. The sales managers understand the clients, the marketing managers understand the brands, production managers understand the production requirements. Finance understands – well, finance. So why make them responsible for all the inputs? Is it perhaps because you use excel and preserving the integrity of the spreadsheets has become even more important than getting really value-adding inputs based on sound knowledge, not just last year’s figures?

 

Planning, budgeting and forecasting do not have to be an annual, time consuming, low value-added process. It can be a great tool to manage your business and avoid letting the ever-changing reality surprise you. But to do that you must turn away from spreadsheet-based budgeting – even though Excel comes almost free of charge. Your time and the success of your business are worth more.

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Implementing a Corporate Planning Solution — a few guidelines

By Thorsteinn Siglaugsson, Consultant / Corporate trainer / Manager

 

When preparing the implementation of a planning and forecasting system I am often asked if we can just take the existing spreadsheet solution and squeeze this into the new system. Invariably my answer is: Yes, we can do this, but we should not. Why?

Usually, the existing spreadsheet solution will reflect all the limitations arising from the fact that spreadsheets do not have the capabilities you get from a proper database solution. Its use is likely to be limited to a few users. The structure will probably be based on a maximum of two dimensions. Consolidation and change tracking will be difficult, if possible at all except manually, and most likely it will be used for annual budgeting only.

Implementing a new solution to budget, that means to forecast, set targets and allocate resources, is a great opportunity to redefine how we do things and improve what’s needs to be improved.

The first question we should ask ourselves is why we do a budget at all? What is really the purpose of it and how will it help us to succeed?  

What we usually call budgeting does, in fact, include three different tasks; setting targets, forecasting performance and allocating resources. The first thing we should do when preparing a new implementation is to think about those different tasks, what they have in common and where they conflict and how this relates to our business. The purpose of setting targets is not the same as the purpose of forecasting. We set targets to motivate a certain behavior and usually, we do this for the longer term. Forecasting and resource allocation, on the other hand, is something we must do more often since it is a part of managing the business and staying agile. Every time our environment, internal or external, changes, we must reforecast and reallocate resources accordingly.

Furthermore, we must not forget the conflicts that typically arise when we try to combine forecasting and target setting. A forecast should be realistic while a target may be, and should be, ambitious. Combining those gives us unrealistic forecasts and unambitious targets. Unrealistic forecasts prevent effective resource allocation. Unambitious targets limit our potential for success.

Once we realize this we understand that we should perhaps not talk about budgeting at all. Instead, we should talk about target setting, forecasting and resource allocation as separate processes. This should be our starting point.

The next step is to determine which of those processes we need. Do we need detailed targets for the business? What value do they add? Or should we rather make do with general high-level targets? If this is the case, do we really need a software application for this? 

When it comes to forecasting and resource allocation the first step is to understand the way our business works. 

Do we run a stable company in a quiet market or a growing business in a dynamic market? If the latter is the case we probably need rolling forecasts updated every month or every quarter, using a horizon that fits the business cycle. If not, we may even not need any detailed forecasting. The nature of our business should determine the frequency and detail of reforecast and re-allocation of resources as well as the appropriate time horizon.

Once we have a rough picture of the requirements it is time to think about work processes and people. Here there are two key considerations. First, it must be clear who is responsible for the planning process. This will not necessarily be the person responsible for the content of the plan. Second, when deciding on participants we should think first about the value of their input and then distribute the tasks accordingly.

We should distinguish between the tools we use for forecasting and resource allocation on the one hand and performance measurement on the other.  

Those are different processes, performed by different people, and they call for different technical capabilities and different user interfaces. A sales manager pulling together his sales forecast has limited need for advanced reporting. He needs a robust planning tool that includes basic historical sales analysis, not necessarily much more. The key is that it gives him the possibility to plan from all the relevant angles at the relevant levels. The finance professional needs a consolidation tool and the CEO needs standard reports for the board, KPI’s and scorecards. In short, we should understand the tasks we are going to perform and what they require.

Now we can move on and start looking at different software solutions based on the specific needs we have identified. 

Of course, every company is different and has its own specific needs. I know this well having done implementations for dozens of clients of all shapes and sizes. However, there are always some common requirements that must be fulfilled. Here are some of the most important demands a good planning solution must fulfill:

  • It should be flexible enough to allow you to build a model that fits your business.
  • It must be best of breed when it comes to the target setting, forecasting and resource allocation processes, not on reporting and analysis.
  • It should be easy to use so that you can let the relevant people work on planning without spending too much time. In other words, your solution should not be used only by finance, it should allow you to go beyond finance.
  • It must really cut the time you spend on budgeting and consolidation.
  • It should be centralized and provide a single version of the truth.
  • It must allow you to use reforecasts/rolling forecasts as a management tool.
  • It must link seamlessly with your reporting/BI and business process systems.
  • It should be easily customizable with minimal effort.

 
Once we have selected the appropriate solution it comes to the implementation project itself.

Apart from general considerations regarding good project management, I would only like to stress two really important points:

1. Avoid huge implementation projects.

For 90% of companies’ planning models are relatively simple. Implementation projects should therefore not have to be very large. There are two main reasons for huge implementations. One is that the solution being implemented is too complex technically and thus difficult to install. Given the wealth of good, easy to use applications we should have avoided this problem in the selection phase. The second reason is that we are trying to integrate processes that are better done elsewhere. For example, for most company’s interest expenses and depreciation are often best done in spreadsheets for there you have the flexibility to model those the way you like, and more importantly, to change the way you model them. This part of the process is not distributed among many users so permission and process flow management is of no concern. So why then try to integrate this into the budgeting solution? It only adds complexity to the project and limits your flexibility to model the way best fits you.

2. Remember the rule of diminishing returns.

Based on my experience with such projects I have found that you will achieve 80% of the work in 50% of the time. After this, the return on additional work will diminish fast. So, rather than use the 100% make do with the 50% or thereabout. Leave the rest out, unless really necessary.

Summing it up

Implementing a new planning solution helps streamline planning processes and better manage your business. The key to success is to avoid shortcuts, to reduce the concept of budgeting into its actual components - target setting, forecasting and resource allocation - choose the tools that best fit each purpose and avoid overcomplicating the implementation project.
 

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Rolling Forecasts — Why and How?

By Thorsteinn Siglaugsson, Consultant / Corporate Trainer / Manager

Increasingly, managers are now looking to change the corporate planning process and replace the traditional annual budget with rolling forecasts, 12, 13 or 15 months ahead. What is the reason for this development? 

Every year, most companies spend a lot of time preparing a plan for the next financial year. Such plans become obsolete quickly, due to the fast changing business environment. Still, in order to retain control, management generally continues to use the budget as a benchmark for performance measurement and rewards are often linked to performance against plan. This still reduces the value of the budget since often it rather contains the result of negotiations between managers and subordinates than reflecting the actual opportunities and threats faced by the business. 

Rolling forecasts have become more prominent in recent years, often in conjunction with new methods such as Better Budgeting and Beyond Budgeting. A budget may still be prepared, but instead of leaving it unchanged it is regularly revised, typically quarterly, or monthly. The aim of the review is not to change the main objectives for turnover or profit, but to re-evaluate priorities in light of operational developments: Declining margins in the department or product category demands actions to make up the losses elsewhere.

When working with rolling forecasts the planning period moves with time instead of ending at the fiscal year-end. Systematic use of rolling forecasts improves the planning process and quality and usefulness of the budget. The annual planning process is replaced by continuous reviews providing an opportunity to adjust the budget to the changing environment. This way the budget becomes a real management instrument that enhances the performance of the business. 

It is often middle managers who drive the implementation of rolling forecasts, simply because they normally end up with the bulk of the budgeting work and thus understand what is wrong with the traditional approach. But in order to gain the support of senior management, board and general staff several things must be kept in mind: 

  • It is important that it is clear from the outset that the purpose of the budget review is not to find justifications for poor performance, but to create a forum to continually seek opportunities for improvement. It is necessary to make a clear distinction between the purpose of the annual budget on one hand and the reviewed rolling forecast on the other. 
  • It must be made clear, in the case traditional budgeting is still adhered to, that the general objectives set out in the annual budget will not change during budget reviews, but instead, the goal is precisely to ensure they will be achieved. 
  • Key performance measures will need to be reviewed and often changed. 
  • At the beginning, it is important to reach consensus on the appropriate performance measures and explore carefully to what extent key business drivers can replace after the fact measures such as profit or margin. 
  • Key indicators, such as turnover pr. hour of work, number of customers or orders may be more realistic measures of performance where the result is less dependent on external factors. 
  • Finally, it is critical that the project management is good, with clear goals and a well-organized implementation. 

The rolling forecast is a powerful management instrument. The growing popularity of rolling forecasts testifies to that. Based on a carefully crafted action, clearly defined roles and not least providing enough time to ensure the quality of the process it can lead to a great improvement.

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Author's Articles

January 30, 2019
FP&A Tags:

In the first part of this discussion we identified the root cause that prevents FP&A to deliver its full value. In fact we have identified a core conflict of FP&A. This conflict can be described in different ways. 

January 16, 2019

​The daily routine of FP&A professionals revolves around providing reports and analyses for senior and operational management, to manage core processes such as budgeting, forecasting, cost allocation and consolidation. And usually they are hard-pressed for time.

December 11, 2018

Spreadsheets are a great tool to build and maintain ad-hoc calculations, quickly draft a business plan and create good-looking reports. But when it comes to planning and budgeting in a complex business environment the flexibility of spreadsheets is often quick to become an obstacle instead of an asset in your planning process.

November 13, 2018

When preparing the implementation of a planning and forecasting system I am often asked if we can just take the existing spreadsheet solution and squeeze this into the new system. Invariably my answer is: Yes, we can do this, but we should not. Why?

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