The fourth meeting of the Stockholm FP&A Club, held in the Swedish capital on January 28, attracted a diverse group of professionals. Among the participants were senior FP&A and business control practitioners from ‘daily deals’ website Groupon, engineering group Sandvik, chemicals to adhesives producer Henkel, financial groups SEB and Siemens Financial Services, IT service company Tieto and Coca-Cola Enterprises and others. However, many smaller businesses were also represented, including a local taxi service.
The event, sponsored by enterprise performance management software specialist Tidemark, kicked off with a brief discussion on the importance of certification in the education and professional development of FP&A/business control individuals. The main topic of the evening – driver-based planning – got underway.
This topic was also in the spotlight at the Dubai FP&A Club’s December 2014 meeting and an outline of what driver-based planning consists of was included in gtnews’s recent report. On this occasion Larysa Melnychuk, the FP&A Club’s managing director focused on the importance to organisations of marrying it to an integrated approach. As she noted, there are usually three basic planning processes: strategic, business and operational.
Figure 1: The Three Basic Planning Processes
Very often the strategic plan is devised well ahead of both the operational and business plan and they are not properly connected up. An integrated planning process harmonises the three, through key drivers.
So achieving value from driver-based planning requires an integrated platform, where users can see the harmonised forecast/plan across the company. Although is possible to create a model in Excel, a dedicated FP&A system helps to maximise the quality and value of the planning and forecasting process.
It was an interesting discussion that included educational and networking element.
An alternative view of the integrated driver-based planning process, as per Figure 2 below, reviews them top down and bottom up; harmonising them through key drivers:
Figure 2: Two Other Main Processes
Among the reasons why the top-down, bottom-up strategy is so rarely executed is the difficulty of separating these two processes in time, in the tools used for planning and due to the disconnection that usually exists with the assumptions. However, when designed and used properly, modern FP&A systems can help to connect the drivers. Plans can then adjust automatically, if and when the assumptions or drivers change.
However, attendees at the Stockholm session asked how the strategy can be implemented by major multinational corporations (MNCs), with hundreds of offices around the globe. There was general agreement that smaller companies generally fare better in introducing driver-based planning, as it’s more of a challenge for larger organisations with numerous departments.
The hard answer is that it’s no easy task, but one that nonetheless should still be attempted. It involves educating the workforce, investment in technology and tools, and using both effectively. It’s a price that many companies will have to undertake in the near future if they are to make their planning processes value-adding.
In return for this investment, the benefits of driver-based planning include: a better alignment across the business, improved collaborative planning, a more insightful decision-making process and the ability to quick revise forecasts with minimal time and effort.
Another major benefit is that driver-based planning can help to make the planning process – and the organisation’s culture – more analytical and therefore less biased and political. The decision-making process will become quick, flexible and dynamic. Driver-based planning is also important for the implementation of rolling forecasts.
Focusing on the Essentials
When creating driver-based planning models the aim is simplicity, which means avoiding the tendency to produce one based on hundreds of connected drivers. Over-complexity will create “black boxes” that are neither manageable nor effective. To ensure the model is accurate and actionable, the FP&A practitioner should concentrate on key business drivers. These could be internal or external, financial or non-financial.
So how many drivers should you limit your focus to, given there could be several hundred within an organisation? There will usually be a small number of top-end ones, say between 10 and 20, that represent 20% but which collectively describe 80% of the total business. This is popularly known as the Pareto Principle (After Italian Economist Vilfredo Pareto), or the ‘80/20 rule’.
How does the FP&A practitioner identify the minimum set of drivers needed in order to manage our business effectively and efficiently? Using sensitivity analysis helps prioritise the main drivers. How sensitive is your organisation’s return on assets and return on investment (ROA/ROI) to the change in these drivers? The most sensitive are the key drivers and these will change over time, as new drivers are discovered and older ones disappear.
Determining these most effective business drivers is the most difficult part of the FP&A professional’s job – and also the most essential. The main considerations in this task are:
- The key drivers should be selected carefully.
- They should be cascaded from strategy to operation.
- They must be measurable and easily obtainable.
- They should linked to performance measures that reflect the organisation’s strategic objectives.
- Ideally, they should be benchmarked to the industry.
When defining the key drivers, also take into consideration such factors as economies of scale and possible changes to the drivers within the timing of your planning process. Also think about the rate of refresh – how often should the drivers be updated? Regular updating could, in some organisations, mean monthly or even weekly review and reassessment. The airline industry is a prime example of an industry where the key drivers are constantly changing.
The next scheduled meeting is for the Amsterdam branch of the FP&A Club. This event will be held on Tuesday February 25, when the topic will be the ‘Beyond Budgeting Philosophy’.
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