Written by Mark Stimpson, senior FSN writer.
Totally surrounded and outnumbered at the Battle of the Little Big Horn, General Custer was asked by one of his aides, "What is our strategy?" Apparently, the general replied, "The first thing we need to do is make a note to ourselves never get in this situation again." It could be said that this plan was successful – this was the last time they ever faced that problem. Fortunately, planning in a business context is usually conducted with more forethought and with less at stake, but the pressures can sometimes seem just as intense as those facing the US 7 th Cavalry all those years ago.
Planning defines a target and the stages by which that future goal will be achieved from today's starting point. From a practical point of view, a plan maps out what must be done, by whom and by when; in a performance management context, plans are also used to justify - and gain approval for – a course of action. The Finance function is normally a key stakeholder in this decision–making process and needs to know, "Can we afford this?" - "What will be the impact on our profitability and cashflow?"
However, although Planning may be central to Performance Management, it is not necessarily a focus for Performance Management systems and the people that implement them. Frank Pizzolato, CEO at Clarity Systems told FSN, "Planning tends to be a lower priority – there are fewer people involved, so there aren't the same productivity gains to be made as with budgeting and forecasting," comments.
But while economies of scale are less relevant in Planning processes (as opposed to Budgeting and Forecasting), providing effective information technology to support Planning is far from a trivial exercise. The complexities of Planning challenge the modelling capabilities of any supporting system. "The variables involved can be uncontrollable, say exchange rates and interest rates - semi-controllable, for example, revenue - and controllable, like headcount," says Andy Nelmes of Cognos. "And typically, planners need to derive financial outcomes from the complex relationships that connect these different plan elements. Flexibility is a key requirement for planning systems."
According to Nelmes, this need for flexibility manifests itself in the different methods that are applied to planning different types of variable. Planners need to overcome the inherent uncertainty of uncontrollable variables. "They might trend forward from historical data and we often see people projecting multiple scenarios and ranges," he says. "On the other hand, if management has some control over the variables they are predicting, they can identify the underlying drivers and use formulae to derive the future outcomes." This driver-based approach has been a major factor in the success of Planning software solutions.
Of course, the fact that plans are related to what we want to make happen and have a particular target in mind, makes goal-seeking another priority in Planning systems. "Using Breakback (the Cognos term for goal-seeking) to work backwards from the desired result to the underlying detail is an obvious short-cut to creating a complete plan," says Nelmes, "but more importantly, it's a quick way of validating targets in the first place – you can spot unrealistic goals much more easily if you can see their implications at a detailed level from the outset."
And it is not just financial detail that is needed to support financial targets. From Finance's point of view, it is critical that financial plans are supported by the corresponding projections evolving in the rest of the business. The importance of this tie-up is well illustrated by Clarity's Pizzolato: "A significant trend we're seeing in the market-pace is the desire to link operational and financial plans. For example, if a large part of employee compensation is driven off Gross Profit, it makes sense to get the planning processes in Finance and HR connected. Companies want to eliminate the 'disconnects' that unhinge so many planning cycles."
Even within the Finance function, there may be specific areas whose complexity – or even sensitivity – places them at arm's length from most Performance Management systems. Tax planning in a large enterprise, for example, requires built-in modelling of national and local tax regimes that is best served by specialist systems; merger and acquisitions planning is inevitably cloaked in secrecy and often carried out using finely-tuned and closely-guarded spreadsheets.
Indeed, of the three pillars of forward-looking Performance Management – Planning, Budgeting & Forecasting – it is Planning that has remained a bastion of spreadsheet usage. One reason is the fine-tuning possibilities that spreadsheet packages provide, not just for modelling, but also for formatting of plan data. Richard Buettner of Infor told FSN, "Excel is the user interface of choice because people are so familiar with it and the ability it provides to model and manipulate data in one place."
Whatever the scope of the plan, the audience for its output places an emphasis on high-quality presentation. Whereas Budgeting and Forecasting are chiefly internally-focused management processes, a plan – particularly a strategic level plan - is often used to seek approval and authorisation – not only from senior management, but also from external parties such as non-executive directors, bankers and major shareholders. The style and clarity of the reports that represent a plan inevitably affects its credibility, so planners ignore presentation quality at their peril. This is where integration of the planning system with Microsoft Office can play a vital role in permitting the final polishing of a document or presentation.
Another reason that many large organisations, even having invested in specialist Budgeting and Forecasting solutions, still use spreadsheet software extensively for Planning purposes, is the smaller scale of Planning processes. They place less of a burden on the traditional Achilles' Heel of spreadsheets – Workflow Management. However, Buettner cautions, "While the benefits of a sophisticated Performance Management suite are not as accentuated for applications such as Strategic Planning as they are for Budgeting and Forecasting, you have to remember that Planning is part of the Performance Management cycle – it can't just be treated in isolation. Plans and strategies need to be reflected in the Budgeting process, for example."
In summary, Planning may lack the scale and reach of Budgeting and Forecasting, but presents tough challenges with its need for sophisticated business modelling, integration with other planning processes and high-quality output. Planners are typically reluctant to give up their spreadsheet systems, but may be in danger of ignoring Planning's role as a lynch-pin of the Performance Management cycle.
Of course, as Peter Drucker famously once said, "Plans are only good intentions unless they immediately degenerate into hard work." The first stage of putting a plan into action is allocating accountabilities and resources to those responsible for its execution. In Performance Management terms this manifests itself as Budgeting – a much-maligned process that we will examine in the next article in this series.
Related FSN articles:
Are you Planning, Budgeting or Forecasting?
FSN White Paper "Meeting the challenge of HR Planning with Clarity 6 "
FSN Product Review Cartesis Planning
FSN Product Review Cognos 8 "Performance Management fit for the whole organisation"
