Planning and Budgeting Remains Immature

Summary
Attending both Hyperion's user group conference and a meeting of the Beyond Budgeting Round Table (BBRT) in April gave us a chance to reflect on the state of planning and budgeting in businesses. The picture is not encouraging. In our view, planning and budgeting remains immature in virtually all companies. Many use stand-alone spreadsheets, which are the single biggest obstacle to making planning and budgeting a more useful management tool. Replacing them with software dedicated to the task can make the process much more efficient and remove barriers to transforming planning and budgeting.

But merely replacing the tool is not enough; what's required is to understand and the exploit the expanded capabilities the new tool provides. Fully utilizing the capabilities of dedicated software will enable corporations to plan more effectively, drive efficiencies throughout the organization, increase agility and improve the performance of both individuals and business units. Unfortunately, too few companies are using their software to the fullest. Ventana Research urges that once companies deploy this software, they then concentrate on how to make planning and budgeting an effective management tool.

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Budgeting and planning has been a core focus of our research agenda for the past three years because it is critical to performance management. Optimal performance requires planning, and planning well means setting baseline metrics for key performance indicators for individuals, business units and the organization as a whole. As it happens, this is perhaps the only area of finance where simply buying new software can improve the process significantly. At more than a dozen sessions at Hyperion's event, companies presented success stories of having used the Hyperion Planning software to manage budgeting and planning. All reported they have reduced the amount of time they spend on the process and now can provide executives and managers with more useful, timely and actionable information than before.

On these measures alone, their investments have been worthwhile. However, we believe simply automating a fundamental process is not enough to create a business advantage. To achieve all of the benefits of budgeting and planning software, companies must make fundamental changes in their process. Ventana Research has found that nearly all companies remain at one of the two lowest levels in planning and budgeting maturity.

• At the basic Level 1, the main purpose of the process is to create an annual budget to present to the board of directors and to set benchmarks for annual compensation plans. Typically the company uses stand-alone spreadsheets to collect and analyze data. Preparation takes four to six months.

• At Level 2, the goal remains the same - to prepare a board presentation and compensation plans - but the company uses a dedicated application. Consequently, it can do more analysis of the proposed budget and variances, and people spend fewer hours in the preparation phase and in preparing reports. This typically shortens the process by four to five weeks.

• At Level 3, the purpose of the process shifts to performance management. Companies create a plan that includes metrics-defined operating objectives and the resources needed to achieve them, along with a budget to specify how the plan will be funded. Organizations use the software to create plans based on drivers tied to strategic objectives. Compensation plans factor in multiple metrics and are based on relative - not absolute - performance, using internal league tables and external benchmarks. While the company may still focus its attention on an annual plan and budget, monthly reforecasting and replanning becomes more comprehensive.

• At Level 4, the planning process is more closely integrated with operations. For example, sales pipeline analysis and operational plans connect directly to the revenue and expense plans. Indirect costs are allocated using activity-based systems, and industries that have a high percentage of shared costs (financial services, for example) use this approach to drive efficiency improvements. The monthly reforecast and replanning operation is much more granular because it is technology-based and thus more efficient. The plan also forecasts balance sheets and cash flow. Today this is common only in financial services and some asset-intensive businesses.

• At Level 5, the most mature level, corporations achieve adaptive planning through frequent performance monitoring analysis and replanning that is integrated into operations. Annual plans and budgets are replaced by a "rolling quarters" approach. (While there has been much discussion about rolling quarters planning and budgeting, few companies do it.)

Our research has found a majority of the Global 2000, and more than two-thirds of midsize companies, remain at Level 1: They continue to create budgets for the board using stand-alone spreadsheets. Shifting the focus to planning for performance management requires senior executives to change their fundamental attitudes about why they are preparing a budget - a nontrivial undertaking. But unless a company is willing to embrace change, modernizing budgeting and planning at large companies may never happen. Even with senior level support or an effective (if sometimes stealthy) grassroots effort, changes usually take several years to achieve.

Most companies that have adopted dedicated applications are still at Level 2. This is not surprising, since most have implemented these systems within the past few years. While there are technology hurdles that must be cleared to move to Level 3 (for example, managing data flows more effectively), these are easy to overcome compared to the changes in management's mind-set needed to drive real process improvements. In most organizations, inertia (and the fact that compensation plans are involved) makes this a multi-year undertaking.

Assessment
The BBRT has done a great deal over the past five years to raise awareness of how to reform the budgeting process. Adoption of dedicated planning and budgeting software has increased steadily over the past three years as companies have come to realize that, if nothing else, using stand-alone spreadsheets is inefficient. Yet effective planning and budgeting also are fundamental to performance management, and increasingly companies are beginning to embrace performance management as a means of managing their business more effectively. While using dedicated applications instead of stand-alone spreadsheets removes a barrier to transforming the planning process, it alone does not make the transformation happen. Ventana Research recommends companies plan to transform their process right from the start, pushing as aggressively as possible for change, yet recognizing that it will take several years to achieve.

About Ventana Research
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2006 Ventana Research