The fourth Dubai FP&A Club, held on 17 December 2014, was facilitated by Teddy Murphy, chief executive of global forecasting, planning and analysis consultancy MIAGEN – which has offices in Dublin, London and Qatar’s capital city of Doha – and myself.
Murphy began by noting that the amount of non-value adding activities FP&A departments have to undertake comprises the majority of their time. After consolidating data, reconciling systems and finding “one picture of the truth” from a number of conflicting data sources, which all generate a huge number of reports that are probably are not needed, the amount of time left on valuable analysis is roughly no more than 10-20%.
In order to reduce the value of non-value adding activities, planning and forecasting models should be based on drivers.
What is Driver-Based Planning?
Driver-based planning is the process of using operational drivers of performance to plan, rather than a one-dimensional value. After the FP&A team identifies the organisation’s key business drivers, it can test those factors against a number of variables and create a forecast. The resulting business plan will likely be dynamic, agile and easily communicated, resulting in a more responsive, aligned and aware organisation.
There are a number of key benefits to driver-based planning, including:
- Quick, flexible and dynamic decision-making.
- High quality forecasting/planning.
- An unbiased analytics culture.
- Quality collaborative planning.
- Improved analytics.
- Better strategic planning.
Murphy offered the example of Australia’s Ramsay Health Care, which also provides private healthcare in the UK, France, Indonesia and Malaysia. The group was undergoing growth; therefore looking at previous history was not relevant to it. MIAGEN determined what Ramsay’s drivers were and connected them to the market demand; for example demand for hip operations which determined the number of consultants required, the number of x-ray hours needed, the number of nursing hours required and the number of bed nights and the related costs for each in comparison to the UK’s National Health Service (NHS) rate for each operation. Planning by drivers is more related to the future activity of the organisation than its historic activity.
Driver-based planning and modern FP&A systems also transformed DHL’s FP&A process to a quick, flexible and dynamic one said Andrew May, CFO of DHL Europe. The logistics provider’s budget had become obsolete, and it was using error-prone Excel templates. Overall FP&A had become a very inefficient and slow process. To fix the problem DHL created a rolling forecast, based on actuals and drivers that can be easily validated and interpreted by finance department. The result was a faster, better and unified approach.
“Now we plan based on the Key Drivers of our Business and as a result are more agile,” added May.
Many popular FP&A processes that are easier to implement with driver-based models:
- On-demand planning and forecasting.
- Scenario planning.
- Risk-adjusted planning.
- Flexible budgeting.
- Rolling forecasts.
- Participative planning.
Driver-based planning can also help to remove bias from FP&A process. Projects and initiatives will be based on clear assumptions, and target negotiations will be challenged through numbers.
Of course, it can often be difficult to define an organisation’s drivers. Murphy recommends that the FP&A team go through the individual profit and loss (P&L) items, and ask what drives each one. Once drivers are identified, see if they can be connected to anything else. Then put them on your P&L and shorten it.
Conclusions and Recommendations
Murphy closed by providing some pointers on implementing driver-based planning. Organisations should:
- Automate any data collection.
- Get more people involved in contributing less data, but more frequently.
- Use drivers as the language of performance.
- Get sponsorship for change from the top of the organisation.
- Deliver in phases, bit-by-bit.
- Know the desired outcome; an agile, aligned organisation.
- Keep the number of drivers at the reasonable level (e.g. around 10-15).
- Not implement the system before fully understanding your drivers.
- Educate your people.
About the Meeting
Senior members from local and multinational companies attended the Dubai meeting, including Exeed Industries, MetLife, Majid Al Futtaim Ventures, Cedar White, Bradley Consulting, Habtoor Leighton Group, Redtag, Dabur International Limited, ANCG, Bristol Myers Squibb, Apparel Group and AIG.
More than 1,000 people from over 40 countries have registered for the Association for Financial Professionals (AFP) Corporate FP&A Professional Certification. Etihad Airways has partnered with AFP on the FP&A exams in the Middle East, and they are both planning a one-day FP&A best practice forum in Abu Dhabi for the end of March.
The next Dubai FP&A Club will be held on May 26. Also in May, the AFP is holding an FP&A Leadership Summit in Amsterdam.
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