Daniele Tedesco

Daniele Tedesco is a former CFO and investment banker and has successfully led a vast number of M&A transactions (buy- and sell-side) as well as driven value-based management approaches in different companies.

He has more than 15 years’ experience in corporate finance and was the head of Technology Equity Research of a large Swiss bank.

 

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Last Chance for Corporate Planning

More than 15 years ago, the Harvard Business Review had already declared corporate planning and budgeting as all but dead. “Corporate budgeting is a joke, and everyone knows it,” the business magazine wrote in 2001. The polarizing article generated an enormous reaction. However, little has changed since then. To this day, planning is perhaps the greatest challenge that companies face. In this blog we reveal how companies can make their planning processes more efficient by applying more modern methods.  

The Unified Performance Management Approach

While potential solutions for overcoming corporate planning frustrations are the subject of lively debate, there is a general consensus as to the causes of the problem: Planning takes up too much time, ties up too many resources and data quickly becomes obsolete. The consequence: Most companies are not satisfied with their own planning processes. So, it's high time to brighten the mood in finance departments.

We are dedicating the first part of our blog series to a method that is better able than any other of combining all relevant business segments in a comprehensive planning system: unified performance management, or UPM. This model consists of strategic planning, medium-term planning, budgeting and forecasting. Essentially, UPM is implemented by the following five steps:

  1. Strategic planning: First, a business model is developed in consideration of the corporate strategy. It must comprise the key value drivers discussed in the section above.
  2. Performance measurement: In this step, the relevant key performance indicators (KPIs) are defined to measure how successfully the company is pursuing its objectives. Note: KPIs should be defined which provide the best insight into daily business. Unfortunately, these KPIs are not always the easiest ones to measure. Selecting the wrong KPIs is one of the most common mistakes companies make when it comes to measuring their performance.
  3. Business analytics and modeling: Next, a company uses the data obtained in step 2 in order to analyze its own performance. The aim here is to establish a solid knowledge base so that well-founded decisions can be made later. In the age of big data, many companies have collected a vast amount of different data. This can represent both an opportunity and a risk. Companies that can positively leverage this data volume have a competitive advantage.
  4. Measuring performance: Now for the tricky part... The insight gained into the company’s performance must be integrated into management reports and dashboards to derive an action plan. Performance measurement and analyses are only meaningful if the necessary conclusions are drawn and changes are made.
  5. Corporate culture: The deciding factor for achieving positive results in the implementation of efficient planning processes is the direct involvement of the employees who are immediately impacted by the changes. This is a question of corporate culture. It is the job of management to mend any potential rift between the upper echelon and employees at the front line.

Nine steps for efficient corporate planning

Now for the tricky part. Leading planning and budgeting away from the brink naturally requires action. Efficient implementation of unified performance management requires structured processes and systems. Here are some practical instructions for achieving this:

  1. Integration: Strategic planning is connected to medium-term planning, budgeting and forecasting. Budget figures are derived from the strategic guidelines for this purpose. There cannot be any inconsistencies, for example from differences between strategic and budgeted ROI targets. 
  2. Harmonizing the data base and reference values: Because many companies have a heterogeneous ERP environment that has evolved over the years, they struggle with inconsistent data bases. A uniform, harmonized data base is the first essential step towards efficient planning. Metadata that are harmonized Group-wide (e.g. charts of accounts and cost-center, customer and product hierarchies) and a globally harmonized data base of facts build the foundation for efficient planning and generate reference values for driver-based planning.
  3. Reducing complexity: Reduced complexity, i.e. less detailed planning, clearer planning forms and increased automation through IT make up the third fundamental component of efficient planning. Financial controllers often tend to buy into the common belief that greater detail results in a higher level of planning accuracy. In fact the opposite is true, as the forecast error grows exponentially with a large number of planning events and the level of inaccuracy increases significantly as a result. Moreover, the time and effort required for planning grows disproportionately without any benefit. One of the keys to success is the ability to dispel these myths within a company and to promote a culture of planning the essentials. 
  4. Generally valid assumptions: A planning process traditionally begins with a meeting of the decision-makers at which the planning assumptions are discussed and defined. These are mainly external developments that the company anticipates and which represent basic assumptions for all business segments. Typical general planning assumptions include the expected economic trend in the relevant regions, market developments, salary increases and projected developments in relevant commodity prices or exchange rates.
  5. Continuity: The criticism that traditional budgeting models lack flexibility is countered with rolling forecasts. In practice, this means that planning is carried out on a rolling basis over a horizon of five to eight quarters.
  6. Focus on key value drivers: An important step on the path to efficient corporate planning is establishing a clear focus on the variables that have the greatest impact on overall success: key value drivers. Key value drivers should be defined in such a way that they make a contribution towards achieving the company’s overall strategy and have a direct, positive impact on the cash flow. Many companies get lost in unnecessary details during the planning process. However, prioritization and efficiency go hand in hand. Companies that take the time to carefully analyze key value drivers have already come a giant step closer to efficient planning.
  7. Target setting: Benchmarking plays a deciding role when it comes to target setting. Targets should be set based on clear benchmarks. Benchmarks can be internal in nature – the best branch, the best business unit – or they can be derived from the results of competition. They represent relative goals, for example achieving greater market growth and thus performing better.
  8. User experience: The times are long gone when users were willing to complete interminable Excel lists and data was aggregated and analyzed in grueling night work. With the rise of highly user-friendly mobile apps, the standards for business applications have also increased. Today’s users want modern, web-based planning solutions that allow for collaboration and easy entry and analysis. Nowadays, self-service analysis and independence from IT experts are a necessity in order to be able to independently design planning applications.
  9. Workflow: Collaboration and cooperation are at the core of every planning process. Specifically, this means that companies must align their resources, objectives and approach in order to achieve common objectives. Thanks to a well-structured workflow process that integrates both top-down and bottom-up aspects into planning, objectives can be better aligned and organizational units synchronized.
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Has zero-based budgeting been given a second life?

budgetingGrowth challenges, cost pressure and new competition from the Far East – the challenges for companies seldom come alone. CFOs are therefore faced with a frantic fall of planning. Above all, there is currently a high demand for new methods of efficient and flexible budgeting. An old trend that dates back to the US in the 1970s is reemerging, seemingly right on cue. Back then, Peter Phyrr, a former manager at Texas Instruments, came up with the idea of zero-based budgeting and successfully implemented it in his company.

Start from zero

In zero-based budgeting, the budget is recalculated from scratch every year. All expenditures for the next period must be justified anew. In other words, the planning stage always starts from zero and assumes that every function must be regularly reviewed with regard to its cost and benefit – unlike most common processes in which planning always begins with the current budget. The advantages are obvious: The various budget items are calculated based on the immediate needs of the different departments for the following year and not simply based blindly on the previous year’s budget or expense level. This enables inefficient and rigid structures to be dismantled. The objective is to thoroughly review and justify every planned expenditure so that all budget items are only released and approved if they are indeed required to the given extent.

Sustainable cost management

It may sound simple, but it's actually quite profound. Zero-based budgeting involves far more than simply creating a budget from scratch. ZBB is a circular process with the clear objective of establishing sustainable cost management within the company. This is facilitated by the fact that ZBB is applicable to every type of cost. Whether it be investments, operating expenses, marketing costs or sales expenditures – all corporate items can be rebalanced from scratch. At the same time, a method dating back to the 1970s may obviously have difficulty depicting the complexities of today’s business world. Modern solutions are required so that the ZBB process can be implemented in an efficient, transparent and effective manner. 

Identifying and justifying expenses – a specific example

Let us assume a company in the engineering industry implements zero-based budgeting. This process requires closer scrutiny of costs in the company‘s manufacturing department. The CFO subsequently realizes that the costs of certain components that are used in its end products and have been outsourced to another manufacturer, increase by 5% every year. However, the company has the know-how and technology to manufacture these components in-house. After carefully weighing the positives and negatives, the company determines that it can produce the components less expensively than its external supplier and that it should do so internally.
In the past, the company may have in this case simply blindly increased the budget for purchasing the corresponding components and cleverly disguised the increase. However, by applying zero-based budgeting, it was able to identify potential alternatives and assess whether it would be better to manufacture the parts itself. Cost drivers within departments cannot be identified using the traditional budgeting methods. In contrast, ZBB is a detailed process that aims to unmask and justify expenses. It is important that the costs of the ZBB process themselves always be weighed against the savings, as zero-based budgeting usually involves more time and effort.

Planning tools as the basis for ZBB

It only makes sense to implement ZBB if the entire process can be executed efficiently, transparently and effectively. Planning solutions provide the basis for this, as such analysis tools can be used to identify key demand and cost drivers. These value drivers allow detailed bottom-up sub-plans to be drawn up for sales, material costs, personnel costs, operating expenses and any other relevant expense items that ultimately result in integrated planning. This enables a holistic view of the income statement, balance sheet and cash flow, which are based on ZBB methods and therefore efficiently allocate costs.


 

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The next step of the Australian FP&A Board led us to meet in Melbourne with about 30 FP&A practitioners attending and debating about challenges, trends and best-practices in Financial Planning and Analysis.  We would like to share some of the insights from the event in short summarized form. The topic of this board was “FP&A Analytical Transformation”.

Author's Articles

August 29, 2018

The next step of the Australian FP&A Board led us to meet in Melbourne with about 30 FP&A practitioners attending and debating about challenges, trends and best-practices in Financial Planning and Analysis.  We would like to share some of the insights from the event in short summarized form. The topic of this board was “FP&A Analytical Transformation”.

August 27, 2018
FP&A Tags:

​Another successful FP&A Board was held in Sydney on 21st August 2018, where more than 50 FP&A practitioners attended and discussed their challenges and trends in Financial Planning and Analysis.

August 21, 2018

More than 15 years ago, the Harvard Business Review had already declared corporate planning and budgeting as all but dead. “Corporate budgeting is a joke, and everyone knows it,” the business magazine wrote in 2001. The polarizing article generated an enormous reaction. However, little has changed since then.

February 8, 2018

As the year slowly draws to a close, CFOs also start their annual haggling over costly budget items. Various challenges force companies to dismantle old, cost-inefficient structures. In looking for new budgeting options, a well-known but controversial method is moving back into the limelight: zero-based budgeting (ZBB).