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Perspectives on Budgeting and
Forecasting
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Agenda
Planning, Budgeting and Forecasting Processes
Tool Landscape
Contacts
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Performance Managementis a top priority
76% say measuringprofitability constraint is top
Improving financialprocesses is a top concern
CFO Priorities in 2009 (Gartner survey)
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Integration of Performanceand Risk Management is agrowing trend
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Top performing companies employ world-class performance managementprocesses
The Sherwin-Williams Company (1) Renault SA (2) Hilton Hotels (3) Continental AG (4) SABMiller plc (5) British American Tobacco (6) Reynolds American, Inc. (7) Nexen inc. (8) KBC Group (9) The Royal Bank of Canada (10) Moodys Corporation (11) Anglo Irish Bank Corporation (12) Thermo Fisher Scientific Inc. (13) Becton, Dickinson and Company (14) WellPoint, Inc. (15) Humana Inc. (16) Textron Inc. (17) AktiebolagetSKF (18) Atlas Copco AB (19) Volvo AG (20) Autodesk Inc. 21
5 Year Total Shareholder Return vs. Industry Performance
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Performance Management Related Benefits Experienced By Top Performing Companies
Through the implementation of world-class performance management processes, these companies are able to:
Align corporate goals and business strategy
Make better and more effective business decisions
Effectively communicate strategic objectives throughout theorganization
Provide increased visibility into all elements of the plan
Quickly respond to changes in business conditions
Increase accountability to plan accuracy
Tie business strategy to measurements and metrics
Simplify and standardize reporting to focus only on metricsthat matter
. Cognizant Technology Solutions (22) KoninklijkeKPN NV (23) Telekom Austria AG (24) Constellation Energy Group (25) Fortum Corporation (26)
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Many elements of todays business environment highlight the need for amore effective planning process
Pressures & challenges Impact on current environment
Regulatory Increasing regulatory oversight and scrutiny Increased need for financial transparency
Migration from well-controlled lagging indicators
to more leading indicator focus
Financial
community Difficulty in raising capital due to credit
market constraints
High returns demanded by investors
Reliance of shareholders and analysts onforward-looking projections and indicators
Increased need for accuracy and defensibility
of forecasts and budgets
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Markets
and
customers
Increased competition for customers
impacting retention and pricing
Increased pressure and emphasis on
profitability and cost reduction
Increased need to understand customer and
product profitability
Businessoperations
Need to efficiently integrate new acquisitionsand business models
Increased need to align business operations
with corporate strategy
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Ineffective performance management can lead to failure to achieve anorganizations strategic objectives
Despite acknowledging the desire to better manage performance, organizations continue to struggle with
issues that prevent them from achieving long-term strategic objectives
No clear accountability of operationalmanagers for targets
Reporting and analysis efforts fail to highlightpotential issues in a timely manner
Targets, where set, are not aligned to thestrategy and value creation
Long-range planning activity does not relateto the strategy
Symptoms of ineffective performance management
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xecu ve an s a e av or s no n ne wachieving performance measure goals
Data exists across multiple systems with nostandard set of business definitions acrossthe enterprise
Inability of existing technology to effectively
manage and analyze performancemanagement data
esources are oun n pro ec s w c arenot top priority to execute corporate strategy
Strategic objectives, initiatives and individualtargets are not aligned nor clearlycommunicated across the organization
The budget process is time consuming and
does not result in the effective deployment ofcompany resources
Tackling the symptoms individually will prevent the resolution of long-term issues. Instead, the
root causes should be addressed through the adoption of a performance management framework
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Deloittes Performance Management Framework
Strategy
Intervention
Strategy
Intervention
Forecasting
Strategic Planning
Development of vision
Determining strategic objectives
Identifying strategic initiatives
Identifying threats to achieving strategic initiatives
Identify and manage enterprise risks impactinginitiatives
Agreeing on desired results (i.e., performancemeasurement targets)
Establishing multi-year, high-level financial and
operational targets
Business Planning
Translation of strate into annual business unit
Intervention (Forecast)
Acting on the information
Decision Making, Investigation,
Reformulation of strategy, changeprocesses, risk response, start newactivity
Forecasting
Understanding the near future
Draws on known facts and realistic estimates ratherthan setting a course
Scenario planning and what-if analysis on critical riskfactors
Risk threshold recalibration if needed
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PlanningPlanning
Budgeting
Operational
ReportingManagement
Reporting
External
Reporting
Analysis
Value
Creation
Reporting Financial variance reporting and monitoring
Close, management & statutory financial reporting
Risk dash boarding and regulatory compliance reporting
Operational reporting and monitoring (i.e. status of key business planinitiatives)
Analysis
Analysis of performance measurement gaps
Ad hoc financial analysis
Analysis of systemic and enterprise risk
Analysis of operational progress againstplanned initiatives
Determination of corrective actions
Performance Measurement
Reporting and monitoring of key, balanced performancemeasures (KPIs and associated KRIs) that reflect desiredresults of strategic plan
Communication of results of corporate and functionalscorecards (performance and risk) throughout theorganization
action plans (projects and initiatives)
Identification of business unit performancemeasurement targets (i.e. KPIs)
Identification of risks to achieving performancemeasures (i.e. KRIs)
Development of annual operational and capitalspending envelopes
Budgeting & Performance Target Setting
Identification and prioritization of capital
projects to develop capital budget Translation of business plans and capital
budget into operating budgets (based ondefined business model)
Translation of business unit performancetargets to operational performance targets(i.e. KPIs)
Translation of business unit risk thresholdsto operational risk thresholds (i.e. KRIs)
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What drives performance in the companys market and in the companys operations? How much should we invest in new products vs. line extensions?
How will an ERP impact operational effectiveness and efficiency?
Should we hire twenty new sales people or build a new warehouse?
How much investment should be shifted to those initiatives with the greatest promise?
Business sustaining vs. Business growth
Our view is that the planning process should raise questions and provideanswers that are core to the business
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What key performance indicators would best measure progress towards strategic goals?
Outcome/Risk Measures Revenue, Earnings Per Share
Process Measures Cycle Time, Number of Hand-offs
Predictive Measures Unemployment, Consumer spending, Fuel cost, Commodity
prices
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Planning/Budgeting is a top-down, bottom-up process with multiplestakeholders
Analyze Consolidated
Results
(e.g., pro-forma financials,KPIs, risk modeling)
Finalize Changes and
Approve Plan
(e.g., tweek plan; obtaincommitment)
CFO and Executive
Management
Top Down Executive
Guidance and DirectionTop Down Plan Finalization
Define Financial and
Operational Targets
(e.g., ROIC, ROE,EBITDA Margins)
Create Strategic Plan
(e.g., shareholder value,
investment portfolio)
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Start Planning Cycle
Push Targets Down to
Actionable Level
(e.g., Communicate targets,
assess implications)
Create Detailed Plan
(e.g., driver based modeling,
approval based workflow,
scenario planning)
Validate Plans and
Consolidate Results
(e.g., verify plan
assumptions, check results
for reasonableness)
End Planning Cycle
Financial Planning & Analysis
Business Units
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More standardized
Enterprise-wide
processes Use of web-enabled
Planning processfully integrated withstrategy
Real-timeforecasting and
Develo in
Defined
Advanced
Leading
Developing a Leading Practice Capability
Companies typically mature from an unstructured planning process toward a more matureand structured process. The development often follows a path such as this:
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No formal planningprocess
No planning tools
Inadequate
communication Purely financial plan
Inconsistentprocess
Basic tools (e.g.Excel)
Ad hocspreadsheets
Highly manualprocess
processes
Some integrationacross BUs
Reliance on ERPsystem as planningtool
Little analytics
budget tool
Rolling forecast andother advancedprocesses
per ormancemonitoring
Compensationlinked to results
Emerging
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Leading organizations are adopting a number of effective solutions toimprove their planning processes and enhance their value
Key performance indicators
Rolling forecasts
Identification of the most significant measures of business performance
Key Benefit: better alignment between strategy and execution
Expansion of forecast horizon beyond current fiscal year
Key Benefit: better insights into market conditions and expectedperformance
Development of planning models based on major internal and external
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Driver-based planning
Capital allocation
Focusing capital spend on projects or initiatives that drive value
Key Benefit: better return on investment for key initiatives
Key Benefit: more accurate plans and better insight into performancedrivers
Scenario Analysis Using various assumptions to gauge bottom line impact
Benefit: better decision-making that includes consideration of all businessscenarios
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Blow-up the Budget!
Leading organizations are beginning to move from a rigid, annual budgeting process that typically is
painful and causes undesirable behaviors to a rolling forecast:
can be
replacedwith this...
but only if
changesmade...
Internally focused, historicalperspective, bottom-up plandevelopment
Multiple lines of targetsprovided, but not formal firmtargets (e.g., revenue)
Multiple iterations of detailedbudget preparation
Forward looking, more market-based, externally-focused, top-down planning
Less overall effect
Few top-down targets
Fewer iterations and less detail
churn at sites
Fewer data lines sent to
Changes made to current plan,process and philosophy
Timely and complete targets
Reduced data elements
Improved data collection tools
Close linkage with other planningprocesses
Continuous planning
Required ChangesTypical Rolling ForecastTypical Annual Budget
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With Rolling Forecast, the need for budgeting is minimized or eliminated while producing amore externally-focused, market-sensitive process
A rolling forecast willincrease the planningworkload
otherwise...
levels
Excessive handoffs
Spring and Fall plans areseparate activities
Forecast focus is only oncurrent year
Fall plan process results inlarge spike in workloads
Incompatible systems/softwareused throughout
corpora e
Tightly linked to strategy
Improved decision support
Planning horizon refocused tolooking beyond year-end (e.g.,15 months)
Annual Event reduced in theFall so increases continuous
planning mind-set Improved, uniform I/T tools and
infrastructure
Smooth resource needsthroughout year
Increased line managementfocus on quarterly forecasts vs.single event
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Rolling Forecast Leading Practices
Timely and complete targets Reduced data elements
Efficient data collection tools
Increased line management focus on quarterly forecasts vs. single event
Expand the scope of forecasts to include financial and non-financial data
4 or 5 quarters
Simplify and focus forecasts by relying on a few measures/drivers
Assign forecast ownership to operational units
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Define threshold-level forecasting (i.e., scope and depth of forecast and action planning basedon predetermined thresholds)
Define consistent methodology and timeline to complete forecasts
Automate and leverage (e.g., modeling and scenario analysis) rolling forecasts throughinformation systems
Link incentive compensation to plan targets and relative value changes
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A Range of Operating Models
Decentralized Coordinated Center-Led Centralized
Central Group defines Central Group defines Central Group responsible
for overall lan
Central Group defines
rocess deliverables
Improving planning & forecasting often requires greater leadership from corporate to facilitate decision-
making
- Basic - - Leading Practice -- Immature -
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Divisions develop all plans
to meet schedule
Sets schedule only
Summarizes divisional
plans into Corporate Plan
Develops all deliverables
to meet timeline/schedule
Divisions define content &
deliverables
Owner of Corporate Strategy
outputs
Sets schedule and f inancial
guidelines
Integrates & coordinates
divisional plans
Develops deliverables within:
Timeline & financial
guidelines
Divisions provide data and
input
Owner of Corporate
Strategy outputs
Overall Process owner
Develops approaches,
deliverable standards,
timeline
Develops deliverables
within:
Timeline
Approach
Guidelines
Deliverable designs
schedule and standards
Divisions work within
approach
Owner of Corporate
Strategy outputs
Overall Process owner
Develops approaches,
deliverable standards,
timeline
Develops deliverables
within:
Timeline/Approach
Guidelines
Deliverable designs
Description
Corporate
Planning Role
DivisionalPlanning Role
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The landscape of PBF tools is quickly changing
Hyperion Planning Cognos Planning BPC PerformancePoint
Offers true out-of-the
box system
integration
Considered the leader
in the Business
Consistently
recognized as the
leader in BI analytical
reporting
Cognos TM1 software
SAP planning tool
Highly customizable
with Excel front end,
which simplifies user
adoption
Leverages Microsofts
Analysis Services
(similar to Essbase
and TM1)
Tightly integrated with
15Copyright 2009 Deloitte Development LLC. All rights reserved.
Management Space
-
approach to
consolidating,
viewing, and editing
data
Built on a centralized
services-oriented
architecture
MS SQL Server
IBM will likely leave
as a stand alone
application
SAP will
incorporate into Net
Weaver architecture
Oracle integrated
into OBIEE, Siebel,
or other Oracle
products
Will continue to
market low cost
solution to mid-
market
Future Direction
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Vendor Overview SAP BPC
Developer and provider of analytic portal-based budgeting, forecasting and reportingProduct Offerings Highlights
SAP-BPC (Formerly OutlookSoft)
Current product is basically OutlookSoft 5.0 ,
designed for consolidation, financial planning,
and scorecarding based on a Sequel Server
Architecture
Next generation to be released in fall 2008 will
include similar capabilities, but be integratedwith SAP Netweaver platform
SAP-BPC
Web centric messaging and portal positioning
which supports collaborative, dynamic
processes
Provides workflow for managing the
submission and approval of budgets, forecasts
and plans
Ca able of mana in com lex calculations with
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SAP-IP (Integrated Planning)
Netweaver based planning product released in
Fall 2006
Primary focus is on planning and forecasting
Though both products provide similar functionality IP
is generally considered more robust and scalable,
while BPC is consider more flexible and user friendly
complete Excel integration
Reporting is limited and lacks formatting
flexibility
SAP-IP
Robust planning and forecasting capability
Complete integration with SAP Netweaver and
BI environment
Highly scalable
Limited installations
Complete dependence on IT for support, no
forward deployed or self-service administration
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Vendor Overview - Cognos
Cognos is a leader in the business intelligence and analytics space coupled with business performancemanagement capabilities
Product Offerings Highlights
Cognos Planning
Analyst is a localized modeling and analytics
product
Contributor is a web-based data collection and
modeling product
Cognos TM1
Cognos 8 allows for integration of Cognos BI products
but limited integration of Cognos financial products
Ease of developing planning functionality by using built-
in-functions (BIFs) or the Analyst product that does not
require programming knowledge
OLAP engine
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Real time response to calculations, analytics with
write-back capabilities, simple modeling
Cognos Controller (for consolidation & related reporting)
Cognos Report Studio and Query Studio (ad hoc
querying, production report templates)
Cognos PowerPlay/Analysis Studio (BI, analysis)
-
the client which may compromise performance of large
cubes if client processing limitations exist
TM1 uses 64 bit technology and stores cube in memory
for quick response times
Integrate with Microsoft Excel, PowerPoint and Word
through Cognos Office Connection
Web or Excel interfaces
Highly configurable and flexible
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Vendor Overview - Hyperion
Hyperion is a leading player in the Business Performance Management spaceProduct Offerings Highlights
Offers a suite of solutions for financial management,
business intelligence, and data management
Hyperion Financial Management (for consolidation)
Hyperion Analytic Services (Essbase)
Hyperion Planning
Hyperion Reports
H erion Anal zer dash board
Hyperion Analytic Services (Essbase) is the dominant
OLAP engine in financial analytics space offering a
powerful and sophisticated multi-dimensional OLAP
engine
Hyperion System 9 serves as an integration platform
across all Hyperion products
Centralized architecture provides simpleradministration and deployment of the various products
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but compromises end-user flexibility in defining rules,
calculations, etc.
Server-based processing
Fully integrated with Microsoft office through
SmartView
Web-enabled across products
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Contacts
Vic KatyalPrincipalDeloitte & Touche [email protected]
Jeff TorstensonSenior ManagerDeloitte & Touche LLP
19Copyright 2009 Deloitte Development LLC. All rights reserved.
mailto:[email protected]:[email protected]