Better Budgets

Replacing a whim and a prayer with relevant data.
BY RUSS BANHAM

EXECUTIVE SUMMARY
  • MANY COMPANIES INVEST inordinate time, energy and financial resources to develop corporate plans only to change or even ignore them.
  • BUT A FEW FORTUNE 1000 companies recognized that mistake and, as a result, are restructuring their planning and budgeting processes.
  • THEY ARE SHELVING bottom-up planning and multi-iterative budgeting processes for top-down strategic plans budgeted by department managers—who are compensated for achieving measurable results.
  • THE COST FOR SUCH an overhaul is high. For large companies, the investment can run as high as $40 million. That includes consulting fees, in-house staff time and the purchase and customizing of state-of-the-art software to link disparate corporate data across the enterprise—an essential tool for effective planning and budgeting.
  • SUCH REENGINEERING REQUIRES patience, intensive ongoing communication with employees, investment in new data-gathering software tools and, most important, the willingness of a company’s finance group to evolve from data collecting and dissemination to expert business analysis.
  • SOME ANALYSTS ESTIMATE that as many as half the companies that attempt the overhaul become so exhausted they give up.
  • WHILE ALL THESE SOFTWARE tools offer a better way to plan and budget, what they are becoming is far more important—the foundation for the business infrastructure of the future.
RUSS BANHAM is a Pulitzer Prize–nominated business journalist and author of several books. His most recent volume is Rocky Mountain Legend, a biography of the Coors brewing dynasty. He lives in Seattle and Missoula, Montana. His e-mail address is bzwriter@aol.com .

company cannot grow effectively without a well-conceived strategy and a supporting budget, yet many companies invest inordinate time, energy and financial resources to develop such plans only to change or even ignore them. Christine Gattenio, CPA and vice-president at Hackett Benchmarking Solutions, oversees corporate benchmarking surveys and says companies put an exhaustive amount of time into these exercises, “with very little return.”

A few Fortune 1000 companies—including Allstate, Fujitsu, Nationwide Financial Services, Owens Corning, Sprint and Texaco—recognize they’ve been guilty of inadequate planning and budgeting. To improve those processes, they’re trading their usual bottom-up planning and multi-iterative budgeting processes for top-down strategic plans budgeted by department managers. And they are compensating the managers for achieving measurable results.

The cost of such an overhaul is high, not only in time and effort but also in dollars. For large companies, the investment can run as much as $40 million. That price tag includes consulting fees, in-house staff time and the purchase and customizing of state-of-the-art software to link disparate corporate data across the enterprise—essential for effective planning and budgeting.

Only 58% of companies link bonuses, merit pay increases and profit sharing to measurable performance of strategic and tactical plans.

—AnswerThink, Hudson, Ohio

BIG CHANGE, BIG BUCKS

The whopping expense has caused some companies to balk. National Semiconductor brought in outside consultants who mapped out the complex steps new strategy required, but after estimating the dollar investment the company decided to revisit a more traditional and far less expensive planning and budgeting process. Other companies, including Whirlpool Corp. and Hershey Foods Corp., set out on the retooling journey. Their well-publicized difficulties trying to implement the special software required to reengineer planning and budgeting led them finally to give up in frustration. Some analysts estimate that as many as half the companies that attempt such an overhaul become so overwhelmed they give up.

Planning and budgeting reengineering requires patience, intensive ongoing communication with employees, investment in new data-gathering software tools and, most important, the willingness of a company’s finance group to evolve. Data collecting and disseminating—the traditional functions of a finance group—will be subsumed, with finance personnel morphing into analysts, strategists and advocates.

Consultants say the improved decision-making capabilities wrought by successful reengineering justify the high price tag. “Companies can double their initial return on investment within a few years, thanks to better decision making, reduced planning cycles, a more motivated, collaborative workforce and a sharper competitive edge,” says Lawrence Serven, a principal at the Buttonwood Group, a Stamford, Connecticut, research and consulting firm. Serven believes that planning and budgeting reengineering is a trend that will build in momentum in the next 10 years. He estimates that a quarter of the Fortune 1000 are currently starting on such a course.

Budgeting and Planning Software Tools
Comshare ( www.comshare.com )
Adaytum Software ( www.adaytum.com )
Cognos ( www.cognos.com )
Hyperion ( www.hyperion.com )
OutlookSoft ( www.outlooksoft.com )

THE LONG VIEW WAS NEARSIGHTED

In large part, the effort is based on a simple fact of corporate life: Traditional planning and budgeting do not do what they purport to. “The customary system of trying to accurately predict what will happen in 12 months and budgeting accordingly is an exercise in futility,” says Serven. “You end up with goals and objectives based on a whim and a prayer.”

David Axsom, managing director of AnswerThink Consulting Group in Hudson, Ohio, agrees: “Trying to figure out how much fax paper you will need next November and what that will cost is like forecasting the weather.”

No wonder most corporate plans end up collecting dust. Serven believes up to three-quarters of all plans are never executed—and planning is nothing without execution. If corporate strategy fails to drive the planning and budgeting process, he adds, then all the attendant effort is just “huffing and puffing.”

Take the case of Fujitsu Computer Products of America. Three years ago, the San Jose, California–based manufacturer of mass data storage products such as disk drives and tapes decided its planning and budgeting exercises were a waste of time. “We were long on process and short on valuable information to run the business,” explains Kevin T. Parker, who was then Fujitsu senior vice-president in charge of finance and administration. “There was a tremendous amount of effort put into the administrative aspects of budgeting, distributing spreadsheets and collecting information. The process took so long that by the time we had completed our critical assumptions, such as expected market growth, they no longer were valid.”

Parker, who recently became CFO of Aspect Communication, another technology company in San Jose, led Fujitsu’s companywide effort to overhaul its faulty planning and budgeting strategy. Like most other companies, Fujitsu followed a traditional process. Its department managers budgeted at the detail level before the company had agreed on strategic objectives. “Basically, they were budgeting before they really knew where we were headed,” Parker says. “They would forecast product availability and customer expectations independent of one another, then kick them upstairs for review. The budgets would go through a lot of churn, traveling up and down the corporate ladder until they were final.”

This circuitous routine took two months, an exceptionally long period of time in the fast-paced computer industry. Says Parker, “We were being overtaken by events. Something had to give.”

Budgeting and Planning Books
  • Value Planning by Lawrence Serven, John Wiley & Sons.
  • The Value Imperative by Peter Kontes, The Free Press.
  • Art of the Long View by Peter Schwartz, Doubleday.

NEW PLANNING PARADIGM

The “something” that gave was traditional planning and budgeting strategy. Fujitsu called in a Big Five accounting firm, KPMG, to evaluate its system, benchmark it against other Silicon Valley companies and reengineer its processes. The firm advocated automating the planning and budgeting process to reconcile the data Fujitsu routinely collected but failed to disseminate.

Excel spreadsheets gave way to enterprise resource planning (ERP) software. Two years earlier, Fujitsu had installed an ERP software program designed by Oracle (other ERP vendors include SAP and PeopleSoft). The accounting firm advised the company to attach an enterprise application system (EAS) software program called Hyperion Pillar to its ERP system. Basically, an ERP program tracks the entire supply chain of manufacturing companies, including timely data on shipments of materials and supplies, purchases, inventory, accounts receivable and accounts payable. An EAS program links to this system to provide a front-end planning database and an analytical tool. “Oracle is a repository of information, while Pillar is a planning tool,” Parker explains. “I can do a wide range of specific planning scenarios using Pillar. Say I want to know what will happen to our financial stream if I delay a product introduction for 30 days. Pillar will tell me.”

Planning programs such as Pillar or Comshare are assumption-driven; a financial manager can submit a change in a strategic assumption, such as a new hiring plan, pricing schedule or cost of material, to determine the impact on profit and loss. “If a customer wants more or less of our product, I can gauge the financial impact of that within an hour—as well as possible corrective actions that might be warranted, such as a change in hiring or expense plans,” Parker says.

What makes such software especially valuable, adds Serven, is its ability to import data from other management software, which may be running on different systems, and then integrate the data into the company’s information database.

Allstate Insurance began to reengineer its planning and budgeting processes three years ago—an improvement effort that’s still under way. At the time, the Northbrook, Illinois–based insurer had 11 different general ledgers, 13 systems for month-end closings and hundreds of other separate systems to account for, track and manage its various lines of insurance. The systems didn’t share data, and every time something changed, it had to be entered one system at a time.

Serven, who was one of the consultants Sears called in, recalls a conversation with Allstate’s new CFO at the time, Thomas Wilson, now president of Allstate Life & Savings. “He told me that when he had asked a company executive how much cash was being generated by the company’s agents, the executive hemmed and hawed.” When he asked the same question of two other executives and was told an answer would take some time, he started to worry. But when he finally got answers from each executive, his concern escalated because the difference between the highest estimate and the lowest was $1 billion.

Allstate invested an estimated $60 million to reengineer its planning and budgeting process, Serven says. The money paid for a complete systems software overhaul undertaken by SAP, a Waldorf, Germany–based software company. Today a wealth of different finance and operational functions—everything from billing and contracts to travel and entertainment—are processed, integrated and warehoused on the same computer system. The centralized system has saved Allstate roughly $100 million in processing costs over the last 18 months. “SAP helped us become more efficient,” says John Carl, Allstate’s current CFO.

Other companies have not been so fortunate with installing SAP software. The German company has acknowledged problems with implementations at both Whirlpool and Hershey, which it blamed on failed efforts to integrate its software with the companies’ legacy systems. Other SAP customers, such as Lufthansa Airlines, also have reported troubles. SAP’s president, Hasso Plattner, promises a more active role in future implementations. Nevertheless, the experiences of these companies show how exasperating the reengineering process can be.

Budgeting and Planning Consultants
The Buttonwood Group ( www.buttonwood.com )
KPMG ( www.kpmg.com )
AnswerThink ( www.answerthink.com )
Andersen Consulting ( www.arthurandersen.com )
McKinsey & Co. ( www.mckinsey.com )

BEST PRACTICE BUDGETING

In Fujitsu’s case, although the journey was arduous, the company says the results justified the effort. The company’s budget is no longer an exercise in tealeaf reading. Instead, Fujitsu uses a monthly, rolling forecast, which is entered into its EAS system and simultaneously uploaded onto its ERP platform. The ERP program then downloads actual results, such as purchase orders, customer returns or accounts payable, into the EAS system. This two-way functionality finally gives Fujitsu financial managers the ability to measure real performance. Says Parker, “We used to predict something but had no capability to measure it. For example, we’d project a revenue increase of X% in a particular geographic region or product line, but since we couldn’t measure this we couldn’t use the information strategically.”

As a result of the change, Fujitsu’s management now works as a team and, using the enterprise planning software tools, determines strategic and tactical assumptions before doing any detailed planning. The team discusses product launches, customer and competitive issues, pricing assumptions and target market share; documents that information; and then brings in support information—competitive analyses—before reaching overall planning objectives. When it is completed, the strategic plan goes to Fujitsu’s product-line and sales managers, who are required to create a forecast and tactics supporting the corporate objectives. Their observations are rolled together and measured to ensure they conform to the original target. If a forecast and tactic fall short, Fujitsu’s financial managers make corrective changes before the budget is approved.

Contrary to the usual multi-iterative planning and budgeting process, where unsupported assumptions are repeated up and down the management ladder, Fujitsu’s process encompasses one up-and-down cycle. As a result, its planning and budgeting process takes about 10 to 15 days compared with 6 to 8 weeks under the previous system.

Because managers spend less time on budgeting, they devote more time to understanding Fujitsu’s individual businesses. Although Fujitsu is a very large corporation (projected 1999 revenues: $1.2 billion), and management has had no trouble understanding the consolidated results, in the past there wasn’t enough time left over after the budgeting process to break down each individual business and measure one against the other, Parker says.

The new system reaped dividends for Fujitsu last year, when it became apparent that its disk drive business was headed for a period of oversupply. Parker entered the information into the Pillar program, which advised the company to hold back on hiring and other capital plans during the period. Fujitsu’s budget was then changed to accommodate this.

Gattenio’s experience jibes, and she says, “For example, strategic planning, on average, takes five months at most companies, but those that have reengineered the process are averaging one month from beginning to end. Similarly, tactical financial planning averages four months at most companies, compared with one month among those that have taken the plunge. All those planning and budgeting iterations have been pared substantially. These are powerful metrics.”

THE FINAL LINK—$$$

There is one other aspect to reengineering planning and budgeting—motivating managers to achieve their budgeted forecasts. While this sounds logical enough, a survey released by AnswerThink last October revealed that only 58% of companies link bonuses, merit pay increases and profit sharing to measurable performance of strategic and tactical plans. That’s a mistake, Axsom says. “If you want employees to develop a sense of planning and budgeting ownership, you must reward their efforts,” he insists.

Parker says Fujitsu’s system of linking roughly 40% of managers’ compensation to successful execution of departmental plans and budgets motivates them. The compensation link can be very narrowly defined. For example, if the objective in a particular forecast is to win customers, a sales executive’s incentive compensation will be structured to reward that specific goal.

Parker concedes, however, that given all the variables, it’s hard to quantify the virtues of enterprise planning. “Nevertheless, I will say that when we started this process, we were a $350 million business and today we are a $1.2 billion business. Our planning and budgeting processes absorb the time and resources of fewer people. We’ve got a more interactive system and I’m convinced the new system has played a major role in our ongoing success.”

As sophisticated as planning and budgeting have become, even more advances are in the pipeline. The focus now is on integrating all these software applications with data from key suppliers and buyers—so-called business-to-business commerce. And what better vehicle for that than the Internet. At the most basic level are vertical exchanges and auction sites such as PaperExchange.com, Verticalnet.com and e-steel.com. These hubs streamline supply chain transactions by assembling corporate buyers and sellers in a virtual marketplace. And to provide that service most effectively, these hubs are now partnering with business-to-business software companies such as Tradex Technologies ( www.tradeex.com ) and webMethods B2B ( www.webmethods.com ), to integrate users’ ERP and EAS systems.

While all these software tools offer a better way to plan and budget, what they are becoming is far more important—the foundation for the business infrastructure of the future.

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