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Accenture

Planning and budgeting is often described as the bane of an organization’s existence. Thousands of man-hours go into a cumbersome and costly process. It’s not surprising then that major software players have recognized a significant gap to fill in the market. Here we examine the best-of-breed solutions.

Introduction

Few corporate undertakings are more labor intensive than the annual ritual of preparing the budget. The average billion-dollar company spends a staggering 25,000 person-days a year on the budget. The largest companies often take six months to prepare a budget. And one company spends twice that amount of time making the process, in effect, and endless burden.

Corporations might find the expenditure of all that time, money, and effort acceptable if they were convinced it produced a real benefit. However, our research shows that fully 80 percent of companies are dissatisfied with their budget processes; indeed so displeased are finance directors that they have made budget reform a top priority.

The disillusionment we encountered again and again in our conversations with executives is captured in a comment from Jack Welch, GE’s recently retired chief executive officer, who once told colleagues with his characteristic forthrightness, “The budget is the bane of corporate America…an exercise in minimalization. You’re always trying to get the lowest out of people, because everyone is trying to negotiate a lower number.” Jan Wallander, honorary president of Sweden’s Svenska Handelsbanken, once expressed his frustration with the whole process this way, “As soon as you introduce a budget, the aim becomes to beat the budget.”

It should be no surprise then that the major software players have recognized that there is a significant gap to be filled in the market. The best-of-breed players, such as Adaytum and Hyperion, have now developed offerings that help companies reduce the effort and increase the value of the process. The big three ERP players – SAP, PeopleSoft, and Oracle – all have offerings under way that specifically focus on this area.

The Value Proposition for Budgeting and Planning

Before companies embark on fixing the budgeting process, it is necessary to understand how doing so will create value. Senior executives interviewed over the past year have raised the following concerns on the process:

• Time consuming
• Not strategic
• Not current
• Adds little value
• Constrains responsiveness
• Concentrates on cost reduction
• Strengthens command and control
• Does not support emerging business models
• Encourages gaming
• Based on guesswork
• Reinforces silos

Three themes are repeated in every process-related conversation; they form the core for any value proposition for change:

• The cost efficiency of current processes
• The lack of forecast accuracy in volatile business conditions
• The lack of strategic alignment of the budget process

Cost Efficiency

It is clear there is a significant cost differential between companies that have started to streamline the process from those that have not (Figure 1). We found that the best-in-class performer took only 3 percent of the time to do the budget compared to companies that have not reformed.

Companies, such as Ford and ABN Amro, have recognized the value of fixing this process and are already seeing significant improvements in decision-making and effort. Our research shows that the typical company can expect savings of 30 to 50 percent once the process has been fixed.

Accuracy of Forecast

Even more compelling than the cost savings attributed to better budgeting is the ability to support a greater degree of forecast accuracy.

Of the analysts interviewed, 84 percent believed greater forecast accuracy has a significant impact on the share price of the company and is part of the halo-effect that the top companies enjoy. Our research confirmed that there is a positive relationship between price/earnings premium and the ability to forecast accurately. During times of economic volatility there is also significant benefit to be gained through faster, more accurate forecasting process. There are probably very few CFOs who would not be happy with a better forecasting process.

More Strategic Decision-Making

In our study, 66 percent of research respondents see no link between the strategic planning process and the current budget process. In addition, a staggering 90 percent of respondents felt that the strategic plans were poorly articulated. Most agreed that the strategic plans were not clear about the value creation aims.

What is abundantly clear from the above statistic is that the budget process cannot be strategic for 66 percent of the companies. If the budget is as disconnected from the strategic planning process as the numbers suggest, it is unlikely to create strategic value for the organization. Even more worrying is that the strategic plans are not articulated in terms of value created or destroyed. For this reason we can assert that most companies could be destroying value through the budget process without realizing it.

There are two other reasons why companies fail to integrate the strategic plan with the budget. The first is that the budget takes too long to integrate with the strategic plan. The second being that governance over the budget structure is normally functionally separated between the chief financial officer and director of strategic planning.

Fixing the Problem

Organizations choosing to fix this problem follow two discernable strands. One is to ensure that the sequence between strategic planning, target setting, budgeting, forecasting, and performance reporting are correct. Historically, companies have performed the budget process before the top-down targets were clear. Secondly, most organizations recognize that it is impossible to jump to the end-state and have fully aligned strategic plans in place; rather, they take a step-by-step approach that has a clear value proposition attached to each step.

Principles of Good Target-Setting, Planning, Budgeting, and Forecasting

Until very recently, the key players in the budgeting and planning space have been a small group of best-of-breed software houses, such as Adaytum and Hyperion. However, over the last year there have been a number of developments by the leading ERP software vendors (SAP, PeopleSoft, and Oracle) to develop powerful planning capabilities. SAP’s SEM BPS is one example of such an approach.

Increasingly the rules of budgeting and forecasting have changed. We have seen a number of new principles being developed over the past years. The following gives a flavor of those changes:

Making it Happen

Each software vendor has a different approach to solving the budget process issues. However, in order to solve the problem, the software needs to support two key themes:

• Top-down target setting
• Bottom-up budgeting supported by strong process controls

All three ERP vendors are making rapid progress toward solutions that offer these capabilities. To give an idea of the progress made, we will use a best-of-breed example first and then demonstrate how SAP, PeopleSoft, and Oracle deal with these points.

Adaytum v2.2

Adaytum was the first vendor to focus on enterprise business planning (EBP) and to have created its own marketspace by rolling out the first Web-based planning solution for enterprise planning. In summary, Adaytum is strong in modeling, top-down planning, and bottom-up data collection. In addition, Adaytum also has a strong track record at companies such as Lucent and Pfizer.

Accenture recognized it would need to improve its planning and forecasting capability by the time of IPO in 2001. In order to deliver this solution, it had to find a solution to support its highly mobile workforce on a global basis. The solution had to be able to collect forecast data regularly from thousands of users. In addition, the solution had to support the current legacy systems as well as a planned move to SAP/R3. Accenture chose Adaytum to support its needs. The chosen solution provides the following functionality:

Top-Down Target Setting – One of the key strengths of the organization is the global operating model. A target setting model was developed that would use Adaytum’s break-back functionality to allocate targets down to the lowest level of the organization, in a matter of minutes.

• Rolling Forecast – A solution was built to support an 18-month rolling forecast. This allows for the organization to have a near and medium term outlook on business performance.
• Bottom-Up Data Collection – On a regular basis, the CFO asks thousands of users to give a view on chargeability, margins, and revenue pipeline. The solution copes well with these volumes.
• Supply-Demand Modeling – A key area to measure and manage in business is the match between supply and demand. At an operational level Accenture has a scheduling system, similar to supply chain planning systems. However, this system does not report the financial implications of supply-demand matching. The Adaytum solution does.

SAP’s Approach

The latest release of SAP’s SEM BPS (v 3.1a) and CPM would be able to deliver a similar solution to the above. However, the SAP solution would look slightly different to the Adaytum solution implementation. Here is how it would work:

• Top-down target setting would not happen in BPS. Rather, it would happen in the CPM (Balanced Scorecard Tool) of SEM. Data integration is achieved through both systems residing on the SAP Business Information Warehouse. Both of these solutions have now matured to the level that such an integrated approach would work well.
• The rolling forecast would be built entirely in BPS. Although the functional hierarchies within BPS are fairly complex, the solution does work. The complexity of the hierarchy allows for strict control.
• Bottom-up data collection would be done through the BPS module. This functionality within BPS is now well-proven and has been implemented for a number of clients. The advantage with the SAP solution is that the data is well-integrated with the transaction systems.
• Supply-demand modeling relies on PowerSim to allow for simulation and modeling.

The latest version of SAP’s offering makes it clear that they have made tremendous progress over the past year. The SEM offering is something that should be considered where a significant SAP estate is in place. The benefits become less obvious where the estate is less than 75 percent SAP. This applies equally to PeopleSoft and Oracle.

Oracle’s Approach

Oracle approaches the solution in a similar manner to SAP. Oracle has a separate balanced scorecard toolset from the budgeting toolset. Oracle’s offering is made up of a number of components, which form part of the e-business suite. The component of interest is the e-business intelligence suite. This component is made up of the following subcomponents:

• Discoverer – Allows for the real-time interrogation of transaction data. The Meta-data for the solution is supplied with Discoverer. Some of the integration advantages include security that is set from within the e-business suite.
• SEM – Strategic Enterprise Management suite, which includes balanced scorecard and active activity-based management.
• OFA – Oracle Financial Analyzer, which includes top-down target setting. This functionality is delivered through the balanced scorecard toolset in SEM.
• Bottom-Up Budgeting – Supported through OFA. Although OFA does not have the same rigor of control as SAP or Adaytum, the next version looks very promising. For organizations that have significant Oracle investment, it still might be worth considering the use of OFA, or waiting for the next version.
• Rolling-Forecast – Once again the lack of process control is a weakness. This can be overcome through heavy customization or manual process controls.
• Supply-Demand Modeling – OFA is quite strong in this area and would deliver a workable solution.

Conclusion

It is clear that it is worthwhile fixing the budgeting and planning process. Deep knowledge regarding procedural and organizational best practice is available. The tools are fast maturing and organizations can rest easy knowing that the ERP vendors are getting it right. The business case for change is compelling – the approach differs slightly for each – but there is no doubt that it can be done.

Many organizations will have to choose between a best-of-breed solution or one supported by the large ERP players. Although the best-of-breeds have the upper hand at the moment, it is likely that the ERP vendors will develop strong offerings over the next two to three years.

Where the ERP occupies less of the landscape, there will continue to be a strong case for best-of-breeds. If the organization needs to implement in the next six months to a year, it may be better off examining the best-of-breeds closely.