2 PLANNING METHODS AND METHODOLOGIES Over the years there have been many attempts to help organisations create better joined-up plans. This chapter will include an overview of some of these approaches and ways in which organisations can assess their planning maturity. PLANNING: WHO, WHAT, WHEN, AND HOW Planning is a simple concept to understand and y et can be difficult to perform. Part of the reason for this is its multi-faceted nature that, w ithin a business context, can come in a range of ty pes (for example, strategic, operational, financial), functions (for example, sales, logistics, production), and techniques (for example, topdow n, bottom-up, driv er-based). Plans include different combinations of these areas, depending on the purpose being serv ed. As a consequence, it is easy to lose sight of w hat each is designed to do and organisations can end up w ith a mishmash of plans that hav e little or no connection to w hat they are try ing to achiev e. To get a better understanding of how planning requirements ev olv e w ithin an organisation, consider the follow ing fictitious company, XY Z, Inc., as it grow s into a large, multi-national concern. Planning Within a Sole Trader XY Z, Inc. w as founded as a re-seller of ballpoint pens. T he ow ner and w orkforce of four people started out by buy ing a small range of quality pens from different manufacturers and supply ing them to a number of shops w ithin their local area. For XY Z to grow they must ensure that their resale price is competitiv e w ith other suppliers and that the anticipated sales rev enue cov ers the cost of buy ing, marketing, and distributing the pens along w ith pay ing w ages and other administration expenses. T he planning requirements here are quite simple, and because there is only one person inv olv ed, they can be easily modelled in a spread sheet. T his w ill include ev aluating discount purchases from suppliers, as w ell as w hat discounts could be giv en to customers should they w ant to buy in bulk. Output from the model w ill include a target sales price, the v olume to be sold each w eek, an associated budget for each activ ity (for example, marketing, trav el, and so on), and a cash flow forecast so that adequate funding can be put in place. Budgeting, Planning, and Forecasting in Uncertain Times, First Edition. Michael Coveney and Gary Cokins. © 2014 AICPA. Published 2014 by John Wiley & Sons, Inc. 21 Planning as a Small Manufacturer Business is good. Pen sales increased and they are now sold through a number of w holesalers and large independent shops across the country. How ev er, XY Z is experiencing supply problems in terms of deliv ery dates and quality, w hich they feel is v ital if they are to retain customers. To fix these issues and to be more competitiv e (and more profitable), XY Z believ es they need to manufacture some of the pens themselv es. T his w ill require an inv estment in machinery and w arehousing capabilities for both components—each pen ty pically consists of 26 different parts, some of w hich are purchased, and others are manufactured from raw materials—and for finished stock. How ev er, these changes w ill require an increase in the number of outlets they manage in a w ider geographic area, and a mov e to becoming a manufacture, both of w hich greatly increase organisation risk. T his is because the ov erhead costs to be cov ered w ould be much higher, and any miscalculation of v ariable costs (for example, price) can cause significant losses due to the high v olumes inv olv ed. T here is also a danger of losing customers (and hence rev enue) if production does not meet demand, the possibility of w asting resources (w hich detract from profits) if more goods are produced than is required, and the capital inv estment for the machinery w ould need to be funded. T hese risks greatly increase the complexity of the planning model(s) required, w hich now need to cov er the follow ing: • Marketing. T his w ill include a sales forecast broken dow n into each pen ty pe, along w ith a budget for the promotional programme. • Pricing. T his needs to be competitiv e and generate sufficient margin to cov er organisational costs and inv estment. It also needs to ev aluate promotional pricing to capture market share. • Optimum production levels. Management w ill need to decide w hich pens to manufacture, at w hat time, and the lev els of stock to be held. T his should be linked to the sales forecast. • Raw material purchases. T his w ill include w hat materials to buy, from w hich suppliers, and the lev els of stock to be held. T his w ill need to be linked to production lev els, but XY Z may w ant to take adv antage of any special offers that suppliers are w illing to giv e. • Warehousing and logistics. T his cov er the best w ay to deliv er finished products to customers, w hich could either be by their ow n transport capability or v ia a third-party carrier, depending on location. • Cash flow and sources of funds. T his w ill need to show how much cash is required by the operation, and how any inv estment is to be funded. It is unlikely that all of the preceding risks can be cov ered by one single model, and that multiple people w ill need to be inv olv ed. How ev er, as the organisation is still relativ ely small in the number of employ ees and that they are all based in a single location, using a spread sheet to plan is still possible, although much care needs to be taken w hen setting up formulae, as an ov erlooked error could prov e catastrophic. If multiple spreadsheet models are used, then linking them becomes an issue. For example, cash flow w ill need to take into account sales forecasts by customer and the pay ment for raw material purchases, both of w hich could come from different planning spread sheets. As a consequence, the order of how the plan is constructed needs to be carefully managed. For example, production planning needs to be re-ev aluated each time a sales forecast is receiv ed, and marketing promotions need to reflect w hat can be produced along w ith the lead times required for ordering materials. 22 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES Planning as a Listed Company XY Z continues to do w ell. As part of its strategy for grow th, it intends to expand the product range to include complementary stationery items such as pencils, rulers, rubbers, and ink. T he management team also plans to expand to multiple locations throughout the country, w ith some hav ing local manufacturing capabilities. T his expansion w ill be partially achiev ed through acquisition, funded by becoming a public company and raising capital by selling shares on the stock exchange. Planning has now become a more extensiv e process that not only has to cope w ith the new products and sites inv olv ed, but also w ith prov iding a clear, realistic strategy that communicates to inv estors how and w hen financial returns w ill be generated. As a result, the planning process includes all of the planning activ ities prev iously described, plus • rev iew ing the market for w riting products so management can decide w here grow th opportunities lie and how XY Z can take a major share (strategic planning); • analy sing w hat changes w ill be needed to the current operation in order to achiev e the predicted market share (operational planning); • assessing how much additional funding w ill be required for the planned infra-structure (capital planning); Once these items hav e been agreed on, then the management team can then decide how • it w ants to allocate its resources (financial and human resources planning) to make the rev ised operation a reality ; and • how best to optimise its production and logistic capabilities (sales and operational planning) to maximise profitability. As the plan gets implemented, it is now v ital to • track actual and forecast performance to see w hat is being achiev ed (forecasting). • identify and mitigate risks that could derail the plan (risk management). • reassess priorities so that adjustments can be made to either keep the plan on track or improv e its performance. As can be seen from this XY Z example, planning is now a multi-user activ ity that encompasses a range of tasks that are w ay bey ond the capabilities of a spread sheet. Planning as an International Group XY Z has now made the big time. W ith help from the introduction of e-commerce and continued expansion, the company has gone international w ith a full range of stationery products. Because of this and the need to increasingly dev elop trade partnerships, decision making has become unw ieldy. In response to this challenge, the company has been split into different legal entities so that each one can focus on the needs of indiv idual countries and markets. Planning has also become a challenge as it not only needs to take into account local trading conditions, but also has to include corporate requirements of tax planning, statutory consolidation, and regulatory reporting w here required. PLANNING METHODS AND METHODOLOGIES 23 Further still, XY Z is now a recognisable brand and is easily exposed to risks, such as an attack by ‘start-up’ companies (like itself in the early day s), w ho can prov ide a more personal serv ice to customers, or by bad press on social media sites that dictate w hat is ‘in’ and ‘out’ of fashion. It w ill also need to act in a socially responsible w ay that smaller competitors can often ignore. T he main issue for XY Z is how do they plan and act like a single company w hen their planning activ ities are so div erse? How do they co-ordinate the different functions across geographic boundaries in a market that is continually changing? In this respect they are not alone. THE RISE OF MANAGEMENT FRAMEWORKS AND METHODOLOGIES As organisations (and the business w orld) become more complex and inv olv e many people, planning must become better disciplined and organised. Ev ery facet of the business needs to be considered, w hether that means sales and operations, logistics, human resources, or tax. T he company must be organised so that plans are complete and assembled in a logical sequence. T here are dependencies. For example, there is no point in planning cash requirements unless sales forecasts and supplier orders are know n w ith some degree of accuracy. To do this requires an analy sis of market trends, competitor activ ity, and production capacity (and cost) of our ow n set up. Each part of a plan has the potential to impact another, and some method is needed to conduct planning in an orderly and efficient manner. To help w ith this task, a range of management tools hav e been dev eloped ov er the y ears that can be categorised as framew orks, methodologies, or processes. Figure 2-1 depicts examples of these. Figure 2-1: Sample Management Tools for Dealing With Complexity For this book w e are using the follow ing definitions to distinguish them: A framework is a structured set of ideas and principles that prov ides direction on the preferred w ay of doing something. It is not prescriptiv e, but is more a set of guidelines that can be customised to suit a particular need or organisation. Examples of these include Risk management, Project management, and C apital asset management. T here are literally hundreds of management framew orks designed to help manage complexity. A recent LinkedIn discussion group listed ov er 940 as of February 2013, w ith the count rising on a w eekly basis. Ty pically these framew orks are associated w ith a specific business area, as can be seen from the examples giv en, and so they can be considered complementary to the framew ork being described in this book. A methodology by contrast is a set of practices that can be used to achiev e a particular goal. T hey are ty pically more rigid and hav e a defined, prov en set of rules, activ ities, and deliv erables to solv e a specific problem. Examples include the Balanced Scorecard, Performance Prism and Six Sigma. 24 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES Management methodologies tend to hav e their follow ers. An organisation w ill ty pically choose one and then adhere to it like a religion. Quite often the methodology w ill be tailored to the organisation based on their beliefs of w hat w orks for them. In the context of this book, methodologies fit w ithin the planning framew ork as they tend to focus on improv ement strategies rather than all aspects of operation. Business processes are the activ ities an organisation does, ty pically across the functional boundaries of the organisation chart, to serv e its purpose. T hese can be broken dow n into smaller tasks that are generally repeatable and could be automated if required. Examples include Purchase order processing, Inv oice to cash, and Sales order to deliv ery. Many processes, such as those that deal w ith pay ments and receipts, tend to be common across organisations and are carried out according to either a legal framew ork or as prescribed in the organisations’ operating manual. To enhance any framew ork, methodology, or process, management schools and leading business consultants hav e all contributed articles on how these should be conducted. T hey are ty pically grouped into popular topics such as strategy execution, change management, leadership, performance measurement, and so on. It is no w onder that there is confusion as each article seems to focus on a particular topic that expresses that their w ay is best, but leav es the reader to figure out how to put them all together. Of course it could be argued that this book is coming up w ith y et another framew ork, methodology, and process, but w e as the authors do not agree. Our approach is to learn from history and to set out w hat w e believ e is important for organisations to plan. To go w ith this w e prov ide examples of how good practices, w hether they are framew ork, methodology, or process based, can be implemented. Before w e do that, let’s first look at some of the more popular management methodologies that hav e been shaping the w ay organisations plan today. POPULAR MANAGEMENT METHODOLOGIES Budgetary Control Budgetary control is probably the most w idely used method to plan and control organisational performance. It has been w ith us for nearly a century. In his book, Budgetary Control, published in 1922, James McK insey put forw ard the concept of budgeting as a management framew ork—a concept that has dominated management practices for most of the 20th century. McK insey stated that to effectiv ely control an operation, it w as necessary to set standards of performance, w hich should be described in the budget. As w ell as setting the standard, budgets w ere also seen as the means of co-ordinating activ ities betw een departments. As Marv in Bow er, former chief executiv e of McK insey & C ompany, w rote in his book, Perspective on McKinsey, the concept of their top-management approach w as based on the budget as 'a statement of policy, expressed in terms of future accounts delegated to units of an organisation'.1 Today, budgeting is still used as the main method of organisational control. Its strengths are that managers are restricted to spending lev els that are not to be exceeded, and there are numerous technology sy stems that can streamline the process of producing the budget. How ev er, results from the surv ey show n in Appendix I w ould indicate that budgetary control is increasingly under attack for a number of reasons: 1. Absence of context. Plans are based on underly ing assumptions that are often outside of the control of the organisation. If assumptions made about market grow th, price fluctuations, and actions of key competitors PLANNING METHODS AND METHODOLOGIES 25 are w rong, then any plan based on them w ill be misdirected. T he issue is that these assumptions are rarely tracked or associated w ith the approv ed budget amounts, and w hen an assumption is no longer true, its consequence is lost and the amounts become meaningless. 2. Inappropriate timing. Plans are often seen as being financial in nature that last for a set number of months, ty pically 12. How ev er, the markets in w hich organisations operate are continually changing and usually at a faster pace than can be predicted w ith accuracy at the start of the budgeting process. Some items such as fixed interest rates may be know n for y ears in adv ance, but other items such as raw material unit cost may only be know n for a few months in adv ance. Try ing to put all of these different items onto the same planning time-frame is both unrealistic and div erts attention aw ay from w hat is really important. 3. Irrelevant content. Plans are ty pically based around the financial structures and accounts found in an organisation’s general ledger sy stem. Although these structures are good for recording transactions, they are inadequate w hen it comes to describing actions and initiativ es that are supposed to be linked to strategy. Planning and budgeting are not purely financial exercises. T heir purpose is to help the organisation allocate resources and assets to achiev e strategic goals, but all too often that strategic content is either v ague or missing. 4. Inadequate capability. For planning to be of v alue, there must first be a process that allow s management to explore alternativ e courses of action and to assess their impact on achiev ing the organisation’s mission. Once those alternativ es hav e been carefully ev aluated, the best combination of activ ities can then be selected and resources allocated as appropriate. Unfortunately, planning is more like a guessing game w here managers try to come up w ith a set of numbers that they think w ill be acceptable. T hese numbers are then ascribed to departments rather than projects or initiativ es, mainly because the softw are solution being used does not allow a strategic focus. If the numbers are not acceptable, senior managers w ill arbitrarily adjust them so that they do add up to their ow n guess or expectations. How ev er, w ho know s if any of these numbers make sense in terms of implementing corporate strategy. Many organisations recognise that budgetary control falls far short of w hat they need to manage performance, but few companies seem w illing to mov e aw ay from them. Quality Management Movement T he aim of the quality management mov ement is to continually improv e the current operations of a business. It does this by analy sing defects and coming up w ith w ay s to reduce or eliminate them. T he methodologies associated w ith the mov ement all hav e their roots in manufacturing and include the follow ing: • Total quality management (TQM) started about the same time as budgetary control, and inv olv ed apply ing statistical techniques to detect and fix problems on production lines to reduce the number of faulty products. T hese techniques w ere dev eloped further by W illiam Deming, Joseph Juran, and Armand Feigenbaum during the 1940s and w ere sy stematically applied to Japanese manufacturers during the 1950s. In addition to training management, w orkers w ere also encouraged to meet regularly to discuss and suggest ideas on how things could be improv ed. T hese became know n as quality circles and ensured that the methodology w as pushed dow n to all staff lev els. Because of the success of Japanese companies in the 1980s and 1990s, organisations in the West started to take a closer look at improv ing quality. T his launched a range of quality -focused strategies, programmes, and techniques that became the focus for the TQM mov ement. 26 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES TQM is defined as ‘management philosophy and company practices that aim to harness the human and material resources of an organisation in the most effectiv e w ay to achiev e the objectiv es of the organisation’. It places customer satisfaction at the centre and looks at how all of the processes in the organisation can better w ork together in serv ing them. • Six Sigma came out of Motorola in the 1980s and is based on the tools they dev eloped to improv e manufacturing. It became famous after Jack Welch introduced the techniques into General Electric during its period of rapid grow th and profitability. T he term sigma has its basis in statistics and refers to the dev iation from perfection, the idea being that if y ou can get rid of the dev iations, then y ou hav e perfection. T he sixth sigma is a defect lev el of less than one in 99.99966 per cent. W hat sets Six Sigma apart from TQM is the approach, w hich looks at improv ing all of the operations w ithin a single business process. T here is a defined set of management and statistical methods ov erseen by teams of people that go under the dubious titles of champions, black belts, green belts, orange belts, and so on, w ho are experts in these complex methods. Improv ement initiativ es are set up as six sigma projects that follow a defined sequence of steps w ith quantified v alue targets (for example, process cy cle time reduction, customer satisfaction, profit increase). Like any other methodology, those related to quality management are not perfect. T here w ill be issues that can derail the spirit of w hat the methodology is try ing to achiev e, including • Quality versus results. Focusing on improv ing quality does not necessarily produce profits. As w e hav e seen, the impact of social media and competing w ith organisations that hav e a fundamentally different business model can inv alidate the output of any improv ement initiativ e. • Focus on short-term goals. Quality improv ement is a long-term process. Organisations that driv e and rew ard staff on this month’s, quarter’s, or y ear’s goals w ill nev er be able to implement the practices required in an efficient and effectiv e manner. • Alignment with strategy. Quality improv ement is the total strategy. Any thing else is outside of the methodology and can adv ersely impact the goal of any existing improv ement project. • Staff motivation. TQM and Six Sigma are surrounded in technical terms and practices that require months, if not y ears, of training to perfect. As such this generates elite teams w hose presence can cause those not inv olv ed to feel dev alued and their expertise ignored. • Complexity. TQM and Six Sigma techniques include a v ariety of analy tical tools such as fish bone diagrams, the Define, Measure, Analy ze, Improv e, C ontrol (DAM IC ) improv ement cy cle, measuring Defects Per Million Opportunities (DPM O), and Pareto analy ses. T he v olume of data required is often immense and finding suitable and reliable sources can be a real problem. Lean Management Traditional management is often results oriented. Did w e achiev e the target? Did w e stay w ithin budget? Is our performance better than competitors? T he only trouble is that w hen these objectiv es are achiev ed, people tend to relax as if the company has made its goals. But this can lead to a situation w here resources could hav e been put to better use, or w hose cost could hav e been av oided altogether. Lean management is a companion of the quality mov ement prev iously mentioned. Its focus is to prov ide v alue to customers and ensure that the processes put in place to deliv er goods and serv ices, continually add v alue. Lean management also promotes minimising or eliminating all forms of w aste. PLANNING METHODS AND METHODOLOGIES 27 T he term lean w as coined by a research team headed by Jim Womack, Ph.D., at M IT 's International Motor Vehicle Program. It w as used to describe Toy ota's business during the late 1980s, w hich at the time w as considered to be one of the best at generating customer v alue. To be a lean organisation is to hav e adopted a new w ay of thinking about the w ay the business is managed. T his changes the focus of management aw ay from v ertical departments and assets to one that optimises the flow of products and serv ices through the organisation’s business processes (that is, how raw materials are acquired and turned into added-v alue products for customers). As a consequence, lean thinking is claimed to • eliminate w aste along entire business processes instead of at isolated points. • create processes that need less effort, space, capital, and time to make products and serv ices at less cost and w ith few er defects, compared to traditional management sy stems. • make companies more responsiv e to changing customer desires for high v ariety, high quality, low cost, and short deliv ery lead times. • enable information management to become simpler and more accurate. Lean management techniques are being used by organisations in all industries and serv ices, including healthcare and gov ernments. Not all choose to use the w ord lean, but label w hat they do as their ow n sy stem, such as the Toy ota Production Sy stem or the Danaher Business Sy stem. T he main issues around the methodology is that it is often seen as a w ay to make cuts in costs that can often destroy an organisation’s v alue chain. It also requires a complete transformation of the w ay in w hich the business is measured and managed, something that cannot be achiev ed in the short-term. Balanced Scorecard T he Balanced Scorecard is one of the more modern management methodologies around, although it w as introduced ov er 20 y ears ago. It first appeared as a series of articles by authors Robert Kaplan and Dav id Norton in the Harvard Business Review in the early 1990s, although it w as based on the w ork of General Electric on performance measurement reporting in the 1950s. T he aim of the Balanced Scorecard is to continually improv e results by prov iding feedback on internal business processes and their link to external outcomes. It is promoted as a management sy stem and not just a measurement sy stem. By adopting the methodology, it is hoped that organisations w ill be able to clarify their v ision and strategy, w hich can then be translated into action. Tw o of the more notable facets of the Balanced Scorecard include the follow ing: 1. Perspectives. T he methodology v iew s organisations from a number of linked perspectiv es. T he more common being the follow ing: • Learning and growth. T his includes the activ ities that help the organisation to dev elop in meeting customer needs both now and in the future. • Business processes. T his includes activ ities on how the business operates in meeting customer needs. • Customer. T his includes the activ ities that lead to satisfied and loy al customers. • F inancial. T his includes how the organisation is funded and the financial rew ards that emanate. Each perspectiv e has a series of measures that are used to plan and report performance. 28 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES 2. Strategy mapping. Strategy maps are a v isual representation on how the organisation generates v alue. T hey link strategic objectiv es in each perspectiv e w ith measures in the form of a cause and effect chain, w ith the perspectiv es determining w hat measures contribute to meeting the ov erall goals of the organisation. For example, a profit-motiv ated company w ill hav e the financial perspectiv e as its goal, w hereas a not-for-profit organisation may see the customer perspectiv e measures as the goal. Giv en that the Balanced Scorecard methodology w as dev eloped at a time w hen executiv e information sy stems and supporting technologies w ere making real headw ay s into an organisation, there are many softw are tools that claim to prov ide management support. How ev er, many of these appear to be limited to w ay s of generating and disseminating scorecards throughout an organisation. T he issues caused by the Balanced Scorecard include the follow ing: • It is often seen as just a reporting sy stem and not a planning sy stem. • Quite often the measures used are backw ard looking and either not directly related to corporate objectiv es or they are outside of user control. • Measures are rarely balanced across the different business perspectiv es. T he financial perspectiv e tends to be ov erly represented, mainly because of the amount of av ailable data or the one of highest interest to the executiv es. • Targets are generally negotiated rather than w hat is required in order for the business to surv iv e and thriv e • T here is no mechanism for improv ing organisational processes Beyond Budgeting Bey ond Budgeting is the latest of the methodologies described here, although it is more of a mov ement w ith a set of principles than a set of prescribed rules. T hose w ho adopt bey ond budgeting concepts tend to choose the ones that they think w ill w ork best for them. Despite the title, and the mantra chanted by some adv ocates that they hav e ‘dumped the budget’, the method still retains budgets. W hat has changed, though, is that the traditional budget process has been replaced w ith a more dy namic and adaptable w ay of allocating resources that focuses on deliv ering organisational v alue. T he Bey ond Budgeting Round Table (BBRT ) w as established at the turn of the century and w as brought to a w ider audience in an article published in 2003 in the Harvard Business Review. Titled ‘W ho Needs Budgets’, the authors Jeremy Hope and Robin Fraser discussed the problems w ith traditional budgeting and asked w hy organisations still cling to inflexible planning practices. It then w ent on to cov er the bey ond budgeting principles. For them, bey ond budgeting means mov ing bey ond command and control and tow ards a management model that is more adaptiv e and empow ering for employ ees. It is about rethinking how organisations are managed w here ‘innov ativ e management models represent the only sustainable competitiv e adv antage’. T hey go on to say that it is also about ‘releasing people from the burdens of stifling bureaucracy and suffocating control sy stems, trusting them w ith information and giv ing them time to think, reflect, share, learn and improv e’. PLANNING METHODS AND METHODOLOGIES 29 T he common principles of the methodology hav e been set as follow s: • Gov ernance and transparency C C C Values. Bind people to a common cause, not a central plan. Governance. Gov ern through shared v alues and sound judgement, not detailed rules and regulations. Transparency. Make information open and transparent, do not restrict and control it. • Accountable teams C C C Teams. Organise around a seamless netw ork of accountable teams, not centralised functions. Trust. Trust teams to regulate their performance, do not micro-manage them. Accountability. Base accountability on holistic criteria and peer rev iew s, not on hierarchical relationships. • Goals and rew ards C C Goals. Set ambitious medium-term goals, not short-term fixed targets. Rewards. Base rew ards on relativ e performance, not on meeting fixed targets. • Planning and controls C C C C Planning. Make planning a continuous and inclusiv e process, not a top-dow n annual ev ent. Co-ordination. C o-ordinate interactions dy namically, not through annual budgets. Resources. Make resources av ailable just in time, not just in case. Controls. Base controls on fast, frequent feedback, not budget v ariances. T he BBRT (w w w.bbrt.org) prov ides resources and case studies on organisations that hav e embraced the bey ond budgeting concepts and the success they hav e achiev ed. T he issues w ith bey ond budgeting are related to changing the culture of an organisation. It is assumed that ev ery one is w orking for the good of the organisation, w hen other pressures such as rew ards and ‘hitting targets’ encourage people to take short cuts or ‘fudge’ the results. T his is true of any methodology but more open to abuse w ith bey ond budgeting. PLANNING AND SUCCESS In rev iew ing the planning needs of our company outlined at the start of this chapter, w ith the aims of management methodologies, it w ould seem that the tw o should go hand-in-hand. After all, XY Z’s management w ants to be able to better plan (that is to connect its resources w ith maximising its outputs) and be more reactiv e w hen things change. T he promise of a management methodology is to facilitate that planning and rev iew process by offering a set of practices that, if follow ed, w ill ensure a more reactiv e process tied to the implementation of strategy. How ev er, few organisations seem to achiev e the methodology promise. It is interesting to note from our ow n surv ey that despite most organisations’ claims to use a methodology, most hav e fundamental issues in the linkage to strategy. In general, there is really nothing w rong w ith the concepts of each methodology prev iously described. T hey are all a product of their time and striv e to fix glaring w eaknesses in an organisation’s management processes. T hey all hav e good points as w ell as w eaknesses inherent in their structure. If they did not hav e w eaknesses, then one of them w ould triumph ov er the others and stand the test of time. In our experience, some methodologies tend to fail for the follow ing reasons: 30 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES • The need for a quick fix. Quite often management w ill look to a methodology as a w ay of fixing a problem in a short period of time. How ev er, quite often w hat needs fixing is the culture of the business or organisation, and that takes time. It is easy to announce the introduction of a new methodology and to arrange training classes, but to get the principles engrained in ev ery manager’s mind in a w ay that changes their w ay of w orking is far from easy. C hange requires a consistent message from senior management, clear communication on w hy change is necessary, and unw av ering support for the principles being established. C hanging course part w ay through the implementation of a methodology is guaranteed to bring failure to any new method being introduced. • Hype over substance. Organisations may choose to adopt a methodology to solv e an issue that cannot be defined or solv ed. For example, hav ing a v ague strategy that cannot be measured is not going to be fixed by introducing a balanced scorecard. Similarly, consultants quick to see an opportunity may contribute to the propagation of hy pe by promising unrealistic sav ings or goal attainment. • Inappropriate systems. In this case, sy stems refer to the technology solutions designed to support the methodology. It is not uncommon for spread sheets to be promoted as the underly ing solution, but they are far from ideal as an enterprise w ide sy stem. Additionally, most sy stems focus on just one aspect of the methodology, such as the scorecard. T hese methodologies require links to budgets and forecasts, and they inv olv e both financial and non-financial key performance indicator (K PI) measures, w hich quite often are supported in different, unconnected solutions. • Lack of success. T here is an underly ing belief that implementing a methodology w ill guarantee success. Similarly, there is also a belief that a lack of success means that the methodology has failed. Neither are true. Organisations can ‘get lucky ’ despite the methodology being used, or they may just fall v ictim to catastrophic circumstances, none of w hich could be predicted or managed by the adopted management sy stem. T he aim of a management methodology is to bring management together around the topic of managing performance and that is it. Success is dependent on the right information being display ed, at the right time and in making the right business decisions. Oh, and a bit of luck is helpful. How ev er, it is unlikely that an organisation can jump from w here it is today into a fully -fledged, continuous planning process. It w ill require a number of smaller incremental steps that gradually introduce changes ov er time. Because not ev ery one is at the same stage, w e hav e dev eloped the follow ing maturity model that describes the different lev els of planning being exhibited w ithin organisations today. T hese different lev els can then be used to assess the next steps in dev eloping the planning process. PLANNING PROCESS MATURITY Planning Objectives T he ov erriding factor in dev eloping an effectiv e (and successful) planning process is to assess the lev el of maturity required by the organisation. Planning maturity can be defined as tw o sets of objectiv es that an organisation should desire to achiev e: (1) those that relate to the outcome of process itself and (2) those that relate to the behav iour of those inv olv ed. T hese planning objectiv es are outlined in figure 2-2. Some of these objectiv es w ill be easy to achiev e, depending on the complexity of the organisation. For example, in an organisation containing just a few employ ees that w ork closely w ith each other, the behav iour objectiv es of PLANNING METHODS AND METHODOLOGIES 31 Figure 2-2: Planning Maturity Objectives ow nership, accountability, and communication do not require much consideration. T hese can be assumed to occur as part of a conv ersation and w ithout recourse to the dev elopment of a specific technology. How ev er, in a large organisation containing large numbers of people, spread out ov er broad geographic areas, these same objectiv es need to be carefully considered and achiev ed through the careful design of a supporting planning sy stem. As a result, these objectiv es become more relev ant to the design of planning solution as organisations exhibit more of the follow ing complexity characteristics: • Large scale. Many and div erse products, serv ices, customers, employ ees, v endors, purchased parts, and commodities. • Variability. In demand v olume, product and customer mix, inv entory and serv ice lev els, product pricing, and input costs. • Rapid change. To products, suppliers, serv ices, processes, projects, operational constraints, and organisation structures. • Organisation structure. Multiple legal entities, business units (BUs), channels, geographies, and product groups. • Interdependence. BUs share customers, suppliers, production, and back office serv ices, thereby obscuring profit driv ers. • Globalisation. Lead times across global supply chains, inv entory lev els, and material av ailability. T he more that these objectiv es and complexity characteristics apply to an organisation, the more likely it is that they should consider mov ing to a more mature planning model. 32 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES Planning and Forecasting Maturity Levels T he maturity of planning and forecasting processes is driv en by the lev el of model integration. As models become more integrated, they support faster processes that y ield greater forw ard v isibility and reduce uncertainty. Figure 2-3 outlines tw o broad categories that comprise our maturity model: fragmented and integrated planning approaches. Figure 2-3: Fragmented and Integrated Planning Approaches T hese approaches can be further broken dow n into fiv e stages of planning and forecasting maturity : basic planning, financial integration, partial integration, matrix planning, and dy namic planning. A key feature that separates each of these stages is the ty pe of driv er-based planning approach that it employ s. Being driv er-based means that v ariables affecting performance or resources can be related to one another. T he dependencies betw een the v ariables can be modelled. For example, production costs could be related to v olume made, w hich in turn could be related to sales success, and so on. By entering a few numbers, the planning model can make use of these relationships to predict future results. As driv er-based planning becomes more mature, organisations are also able to support more sophisticated scenario planning. Basic Planning At this stage, organisations employ traditional bottom up budgeting approaches that are augmented by v ery basic models. T hese models are ty pically based on financial relationships w here a planning line is expressed as a per cent of another line item or period. T he follow ing are examples of this: • Sales are expressed as a per cent increase or decrease ov er the prior y ear. • C ost of sales is expressed as a per cent of sales. • Expenses (for example, salaries and trav el) are expressed using either approach. • C ash flow is expressed as per cent of receiv ables and pay ables. T he follow ing are some the classic characteristics of these models: • Any analy sis that supports them is often maintained in off line sy stems or spread sheets. • Operational reconcilliation is done on an ad hoc basis, if it is done at all. • T here is a loose connection betw een objectiv es, targets, budgets, and forecasts. PLANNING METHODS AND METHODOLOGIES 33 T he effectiv eness of these models depends on the complexity of the business. For smaller and less complex organisations, they may support all of the analy sis required. How ev er, as complexity rises, these models are not as useful because they are not accurate and they do not support consensus. Financial Integration T he financial integration stage is one w here organisations use operationally -based driv er models that estimate how costs behav e as v olume and rev enue changes. Key features of this approach include the follow ing: • T he role of finance is to determine w hich driv ers best quantify the impact of changes. • T his role often entails summarising operational planning models into simpler financial ones. • T he models are ty pically expressed in terms of cost per driv er or per unit of output. • Examples of driv ers include the number of orders, customers products, or shipments. T hese models are ty pically dev eloped for financial planning and cost estimating purposes only. Activ ity -based costing (ABC ) is the accepted method to proportionately trace the consumption of resource expenses (for example, w ages, supplies, pow er) to the outputs (for example, product costs) using a cause-and-effect relationship. ABC prov ides per unit of output lev el cost rates needed to multiply times forecasted unit of output v olume quantities to calculate projected resource capacity expenses. Although operations prov ide input into dev eloping the models, the lev el of granularity of ABC ’s activ ity cost pools are ty pically adequate for strategic insights by hav ing high cost accuracy, but may not be sufficiently detailed to enable operational managers to make operational decisions. Gary C okins, co-author of this book, has w ritten a popular book, Activity-Based Cost Management: An Executive Guide, that explains how to construct, implement, and apply ABC for strategic and operational analy sis, projections, and decision support. At this stage, many organisations start using balanced scorecards and other performance measurement approaches. How ev er, target setting, budgeting, forecasting, and scenario planning processes are only loosely connected. T his is primarily because the planning models are not sophisticated enough to connect K PI targets to resource requirements. In organisations that experience little change or v ariability, these models can be v ery effectiv e. How ev er, more complex ones often experience the follow ing: • Maintaining models can be time consuming, often resulting in models that are inaccurate. • Embedded operational assumptions are often only v alid across a narrow range of scenarios. • Models often hav e to be manually updated to examine the impact of outly ing scenarios. • As a result, organisations can only run a limited number of scenarios, thereby exposing them to potentially unidentified risks. • Scenario planning can be costly, as significant time and effort goes into v alidating and reconcilling financial and operational scenario planning efforts. 34 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES Partial Integration At this stage, finance and operations start sharing models and processes in parts of the organisation. Other parts continue to operate processes at lev el 1 and 2. T hey do this because it • reduces the cost of processes and sy stems. • results in greater clarity because there is only one plan. • supports more effectiv e scenario planning in these parts of the business. • prov ides greater forw ard v isibility into risk as a result of scenario planning. • improv es process speed by eliminating non-v alue added activ ities. T his stage of planning maturity can take many forms. Demand planning is a classic example of w here a single model can be used to support more effectiv e processes. T he manufacturing sector has led the w ay in lev eraging such integrated models that, at a basic lev el, prov ide the means to connect the number of units sold to rev enue and av erage selling price. Bey ond that, they enable organisations to • establish more collaborativ e demand and rev enue planning processes. • automate the analy sis of v olume and mix v ariances on rev enue and av erage selling price. • support a more effectiv e rolling forecast process that adapts faster to change. • co-ordinate new product dev elopment and promotion planning into demand and rev enue forecasting. Manufacturing has also led the w ay in dev eloping models that integrate planning of direct costs or cost of sales. Planning bills of materials are used to define the commodities and components of the products they sell and how they are made. T his results in a process that simultaneously forecasts • cost of goods manufactured and sold, together w ith inv entory balances. • production capacity requirements, together w ith capacity constraints. • commodity purchase requirements and related cash flow impact. • purchase price and production cost v ariances from standard. From an indirect perspectiv e, integrated models translate K PI targets, along w ith departmental v olume into the follow ing: • Staffing requirements • Departmental budgets and forecasts • Productiv ity (cost per outcome) targets Multiple planning models and sy stems still exist for organisations at this stage of maturity. Matrix Planning At this stage of maturity, organisations shift from traditional functionally -based planning approaches to more horizontal cross-functional and outcome-based approaches. To support this, finance and operations share models and processes across the organisation. T he follow ing are key features of this stage: • Profit and cash flow forecasting is explicitly linked to K PI and rev enue targets • Plans are expressed from both functional and process perspectiv es PLANNING METHODS AND METHODOLOGIES 35 • Budgets and forecasts are expressed in relativ e terms (cost per output) • Planning and target setting cuts across functions and BUs One of the key reasons that organisations shift to such an approach is to optimise performance across functions and BUs. In so doing, they are also recognising the limitations of traditional budgeting processes because they reinforce functional silos and thereby sub optimise performance. Dynamic Planning Organisations employ highly sophisticated models that integrate all aspects of planning and forecasting at this stage of maturity. One of the primary motiv es for doing so is to enable organisations to more effectiv ely manage complexity, uncertainty, and risk, a key component of w hich is more effectiv e scenario planning. T hese organisations also conduct integrated scenario planning. T his includes the ability to simultaneously ev aluate the impact of different scenarios on all aspects of performance. Four specific capabilities arise at this lev el of maturity : • Dy namic models that self-adjust to changes in v olume and mix • Forw ard looking (activ ity -based) product and customer profitability and cash flow s • C apacity constrained cash flow s, w hereby models forecast capacity constraints, along w ith their impact on cash • Project and portfolio return on inv estment w hereby models quantify the impact of operational changes on the cash flow of project portfolios As mentioned earlier, the lev els of planning maturity described can be used to assess w here an organisation is today and the lev el at w hich it needs to be. As w e come to the end of this chapter, w e recognise that the reader can be easily ov erw helmed by the array of methods that all seem to point to an idealistic approach to planning. It’s an approach that seems to be dev oid of internal politics, w here ev ery one is w orking for the good of the organisation, and there is ample time in w hich plans can be carefully crafted. In the last part of the chapter w e looked at the lev els of planning maturity that organisation’s achiev e, irrespectiv e of their chosen management methodology. T he reason for doing this is to show that planning is a complex topic and more than just predicting a set of numbers on future performance. How ev er one thing that is missing is in explaining just how does an organisation go about putting a more focused plan together? Well that’s something w e w ill do starting at C hapter 4 ‘Business Planning Framew ork’, but before then w e need to cov er the role of planning technology w hich is the subject of the next chapter. 36 BUDGETING, PLANNING, AND FORECASTING IN UNCERTAIN TIMES Endnotes 1 Marvin Bower, Perspective on McKinsey, 1977. PLANNING METHODS AND METHODOLOGIES 37