Robert Kugel's Analyst Perspectives

Usually, just figuring out how to start the process of change is a major barrier to improvement in business. I think that’s especially true when it comes to integrated business planning (IBP). I started using that term six years ago to differentiate that process from financial budgeting and the many other forward-looking activities used in companies. IBP applies to a longstanding objective: bringing together the disparate strands of forward-looking activities across a corporation to foster internal alignment, enhance agility and therefore increase financial returns and improve strategic position. Especially in larger companies, fragmented planning efforts prevent companies from achieving these goals. They miss opportunities to sell more, incorrectly allocate their resources to less productive or less profitable activities and react too slowly to changing market conditions.

Our research finds that the closest most companies get to doing integrated business planning is their budget, which is in itself a financial plan, but a poor substitute for true IBP. Financial plans are too focused on finance and control issues and do not adequately incorporate operational aspects of the business.

The first step toward integrating business planning is understanding the fundamental difference between budgeting and planning. While people tend to use the terms interchangeably, budgeting and planning are different things. Budgeting is financial planning – it’s about creating a statement of financial administration for a period of time based on what an organization expects to spend and how it expects to finance those expenditures, either from internal cash sources or external ones. Planning is about creating a detailed program of action consistent with strategy and objectives. Budgeting is about money. Planning is about things – units sold, headcount required, less-than-truckload shipments and so on. Budgeting sets limits; planning figures out what’s possible. Philosophically, there are subtle but vital differences between the two: Budgeting is about not failing; planning is about succeeding. Budgeting is about establishing a fixed number; planning is about understanding a range of possibilities. Today, budgets almost always are derived from operational plans. A better approach is to have the operational plans drive the budget more directly.

The second step toward IBP is creating a central store of all necessary planning data. While a company’s budget may be reachable, it’s rare to find a usefully complete set of data related to operational plans available in a workable format and in an accessible data store. Typically the data resides in desktop spreadsheets scattered across file servers and individual computers. In some cases, the information may be in one or more enterprise applications, such as sales forecasts in a sales automation system or financial forecasts in a dedicated planning application. Manually pulling together these individual strands on a regular basis is too time-consuming, especially if this integration is done in a desktop spreadsheet. Businesses need a central data store of the most up-to-date information that includes actual and planned amounts presented in a way that everyone can understand. That way, when people in one part of the organization pull together a plan, they can access the outlook of another part of the business that may have an impact on their projections. Note that “usefully complete” does not necessarily mean exhaustive; each business must decide on an optimal level of detail.

Having a central store of all planning data requires information technology: hardware, software and the ability to extract and move data to the store. Fortunately, most large and many midsize companies already have these assets available; they should not require any incremental capital investment to create such a data store.

Ideally the software for managing the planning process would be a dedicated planning application. It should not involve standalone spreadsheets, because of the difficulties these sorts of spreadsheets pose when people try to aggregate data from them. Most planning applications enable people to use a spreadsheet interface, which means that employees need little or no training to work on individual plans because they are using familiar-looking software. Alternatively, a company could elect to simply gather data from various business units using a server-based spreadsheet such as Microsoft Excel Server. This approach gives individuals the ease of use they expect but with a real database back end in which the data can be stored, aggregated, queried and reported on faster, more flexibly and more accurately.

These are the first two steps toward what should be the ultimate goal: an integrated, driver-based business model that enables a company to rapidly update its business plan on a regular basis and automatically generate the financial plan (income statement, balance sheet and cash flow) consistent with this outlook. These financial plans would not necessarily replace the annual budget as a control or governance device, but would provide executives in and out of the finance organization with a clearer view of the financial implications of the current set of plans.

Corporations worldwide have had to contend with high levels of volatility in commodity prices, demand, supply chains and currency, among other things, over the past five years. The reverberations of the financial crisis are likely to persist for years to come, so business conditions will remain turbulent. Integrated business planning can provide companies with the ability to react to change faster, and with greater coordination and effectiveness. Taking the first steps to adopting this approach does not have to be expensive, and it can be cost-effective. It can enable better coordination and collaboration across an organization because of the greater transparency into future plans and assumptions. Companies need to adopt integrated business planning to make it easier to cope with volatility.

Regards,

Robert Kugel – SVP Research