Driver-based modeling uses key operational drivers like volume, rates, and brand awareness to predict financial results through mathematical equations. It has advantages like increased accuracy, efficiency, and the ability to quickly provide actionable information to management. Driver-based models are applicable for forecasting, especially for volume-sensitive items, and long-range planning where higher-level details are needed. However, they may not be suitable for detailed budgeting processes that require monthly expense mappings, or for fixed costs and items with loose driver relationships. The level of driver detail should match each planning cycle.

1. When is Driver-Based Modeling Applicable?
Nilly Essaides
Director, FP&A Practice, The Association for Financial Professionals
More companies are looking to put science in their forecasting and planning processes. To this
end, they’re basing more and more of their forecasting models on key business drivers – those
factors that can really move the needle and affect enterprise performance.
“Driver-based modeling and planning use operational drivers to predict financial results,” said
Philip Peck, Vice President, Financial Transformation at consulting firm Peloton Group.
These models are essentially equations that represent mathematical relationship between key
operational drivers (e.g. volume, rates, conversion ratios, brand awareness, etc.) and anticipated
financial outcomes.
The driver-based models have several key advantages: they’re more accurate, more efficient, can
be run on the fly and enable FP&A to come up with actionable information more quickly, at a
time when senior management is facing an increasingly complex and uncertain business
environment. They also help balance the inherent bias managers have in producing forecasting
data -- a combination of human error, politics and over-optimism. Of course, to do this they have
to be correct.
When does it work?
According to Mitch Max, CEO and President of BetterVu, forecasting is one of the first areas
where driver-based models can be applied. “As a basic example, if I’m forecasting a product or
series of products, and have a price, the driver is typically volume; it’s a simple metric
calculation of rate X volume. It’s applicable in many volume-sensitive calculations. But it can
also be used for non-volume-sensitive items, for example, you can apply a driver-based
calculation to payroll and multiply by average salary,” Max said.

2. “What’s important is the level of detail. Even drivers have different levels of detail,” said
Sholape Kolawole, EPM Transformation Associate Principle at The Hackett Group. The level of
detail should be aligned with the applicability to each planning cycle. For example, a quick
monthly forecast or the strategic plan would call for a less detailed driver approach.
According to Vic Datta, CEO of Resilicore: “The models enable the company to move away
from allocation-based budgeting to a more anticipatory approach, with an “activity-based”
costing approach as the precursor. “Driver-based models are outcome based, rather than the more
traditional inward-looking models,” Datta explained.
But driver-based models may not work everywhere.
Craig Schiff, Owner of consultancy BPM Partners Schiff said that he thinks driver-based
modeling is very applicable in the forecasting and long-range planning processes in FP&A but
less so in the detailed budgeting process. “When you look at budgeting it’s not ideal,” he noted.
“The budget includes a very detailed expenses and revenue lines for the year,” he said, “whereas
driver-based models are better suited to higher-level, quicker and more frequent forecast and
planning processes.” Budgeting often involves mapping expenses by area, by month. A true
driver-based model won’t produce these results.
Another area where driver-based models don't work is in fixed costs, for example rent, or
charitable donations.
In addition, according to Curtis Gratz, Director at Huron Consulting Group, driver-based
modeling is not applicable where there are only very loose relationships between drivers and
outputs, or if these items are not material or actionable.
“Building this additional, low value add, details encumbers participants to plan at a detail that
does not help the goals and mission of the corporation and just takes up time,” Gratz said.