Defining Driver-Based Planning

In a recent presentation, I made at the American Strategic Management Institute’s Budgeting and Forecasting Summit in Dallas I spoke about driver-based planning.  One of the interesting things about driver-based planning is there does not seem to be a consensus about the definition of driver-based planning.  I have seen different definitions or explanations from very credible sources, so a better way of understanding what driver-based planning really might be to look at examples.  Before we do that, let’s take a quick look at some widely publicized versions of a working definition.

Alight Planning, makers of a software package created specifically to facilitate ‘Agile Planning’, says in one of their white papers, “Driver-based planning is a best practice methodology where financial plans are structured using models of underlying business activities.”  Yet another explanation is offered by Oracle Hyperion, who says, “With driver-based planning capabilities, nonfinancial users can enter business and operational drivers, while sophisticated business rules will then calculate their financial impact.”  Both Alight and Oracle are credible sources of information regarding corporate planning applications.  After all, that is their business, literally.  Both definitions are similar enough that to split hairs over whose definition is ‘better’ is a waste of time.

My favorite quote that encapsulates what any kind of planning should focus on is actually not from someone who works in the business world at all.  Rather, a great summary of what planning should focus on comes from an academic, a Stanford University professor that most people refer to as a futurist.  Paul Saffo, Director, Institute for the Future at Stanford University says, “The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present.”

Isn’t the real, underlying, reason we make plans in the first place to inform our decision making?  There is nothing wrong with information for information sake.  It can be informative, entertaining and often very interesting.  But, in the context of business, planning should be a function that facilitates better decision making.  To the extent your planning enables you to take action to improve your business you’re headed in the right direction, regardless of whose definition of driver-based planning you subscribe to.

We will examine other definitions of driver-based planning and how they may apply to your business in future articles, so stay tuned.

Leadership Tips from Political Observations

A recent article in Inc., “What You Can Learn From Romney’s Inauthenticity” paints an interesting picture of the importance of people skills to leaders of all types.

Whether you are a leader in politics or business, the lesson is the same.  Lacking people skills will hurt you as a leader.  There is no way around that truth.  The article’s author, John Baldoni, gives a few simple points to learn from Romney’s shortcomings.  They are:

1. Shift the focus from you to others.

2. Let down your guard.

3. Roll with the punches.

4. Stand tall.

5. Act the part.

It’s a good, concise article, so I won’t paraphrase it here.  I encourage you to read the entire article.

In stark contrast to Romney, New Jersey Governor Chris Christie has been lauded for his leadership style and was practically begged to run for President by Republican Party leaders and others.  He has captured so much public attention, Oprah Winfrey recently interviewed him to find out more about him and his leadership style.  According to Oprah’s own website, “Oprah rarely interviews politicians, but she makes an exception for Governor Christie because she believes he is a leader willing to go beyond sound bites and canned responses.”

There are many measures of leadership, and many personality tests aimed at identifying a person’s “type” and fit for different types of jobs.  The Myers-Briggs Type Indicator (MBTI) is one of the best known personality tests and many people would agree that someone whose test results indicated a MBTI type of ENFJ (Extraverted iNtuitive Feeling Judging) might make a good manager or leader of people.  The Myers & Briggs Foundation website describes the ENFJ type as follows:

“Warm, empathetic, responsive, and responsible. Highly attuned to the emotions, needs, and motivations of others. Find potential in everyone, want to help others fulfill their potential. May act as catalysts for individual and group growth. Loyal, responsive to praise and criticism. Sociable, facilitate others in a group, and provide inspiring leadership (emphasis added).”

If you are not a natural ENFJ, according to the MBTI, it does not mean you can’t be a good leader.  What it does mean is that you are not wired by mother nature to do it naturally without working at it.  Some of the best known, and most effective leaders, were not born leaders.  Many of them had to work very hard to acquire the skills to be as good as they were at leading, whether they led individuals in a business, political constituents or maybe even just their own family.

At the end of the day, we can all choose to improve our people skills and leadership capabilities.  First, we must recognize our strengths and weaknesses and act accordingly.  There is plenty of information and training available in the areas of people skills and leadership, so if you decide to improve in these areas it will just be a matter of deciding to do it, and then doing it.

Create your own leadership development plan, or enlist some help to create that plan.  Either way, if you decide to be a leader, do it well.

Why Budgets Suck! And, what to do about it.

One of the best known quotes about budgets came from one of the best known business leaders in modern times, Jack Welsh. He said bluntly, “… the budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization.” Why is that the case in so many organizations? And what can be done about it?

Three of the many reasons budgets can be ineffective are:

1. Past performance used as predictor

2. Too much detail

3. False sense of security


Past performance used as predictor

Every investment prospectus contains the classic disclaimer “past performance is not an indication of future performance”, yet their specific purpose is to sell you on buying the fund, The clear implication is a wink, wink, nod, nod, that says “oh yes it does”.

Google Stock Chart

This same paradigm plagues traditional budget processes today. There are many less traditional, but more effective methods of developing budgets. There is no lack of options, so why don’t more organizations use them? The simple answer is that all budgeting methods have their pros and cons and some of the more effective methods are perceived to be expensive, complex, or both.

Too much detail

It is very common for a budget to be prepared using all of the accounts in a company’s general ledger.

It is proven that forecasts done at a higher level tend to be more accurate, so budgets done at such a level of detail are totally counterproductive to the intent of using so much detail. Budget practitioners use so much detail because they feel that the detail shows support for the number and therefore the number budgeted should be more accurate. People in general tend to believe a number if it is supported, and the more detail the better seems to be a common misperception.

False sense of security

Generally speaking, if something is not in the budget the chances of money being spent on it decrease right? So doesn’t it make perfect sense that if it is in the budget then it is o.k. to spend the money on it? Well, it certainly seems like sound logic, but sometimes people only look at the dollar amount and not the specific item the money is being spent on. And, even if the money is being spent on exactly the item that is budgeted, things change. That’s the one certainty in life is that things will change. And, when things change we need to adapt.

So, if we always just spend on exactly what is in the budget we run a risk that we are not paying attention to current circumstances. We may have budgeted a certain dollar amount, but prices may have actually gone down. This is not uncommon at all with respect to technology. That desktop pc we budgeted in November of last year that we are wanting to now purchase in November of this year may now be cheaper for the exact same computing power. That’s just the nature of some things and we need to adjust our spending accordingly. We could argue that the dollars were budgeted, so why not get more for the same dollars. That may be a perfectly valid argument and it may, in fact, be the best thing to do. The point is simply that we should at least be asking the question about whether we should spend the same amount and get more, or spend less and get what we originally planned to budget. Keep in mind that many items work the other way, in the sense that their pricing goes up faster than general prices, so always just ask the question.

It’s the plan stupid!- Improving your process without spending a dime.

“It’s the economy stupid!” was a phrase made wildly famous by James Carville during Bill Clinton’s campaign for the presidency in 1992.  Never at a loss for words, Carville had a few things to say about the communication of Clinton’s campaign platform beyond just that statement.  But, let’s stay focused.  As a matter of fact, that was precisely Carville’s point.

“When you say three things, you say nothing”, was another gem of Carville’s and I think this is an overstatement of the point to emphasize the importance of focusing on a single, clear message.  There is a big lesson here for FP&A practitioners worth their salt.  How many times have you been involved in preparing or updating a dashboard of “KPIs”.

Jack Canfield, in “The Power of Focus” says that the number one reason people don’t get what they want is lack of focus.  The same goes for organizations.  If you are constantly trying to focus on a dozen things common sense tells you that you can’t focus completely on any of them.

One company that embraced this thinking went from tracking over a dozen items every month in what they called their “KPI Dashboard”.  Sound a bit buzzwordie?  Does it also sound somewhat familiar?  They cut the list to three simple metrics.  Their new focus was on growth of total sales dollars, inventory turnover, and their quick ratio.  That’s it.  And guess what?  It worked great for them.  In the process of reviewing all of the metrics they had been tracking they realized that if they kept an eye on those three metrics, everything else they used to track would fall in to line.  They didn’t just take for granted that this was the case.  They looked back through some historical data and found that to be the case.  So, what, they asked themselves are we gaining by tracking more metrics?  The answer the found was nothing.  So, wisely they stopped the insanity.

More than a few people in financial reporting, FP&A and other disciplines would love to embrace this idea, but they aren’t always the ones deciding what gets reported.  I encourage you to gather some data for your argument if you feel that tracking fewer items would net the same results as our example company did.  If your senior management sees a tangible benefit, like freeing up your time to do more value added activities, they will be much more likely to embrace the idea themselves.

Drive the Bus – How simplicity and certainty of purpose can transform your organization

I am a big fan of John Maxwell and his writings and teachings in the field of leadership.  He uses a simple analogy that I find useful in many contexts.  Let’s look at how you can apply it in your organization to drive positive change.

Be Clear About Where the Bus is Going

This is the simplest and most important part of this whole story.  For the rest of the plan to work you must be crystal clear about where you are going as an organization.  Without clarity of purpose and a clear direction to go in there is every chance you will not get where you really wanted to go.

Get the Right People On the Bus

Once you are clear about where the bus is going this step is much easier because people will tend to self select.  Imagine someone who wants to go home stepping on to the bus and asking where you are going.  When you respond “downtown”, and they live in the suburbs common sense says they will voluntarily get off the bus.  If you aren’t clear on where you are going you may be tempted to try to accommodate whoever happens to get on the bus.

Get the wrong people off the bus

You may have had people who were a part of your organization before you got clear on your direction.  Once you communicate your vision of where you are going some people may not want to go in that direction.  It is your job to get these people off the bus and it is important to do this in a way that causes the least possible disruption in your organization.

Get People in the right seats

You now presumably have only the “right” people on the bus, so now you need to get them in the right seats.  You must evaluate your team’s individual strengths and weaknesses and make sure they are in the right roles.  This can involve a myriad of tactics to accomplish, but it must be done and done swiftly.

Happy driving and stay tuned for more on how to give your bus a world class tune up.

Tap Innovative Budgeting Practices

We will be presenting two sessions in a series of progams offered by the American Strategic Management Institute (ASMI) in San Jose on March 16th, 17th and 18th.

The American Strategic Management Institute (ASMI) is one of the nation’s most innovative training providers, combining market research and industry insight to deliver experiences and tools to inspire leaders and grow businesses.

Tap innovative budgeting practices to Achieve Optimal Levels of Operational Performance and Maximize Profits.  Here are just a few reasons to attend:

  • Master the steps necessary to move from traditional budgeting to rolling forecasts
  • Incorporate best practices in forecasting to enhance
  • precision and organizational agility
  • Enhance your forecasting methods to eliminate inefficiencies and waste
  • Rollout advanced planning processes with more dynamic forecasting techniques
  • Utilize budgeting & forecasting methods that will aid in the strategic deployment and allocation of resources

Register and download the brochure and agenda here:

Social Media Articles coming soon

We recently reviewed some great social media reports showing some trends that are of particular interest to finance and accounting professionals.  Our next full article on social media will include information from the AICPA among many others.

Stay tuned…

FP&A Focus…’Tis the Season (not that one)

A recent article in Business Finance Magazine about the hottest jobs in finance discussed the fact that, “The hottest position today is financial planning and analysis.”  Tell that to the many professionals in corporate America who make their living in financial planning and analysis (FP&A).  As planning season sets in at many companies they may be looking at having to get through yet another planning season filled with overtime and sacrificing personal time.  And they’ll do all this without any extra help. 

To paraphrase a CFO who was speaking about forecasting, “…everybody is trying to figure out the same thing: today is the 28th of [the month], and I know how much we sold yesterday on the 27th. But if I can figure out what we’re going to sell in [next month], I can truly pound my competitors.”   Senior management at some of the world’s top companies are getting more and more in tune to the importance of the financial planning and analysis function.

Institute of Management Accounting (IMA) statistics indicate that of all of the time spent on the budgeting process, roughly eighty percent of the time involved in the budgeting process is spent on assembling data and manipulating spreadsheets.  The time spent on “value added analysis” represent less than twenty percent of the total time in the process.

To Excel or not Excel

Spreadsheets, and MS Excel in particular, are ubiquitous in business today.  There are many Excel diehards who believe that you can take their Excel spreadsheets from their cold, dead hands and that’s the only way they will part with them.  I was one of those people until the realities of my work changed.  So, how do you know when you should be considering other options besides Excel?

Here are some simple tips to help you decide when you need to seriously consider leaving Excel and using a different tool.

  1. Do you have a large volume of information?  Remember, that while Excel 2007 can accommodate over a million rows of data, that doesn’t mean it can analyze that much information efficiently.  Excel does well with analysis, not so well at effectively storing lots of data (compared to a database, that is).  It may make sense to store your data in a database and use Excel to analyze it.  There are many, many tools for this and many ways of doing it.
  2. Is all of your information in one place?
  3. Do you have lots of repeated information, like someone’s employee status (e.g. exempt vs. non-exempt)?
  4. Do you want to be able to track changes in some variable?  For example, do you want to know when someone returns a product?
  5. Is your information mostly numbers, or do you have lots of other types of data?  If you have information such as names, dates, or descriptions Excel doesn’t deal with this type of information as efficiently as other tools.
  6. How familiar with the information is the end user?  In most databases they have easily set up and user friendly input forms that make input much easier for the end user.  Excel has functionality to create forms, but it is very limited compared to databases and most Excel users have no idea how to use this functionality.
  7. How many people need to have access to the information simultaneously?  With Excel only one person can have access to the information in the spreadsheet at a time, except that someone else can view the same spreadsheet with read only access.  In this mode they cannot make any changes.  With databases multiple users can access the same information at the same time, with the exception of a single record that is actively being changed.  This is much more flexible than Excel. 

With some of these questions in mind you can better determine when it may make sense to evaluate a database or other tool instead of relying on Excel exclusively.  Excel is great for certain things, just don’t treat it as a cure all for everything and you’ll be fine.

This article is a part of a series.  Please check back for additional installments.