"And now, back to the studio for the Weather Plan... here is the weather we would like to see tomorrow. After sustained and steady rainfall, invigorating our gardens between 3am and 5am, the day will start with blue skies and bright sunshine. This is how it will stay for the rest of the day. The temperature will rise to 24 o and remain there until 9pm, when it will steadily fall to 12 o by midnight, allowing us a restful night's sleep."
Sounds good, doesn't it? But of course, however enticing it may be, this type of prediction is unlikely ever to replace the weather forecast – a prediction based on the latest observations and readings of what the weather is actually going to do tomorrow. This important differentiation between what we want to happen and what is likely to happen applies in business too. Scan through the websites of the software vendors and industry analysts targeting the Performance Management sector and there is a good chance you will come across the expression, "Planning, Budgeting and Forecasting . " To the uninitiated, it can seem that these terms can be used interchangeably, even though the activities they describe have significant differences.
However, anyone treating planning, budgeting and forecasting as a homogeneous set of business processes is risking serious confusion – particularly when it comes to implementing systems to support these tasks. Planning, budgeting and forecasting may have in common the desire to predict future business performance, but they attack the problem with widely-varying objectives.
Any crystal-ball gazing that organisations apply to business performance is aimed at answering a range of questions about the future. At one extreme one may ask; "What is it we are trying to achieve and how will we get there?" and at the other end of the spectrum;
"What is our best estimate of what actually will happen?"
The first is an exercise in planning, i.e. what we want to make happen. Typically it captures how we will achieve goals delegated down through the management hierarchy. The second arrives at a forecast, i.e. seeking insight into what people believe the future holds, irrespective of what targets have been agreed.
The value of plans and forecasts as defined above varies with timescale and context. While it might be more comfortable to listen to a weather 'plan' (a description of what we would like the weather to be) rather than tomorrow's weather forecast (details of the snow and ice that are on their way), the latter is far more useful. Conversely, a cost centre manager's forecast – a 'guesstimate' - of salary costs in 2009 is likely to hold less water than a plan derived from assumptions about business drivers or trends. In essence, the reliability of a plan increases in proportion to the control that management has over the variables being predicted and the timescale of the plan – the time that management has to take corrective action if needed.
In a Performance Management context, planning is a vital part of establishing how resources will be allocated, for optimal effect, around the organisation. Usually, this starts with a high-level, long-term (three to five years out) plan, capturing key corporate goals and how they can be achieved. This "strategic plan" will naturally include a summary of the financial figures underpinning the plan, often expressed in several versions, to describe the impact of different scenarios.
Strategic planning is the province of a relatively small number of senior managers working on relatively low volumes of data, so in systems that support this process, workflow management and scalability are not as important as in other forms of planning – while the need for flexible, sophisticated business rules and scenario management must be given a higher priority. At the same time, these systems are often driven by skilled business analysts on behalf of senior managers, so ease-of-use many not be the imperative it at first seems.
While planning often starts as a top-down exercise, a specific stage of this process, budgeting , has a strong bottom-up element – engaging a broad constituency of decision makers in the agreement of target values for key categories of revenue and expenditure that support corporate objectives. The resulting Budget establishes a commitment against which actual performance may be measured and, in many cases, rewarded. The fact that remuneration is often linked to budgets ensures that the budgeting process is highly iterative with several rounds of submissions usually required before the budget can finally be put to bed. This factor and the large number of individuals involved in contributing or reviewing budget data require budgeting systems to provide an effective means for controlling and monitoring workflow status. Ease of use is also an important factor, because the cost of training hundreds of users – assuming that you can motivate them to attend courses in the first place – will be prohibitive.
As the business cycle progresses, the key question; "are we on track?" can be addressed by collecting revised forecasts of business drivers and outcomes. Since the individuals best positioned to make these predictions are likely to be widespread across the business, the number of contributors is likely to be large, so as with budgeting systems, forecasting systems need to scale well and be easy to use. Workflow management is of less significance here, however – if your organisation's forecasting process requires multiple iterations until senior management has a version of the truth they can live with, the process probably needs changing.
Instead, it is important that a forecasting system has good access to plan data and actual business performance to date, so that a complete picture can be derived – based on the latest actuals, the short-term forecast and longer term plans. This requires a focus on direct, as well as manual data feeds. Efficient and effective links to ERP systems and spreadsheets, preferably packaged with the solution, are critical in this process.
Why does all this matter? One key reason is the prioritisation of capabilities for a performance management solution. Looking at the packaged software solutions on offer today, while all claim a broad range of capabilities, each has a 'sweet-spot', often determined by the product's origins and architecture. Prioritising the capabilities required helps to assess more easily the merits of potential solutions in the context of the main application area(s) that needs to be addressed – and so gives the selection process a sharper focus.
Of course, life could be simpler. If we had complete over control business outcomes, plans and forecasts would be synonymous and budgets would be irrelevant. Equally, if we could control the weather, we probably would find ourselves listening out for the Weather Plan. However, the latest forecast is that neither of these situations is likely to happen in the near future...
