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Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012
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Driver-Based planning - ASMI Budget & Forecasting Summit - Boston - Presented June 22, 2012

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The informal working title of this presentation was, "Get out of your spreadsheets and into your business." …

The informal working title of this presentation was, "Get out of your spreadsheets and into your business."

If you remember only one thing from this presentation, remember this:
======================================
By focusing on the big rocks and getting out into your business you can identify your true business drivers and develop a better, driver-based planning process.
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"The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present." - Paul Saffo, Director of the Institute for the Future, Stanford University

Attendees at the conference where this slide deck was presented had the following take aways:

- Enable SWOT on the fly
- Streamline your planning process
- Enable quicker and more meaningful scenario - analysis
- Enable more proactive planning
- Enable a smoother transition to rolling forecasts
- Enable you to take meaningful action on the planning and analysis you do

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  • 1. Achieve Superior Performance through Driver-Based Planning John Sanchez Managing Director The FPA Group American Strategic Management Institute Budgeting & Forecasting Summit Boston, MA – June 22, 2012 © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 2. Mike Tyson on Planning“Everyone has a plan till they get punched in the mouth.” © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 3. About FPA Group © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 4. Get out of your spreadsheets and into your business! © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 5. Session Objectives• Focus On The Big Rocks (80/20 Rule)  Many companies don’t successfully make the transition to driver-based planning because they focus on the wrong things, or too many things• Understand Your Business Drivers – SWOT on the Fly  Do this by wearing different hats  Understand your “Cone of Uncertainty”• Create Your Own Next Steps Action Plan  Develop a game plan to get into the field.  Develop a communication improvement plan.  Communicate what you have learned to your team. You can’t do it alone. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 6. What Is the Current Situation?• Traditional budgeting dominates FP&A today and it takes too long and is ineffective• Too much of FP&A professional’s time is wasted on non value added activities• Not everyone is on the same page about what DBP is• Communication skills are generally lacking in FP&A © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 7. Traditional Budgeting is Widespread Criteria Average Best in Class Firms using spreadsheets 67% -- Use of budgeting applications 7% 100% Use of Driver-Based Planning -- 6% Best in Class companies are 2.25 times as likely as laggard companies to have the ability to incorporate business drivers into forecasting processes.Source: Adaptive Planning; T. Canace – 2010 Wake Forest School of Business; & Ventana Research (2009) © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 8. What tool do you use today? Other 2% Most companies ERP 4% still use Excel!!! SBA (1) 7% CRM 20% Excel 67% 0% 10% 20% 30% 40% 50% 60% 70% 80%Source: Institute of Management AccountantsNote: (1) Spreadsheet Budget Applications © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 9. How Many of Us Treat Spreadsheets Like a Swiss Army Knife? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 10. Which tool would you rather use? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 11. Current Practices are Slow and Problematic Duration of Budgeting  Overall, 56% report 3+ How long do you expect your months budgeting process will take?  Larger companies take longer: 6 months or more 10% •69% of companies with 5 months 6% 100+ employees take 3+ 4 months 14% months 3 months 26% 2 months 26% •78% with 1,000+ employees 1 month or less 19% take 3+ months (and 38% take 4+ months) © Copyright 2012 FPA Group, LLC. All rights reserved.Source: Oct 2009 BPM Forum & Adaptive Planning Survey
  • 12. Everyone Is Not Always On The Same Page “Driver-based planning is a best practice methodology where financial plans are structured using models of underlying business activities.” - Alight white paper “With driver-based planning capabilities, nonfinancial users can enter business and operational drivers, while sophisticated business rules will then calculate their financial impact. - Oracle Hyperion Planning Data Sheet “…driver-based planning — an approach that bases financial forecasts on operational drivers,” - Deloitte, Feb, 2009 “..driver-based planning, in which managers build a structural model, typically using extensive nonfinancial data, to predict sales.” - The Execution Premium, Kaplan and Norton, 2010 © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 13. Time Spent on the Wrong ThingsOverall, not having enough time for analysisis the greatest challenge.For mid-sized & large companies:  48% say they spend “Too much time on the processes vs. analysis  41% say processes “Take too long” © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 14. Business Ignores the 80/20 Rule “ 77% of financial analysts time is NOT spent performing value added analysis” APQCSource: American Productivity and Quality Center – www.apqc.org © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 15. Focus on the Big Rocks © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 16. Big Rocks First © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 17. It Makes a BIG Difference © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 18. Focus on the Big Rocks The only guarantee with respect to budgeting is that the more detailed the budget is, the more wrong it will be. Average number of days the average company devotes per billion dollars in revenue to the budget process in 1998: 25,000 person days In 2010: 20,000 person days Cost of $10 million per billion dollars in revenueFrom: Axson (2010) – The Management Mythbuster © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 19. Focus on the Big RocksSo, how do we find the big rocks so we are focused on the right things? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 20. Lessons from Undercover Boss © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 21. What Can We Learn From Undercover Boss• CEOs on Undercover Boss TV Show consistently fail miserablyat other jobs within their own companies.• They get great new ideas to improve their business frompeople at “front-line” jobs in the company• They find operational breakdowns and develop ways toimprove.• The common thread to all their takeaways is they cameabout as a result of wearing different hats. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 22. How Many Hats Have You Worn © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 23. More Timely Analysis © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 24. C.A.R.s, Toasters & Drive ThrusUnderstanding your business drivers will help you be more aware of how processes affect your business. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 25. Benefits of Better Understanding Your BusinessWhen you understand your business drivers, you arebetter equipped to understand the potential variablesin your plans/forecasts.Understanding the variables enables you to anticipatescenarios to plan for. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 26. Why Do We Make Plans? The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present.- Paul Saffo, Director, Institute for the Future, Stanford University © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 27. Cone of UncertaintyThe concept of the cone of uncertaintyrepresents potential variations in our forecast.These variations are potential scenarios to planfor.By getting out from behind our desks we canlearn more about what affects our forecasts andwhat potential scenarios to plan for. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 28. Cone of UncertaintyWith forecasting hurricanes, as the forecast goesout in time, the exact location of the hurricane becomes less certain. Does this sound like planning we do? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 29. Too Much Focus on One the Wrong Thing © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 30. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 31. Communicating Plans is Critical © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 32. How Do You Communicate?A simple experiment: Punctuate this sentence.Woman without her man is nothing. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 33. How Do You Communicate? A simple experimentThe men wrote:“Woman, without her man, is nothing.”The women wrote:“Woman: Without her, man is nothing.” © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 34. We Spend Lots of Time Communicating Make it Count Some experts have estimated that the average business executive spends 75% to 80% of the time communicating, about 45 minutes of every hour.Source: Business Outlook, http://depts.washington.edu/mbaclub/businesscomm/system/files/whycommunicate.pdf © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 35. How Do You Communicate Your Plan Process? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 36. What’s In It For You• Enable SWOT on the fly• Streamline your planning process• Enable quicker and more meaningful scenario analysis• Enable more proactive planning• Enable a smoother transition to rolling forecasts• Enable you to take meaningful action on the planning and analysis you do © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 37. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 38. Budgeting vs. Planning Planning and budgeting are two separate functions.Budgeting focuses on controlling spending to ensure the company hasenough income and cash to operate. It’s about not failing.Planning focuses on “things” (headcount, units produced, sales calls,etc).While budgeting is about money, the purpose of planning is to figureout how a company can best implement its strategy and achieve itsobjectives. It’s about succeeding. - Robert Kugel, Ventana Research © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 39. Prediction vs. ForecastingPrediction is concerned with future certainty; forecasting looksat how hidden currents in the present signal possible changes indirection for companies, societies, or the world at large.Whether a specific forecast actually turns out to be accurate isonly part of the picture—even a broken clock is right twice aday. - Paul Saffo, Director, Institute for the Future, Stanford University © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 40. Everyone Is Not Always On The Same Page © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 41. Let’s Compare Traditional Budgeting Driver-Based Planning- Creates a fixed plan: The - Generate asBudget automatically as possible- Sets limits on spending a financial plan consistent- Attempts to hold people with the business planaccountable for financial -Disaggregated approach:results unit-rate-amount vs- Line-item budgeting financial impact of the(from your COA) activity © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 42. Where Are You?Do you have a dedicated budgeting application? Do you still use Excel? Do you use both? If you use both, why? Do you already use driver-based planning? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 43. Why Do We Plan? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 44. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 45. Why Driver-Based PlanningThe point in creating a driver-based model is not toproduce one that is overly detailed (say, one thatmimics the chart of accounts) and/or complex.To make such a model accurate and actionable,planners must focus on key performance drivers …which are the most important determinants ofrevenues and costs across all business functions andwhich draw the connections between them. – VentanaResearch © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 46. Remember the 80/20 RuleThe chart of accounts is probably not the best starting point. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 47. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 48. Characteristics of Driver-Based PlanningData should integrate the operational elements of thebusiness, not just financial data from the G/L.- Revenue drivers: units, customers, transactions- Operational drivers: production, service levels, manhours, cost activity © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 49. Examples of Business DriversFinancial Drivers Non-Financial Drivers• Price • Call Volume• Volume •Employee turnover• Margin • Service Level:• COGS - % of orders fulfilled• AR Days - % of orders delivered• AP Days on time• Inventory Days - % returned product• DSO’s • Capacity employed• ITO © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 50. Driver Modeling Check List•Modeling supports operational activity drivers: •Specify activity driver units •Specify activity driver rates• Apply the 80/20 Rule for Planning inputs: 1000+ static inputs = 80% data gathering & 20% analysis (traditional budgeting) vs. 20+ drivers = 20% data gathering & 80% analysis (dynamic forecasting/planning) Which one would you rather work on? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 51. How many driver levels can be used?1. Revenue = Volume x Price 2. Volume = Category Growth x Share 3. Share = Base Volume Share + Incremental Volume Share• This will depend on having good sources of data.• Don’t expand into the theoretical if there is no data to support it.• Avoid complexity by adding variables if they do not provide analytical benefit. If it does’t improve your plan/forecast, don’t use it. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 52. Driver Modeling ExampleNumber of # of Active Monthly Annualized Seasonal Average Card Activity Card Spending Billing Factor Revenues X12 Holders Holders •# of Card Holders • Demographics • Market Penetration • Activity • Promotions • Substitutes • Average Spending - $ • Income • Credit limits • Seasonality © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 53. Driver Modeling Example New # of CallsProducts By Type Sold Service Peak Person Average volume / Call Length Hours Service Hours TargetsInstalled Required Required Don’t Product forget Base about quality •# of Calls • New Products Sold • Installed Product Base • Type of call (warranty, tech support, training, etc.) • Capacity Requirements • Average Call Length • Service Targets: < 30 sec. • Peak Volume Call © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 54. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 55. Before You Start, Ask Yourself These QuestionsDo I need to make a change? • People – New Employees, Consultants, both • New process(es) • New tool(s) • More/better/different training • Something else © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 56. Processes - Remember C.A.R.s, Toasters & Drive ThrusUnderstanding your business drivers will help you be more aware of how processes affect your business. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 57. People and TrainingThese may go hand in hand in yourorganization.•Do you need new/different people on yourteam?•Do your people simply lack training? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 58. Is Driver-Based Planning for Me?The two most dreaded questions:1.“Where did that number come from?”2. “Why did that number change?” If you were better able to answer these questions would that be an improvement? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 59. How fast can you handle what if questions?If you could handle scenario analysis better/quicker would that be an improvement? All rights reserved. © Copyright 2012 FPA Group, LLC.
  • 60. Do You Want to Transition to Rolling Forecasts? Year n | Year n +1 Q1 Q2 Q3 Q4 | Q1 Q2 Q3 Q4 | Plan | Your next | year’s plan 1st Outlook | will be ready! | 2nd Outlook | | 3rd Outlook | Actuals ForecastDriver-Based Planning Can Ease the Transition to Rolling Forecasts © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 61. What are common hurdles in implementing Driver-Based Planning?• Lack of analytical capability toabstract the essence of acompany business model into adriver-based planning structure• Lack of organizationalalignment around the entireframework  understand roles  require alignment of rates and drivers to be used © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 62. © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 63. Session Summary• Focus on the Big Rocks.  Many companies don’t successfully make the transition to driver- based planning because they focus on the wrong things, or too many things.• Learn about the true drivers of your business.  Do this by wearing different hats.• What do we need to change to get better at this?  People, processes, tools, training? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 64. Key Points Summary Understand YourBIG Rocks Drivers First What Needs to Change? © Copyright 2012 FPA Group, LLC. All rights reserved.
  • 65. John Sanchez Managing Director Office: 704-970-7146E-mail: jsanchez@thefpagroup.com Website: www.thefpagroup.com Charlotte, North Carolina © Copyright 2012 FPA Group, LLC. All rights reserved.

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