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CPM Title (03)

See also:
CPM: What it is and how it is different from traditional approaches? -- Part One
CPM: Systems and Steps to CPM -- Part Two
CPM: Selecting the Right Technologies -- Part Four (A)
CPM: Selecting the Right Technologies -- Part Four (B)
CPM: Selecting a CPM Vendor -- Part Five
CPM: Emerging Technology Systems -- Part Six

          In the last article (Part Two) we took a look at what is needed to bridge the gap between strategy and execution: how the four different areas of management -- Measures, Processes, People and Technology -- need to be aligned. Aligning two or even three of these areas is not enough -- all four need to be addressed.

          In this article, we will look at 12 'Best Practices' in implementing a CPM solution -- practices that will help greatly in communicating and monitoring strategy.

1. Identify and agree on objectives for each process

          Most people would agree that the purpose of budgeting is to implement strategic initiatives. Unfortunately, there is very little evidence to support this. The Hackett Group found that only 30% of organizations link their strategic plans with their tactical plans, while Norton Kaplan reported that other than senior managers, few middle or junior managers understand the vision or actually see the plan.

          Without a specific purpose, it's easy for the different management processes to degenerate into a ritual that misses the point of the activity. By having a specific purpose, you are able to tune each activity to support that purpose i.e. you can determine what is planned, how it is planned, how often, at what level and who should get involved.

2. Plan for all aspects of the business

          For a plan to be useful it must be complete -- but what should be included? Is it just financial figures? As covered in the last article (Part Two), it's vital that all areas that are important for your organization to stay 'alive' need to be planned.

          Kaplan and Norton's Balanced Scorecard (BSC) is perhaps the most well known methodology that helps organizations ensure that their strategy covers all areas of the business to ensure both short- and long-term performance. It does this by focusing attention onto the different aspects that impact viability: financial results, operational efficiency, customers, and learning and growth. For more information on BSC, there is an excellent 'free' web site at http://www.bscol.com.

3. Align Critical Success Factors (CSF) with operational budgets

          Whatever methodology gets adopted, it's vital that the budget is aligned with strategic objectives. Traditionally, budgeting and subsequent reporting is done by cost/revenue/profit center. Sometimes this is broken down further -- for example, by product, customer or line of business.

          While this may be important from a control point, it generally does nothing to evaluate the success of strategy. To do this requires translating strategic goals into action plans from which specific budget measures and associated business dimensions (e.g., product) are derived. For example, if a strategic goal is to improve sales productivity, then we need to define the Key Performance Indicators -- the measures of success -- so that we know when the goal is achieved. In this example, the KPIs may be that revenue per head will exceed $250,000 and that discounts will be kept below 10%, with Cost of Sales below 15%.

Critical Success Factors

          So how will those KPIs be achieved -- what action plans are going to be put into place? In our example we may choose from two tactics: To conduct sales training and to reduce discounts. From this, we can now work out the measures than need to be planned and measured: Sales by person (so we can work out the revenue per head figure); discounts, salaries and T&E (the accounts that make up Cost of Sales).

          Budget Holders should now be able to enter budgets by tactic that when consolidated will allow management to evaluate the cost/success of individual tactics and the associated affect on strategy.

4. Assign responsibility

          CPM is all about organizational accountability. Goals are generally only met if someone is made responsible for them. In general the following guidelines are desirable:

Bullet   The maximum number of measures assigned to any one budget holder should be less than 40. 15 to 25 is typical in 'Best Practice' organizations.'

Bullet   Where possible, implement 'flex' targets. E.g., a target may be to keep expenses within 15% of revenues. Traditional budgeting typically sets revenues that become 'ceilings', and costs that become 'floors'. When the revenue targets are reached everyone relaxes, however, costs are normally always spent up to the budget, even if that expense was unnecessary. A flex target is more likely to help a budget holder achieve the objective. In the above example, a budget holder could spend more if the revenue target is increased, similarly, as long as costs are reduced an underperformance on revenues may be acceptable.

Bullet   If someone is responsible for a goal, they must have the authority to influence the goal.

Bullet   Compensation should be linked to KPI achievement -- the adage 'You get what you pay for' is very true.

5. Report at a level that achieves the objective

          Many organizations believe that budgets should be at the same level as the reports -- but why? The level at which measures are reported should depend on the objective. For many organizations there are three objectives for actual reporting:

Bullet   To see if tactics will achieve the strategic goals.

Bullet   To establish how efficient the organization is operating

Bullet   To identify any weaknesses and opportunities that may be present.

          For the last two points, information at a more detailed level will be required but this does not mean that the budget should take place at this level.

6. Record assumptions

          What makes a good performance? Being better than budget? Well that depends on what assumptions had been made about the business environment. For example, if the sales budget was set on the assumption that the market would grow by 5%, if the market actually grows by 10%, an on-budget performance is not a good performance. Therefore to gain meaningful value from an actual/budget variance, we need to check that the assumptions made at budget time were correct. You can't just measure yourself with yourself -- or you will be deluded.

.           As a result we need to record the assumptions made -- otherwise they will be lost. Assumptions may include anticipated market share, competitor activity, anticipated exchange and tax rates, and so on. As well as informing budget holders about the anticipated business environment for which they should plan, these become checkpoints later on when analyzing variances.

7. Communicate goals, objectives and timetables

          Never assume budget holders know what is required or by when. Effective systems will answer questions such as these:

Bullet   What are the targets?

Bullet   Why have they been set?

Bullet   When is the budget submission/forecast due?

Bullet   Who has to approve the submission?

8. Give access to relevant information

          To budget and forecast realistically, requires a combination of:

Bullet   Actual and historical trend results.

Bullet   Comparisons to plan and prior periods.

Bullet   Competitor and market information.

          To support an efficient process requires budget holders to have simple, fast access to the latest information as it relates to strategy.

9. Use statistical techniques to predict future performance

          By analyzing historical information on products and services, trends can be established that can help forecast future performance. These can be used to seed or check budgets and forecasts. Statistical techniques are un-emotive and can make budget holders think about budget and forecast submissions, which will result in better, more accurate plans.

          Technology allows these techniques to be used to automatically predict future performance that can then compared to a previously set target with any variances being reported to users -- all without user intervention.

10. Provide a feedback loop

          What makes a good budget or forecast? It could be that some budget holders may be able to better the expense budget by trying something different, but the risk is that it may only have a 10% chance of being successful.

          In traditional budgeting, these opportunities never get explored. Provide a feedback mechanism specifically aimed at 'how the targets can be bettered' to allow users to pass back comments. This may be implemented as a 'scenario' of the budget.

11. Budget/forecast a range of scenarios

          It has been said of business plans that the only scenario guaranteed not to work is the budget. Getting budget holders to plan for a range of scenarios -- e.g., pessimistic, optimistic based on additional marketing investment, and so on -- provides a range of results that can help pinpoint marginal cost implications with associated revenue opportunities.

12. Create an analysis methodology

          It is too easy to allow users to 'wander' through results when reviewing budgets and actual performance, with the result that exceptions and opportunities can be missed.

          To ensure users are focused, develop a methodology (which may be a set of reports and alerts) to properly evaluate each part of the planning process. Suggestions include providing answers to the following:

Reviewing a Budget Submission:

Bullet   Which tactics have KPIs that are outside of the top-down goals?

Bullet   Which major income or cost items show an abnormal trend compared with last year?

Bullet   What variances are there between the budget and the statistically predicted forecast?

Bullet   What major income and cost items show an abnormal increase or decrease between the budget and last year actual/forecast?

Bullet   How far are budget tactics from top-down targets?

Bullet   What comments do budget holders have about the targets?

Bullet   What metrics have changed the most since the last budget pass?

Bullet   Can this plan be funded?

Bullet   Could this budget be improved?

Reviewing Actual Results:

Bullet   What things are working better/worse than budget?

Bullet   Where have costs/revenues changed the most since last year?

Bullet   What forecasted costs/revenues have fluctuated the most over the year?

Bullet   Are the original assumptions made in the budget about the market/competition correct?

Bullet   What internal and external threats could jeopardize the achievement of the CSFs?

Bullet   What comments do budget holders have on actual and forecast performance?

Bullet   Are the Budgeted results going to be achieved?

Bullet   How do peer groups compare with each other?

Bullet   Who are the "good" and "poor" performers?

Bullet   Should any tactics be eliminated and their funding transferred to others?

Summary

          These 12 best practices have the potential to transform your planning, budgeting and reporting process. Give them a go -- you'll be surprised at the difference they can make:

  1. Agree objectives of each process

  2. Plan for all aspects of the business

  3. Align strategic goals with operational budgets

  4. Assign responsibilities to goals

  5. Report at levels that achieve objectives

  6. Record assumptions on business environment

  7. Communicate goals, objectives and timetable

  8. Give access to relevant information

  9. Use statistical techniques to predict future performance

  10. Provide a feedback loop

  11. Budget a range of scenarios

  12. Create an analysis methodology

          To easily implement these best practices will require organizations to use 'the right' technologies which will be the subject of the next article [Part Four (A)].

About the Author:

Profile of Michael Coveney

Email: mcoveney@comshare.com

See also:
The Strategy Gap: Leveraging Technology to Execute Winning Strategies
Michael Coveney, Brian Hartlen, Dennis Ganster and David King
John Wiley & Sons, 224 pages, US$27.97 / 22.98 (Amazon.com)

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Revised: February 24, 2003 TAF

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