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.

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. 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.
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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-
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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.
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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.
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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.
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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.
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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