OKRs and driver based plans by lamorte - aug 2014 san francisco

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Presented at Business Forecasting 2014 in San Francisco, August 2014. Includes 5 best practices for making driver-based plans work and focuses on Objectives and Key Results.

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OKRs and driver based plans by lamorte - aug 2014 san francisco

  1. 1. Measure the Right Things Financial Modeling and Driver Based Planning Link operational drivers and key performance indicators to financial forecasting Ben Lamorte President President, OKRs.com SME Driver-Based Forecasting, Accenture
  2. 2. Today’s Speaker Ben Lamorte, President OKRs.com Business Activities Customer Excellence, Adaptive Planning VP at Alight Planning Principal, Decision Consulting (Adobe, Kaiser) Management Consultant, APM/CSC Healthcare  Publications  Co-author of driver-based planning white papers  Introduction to Driver-Based Forecasting (Accenture eLearning course)  Education  MS Management Science & Engineering, Stanford University  BS Mechanical Engineering, UC Davis
  3. 3. Who’s doing Driver-Based Planning? Only 6% of companies with more than 100 employees do driver-based planning Just 10% say they react to change in business conditions in a very coordinated fashion 37% say lack of coordination occurs frequently and is an issue Source: A Practical Look at Driver-Based Planning: Planning Benchmark Research
  4. 4. Where Are You on the Performance Management Maturity Scale? Level 1 Unaware •Spreadsheets •Financial reporting risk Level 2 Opportunistic •Mixed bag of applications to support different processes •Limited users Level 3 Comprehensive •Operational participation in planning •Expanded financial analytics Level 4 Enterprise •Connected, agile systems •Enterprise metric analysis Level 5 Transformative •Data-driven decision-making culture •Driven by business strategy Tactical: Use CPM to support more efficient financial processes Strategic: Use CPM to gain competitive advantages Source: Adaptive Roadshow, Assess CPM Maturity to Rate Your Performance Management, October 2012
  5. 5. Sneak Preview: Driver-Based Planning Maturity Scale Level 1 – Disconnected Models/Chaos Revenue forecast totally separated from expense plan. No analysis of outputs of one department serving as inputs to another. Level 2 – Signs of Intelligence Revenue & expense model in 1 file; 1 or more expense item changes in real time with change to a revenue assumption. Revenue forecast based on high level estimates or manual inputs of sales forecasts across lowest-level dimensions. Level 3 – Basic Driver-Based Planning Departments starting to jointly define shared drivers (e.g. marketing & sales agree on definition of a lead and customer). Analyzing optimal level of detail in the revenue model rather than planning at lowest available level of sales forecast data. Level 4 – Optimized Driver-Based Planning for Rapid Refresh External data feeds directly into centralized planning model (e.g. from CRM, Payroll, GL). Minimal manager input set focuses on materiality rather than precision. All material variable expenses connected to revenue. Management can get answers to “what-if” questions in near real time. Level 5 – Strategic, Integrated Driver-Based Planning Transparency into how outputs of each department drive activities of other departments Drivers and metrics clearly defined and documented across all business functions Sensitivity Analysis (e.g. Tornado Diagrams) communicate impact of variation in key drivers Financial statements may include allocations to enable P&Ls by product, business unit, etc. Source: Adaptive Planning Blog: Why Integrated, Driver-Based Financial planning is Key to your Business. Oct 2013
  6. 6. Exercise: What describes your driver-based planning maturity? Level 1 – Disconnected Models/Chaos Revenue forecast totally separated from expense plan. No analysis of outputs of one department serving as inputs to another. Level 2 – Signs of Intelligence Revenue & expense model in 1 file Revenue forecast based on high level estimates or manual inputs of sales forecasts Level 3 – Basic Driver-Based Planning Departments starting to jointly define shared drivers Analyzing optimal level of detail in the revenue model rather than planning at lowest level data available Level 4 – Optimized Driver-Based Planning for Rapid Refresh External data feeds directly into centralized planning model (e.g. from CRM, Payroll, GL). Minimal manager input set focuses on materiality rather than precision. Level 5 – Strategic, Integrated Driver-Based Planning Transparency into how outputs of each department drive activities of other departments Drivers and metrics clearly defined and documented across all business functions
  7. 7. Driver-Based Planning – At a Glance Driver-Based Planning is: A best-practice approach that focuses on operational drivers and leading indicators such as units and rates that serve as inputs that impact financial results in a mathematical model 5 characteristics of good driver-based plans 1. Meaningful: Financial models are easily communicated, documented 2. Material: Optimal level of detail (balancing precision with materiality) 3. Vertical: managers can connect their work to corporate goals 4. Horizontal: plans connect across departments, not just corporate rollup 5. Progress: ability to make and measure progress frequently Source: Preview from Accenture eLearning course FPM238: Introduction to Driver-Based Forecasting
  8. 8. Driver-Based Planning: 5 best practices Process Best Practice Other Practice 1: Communicate & document Predictive Logic Diagram Models in spreadsheets 2: Sensitivity Analysis Proactive ranking impact of key drivers Answer questions as they arise 3: Defining Level of Detail Materiality: Start at highest level, fill in details later Precision: Start with lowest level (e.g. pipeline or chart of accounts) and build off this data 4: Integrating Driver Models Drivers from each business activity feed one another Driver models rollup to corporate, but are in silos 5: Strategic, metrics-driven culture Objectives & Key Results (OKRs) in centralized and shared metrics library Brainstorming a list of KPIs and Drivers with managers
  9. 9. 1: Communicating & Documenting with a Predictive Logic Diagram Software Licenses Sold Conversion rate # Services Customers Predictive logic diagram for a software/services business It’s about Activities & Rates Hours Per Customer Billable Services Hours Bill Rate Billable Services Revenues Source: Is it Really Worth it to Replace Spreadsheets with a Planning Application. An Insider’s Guide by Ben Lamorte, Alight Planning
  10. 10. 1: Communicating & Documenting with a Predictive Logic Diagram, cont Software Licenses Sold Conversion rate # Services Customers Services Staffing Hours Services Expenses  Salaries  PR taxes/ benefits  Supplies  Travel  Recruitment Training  Etc. Predictive logic diagram for a software/services business It’s about Activities & Rates Hours Per Customer Billable Services Hours Staff Utilization Rate Bill Rate Billable Services Revenues Hours Per Month Services Staffing Heads Services Profitability Source: Is it Really Worth it to Replace Spreadsheets with a Planning Application. An Insider’s Guide from Ben Lamorte’s SlideeShare
  11. 11. 2: Sensitivity analysis Finds most important issues (drivers) that matter in a decision Tornado Diagram: 1-way sensitivity analysis: examines deviation from base case by modifying one variable at a time Case study: You are in charge of the long-term planning forecast at a large business school. Depending on who you ask, the main profit driver is reported to be: Average tuition rate per student #students enrolled #faculty on staff Average faculty salaries Questions you are asked to answer definitively: 1) Which is the most critical driver that impacts profits? 2) How accurate do you expect your forecast to be? In other words, don’t give me a point estimate, give me a range on expected profit.
  12. 12. 2: Tornado Diagram  Shows #students is most impactful driver, #faculty is least.  Caveat: quick way to display impact of 1 variable at a time only
  13. 13. 3. Defining Level of Detail Enable Managers to plan the way they think, at a level of detail that is meaningful to them not dollar amounts in the chart of accounts that are meaningful to finance department This is the way managers think – help them plan like this Key Responsibilities Business Goals • Measuring performance • Controlling costs • Analyzing business trends • Tracking initiatives Operational Effectiveness Planning, Analysis, and Reporting Solutions Drive Financial Performance Management, January 2013 Not this! Source: Adaptive Planning Roadshow 2013
  14. 14. Example: Driver-based model w/too much detail! Precision of 1000+ static inputs may work for budgeting; forecasting should be higher level • Version 1: 10k line items • Version 2: 3k line items • Version 3: 1k? Lessons learned over and over: • Start plans at high level to reveal which details are missing • Easier to add detail than to remove tons of data from a model! Source: Is it Really Worth it to Replace Spreadsheets with a Planning Application. An Insider’s Guide by Ben Lamorte, Alight Planning
  15. 15. 4: Integrating Driver Models Sales Pipeline Forecasts Corporate Financial Plan Manu-facturing Production Plans Logistics Inbound & Outbound Shipments HR Marketing Workforce Planning Lead Generation Source: Adaptive Planning Blog: Why Integrated, Driver-Based Financial planning is Key to your Business. Oct 2013
  16. 16. 2: Strategic, metrics-driven culture In the absence of a clearly articulated and up-to-date strategy or set of objectives, a KPI team must spend significant time interviewing departmental executives and corporate executives to understand the mission and direction of their group before they can commence with the actual work of defining KPIs.” – Wayne Eckerson
  17. 17. 5: Strategic, metrics-driven culture 1. *Mission: 1-2 sentences describing team’s purpose 2. *Objectives: Names 2-5 core components of mission to achieve in a defined timeframe 3. *Key Results: Identify 1-4 measurable results to demonstrate achieving each objective by set date 4. Metrics: numbers with a defined unit to help Strategic BUT Not Measurable Strategic measure and communicate progress. AND Measurable Source: Never Before-Disclosed Oracle Planning Techniques by Jeff Walker, former CFO of Oracle who deployed a “Mission Objective Key Results” system to help grow Oracle from $20M to $1B by more than doubling revenue year after year in the 1980s.
  18. 18. My OKRs for remainder of session Objective: Provide as much value for free as possible to improve planning and performance management Key Results: 1. Everyone can name 3 driver-based planning best practices 2. 5+ sign up for FREE private, 1:1 OKRs drafting session *Source: Inspired by John Doerr Presentation to Google, 1999
  19. 19. OKRs What, Who and Why What OKRS = Objectives and Key Results Best practice performance management methodology Who 1980s: Intel and Oracle 1990s: Google begins using OKRs w/just 40 employees 2000s: 100s of companies including Twitter, LinkedIn, Sears…
  20. 20. Google on “Why OKRs” Source: BusinessInsider.com
  21. 21. OKRs Example: Marketing Team O: Achieve lead targets provided by sales team KR: Deliver 100 leads in Q1, 200/Q2, 250/Q3, 300/Q4 O: Deliver quality leads cost effectively KR: Identify best and worst marketing event by analyzing ROI of at least 5 conferences KR: Achieve an overall cost per lead below $65 in Q1 KR: 30% of leads convert to opportunity within 6 weeks of creation Notice how the “KPIs/Drivers” emerge organically as we define OKRs
  22. 22. Even AP can be Strategic Driver-Based! 22
  23. 23. 5: Strategic, metrics-driven culture, Summary In each cost center Identify metrics (volumes & ratios) to predict costs & revenues # invoices # applications products sold # sales staff Average price per sale Measure Metrics Plan to drive metrics in desired direction Plan objectives around influencing the metrics Use metrics in forecasting where possible Note: forecast drivers can emerge organically with your team as you define OKRs and create predictive logic diagrams to connect drivers to financial forecasts Source: Never Before-Disclosed Oracle Planning Techniques by Jeff Walker
  24. 24. Summary Driver-Based Planning: 5 best practices Process Best Practice Other Practice 1: Communicate & document Predictive Logic Diagram Models in spreadsheets 2: Sensitivity Analysis Proactive ranking impact of key drivers Answer questions as they arise 3: Defining Level of Detail Materiality: Start at highest level, fill in details later Precision: Start with lowest level (e.g. pipeline or chart of accounts) and build off this data 4: Integrating Driver Models Drivers from each business activity feed one another Driver models rollup to corporate, but are in silos 5: Strategic, metrics-driven culture Objectives & Key Results (OKRs) in centralized and shared metrics library Brainstorming a list of KPIs and Drivers with managers
  25. 25. Feedback Scoring performance Objective: Provide as much value for free as possible to improve performance management Key Results: 1. Everyone can name 3 driver-based planning best practices (Score 1 if 100%; .7 if 75%, .5 if 50%, 0 otherwise) 2. 5+ sign up for FREE private, 1:1 OKRs drafting session (Score 1 if 5+ completed, .7 if 4, .5 if 3, 0 otherwise) *Source: Inspired by John Doerr Presentation to Google, 1999
  26. 26. LET’S DRAFT YOUR OKRS!
  27. 27. Thank You and Learn More! Videos • Google Ventures Startup Lab workshop on Google’s use of OKRs since 1990s for Performance Management • Executioner’s Tale: 20 minute video by Christina Wodtke • Small Wins (authors of the Progress Principle) https://www.youtube.com/watch?v=FJ0rs9ZENgM&list=PLPkq59We34mujr0IYnY_rrQBx9TThnAqa • Simon Sinek - Biology of OKRs and measurable progress on goals Social Media • Join Objectives and Key Results (OKRs) LinkedIn Group • Quora has great Q&A on OKRs Books • High Output Management, Andy Grove • Performance Dashboards, Wayne Eckerson OKRs Performance Management Software Vendors • BetterWorks • WorkBoard • 7Geese
  28. 28. 5: (Data used to create Tornado example)

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