FP&A: the evolution of driver-based planning

Driver-based planning (DBP) is an essential part of the financial planning and analysis (FP&A) armoury, enabling organisations – ranging from the smallest non-profit to a multinational – to become quicker, more dynamic and agile in their planning and in responding to internal and external changes in the business environment.

DBP was the focus on the London FP&A Board of senior practitioners’ most recent meeting, sponsored by Michael Page and Metapraxis, which was held on the eve of the landmark UK referendum on its continued membership of the European Union (EU). Given that the result early on June 24 confounded many expectations, the benefits of DBP may have been evident to many companies forced to reassess both their short-term and longer-term business plans.

This article outlines the main conclusions and recommendations on DBP that were generated by the London FP&A Board.

Key business drivers

Key drivers have a major impact on organisational performance and value. Typically, any organisation will have hundreds of business drivers. However, in order to manage organizational performance it is important to identify not more than 20 key drivers. Use the Pareto principle (named after its developer, Itaian economist Vilfredo Pareto): identify those 20% of drivers that generate 80% of the organisational performance.

Sensitivity analysis is one of the methods to discover the key drivers. This important process is essential for any DBP process as it helps not only to identify the key drivers, but also to monitor and manage them.

The time concept of drivers should not be forgotten: over time new drivers may appear and older ones disappear. Monitoring the dynamics and sensitivity of the drivers will help organisations in maintaining a quick, flexible and dynamic planning process.

Good business drivers should be measurable. It is also important to identify both external and internal drivers. Typically, internal drivers can be managed, but external ones cannot and thus require a different approach. Playing various scenarios against a set of key business drivers is a good way to incorporate risk management into the planning process.

In order to identify internal and external business drivers, collaboration with business stakeholders is essential. This is where FP&A’s business partnering role should be used in full.

The FP&A Board summarised the key features of effective business drivers as follows: They should be
• selected carefully (using the 20%-80% principle).
• cascaded from strategy to operation.
• measurable and easily obtainable.
• understood at a glance, with the ability to drive consensus.
• fundamental and able to ensure context.
• both internal and external.
• ideally should be benchmarked to the industry.

What are the key strengths of DBP?

They include the following:

• DBP is customised.
• It provides a consistency of focus across the entire organisation. This is particularly valuable when individual managers may hold differing views on what its key business drivers are.
• It enables better alignment across business and helps to harmonise both top-down and bottom-processes.
• It can be quickly produced and ‘tweaked’ to assist in business scenario analysis.
• It enables collaborative planning process and drives consensus across the business.

As the Danish trade, shipping and energy conglomerate AP Moller Maersk recently attested, DBP is also an essential tool for delving down into an organisation’s business model, and becomes even more powerful when used in combination with rolling forecasting.

Essentials of DBP

DBP is a main factor for better decision making, which begins with the task of deciding where the organisation is going and how it wishes to reach its planned destination. The most essential drivers are then identified. These are both the internal and external drivers that help drive the business and these are then used to build the plan.

For financial professionals, charting a course for the organisation’s ultimate goal has much in common with steering a ship. A number of the levers produce little impact, so the process is one of selecting those levers that achieve the right movement and keep the vessel on course. The process is also one where typically 90% of time will be devoted to crunching the numbers and only 10% in analysing the resulting data.

Yet ultimately it is worth the effort. Identifying the organisation’s main operational drivers or activities enables financial forecasts to be made with more confidence and robustness. Better decision making results from better alignment of decision makers across the business, which can be quick, flexible and dynamic. Also, bearing in mind how recent events have demonstrated the unpredictability of events, DBP provides the ability to rapidly re-forecast with minimal effort and re-engineer the current situation.

Case study: DBP in action at Cafcass

Julie Brown is director of resources at the UK social services organisation Cafcass – or the Children and Family Court Advisory and Support Service to give its full title. She outlined to members at the recent London FP&A Board meeting that the role of Cafcass, which was founded in 2001, is to safeguard and promote the welfare of children, with 116,000 cases handled last year.

The service provides advice for family courts, makes provision for children to be represented and provides information, advice and support to those children and their families. Sponsored by the Ministry of Justice (MOJ) and with an annual budget of £114m – of which 93% is allocated to frontline activities – Cafcass employs 1,800 staff across its 40 UK offices, with one in five working flexible hours rather than full-time employees.

Brown outlined key questions that her department must consider in its financial planning:

• What is the most realistic forecast for spending in the current financial year and what is its variance with the actual budget?
• How can that variance be controlled?
• What level of uncommitted funds is appropriate?
• What are the financial planning trends over both the medium term and long term?

The organisation’s budget holders must regularly also check whether there is sufficient funding for the work that Cafcass undertakes, while as its sponsor the MOJ must decide the correct level of funding to allocate.

From these considerations, Cafcass devises a detailed one-year plan while also considering headline changes over the coming two to three years. These will reflect its main drivers of demand and drivers of spending respectively.

Drivers of demand include rates of teenage pregnancy, unemployment levels, the conviction rate for domestic abuse offences, migration levels, divorce numbers and the number of children under the age of four years old. Drivers of spending include case volumes and throughput, the average number of hours devoted to each case and the stage it has reached, the workload of individual practitioners, the proportion of the workforce that is fully employed and those working flexible hours, and fixed costs.

“It’s important to ensure that the workload matches staff availability and that we have enough individuals available to allocate to all of our cases,” said Brown. “This means constantly recalibrating the workload of individual managers, helped by an online dashboard that each of them uses.”

This tool is also used in future scenario planning to calculate what funding level would be needed and to provide indicative numbers to government policymakers. “We produce a written analysis that combines elements of the current data and future projections into a single document,” said Brown. “That’s good for anyone who prefers to see a written report rather than a dashboard.”

Defining the drivers

Advanced DBP is based partly on simplicity. An organisation will usually have numerous key performance indicators (KPIs) but not all of them will be a driver in the model. For most, the macroeconomic environment will be a key driver; another determining factor is that a driver is typically an operating activity that can be measured.

To define the key drivers the following steps could be used:

• Go through the financial statements – ask what drives each item.
• Collaborate with all your key functions in order to derive the key drivers list.
• Are there internal and external drivers, financial and non-financial?
• Can we connect them to anything else?
• Shorten the list to make it manageable. Use sensitivity analysis to define the most important drivers.
• Cascade drivers from strategy to operation.
• Ensure that they are measurable and easily obtainable.
• Identify both internal and external drivers.
• Benchmark them to the sector/industry the organisation operates in -although if best-in-class it may prefer not to benchmark.
• Keep them under regular review.

Recommendations and conclusion

Effective DBP can be achieved through five relatively simple strategies: automating any data collections, involving more employees in contributing smaller amounts of data but more frequently; using drivers as the language of performance, securing sponsorship for change from the board, and delivering DBP incrementally via phases.

Ultimately DBP is an essential part of modern FP&A and should be an integrated process across the organisation. Strategic, Business and Operational plans should be driven by the same key drivers.purposes. For maximum efficiency between 10 and 20 key drivers should be identified and selected. It is then the responsibility of FP&A for managing those drivers.

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