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Forrester Research

Time-consuming methods of sharing and aggregating information bog down budgeting and financial planning processes. The concepts of rolling budgets and dynamic, cross-functional financial planning are catching on as companies adopt more powerful software tools. Ultimately, technology will enable companies to execute real-time planning and performance management processes through a more collaborative approach.

Budgeting and financial planning processes are traditionally performed on a periodic (usually annual) basis, limited by time-consuming methods of sharing and aggregating information. From a technology perspective, these processes often depend extensively on the use of electronic spreadsheets and email.

From a business standpoint, the budget itself has been more of a cost-control instrument rather than a planning tool in many organizations, limiting expenditures by organizational units through a hierarchical command and control scheme. As a planning tool, the budget quickly loses relevance as it becomes out-of-date within months or weeks of its laborious creation. As technology constraints are lifted by a new generation of Web-based budgeting and financial planning tools, business processes become more collaborative and dynamic, and thus more responsive to business needs. While many companies will find it beneficial from an efficiency standpoint to automate budgeting and financial planning processes, the ultimate potential will be realized by transforming these activities into a virtually continuous process, driven by events rather than the passage of time. Companies making this transformation can achieve greater visibility into future revenue, expenditure, and operational patterns, increasing their ability to predict and manage financial performance.

The budgeting and financial planning application market is led by a relatively small group of aggressive best-of-breed software vendors, including Hyperion, Adaytum, and Comshare. Paradoxically, the large enterprise resource planning (ERP) vendors, which dominate the market for transactional financial systems among large companies, have lagged in this application area from a competitive standpoint. Giga predicts the market for budgeting and financial planning solutions, currently at about $225 million in software licensing revenues, will grow 20 percent annually through 2005. The main drivers of this growth are: the critical need by most businesses to rapidly reconfigure or adjust business plans in a dynamically changing business environment and the availability of more powerful technologies that will enable the innovation of financial planning processes for greater effectiveness. The large ERP vendors are improving their budgeting and financial planning offerings as well and will begin to exert more influence in this application market in 2002, contributing to its overall growth. While the ERP vendors should provide a more substantial competitive threat, best-of-breed vendors will continue to lead this market through 2005.

Processes in Transition

Budgeting is fundamentally a cost-control discipline that has seen virtually universal adoption in business. In government, the budget process is generally the primary mechanism for fiscal planning and control by law, allowing accountability and checks and balances over public funds. The budget’s use in private sector businesses varies widely from a planning exercise to a strict discipline for regulating expenditures. In addition to budgeting, businesses typically invoke other financial planning processes, including strategic (long-range) financial planning and profitability forecasting. Long-range financial planning allows a company to develop financial models of the business to analyze strategy scenarios. Quarterly profitability forecasting is of paramount importance to companies whose stock is traded on public exchanges, as quarterly earnings results and projections often materially influence stock prices.

The major changes occurring in budgeting and financial planning business processes are an increase in the frequency of activity and a greater degree of collaboration. For many companies, the pace of business change is far more dynamic than the traditional processes and tools used to predict and model financial results. Many companies have adopted the concept of rolling budgets and forecasts to react to changing business conditions. The frequency of updating financial planning information may be quarterly, monthly, and even weekly depending on the volatility of the business. Figure 1 illustrates the relationship of financial planning activities to time. More recently, the concept of continuous (or dynamic) financial planning has begun to gain acceptance, particularly with high growth businesses, such as technology companies. With such companies, an annual budget is of little relevance because business conditions can change overnight. Less volatile businesses can also benefit from real-time financial planning processes because greater visibility into front-line revenue and expenditure activities gives managers a clearer picture of business performance as a basis for making operational decisions.

Greater frequency in financial planning requires higher levels of interaction and collaboration. This means the process must be distributed to a wide variety of users, not just limited to the finance/accounting function. Financial planning processes, accordingly, must be viewed as cross-functional. Although managing expenditures is a key component, an accurate forecast of the business must take into account sales, operations (production, supply chain, and inventory), and human resources activities. A collaborative financial planning process, therefore, should incorporate timely input from nonfinancial sources, such as front-line sales management. Where the forecasting process is driven by financial reporting needs, such as quarterly earnings projections, financial data is the main focus, but nonfinancial drivers of revenue, costs, and profitability should also be taken into account. These drivers may include external economic and competitive factors as well as internal performance indicators. Several leading budgeting and financial planning applications, later discussed, include financial forecasting capabilities. Specialized planning and forecasting processes, including sales pipeline analysis (typically supported by customer relationship management (CRM) applications) and supply chain planning, that are beyond the scope of this planning assumption, should be recognized as potential process and system integration opportunities.

There is virtually no limit to the level of sophistication and complexity that can be built into planning and forecasting business models, but for practical reasons, financial planning and forecasting techniques should balance sophistication and precision against manageability and clarity. In addition to the normal IT challenges for implementing an enterprise application, including system integration, platform installation, and application configuration, cultural and business process change should also be taken into account. Expanding the use of an application to a broader audience and changing process frequency and mechanics requires high levels of communication and user involvement. A staged roll out or pilot test group is recommended to manage risk and assess solution effectiveness.

Technology Impact

The development of continuous financial forecasts and rolling budgets is difficult, if not impossible, to execute with traditional financial planning tools. Even the annual budgeting process suffers from an efficiency standpoint when executed with common spreadsheet-based methods. In a traditional budget development process, instructions and guidelines are sent to line or department managers for detailed development and resubmission. The results are then consolidated and analyzed by the centralized financial planning function. With spreadsheets, the process is time-consuming, difficult to control, and constrained by the inability to manage large volumes of data and monitor the integrity of the data. Client/server budgeting products (e.g, Hyperion’s Pillar) were a major improvement in providing distributed functionality with centralized control. Such products, however, are often constrained in terms of network scalability and the need to install software on each user device. Data management including consolidation, manipulation, and analysis is another key technical requirement made more difficult with spreadsheets. Advanced solutions for larger companies make use of relational databases, multidimensional online analytical processing (OLAP) engines, and data ware-housing tools for managing large volumes of financial data.

A very significant technical innovation for this application type has been the use of Web technology, which eliminates the constraints on timely collaboration and maintenance of software on local devices. Workflow automation also enables submission control, business rule consistency, and the routing and approval of information. From a collaborative perspective, the Web technology is enabling a larger number and variety of users to participate in financial planning processes. The network-centric approach also facilitates access to, and dissemination of, financial management information. Portals providing access to financial planning and historical information are gaining momentum as vehicles to deliver information. While the newer technology facilitates virtually real-time financial planning activities, companies must recognize that a major cultural change is required to effectively maintain and use the information in a collaborative fashion.

With the newest generation of Web-enabled and Web-native budgeting and financial planning products, vendors are split between client-centric and server-centric architectural approaches. The server-centric approach typically features a thin HTML Web client with the calculation formulas and business rules stored on the server. Hyperion’s planning product and Closedloop’s applications solutions use this approach. The client-centric approach downloads calculation routines and business rules to the Web client via Active X controls or Java applets, allowing manipulation of the financial data to occur essentially offline prior to submitting updates to the server. Adaytum and Comshare, two leading vendors, use this client-centric approach.

Product Functionality

In contrast to transactional financial applications, most planning and budgeting applications emphasize flexible modeling and configuration tools more than out-of-the-box functionality. Modeling capabilities are one of the more important features to consider, allowing the development of sophisticated financial planning scenarios that represent the dynamics of the business. The application must be able to model business drivers based on a variety of inputs, both financial and nonfinancial. Advanced modeling capabilities should include solving and goal seeking, allowing detailed values to be resolved against desired target amounts. Although spreadsheets have good modeling capabilities, the planning application should apply these capabilities in multiple dimensions and with potentially large volumes of data.

In order to configure the application to business needs based on such factors as organization structures, products, time frames, geographies, and statutory requirements, the following capabilities should be sought:

• Hierarchical reporting structures, which may be configured graphically
• Workflow automation, incorporating routings and notifications
• Foreign currency and international support
• Varying levels of detail and the ability to drill to supporting line items and schedules
• The ability to document, in context, the underlying assumptions used to develop the financial information at detail and scenario levels
• Designation of calendars and time frames for each planning activity
• Allocation capabilities for distributing and spreading amounts based on a varietyof methods
• Open integration to financial and ERP systems for importing data and exporting results

Besides modeling and configuring the planning environment, the application must have strong capabilities for analyzing and reporting information generated. From a data management standpoint, the application should make use of multidimensional OLAP capabilities or “cubes” for multidimensional analysis and data manipulation, which are either embedded in the product or available through integration with leading OLAP servers. From a reporting standpoint, graphic views of data must be supported as well as the ability to publish output to the Web and to other formats, such as Excel spreadsheets. Increasingly, vendors are offering or integrating with portals designed to provide intuitive access to financial information. The application’s information delivery environment should also provide query capabilities that are suited for end-users. Ideally, the query tool should shield the complexity of underlying data structures from the nontechnical user, such as through the use of a semantic layer that translates technical terms in plain language.

Another important product characteristic is usability, including nonfinancial users such as line/department managers and sales professionals. With this type of diverse user population, multiple types of user interfaces are required, from simple graphic and forms-based presentations for infrequent users to a more complex spreadsheet style preferred by core finance users.

Various vendor offerings are more easily differentiated by technical characteristics and an overall approach to addressing financial proc-esses than by detailed functions and features. Users should have a clear understanding of how they intend to manage future financial planning, budgeting, forecasting, and reporting processes before selecting a tool. Key technical and functional characteristics, such as architecture, scalability, and usability, may be critical depending on the organization’s size and how the applications are deployed.

Market Characteristics

The market for budgeting and financial planning applications is relatively small. Currently, the market is approximately $300 million globally, but Giga anticipates a robust compounded annual growth rate (CAGR) of 20 percent through 2005 (Figure 2). This forecast is based on software license revenues only (excluding services) and is limited to products specifically for budgeting and financial planning, reporting, and analysis. Our forecast excludes business intelligence and analytical tools for more general use, operational and sales forecasting tools, strategic performance management tools (e.g., balanced scorecard), and activity-based management applications.

There are several factors driving substantial growth. The current economic downturn and the volatility of financial markets have painfully increased awareness for sound and responsive financial planning. The keen anticipation of quarterly earnings announcements from public companies has prompted many to preannounce earnings estimates, thereby avoiding surprises once historical results are made public. On a more strategic level, there is a clear need to anticipate positive and negative scenarios that may materially impact financial performance. Sophisticated budgeting and financial planning tools, therefore, fulfill several important business requirements. These requirements are currently addressed in many companies by makeshift solutions (e.g., spreadsheets) that are suboptimal in effectiveness and scalability. These factors suggest market growth will initially be more concentrated in the U.S. market, where these economic and market conditions are more pronounced.

Another recent development spurring growth is collaborative, Web-based technology. As companies recognize the value of the new technology, increased adoption of budgeting and financial planning applications will occur. Even organizations that primarily focus on the traditional annual budget process (including governments) will contribute to the market’s growth, benefiting substantially from the process efficiency and reporting capabilities offered by new applications.

Finally, large ERP vendors, like SAP, Oracle, and PeopleSoft, are beginning to exert more influence in this market. Giga has seen significant progress on the part of the large ERP vendors in financial planning and budgeting applications, particularly by PeopleSoft and SAP.

Customers using current releases of these vendors’ accounting systems can benefit from the prepackaged integration between applications and planning, budgeting, and financial analytic applications from the same vendor. Applications are still maturing and capabilities vary among vendors.

Return on Investment

For larger companies, software costs for enterprise budgeting and financial planning systems typically range from $200,000 to $500,000. Pricing is normally based on the number of named users and product modules. Implementation costs vary depending on platforms, system integration, and software configuration requirements. The key system integration requirement is transactional financial applications, particularly general ledger. Actual historical financial information is imported into the budgeting planning application and budgeted amounts are exported to a general ledger for tracking and reporting. Integration with sales forecasting, human resources, and other applications may also be required. Configuration of the application involves setting up reporting hierarchies, line items, modeling logic, security, and workflow. In large companies, implementation costs may range from one to three times the software costs depending on complexity and integration requirements.

For organizations executing a time consuming and iterative annual budgeting process, efficiency improvements are a significant justification for investing in an enterprise budgeting and planning application. The time and effort to complete and aggregate financial planning data using a spreadsheet-driven process, along with the process cycle time and inflexibility to changes, are factors that can significantly improve with an enterprise planning and budgeting application. Unlike transactional applications, however, efficiency alone usually does not justify the cost of budgeting and planning applications.

Significantly higher-level benefits for these applications exist beyond efficiency. This value proposition includes:

• Flexibility and agility – Scenario-based business planning capabilities that support management decisions on product lines, markets, acquisitions, and other key aspects of the business. Companies can react more quickly to changing business conditions using collaborative planning processes and tools.
• Shareholder value – Public companies must forecast and monitor performance against market expectations. A continuous forecasting process enables such companies to potentially reduce the volatility of the company’s stock price by accurately setting expectations of earnings with investors.
• Business performance – Analytical capabilities enable the comparison of actual and planned results as well as the use of financial and nonfinancial measures for optimizing business performance.

The real value of these applications lies in the information they produce. Enhancing an organization’s ability to monitor and control expenditures is a key factor. This opportunity is improved if the organization adopts a practice of rolling budgets, enabling ongoing adjustments and monitoring of spending. Accurate forecasting of revenues and expenditures is another significant benefit that can be achieved. For a company whose stock trades on public exchanges, forecasting enables early warnings that could potentially reduce the volatility of the company’s stock price by setting expectations of earnings with investors. Finally, the strategic business planning capability will support management decisions on product lines, markets, acquisitions, and other key aspects of the business. To the extent that an organization can leverage at least some of these benefits, the payback on the application can be realized quickly.

Findings and Recommendations

The main reasons companies should invest in new financial planning and budgeting solutions are increased flexibility and responsiveness to business needs. Companies that adjust with changing market conditions more effectively align expenditures to expected revenues and manage assets and resources.

The need for agility is quickly transforming how organizations process and manage information and advanced financial planning tools are mission critical.

Budgeting and financial planning software applications generally support a continuum of processes for financial planning, budgeting, forecasting, analysis, and reporting. The frequencies of these processes range from annual to daily, with some organizations adopting a philosophy of continuous planning and forecasting. Organizations should be able to reconcile and align the results of a top-down, strategic planning process with bottom-up, collaborative budgeting and forecasting processes; testing strategic assumptions against the realities of regions and lines of business.

Budgeting and financial planning solutions emphasize flexibility as compared to the prepackaged functionality more characteristic of transactional financial applications. Various vendor offerings are more easily differentiated by technical characteristics and the vendor’s overall approach to addressing financial processes than by detailed functions and features. Users should have a clear understanding of how they intend to manage future financial planning, budgeting, forecasting, and reporting processes before selecting a tool. Key technical and functional characteristics such as architecture, scalability, and usability may be critical depending on the organization’s size and how the applications are deployed.

The collaborative capabilities of solutions leveraging a Web-based technical architecture can make the processes more efficient and effective, reducing process cycle times and opening the processes to a wider variety of collaborative users. While the newer technology facilitates a greater degree of collaboration, companies must recognize that a major cultural change is required to adopt continuous financial planning and forecasting processes.

Implementing these applications involves significant integration and configuration. Budgeting and financial applications are integrated primarily with transactional financial systems, including general ledger applications, and may also integrate with sales, human resources, and operational systems. Con-figuration involves defining organizational and financial structures as well as business process and modeling logic. Cultural and business process change should also be taken into account. Expanding the use of an application to a broader audience and changing process frequency and mechanics requires high levels of communication and user involvement. A staged roll out or pilot test group is recommended to manage risk and assess solution effectiveness.

The return on investment (ROI) can be substantial to the extent that the organization is able to improve cost control, increase forecasting accuracy, and anticipate changing business conditions. The benefits of these applications are not limited to specific types of businesses; varying requirements dictate the choice of one solution versus another. Consider the following situations:

• Companies with a more frequent need (i.e., weekly or daily) to update forecasting information should favor a solution designed for collaborative forecasting.
• Where a greater emphasis on modeling and data manipulation exists, particularly among finance-savvy users, a client-centric approach may be preferred.
• Companies looking for an integrated financial management solution that incorporates budgeting, planning, consolidating, and reporting should consider the more comprehensive financial planning and analysis product suites.

In all cases, companies should assess the immediacy of their solutions needs based on the level of pain currently experienced in executing these processes using in-house methods consisting of spreadsheets, emails, and phone calls.