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What's with all the planning?

By Henrik Ekstrom | GROUP CFO, FINANCE TRANSFORMATION, Finance Business Partner, Financial Modelling | 20 Jul 2018 |

A largely non-mandatory process that you have the freedom to shape and set up as you see fit. That sounds great. Planning, budgeting and forecasting has still somehow managed to become one of the most painful processes around in many organisations. It seems a non-mandatory process that offers great flexibility may just open the door for an unclear purpose and endless content that “may be interesting at some point”, driving excessive effort. Many organisations ask themselves why it has to be so painful.

Step one would include not treating it as a Swiss Army Knife (i.e. always at hand as the answer to everything). We would all like to be MacGyver (at least all men), but the effort to be ready for anything may just be too high. It is very hard but there really is a need to define what the purpose of the planning processes really are and focus on delivering that, and only that.

What is the purpose of planning then?

This was the first question we always asked clients when I was at Deloitte when we spoke about planning. I’ll paraphrase, but the common answers were along the lines of: “Stupid consultant, any finance person with half a brain knows why you plan, budget and forecast”.

Yes, I agree, it may be a little bit of a silly question, but it is a discussion that is really worth having. It is probably true that most finance people, and non-finance people, can tell you a few reasons why there is a plan. They just rarely agree with one another. Try asking a few different people to list the reasons to plan, you may be surprised about the results.

There is no right and wrong when it comes to this, which is why it is hard. Purpose and priorities can differ from organisation to organisation, but as I said, a discussion worth having. Why does your organisation plan?

Can we stop activities and effort that are not “on purpose”?

With few exceptions. Yes, you can. I don’t blame anyone who doesn't stop though. Sitting in the consultant’s chair saying, “just stop what doesn’t make sense”, is easy as you are not actually accountable for the organisation’s future. I have also been responsible to the board and I really do not want to be the CFO who says “I don’t know”, “we don’t have that” or “we decided to stop collecting that level of detail” but sometimes you may have to. The opportunity cost to being ready for everything is simply too high. There are other things you can do with your time.

What are some of the other issues then that make the process painful?

According to the Global Planning survey by Deloitte (500+ participating organisations).

  • Goal setting vs. best estimate, it seems simple but about half of all organisations feel they confuse goal setting (where do we want to go) with a best estimate (where does it look like we are going?) Again, a clear idea of the purpose of the process is key.

  • Incentives, as incentives are often linked to the budget there are a myriad of individual interests at play. Hence, most of the time in many processes are spent on gaming the targets as opposed to working out how to hit them. There are some different points of view on this which I will have to elaborate on separately.

  • Tracking and improvement, 76% of respondents state that forecasting is the best estimate of the future results, but only 17% actually track the accuracy of the forecasts and actively work to improve it. Forecasting is too onerous of a process to simply run for the hell of it. If you don’t care whether it is right or not (or worse, you are sure it is wrong), maybe it would really be time to re-think this?

  • Leadership behaviour and expectations, Having the immediate answer to every possible question in potentially one of the biggest drivers for excessive effort in planning. A client of mine produced 400+ slides in addition to the planning package requested, to be ready for anything. A lot of work, especially if you must update them every round. What’s your culture? Do you expect people to turn up with their Swiss Army knife, or is “I will have to check that and come back to you” sometimes a reasonable answer?

  • Level of detail, you know what the main problem with finance is? It’s full of finance people. I feel I can make that joke since I am an accountant myself. It is a tad silly, but it does have a bit of truth to it. There is sometimes a smidgen of belief in the profession that more detail makes for better accuracy. Firstly, it is not necessarily true. Secondly, even when it is true, you need to keep a close eye at the law of diminishing returns. How accurate does it have to be to fulfil its purpose? Again, what else could you do with your time?

What is the golden rule then?

Ask a management consultant and they will likely answer something like “A nimble, driver based, rolling forecast with an appropriate level of detail”. Sounds great, and it is sort of right, but it is still open to unclear purpose and being clogged up by detail (“appropriate” is not exactly crystal clear). I have seen clients come up with hundreds of drivers connected in a way nobody understands and doing weekly updates of a 24-month forecast where the result is always the same while the 12 months furthest out is nothing but a wild guess. Really it just creates the illusion of control and certainty where there is none. It demonstrates that we have done all in our power to predict the future.

  • Driver based does not have to mean 100% driver based i.e. every single number is derived from a series of drivers. Don’t force feed the process with drivers, use it where it makes sense. And use a good old fashioned direct estimate where that makes sense

  • How often you re-forecast is based on how volatile the market is (how likely the result is to be significantly different from forecast to forecast). If the forecast is always the same, you are either in a stable market (maybe safe to cut back on the frequency) or the forecast is not done for real (Tick-the-box exercise? Consider a look at purpose, process and your review style)

  • How far into the future you forecast is based on how long it takes for you and your organisation to react (i.e. how much warning you need), but also on for how long you actually can forecast. At what point does the reliability start to trail off? Either stop there, or make it clear that it turns from forecast to guess.

The essence of it in three bullets

  • Process and technology is important but most important is behaviour. Expect a Swiss Army knife and people will spend enormous time and effort in vain

  • Planning and forecasting a lot to a great degree of detail will create a level of comfort but may just be an illusion of control and certainty. Many organisations know that their forecast is wrong, but still keep FTE after FTE busy with it. Consider stopping what you can.

  • Driver-based and rolling horizons are great things, but be careful as these are still open to issues with behaviour and too much detail.
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