You are currently browsing the tag archive for the ‘FPM’ tag.

Ventana Research recently released the results of our Next-Generation Business Planning benchmark research. Business planning encompasses all of the forward-looking activities in which companies routinely engage. The research examined 11 of the most common types of enterprise planning: capital, demand, marketing, project, sales and operations, strategic, supply chain and workforce planning, as well as sales forecasting and corporate and IT budgeting. We also aggregated the results to draw general conclusions.

Planning is the process of creating a detailed formulation of a program of action designed to achieve objectives. People and businesses plan to determine how to succeed in achieving those objectives. Planning also serves to structure the discussion about those objectives and the resources and tactics needed to achieve them. A well-managed planning process should be structured in that it sets measurable objectives and quantifies resources required to achieve them. Budgeting is a type of planning but somewhat different in that is financially focused and is done to impose controls that prevent a company from overspending and therefore failing financially. So while planning and budgeting are similar (and budgeting involves planning), they have different aims. Unlike budgeting, planning emphasizes the things that the various parts of the business focus on, such as units sold, sales calls made, the number and types of employees required or customers served.

Integrating the various business planning activities across a company benefits the senior leadership team, as I have written by enabling them to understand both the operational vr_NGBP_02_integrated_planning_works_betterand the financial consequences of their actions. There are multiple planning efforts under way at any time in a company. These plans typically are stand-alone efforts only indirectly linked to others. To be most effective, however, an individual business unit plan requires direct inputs from other planning efforts. A decade ago I coined the term “integrated business planning” to emphasize the need to use technology to better coordinate the multiple planning efforts of the individual parts of the company. There are good reasons to do this, one of which is accuracy. Our new research reveals that to be accurate, most (77%) planning processes depend to some degree on having access to accurate and timely data from other parts of the organization. For this reason, integrating the various planning processes produces business benefits: In our research two-thirds of companies in which plans are directly linked said that their planning process works well or very well. This compares favorably to 40 percent in those that copy planning data from individual plans to an integrated plan (such as the company budget) and just 25 percent of those that have little or no connection between plans.

Technology has been a major barrier preventing companies from integrating their planning efforts. Until relatively recently, joining the individual detailed plans of various departments and functions into an overall view was difficult because the available software, data and network capabilities were not sufficient to make it feasible and attractive to take this approach. To be sure, over the past decades there has been steady progress in making enterprise systems more accessible to ordinary users. But while dedicated planning software has become easier to use, evidently it’s still not easy enough. The research reveals that across the spectrum of corporate planning activities, three-fourths of organizations use spreadsheets to manage the process. We expect this to change over the next several years as the evolution in information technologies makes dedicated planning software a more compelling choice. One factor will be enhanced ease of use, which will be evident in at least two respects. Software vendors are recognizing that a better user experience can differentiate their product in a market where features and functions are a commodity. Ease of use also will extend to analytics and reporting, making it easier for business users to harness the power of advanced analytics and providing self-service reporting, including support for mobile devices. The other factor will be the ability to make the planning process far more interactive by utilizing in-memory processing to speed calculations. When even complex planning models with large data sets can be run in seconds or less, senior executives and managers will be able to quickly assess the impact of alternative courses of action in terms of their impact on key operating metrics, not just revenue and income. Having the means to engage in a structured conversation with direct reports will help executives be more effective in implementing strategy and managing their organization.

Technology is not the only barrier to better planning. The research demonstrates the importance of management in the process, correlating how well a planning process is managed with its accuracy. The large majority (80%) of companies that manage a planning process well or very well wind up with a plan that is accurate or very accurate. By contrast, just one-fourth of companies that do an adequate job achieve that degree of accuracy and almost none (5%) of those that do it poorly have accurate or very accurate results. Additionally, managing a planning process well requires clear communications. More than three-fourths (76%) of companies in which strategy and objectives related to plans are communicated very well have a process that works very well, while more than half (53%) with poor executive communication wind up with a planning process that performs poorly. And collaboration is essential to a well-functioning planning process. Most (85%) companies that collaborate effectively or very effectively said that their planning process is managed well, while just 11 percent of companies that collaborate only somewhat effectively expressed that opinion.

vr_ngbp_03_collaboration_is_important_for_planningCollaboration is essential because the process of planning in corporations ought to get everyone onto the same page to ensure that activities are coordinated. Companies have multiple objectives for their planning processes. Chief among these is accuracy. But since things don’t always go to plan, companies need to have agility in responding to changes in a timely and coordinated fashion. In a small business, planning can be informal because of the ease of communications between all members and the ease with which plans can be modified in response to changing conditions In larger organizations the planning process becomes increasingly difficult because communications become compartmentalized locally and diffused across the entire enterprise. Setting and to a greater degree changing the company’s course requires coordination to ensure that the actions of one part of the organization complement (or at least don’t impede) the actions of others. Coordination enables understanding of the impact of policies and actions in one part of the company on the rest. Yet only 14 percent of companies are able to accurately measure that impact, and fewer than half (47%) have even a general idea. Integrated business planning address that issue.

In most organizations budgeting and operational planning efforts are only loosely connected. In contrast, next-generation business planning closely integrates unit-level operational plans with financial planning. At the corporate level, it shifts the emphasis from financial budgeting to planning and to performance reviews that integrate operational and financial measures. It uses available information technology to help companies plan faster with less effort while achieving greater accuracy and agility.

For companies to improve competitiveness, their business planning must acquire four characteristics. First, planning must focus on performance, measuring results against both business and financial objectives. Second, it must help executives and managers quickly and intelligently assess all relevant contingencies and trade-offs to support their decisions. Third, it must enable each individual business planning group to work in one central system; this simplifies the integration of their plans into a single view of the company and makes it easy for planners in one part of the business to see what others are projecting. Fourth, it must be efficient in its use of people’s time. Success in business stems more from doing than planning. Efficient use of time enables agility, especially in larger organizations.

Today’s business planning doesn’t completely lack these features, but in practice it falls short – often considerably. Senior executives ought to demand more from the considerable amount of time their organization devotes to creating, reviewing and revising plans. They should have easy access to the full range of plans in their company. They must be able to engage in a structured dialog with direct reports about business plans, contingency plans and business unit performance. Information technology alone will not improve the effectiveness of business planning, but it can facilitate their efforts to realize more value from their planning.

Regards,

Robert Kugel – SVP Research

One of the issues in handling the tax function in business, especially where it involves direct (income) taxes, is the technical expertise required. At the more senior levels, practitioners must be knowledgeable about accounting and tax law. In multinational corporations, understanding differences between accounting and legal structures in various localities and their effects on tax liabilities requires more knowledge. Yet when I began to study the structures of corporate tax departments, I was struck by the scarcity of senior-level titles in them. This may reflect the low profile of the department in most companies and the tactical nature of the work it has performed. Advances in information technology have the potential to automate most of the manual tasks tax professionals perform. This increase in efficiency will enable tax departments to fill a more strategic, important role in the companies they serve.

In the past (and still in many organizations today) there was a sharp pyramid of value-added work in the tax function, with tax attorneys at the top, corporate counsel in the middle and tax practitioners at the bottom. The tax attorney, versed in the intricacies of laws and their applications – especially in cross-border situations – typically has had the greatest ability to minimize tax expenditures. The role requires a combination of inspiration and art to see the underlying logic of tax laws and legal structures to be able to apply creative interpretations to black-letter statutes and has been rewarded accordingly. Senior corporate counsel has weighty responsibilities and therefore merited elevated titles. But the role of tax preparation has been oriented toward functional execution. It typically is done hard-working experts who have limited impact on policy and decision-making. Because the workings of this group are particularly sensitive, it also has a culture that attracts people who tend to be tight-lipped and not given to self-promotion. This hierarchy has helped to keep tax matters outside of the mainstream activities of the corporation, as I have discussed.

Today, information technology can flatten the value-added pyramid  by automating routine work. Doing this can give skilled practitioners in the tax department more time to spend on value-adding analysis and contingency planning because they spend less time on data gathering, data transformation and vr_Office_of_Finance_15_tax_depts_and_spreadsheetscalculations. Increased productivity creates more time to find tax or cash flow savings, as well as to provide better-informed guidance on alternative strategies. To accomplish this, corporations must automate their tax provisioning process; most will benefit from having a tax data warehouse, which I have written about. However, our recent Office of Finance research finds that this is not widely done. Instead almost all midsize and larger companies (90%) use spreadsheets exclusively or mainly to manage their tax provisioning process, including calculations and analysis, and this demands manual effort.

Desktop spreadsheets are not well suited to any repetitive collaborative enterprise task or as a corporate data store. They are a poor choice for managing taxes because they are error-prone, lack transparency, are difficult to use for data aggregation, lack controls and have a limited ability to handle more than a few dimensions at a time. Data from corporate sources, such as ERP systems, may have to be adjusted and transformed to put this information into its proper tax context, such as performing allocations or transforming the data so that it reflects the tax-relevant legal entity structure rather than corporate management structure. Moreover, in desktop spreadsheets it is difficult to parse even moderately complex nested formulas or spot errors and inconsistencies. Pivot tables have only a limited ability to manage key dimensions (such as time, location, business unit and legal entity) in performing analyses and reporting. As a data store, spreadsheets may be inaccessible to others in the organization if they are kept on an individual’s hard drive. Spreadsheets are rarely documented well, so it is difficult for anyone other than the creator to understand their structure and formulas or their underlying assumptions. The provenance of the data in the spreadsheets may be unclear, making it difficult to understand the source of discrepancies between individual spreadsheets as well as making audits difficult. Companies are able to deal with spreadsheets’ inherent shortcomings only by spending more time than they should assembling data, making calculations, checking for errors and creating reports.

On the other hand, a tax data warehouse addresses spreadsheet issues. It is a central, dedicated repository of all of the data used in the tax provisioning process, including the minutiae of adjustments, reconciliations and true-ups. As the authoritative source, it ensures that data and formulas used for provisioning are consistent and easily audited. Since it preserves all of the data, formulas and legal entity structures exactly as they were in the tax period, it’s far easier to handle a subsequent tax audit, even several years later. In this respect a dedicated tax data warehouse has an advantage over corporate or finance department data warehouses, which are designed for general use and often are modified from one year to the next as a result of divestitures or reorganizations.

Another benefit of automating provisioning and having a tax data warehouse is that this approach provides greater visibility and transparency (at least internally) into tax-related decisions. This gives senior executives greater certainty about and control over tax matters and allows them to engage more in tax-related decisions. In companies where executives are more engaged in tax, the tax department gains visibility. Also, because automation enables better process and data control, external auditors spend less time examining the process and tax-related calculations in financial filings, and it cuts the time the tax department might need to spend in audit defense with tax authorities. Process automation enables tax departments to increase their efficiency and give members more time to apply their tax expertise to increase the business value of their work, thereby flattening the value-added pyramid.

The scope of the value that tax practitioners can add is broadening because having greater visibility into the methods used in direct tax provisioning will be increasingly important. I have noted that companies that have significant operations in multiple tax jurisdictions are likely to face a more challenging future. While I’m skeptical that there will be a massive change in how tax authorities manage cross-border tax information soon (which is more a reflection of the competence of the taxing authorities than their motivation), it’s worth assuming that it will grow at least gradually and therefore companies must be prepared to deal with increasingly better-informed tax officials. Transparency also fosters consistency in tax treatments and the ability to manage the degree of risk that CEOs, CFOs and their board are willing to take on in weighing how conservative or aggressive a corporation would like to be in how it handles taxes. This is another way for tax practitioners to increase their value and visibility in their corporation.

Forward-looking companies have been making the transition to automating their direct tax provisioning process, redefining their approach to managing taxes and giving their tax departments greater visibility. It’s unlikely that these companies are using desktop spreadsheets to any meaningful degree. It’s not clear when the mainstreaming of the tax department will be common, but it’s probably at least several years away. Evidence that a fundamental shift has occurred in how corporations manage their income tax exposure will exist when a majority of midsize and larger companies use dedicated software rather than spreadsheets for this function. That’s also likely to be when Senior Vice President – Tax becomes a common title. This promotion won’t be the result of title inflation. It will happen because the tax department’s role will be important, making a bigger, more visible contribution to the company as practitioners focus more on analyses that optimize tax decisions and far less on the calculations and other repetitive mechanical processes that consume time but produce little value.

I recommend that every CFO of a company operating in multiple tax jurisdictions with even a slightly complex legal structure consider automating tax provisioning and deploying a third-party (rather than a custom-built) tax data warehouse.

Regards,

Robert Kugel – SVP Research

Twitter Updates

Stats

  • 94,444 hits
Follow

Get every new post delivered to your Inbox.

Join 75 other followers

%d bloggers like this: