Getting It Rolling

APQC surveyed 130 finance executives, most in U.S.-based multinationals with more than $1 billion in annual revenue. Even in these presumably sophisticated companies, performance management is not living up to its potential. When asked about the benefits of their budgeting process, nearly one in five of the survey's respondents indicated that the process is not valuable to anyone outside of senior management. Another quarter of respondents said their budget becomes obsolete quickly. (See Figure 1 on page 2.)

That makes sense in light of another of the survey's findings: Only half of organizations are currently using rolling forecasts; the rest manage their business to meet budgets established once a year. "When you're managing to a budget that is static, the baseline of the budget may become irrelevant as factors in the environment and in the business change throughout the year," says Graham Tasman, business advisory services principal at Grant Thornton. "Companies aren't going to be responding to those cues if they're just working off the annual budget."

Timeliness may remain a challenge even for the 50 percent of survey respondents whose companies do use rolling forecasts. "When you make changes to the budget and re-forecast, a lot of reviews and approvals are involved," Tasman says. "If that process moves smoothly and is timely, the benefit of doing a rolling forecast is closer-to-real-time feedback on changes to your budget. But when that process breaks down, or when reviews or approvals take a long time, the revised forecast might be dated by the time it becomes instantiated.

"Most organizations today are familiar with rolling forecasts, and half of the survey respondents said they do rolling forecasts," Tasman adds. "But what's not revealed in the data is whether they're doing them well. Rolling forecasts aren't easy, and sometimes it's not a fluid process. Just saying you have a rolling forecast doesn't mean it's optimized."

Battling the Tyranny of the Urgent

In fact, even when they're not out of date, many companies' budgets are not optimized. More than two-thirds of respondents to the APQC survey (69 percent) reported that their company sets performance goals as a percentage of the prior year's budget. "I'm a little surprised that the percentage is that high, but I'm not shocked," Tasman says. "Folks get caught in the tyranny of the urgent, and starting from last year's budget is easier, even though it may not be relevant to the current conditions."

Moreover, the survey shows that only 11 percent of companies use predictive modeling in developing their budgets, while a quarter of companies are using demand-pull budgeting, which entails creating a budget by starting at either the prior year or a different baseline, then adjusting based on key business drivers rather than a standard percentage. Just 24 percent of companies are using zero-based budgeting, which means building a budget from the ground up, not using the prior year at all. "It's a much more tedious and time-consuming process, but the final budget is pristine and clean," Tasman says.

Companies are not much more innovative at the other end of the process—turning performance analyses into decision-supporting intelligence. About a quarter of respondents (24 percent) said their organization uses predictive analytics to project probable outcomes, while 36 percent use scenario planning and what-if analyses. (See Figure 2 on page 3.) These percentages aren't impressive, but Tasman reports that they're even a bit higher than what he would expect based on his experience working with clients.

"The mission for FP&A [financial planning and analysis] is to leverage option analysis as much as possible, to be able to look at various outcomes based on changing inputs," Tasman says. "Organizations tend to miss opportunities, or tend to incur excessive costs, if they don't make decisions quickly enough. By being proactive and forward-looking with scenario planning and predictive analytics, organizations can anticipate changes in the variables that drive their business. They can adjust their resource mix and their strategic decision-making to optimize their business activity."

In some companies, operations managers and line-of-business leaders perform these types of analyses, but Tasman says the best practice is to house predictive modeling within FP&A. "CFOs have ultimate fiduciary responsibility," he points out. "They have access to the financing of the business and access to the capital markets. If they are involved in strategic decision-making, then they can help ensure not only that corporate strategies are sensible, but also that the company has a solid plan for how to fund the strategies, tying in aspects of treasury and risk. Having finance in a pivotal role creates more of a complete picture."

The Tech Advantage

Companies that set budgets by applying a standard percentage increase to the prior year, and those that perform only the most basic analyses of actuals-vs.-budget variance at month-end and quarter-end, are failing to take advantage of the sophisticated performance management techniques that have been developed over the past few decades. For 62 percent of survey respondents, a major reason is that finance staff are buried in basic duties and have no time to improve FP&A. Tasman believes an outdated technology infrastructure is often to blame.

"One of the biggest challenges we see in finance functions is that FP&A systems aren't integrated," he says. "The data they're using for planning and forecasting comes from another system, whether it's a legacy ERP system or other feeder systems. Oftentimes these systems lack integration, so getting data into the performance management solution is time-consuming, and finance needs to cleanse the data in order to get the analysis to work."

The APQC survey's most problematic finding from the standpoint of automation may be the fact that 39 percent of respondents said they use only spreadsheets for FP&A and internal financial reporting. Another 56 percent use a combination of spreadsheets and dedicated software, while only 5 percent do not use spreadsheets.

"A preponderance of the respondents rely heavily on spreadsheets," Tasman says, "and we see the same thing with our clients every day. Spreadsheets often come into play in the more sophisticated planning and analysis activities because a spreadsheet gives you a lot more flexibility. Of course, it also creates control issues, which leads to a lot more manual activity and resources spent managing data."

The obvious solution is to upgrade to a technology system that automatically integrates data and minimizes manual activities. "Your metrics, your operational data and financial data, all have to work in concert together to inform decision-making," Tasman says. "A really robust enterprise performance management platform enables folks to spend a majority of their time changing inputs, looking at various scenario options, looking at the outputs, and going through an iterative process of analysis. That's the ideal."

To reach the ideal, finance needs, first and foremost, to ensure that the company's C-suite understands the difference a more sophisticated performance management process could make in their decision-making. "Leadership at the top has to recognize performance management as a business differentiator," Tasman says. "When an organization is under cost pressure, its priorities for finance might be making sure the transaction processing is flowing and the financial reports are being produced. The activities around strategic planning will likely be cut first because they aren't required to run the business from a regulatory standpoint. But ironically when a company is under cost pressure, that's the time when finance really needs to be doing more analysis."