Value Matters: Tom Bendert, Deloitte Consulting LLP

In our work with leading companies, we often hear this complaint: "Our planning, budgeting and forecasting (PBF) process is a complete waste of time." In fact, this opinion is so common we could only conclude that, for many companies, PBF has somehow gone off the rails, and has somehow lost its whole purpose.

 

We decided to address the issue head on by describing the way PBF should work. Put another way, we imagined a PBF process that makes "value" the point of the exercise.

 

When it's done right, the PBF process drives real value into the enterprise, and it happens at three levels:

 

1.Value Creation: Successful companies create value by investing in opportunities, however, most companies do not have the luxury of investing in every opportunity that they identify. Practically speaking, only a finite number of major initiatives can be managed effectively. That's why companies need ways to identify the right opportunities.

 

Since funding is generally limited, initiatives must compete with each other. The best vehicle for evaluating opportunities is the annual planning process. A well-designed planning process enables a company to develop, evaluate, approve and report on both steady-state and growth initiative investments. In other words, it is fundamental to core value creation.

 

2. Value Stewardship: Within the typical PBF process, the planning process is long and highly resource-consuming. For many companies, regardless of size, the planning process takes six months or longer. Why does the typical PBF process take so long? For two reasons: poor target setting and too many details.

 

In many companies, senior executives responsible for planning think they set targets, but in reality these so-called targets are set at the top and sent out to the business operators via e-mail or distributed as part of a handout at a management meeting -- without context, explanation or discussion. 

 

In contrast, good target setting includes formal meetings for communication, negotiation, acceptance of targets and feedback. Each meeting has a well-defined purpose and agenda to keep the effort on track. The result is a group of targets that have real strategic meaning and purposeful buy-in.

 

What is the right level of detail for an annual budget? It is commonly believed that detail correlates with accuracy and, since everyone assumes accuracy is good in a view of revenues and costs, the more detail the better. The serious problem with this obsession for detail happens in the PBF process itself: getting all this detail "right" requires multiple passes for input, consolidation, reviews and revisions. The secret to cutting out the detail is to ask: "How much do we need to know to make a good decision?"

 

3. Value Management: Too many companies put a tremendous effort into the PBF process, only to have much of that work wasted by not having the right information. Why invest time in developing plans and budgets, but fail to implement an effective performance management process?

 

To accomplish this, companies should expand their actual to plan reporting processes to include key performance indicators (KPIs) that are aligned with enterprise strategies. By using KPIs, planners gain a deeper understanding of the true drivers of the business and become more effective and accurate at forecasting them. Leaders can quickly take action to address unfavorable variances.