Time for Change

People who are closely involved in budgeting and planning are open to changing the process. We asked participants whether their companies are planning to change their budgeting and planning methods "significantly," and 71 percent responded that they are. Of those who are planning to change, we asked their reasons for doing so. The most frequent answers were not about saving time, but rather about using budgeting and planning more effectively as a BPM tool. The three most frequently cited responses were to achieve better insight into performance, to attain higher budget accuracy, and to improve alignment between companywide objectives and individual business units or individuals. Shortening the process came in fourth, followed by improving responsiveness. In other words, it's not just about saving time -- it's about what you do with the time saved.

Key Characteristics of Effective Budgeting and Planning

The purpose of BPM is to optimize business processes while aligning them with the organization's strategy. Planning and budgeting consequently play a critical role in any company's BPM efforts because they're the best way to translate strategy into a coherent set of initiatives and objectives. Planning should be the basis for objective assessment and matching up the efforts of all corporate units and individuals. The discussion that follows outlines the key characteristics that Ventana Research believes define effective planning and budgeting.

Insight into a company's performance and the factors that drive results. Insight into how a business is doing (i.e., the meaning behind the numbers) is necessary to improve performance. We asked companies that had recently proposed and implemented a major change in their budgeting and planning process to give us their reasons. Better insight is considered to be a very important benefit of budgeting and planning: In fact, it was the most frequently mentioned factor (18 percent), ahead of greater accuracy at 16 percent, as exhibit 7 shows.

Getting to underlying data quickly if there's an issue has a significant impact on how effective the planning and review process can be in managing performance. As exhibit 8 shows, 58 percent of respondents cannot even drill down into the source of a number. For those who can get to the source data, more than two-thirds (69 percent) can do it in minutes or hours (i.e., in a reasonable amount of time). Another 24 percent stated they can do it in "days," which may or may not be adequate. The remaining 7 percent can arrive at the answer only in weeks or months, which in most instances is not likely to be of any value at all.

Accuracy sufficient to support smoothly functioning operations. Budget accuracy is important to an organization's performance. At the very least, appropriate financial controls need to be in place in order for the company to be profitable and to ensure there's adequate cash to meet obligations. The right resources must be allocated to the activities that will produce the highest returns. Assessments of how well objectives are met depend on how realistic these objectives were from the start.

On the whole, the respondents have mixed feelings about the accuracy of their budgets (see exhibit 9). We found that a bit more than 44 percent rated their accuracy above average, while 24 percent believe theirs is below par. The overall weighted average value of responses was 2.9 on a five-point scale.

Alignment of corporate, departmental, and individual objectives. Companies, particularly larger ones, must keep their budgets aligned with their strategic objectives and coordinate the allocation of resources across and within business units. We found that the study participants believe their budgets are well aligned with their strategic objectives: Exhibit 10 shows that 54 percent agreed with this statement, while only 18 percent disagreed.

While this answer is encouraging, we caution that in many corporations the budget is the strategy. Some companies fail to do any significant strategic planning, and many never explicitly integrate these longer-term, higher-level objectives with quarterly or annual tactical objectives when setting budget priorities. Not that budgets are created willy-nilly -- but the actual priorities may bias resource allocation to individuals' political agendas, not the stated corporate objectives.

Agility to effect a well-coordinated response to change. Agility in the budgeting, planning, and review process is measured by how quickly companies spot and react to changes in their environment. Nimble companies can promptly detect significant deviations from plan, make the appropriate interventions, and revise their operating plan accordingly. Only 30 percent of the respondents said their company is able to implement changes to their plan in hours or days (which is our definition of agile), while 41 percent said it takes weeks (which we consider is often, but not dependably, adequate) and 28 percent indicated it takes a month or more (which is inadequate, in our judgment).

Collaboration throughout the process. There are several ways companies can increase the effectiveness of their budgeting and planning process. Exhibit 11 lists what participants consider the most important ones. Our study found that companies that believe their budgets are very accurate attribute this to better collaboration more than any other factor. We also asked companies that believe their budgets are not accurate what would make them more accurate. They cited better collaboration more often than any other factor. Collaboration contributes to deeper insight into performance by bringing frontline intelligence into planning and reviews. Ventana Research has determined that companies that increase participation in the budgeting and planning process broaden the sense of "ownership" of corporate objectives.

CFOs, controllers -- indeed, anyone in the finance organization -- should investigate ways to make budgeting and planning processes a more effective management tool. As part of a process improvement plan, eliminating spreadsheets as the core software tool is an important first step to achieving measurable improvements in effectiveness. Compared with dedicated planning and budgeting software, spreadsheets have inherent technical defects that prevent them from being a good tool for this purpose. They're often the root cause of numerous problems in the process. Simply buying software, however, is never enough. Budgeting and planning must become a key element of a corporation's BPM initiative.

Robert D. Kugel heads up the financial performance management (FPM) practice at Ventana Research, focusing on the intersection of information technology and the finance organization. Ventana Research is a premium content partner of Business Finance and Business Performance Management (BPM) Magazine.