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Line managers and finance staffs are frustrated by the inadequacies of spread-
        sheet based planning systems for de...
Driver-Based Planning for Budgets and Forecasting

   more accurate than the last. Revising her           Staffing plans ...
Driver-Based Planning for Budgets and Forecasting

Unlike budgeting, quarterly updates don’t             cision usefulnes...
Driver-Based Planning for Budgets and Forecasting

   from marketing’s forecast of new cus-            Second, when using...
Driver-Based Planning for Budgets and Forecasting

The reasons are two: a) formulas and data
relationships for pervasive ...
Driver-Based Planning for Budgets and Forecasting

                                                                Plan B...
Driver-Based Planning for Budgets and Forecasting

Here’s the summary statement about im-                         How wou...
Driver-Based Planning for Budgets and Forecasting

CAUSAL ANALYSIS: Alight Planning’s causal interface lets users compute ...
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Driver Based Planning


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Learn a best practice methodology where financial plans incorporate assumptions about business activities which are modeled to drive financial data such as revenue projections, headcount, spending and capital requirements.

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Driver Based Planning

  1. 1. Line managers and finance staffs are frustrated by the inadequacies of spread- sheet based planning systems for delivering useful budgets and rolling fore- casts. A major problem is the disconnect between the operational elements of a business and financial plans. In particular, managers have difficulty forecast- ing headcount and expenses because spreadsheet templates do not contain models that allow them to relate their spending to marketing forecasts or other operating activities. Finance staff who roll up the numbers from the managers have very little backup for evaluating the reasonableness of submissions or for answering questions from the executive staff. What’s missing is driver-based planning, a best practice methodology where financial plans incorporate assumptions about business activities which are modeled to drive financial data such as revenue projections, headcount, spend- ing and capital requirements. With driver-based planning, managers are em- powered to do better budgeting and, in particular, improve the accuracy and decision making usefulness of rolling forecasts. Alight Planning is a multi-user software package that incorporates architec- tures, modeling tools and analytics that make driver-based planning accessible to companies that want to improve their budgeting, forecasting and decision making processes. Driver-Based Planning for Budgets & Forecasting By Rand Heer Helen Marston, Call Center Operations Manager for Whitehorse Corp., a $300 mil- lion manufacturer of electronic equipment, is reworking the Excel template for her de- partment’s expenses. Each quarter Whitehorse updates its busi- ness forecasts. Key managers such as Helen revise spending plans for the balance of the year based on the latest marketing forecasts. The process is time consuming and involves a lot of guesswork. In the past two weeks Helen has been given three different forecasts for unit sales, new products and new customer installations, each version supposedly © 2007 by Alight LLC. All rights reserved.
  2. 2. Driver-Based Planning for Budgets and Forecasting more accurate than the last. Revising her Staffing plans for sales reps are inconsis- numbers takes three hours each time. tent. In four regions, headcount doesn’t change for any of the three marketing To update the numbers, Helen pours forecasts—i.e. nobody paid attention, through operating statistics for her de- perhaps for good reason. For other re- partment which are in a separate data- gions, salaries and benefits vary, but base. Metrics include number of opera- other headcount related expenses that in tors, number of customers calling, calls theory should be impacted by new per day, etc. Helen has no specific pro- hires, such as training and recruitment cedure for tying out this operating his- fees, are unchanged. Peter rolls the tory to the marketing forecasts. numbers into the forecast knowing that Helen enters headcount projections into expenses are probably understated. an Excel template which updates sala- “Here we go again,” Peter says as he enters ries and benefits. She does so with a lot the board room to pre- of guessing; she’s glad when the exer- sent the forecast up- cise is over; she hasn’t learned anything. date to the executive But her job is done for this round. staff. The numbers add Peter Forrester, Financial Planning Manager up on the PowerPoint for Whitehorse, is studying the Excel tem- slides, but Peter has an plates department managers have submit- incomplete under- ted. standing of changes in overhead spending, a The headcount increases Helen forecasts stated focus of the cur- for the Call Center seem low in relation rent reforecast. Many to the latest marketing forecast which times during the review he is asked the two has sales up 20% in the next quarter. dreaded questions: “Where did that number Helen provides no backup or justifica- come from?” and “Why did that number tion. Peter has no special insights either. change?” Sometimes Peter has an answer. He rolls Helen’s numbers into the fore- Other times he says: “I don’t know.” cast. The pattern is reversed for The two most dreaded questions: the Service Center. Harry “Where did that number come from?” Laswell, the manager, forecasts a dramatic and “Why did that number change?” increase in headcount, much higher than the 20% sales increase What’s Missing? Driver-Based Plans would seem to justify. He attaches a Whitehorse recognizes that annual budgets passionate note arguing that service has should be supplemented with forecast up- been understaffed for months and now dates. However, the forecasts are not very is the time to remedy the situation be- accurate, and there is little analysis of un- fore everyone quits. After a heated derlying assumptions, partly because the phone call with Harry, Peter rolls the forecast cycle is squeezed into a tight two Service numbers into the forecast. week time frame after the quarter end close. Page 2
  3. 3. Driver-Based Planning for Budgets and Forecasting Unlike budgeting, quarterly updates don’t cision usefulness of rolling forecasts. Fi- have the luxury of a three month cycle time. nance staff like Peter also have the informa- tion to understand the numbers, negotiate At the operations level, responsible manag- with line managers, and explain assump- ers like Helen and Harry do their best, but tions to higher ups like the executive staff. the process is essentially manual, despite the fact that the spreadsheet-based system Driver Model Fundamentals captures information from the line manag- ers and rolls it up to corporate. The spread- Driver-based planning is about modeling sheet templates do not contain models that concepts. It’s based on the idea (or struc- allow managers to relate their spending ture) that line items within a plan have an plans to the market forecasts. Nor do Helen inherent units/rate/amount architecture and Harry have information systems that that is the basis for linking up activity integrate operational data into the forecast driver and financial relationships. templates. Thinking about driver-based planning us- ing units, rate and amount Driver-based planning is a best practice makes it work. Here are the fundamentals… methodology where financial plans are structured using models of underlying Start by identifying important drivers in a business activities… business. Drivers are typically operating What’s missing at Whitehorse is driver- activities that you can measure— based planning, a best practice methodol- numbers of things such as units of prod- ogy where financial plans—namely budgets uct, customers, installations, deliveries, and rolling forecasts—are structured using transactions, throughput and the like. models of underlying business activities The key word is units: if an activity can that drive financial data. be thought of as units of something, then Driver-based planning incorporates a series it may be part of an activity driver of step-by-step sub-models within an over- model. all financial planning system—e.g. a call Multiple operating activities—i.e. the center sub-model for Helen—that integrate units—may have driver relationships input assumptions about activity levels that between each other that are connected drive revenues, variable headcount and ex- through a conversion rate. For example, penses, and capital that roll up to financial 50% percent of customers who buy a statements for a company. Such company computer also buy a printer. The for- forecasts are the foundation for many ex- mula is: units of computers * 50% = # of ecutive level decisions, allocation of re- printers. 50% is the conversion rate. sources and communications with inves- tors. A unit/rate/amount structure may be applied to a series of line items that are Using driver-based planning, companies linked. Below is a simplified example of like Whitehorse can empower line manag- how an activity model might be con- ers like Helen to do better budgeting and, in structed for Helen’s call center, starting particular, to improve the accuracy and de- Page 3
  4. 4. Driver-Based Planning for Budgets and Forecasting from marketing’s forecast of new cus- Second, when using a driver model, it’s tomers: easy to identify and manage the most im- portant, financially sensitive drivers in the # of New Customers * Calls Per business. The old saying now has meaning: Customer = Total Calls “Don’t manage the dollars, manage the un- Total Calls * Length of Calls In derlying units and rates that cause the dol- Hours = Total Call Hours lars to be spent.” Managers can focus cost reduction and performance improvement Total Call Hours / Operator Utiliza- energies on the most important activities tion % = Operator Hours and processes, knowing a payback is there. That’s what the activity driver model tells Operator Hours / Hours Per Month you. = # of Operators Third, with driver-based planning, true # of Operators * Salary Rate = Op- causal analysis of variances is now possible. erator Salaries When actual financial results differ from Operator Salaries * Payroll Tax Rate plan, it’s a straightforward exercise to iden- = Operator Payroll Taxes tify the operational drivers which caused the variance. In many cases, the analyst can # of Operators * Benefits Rate = Op- segregate financial variances by volume (i.e. erator Benefits units) and rate (i.e. price/cost per unit) im- pacts. Where the underlying unit and rate # of Operators * Cost Per Work- data is available, volume/rate causal analy- station = Operator Workstation As- sis by line item is a powerful analytic tool sets for the finance staff. Once an activity driver model is structured, several With driver-based planning, everyone can important planning and see changes immediately and talk about analysis activities are possi- ble. the assumptions…the playing field is lev- First, rolling forecasts with eled and discussions are more objective. tight turnaround cycles are now feasible and efficient. Line managers Spreadsheets and BPM like Helen can quickly respond to changes in marketing forecasts. Updates to revenue Financial planning managers typically use plans ripple through the activity model spreadsheets to model a few activity driver automatically adjusting variable headcount relationships in budget and forecast and related expenses. Managers spend no templates. The most common and easy to time calculating offline what headcounts implement are driving fringe benefits from should be. Everyone in the plan cycle can headcount and driving payroll taxes from see changes immediately and talk about the salaries. However, true driver-based plan- underlying driver assumptions and im- ning, where revenues or other higher level pacts. The playing field is leveled and dis- activity drivers impact headcount and de- cussions are more objective. partment expenses, is rarely implemented in spreadsheet-based budgeting systems. Page 4
  5. 5. Driver-Based Planning for Budgets and Forecasting The reasons are two: a) formulas and data relationships for pervasive activity models are too complicated to maintain, and/or b) driver-based links do not automatically flow through to workbook templates dis- tributed to line managers for department budgets and forecasting. Support for driver-based planning in soft- ware from business performance manage- ment (BPM) vendors is limited or difficult to implement. In some BPM applications Each line item incorporates data fields for Units, Rate and Amount. URA values may be input assumptions modeling tools are weak—i.e. they do not as indicated by shaded cells, or they make be linked. support a minimum level of modeling and URA values are automatically displayed on reports. linking comparable to spreadsheets. In other BPM applications, modeling and link- ing are more sophisticated, but the inter- faces are technical requiring scripting or programming skills that finance staff do not have or want to learn. Driver-Based Planning with Alight By contrast to spreadsheets and other BPM vendors, Alight Planning is sophisticated multi-user software specifically designed for driver-based planning. Its architecture and modeling interfaces directly support requirements for building robust sub-models anywhere in a financial plan structure—for revenues, headcount, expenses and balance sheet items—with Alight’s modeling interface is based on object-based linking versus cell formulas. You can link the units automatic rollups to financial statements. and rates of a line item to the URA of any other line item, rollup sub-total, or a search based combination Critical to effective driver-based planning, of line items. Linking automatically operates across all time periods—i.e. no fill right as required with Alight has a built-in unit/rate/amount ar- spreadsheets. chitecture that facilitates building activity- based sub-models as described earlier. With Alight, operational or financial data at the line item level can be computed using any of six computation methods that facili- tate driver-based modeling. Such methods, using the unit/rate/amount architecture, simplify cross time period, accumulation, indexing and other operations that are diffi- cult to implement and maintain with cell- based formulas in spreadsheets. Page 5
  6. 6. Driver-Based Planning for Budgets and Forecasting Plan Billed Hours / Utilization % = Staff Hours 500 / 70% = 625 Staff Hours / Hours Per Month = Staff Headcount 625 /170 = 3.7 Staff Headcount * Salary Rate = Alight’s modeling interface includes easy-to-use tabs Staff Salaries for special purpose calculations. The cross time pe- riod tab pictured above lets the user link to the URA 3.7 * $10,000 = $37,000 of other items in prior or future time periods with accumulation of values rolling forward. For actuals data, Utilization % is a calculated value requiring a different Importing Actuals for Activity Analysis modeled structure: Importing actuals into plan files is a Staff Headcount * Hours Per Month fundamental requirement for effective = Staff Hours driver-based planning. The import, however, cannot be restricted to financial 3.0 * 170 = 510 data from the general ledger. It must also include operating data so that comparisons Staff Hours / Actual Billed Hours = for variance analysis can be made for Utilization % operating assumptions that are the activity 510 / 500 = 102% drivers of the sub-models. As well, import- ing and integrating actuals for operating The above example represents one major data is a foundation for analyzing activity difficulty with implementing driver-based driver trends that help tremendously when planning. For comparisons and analysis, actual developing rolling forecasts. and plan data must often be modeled differently. But the two data sets, actual and plan, must The tricky part of integrating actuals into a appear as the same line item for reporting. This financial plan is that operating data is is difficult or often impossible to do in both usually not “apples to apples” in formats or spreadsheets and other BPM applications. structure to plan data. Let’s walk through a common example—comparing actual staff Integrating Actuals with Alight utilization percent to plan—to illustrate the issue: We call it integrating actuals instead of im- porting because of the example above. The Plan utilization percent is usually an issue is not simply importing. The planning input assumption that might be used to application must import operating data calculate staff headcount and salaries as from outside sources and allow easy ma- shown below. Note that Utilization % is nipulation—i.e. modeling—of actuals data an input assumption. once it’s in the plan file. Alight Planning was specifically designed for integrating actuals as required in the staff utilization example above. Page 6
  7. 7. Driver-Based Planning for Budgets and Forecasting Here’s the summary statement about im- How would call center headcount and port: Alight supports importing actuals expenses (or any department spending) from any outside database, financial or be impacted by a 10% volume (activity) operational, to any level of detail. For ex- increase? ample, you can import actual unit sales and amounts by product from a sales database What are the most important activity or CRM system, and concurrently, you can drivers in the financial plan that impact import total sales from the general ledger at sales or profit? What are the least impor- the account level. Alight reconciles any dif- tant? ferences between the GL total and the sum of imported line items with a plug value. How much of the miss in the sales forecast for services was due to fewer In addition to importing from any source to product sales versus lower service con- any level, Alight also allows modeling actu- version rates? als data with different algorithms and link- ing than the plan model for the same line item. Why are salaries higher? More people or higher wages? What’s the ripple through affect of higher headcount on other expenses? Just as Alight Planning’s driver-based archi- tectures let planners develop and maintain more accurate financial plans, the software also incorporates numerous automated analytic tools for understanding activity driver impacts and financial results. Such tools, not available in spreadsheets or other BPM applications, let planners quickly identify the most important driver assump- tions in a financial plan and perform other sophisticated analyses. The analytic tools include: Sensitivity analysis: Unlike spread- Each line item has three tabs for modeling: Struc- ture, Plan and Actuals. On the Actuals tab, you can sheets or other planning applications use the same structure and linking as Plan, or you where sensitivity analysis is a “hunt and can independently model actuals data with its own peck” operation, Alight automates the links—as would be required in the staff utilization example. process. In a special analysis pane, the planner chooses a target such as net Driver Analytics in Alight sales or operating profit. Alight auto- matically produces a list of line items A major benefit of driver-based planning with input assumptions that affect the using units, rates and amounts is that a target and ranks them in order, top to world of analysis questions can now be bottom, based on the dollar magnitude asked and answered. Such questions as: of the impact on the target. Page 7
  8. 8. Driver-Based Planning for Budgets and Forecasting CAUSAL ANALYSIS: Alight Planning’s causal interface lets users compute volume and rate variances for line items that have underlying units and rates. The Units and Rate causal columns automatically calculate the volume and rate dollar impact on the total variance. The Causal column automatically appears on all revenue, expense and headcount reports. Goal seek analysis: Alight automates spread through out a plan, that consti- goal seek operations. The planner tute a subset driver model. For example, chooses a target for a time period then all drivers and resulting metrics for the specifies a desired goal and input vari- call center model could be organized in able. For example: profits in May are one key measures group for testing, forecast to be $50,000; the planner enters analysis and discussion. You use Key a goal of $75,000, then selects Unit Sales Measures to tell the story. as the input assumption to be tested. A dialog appears showing the required Summary number of Unit Sales necessary to meet the $75,000 profit goal. Driver-based planning is a best practice methodology where financial plans are Causal analysis: Alight’s built-in URA structured using models of underlying architecture allows producing vol- business activities. Alight Planning software ume/rate computations that can be incorporates a unit/rate/amount architec- applied to any activity driver or finan- ture, modeling tools, integration of actuals cial line item. For example, an operator and analytics that make this powerful column called Causal can be added to a methodology accessible for any company revenue report that calculates the actual that wants to improve their budgeting, fore- versus plan financial impact of unit vol- casting and decision making processes. ume and price variances for each prod- _______________________________________ uct. The same report format computes volume/rate variances for headcount. Rand Heer is President of Alight LLC and the creative force behind Alight Planning. He was a Key measures analysis: In a special Key contributing author to “Business Intelligence: Measures pane, Alight lets plan admin- Making Better Decisions Faster” published by istrators create custom dashboards for Microsoft Press. He was also the founder of Pil- activity driver models that allow users lar Corporation and designer of Hyperion Pillar, to analyze in one view multiple line the first enterprise software for budgets and fore- items or plan subtotals, otherwise casting. (800) 960-7717 Page 8