VideoThe typical budget, most CFOs will agree, takes too long to prepare, is too detailed, and delivers too little value for the effort put into it. Yet budgeting is usually one of the last areas within corporate finance to be reengineered-- if at all.
Why? One reason is that the benefits of redesigning the process are less quantifiable than the benefits of redesigning, say, accounts payable. That also means that when the budget process isn't working well, it's not particularly evident to those who participate in the process. And because "the pain and suffering [budgeting] inflicts is dispersed across the company, there is usually no one group that is really motivated to effect change," says Brian D. Belchers, a senior partner with Ernst & Young LLP.
But the potential payoff from reengineering the budget process is vast. "If you can plan and manage the business better via the budget process--setting your strategic targets, building a plan to achieve those targets, and putting in place a system to monitor your progress and make course adjustments as necessary--the benefits will be enormous," says Lawrence Serven, a manager in the Stamford, Connecticut, office of Deloitte & Touche Consulting Group.
Enormous benefits from a reengineered budget process are what Sprint Corp., the Westwood, Kansas-based diversified telecom giant, hopes to reap. In the spring of 1996, Sprint began revamping its approach to budgeting as part of a larger effort to improve forecasting and business planning. The new process should be fully implemented by June 1998. The most striking change: no more annual budgets. Instead, the company will rely on quarterly reviews of a six-quarter rolling forecast of the business. The emphasis will be on forecasting around a key set of business drivers, coupled with an exception-based monitoring system.
The new process will produce shorter cycle times, greater flexibility, and a stronger link between business drivers and forecasts, according to John Livers, Sprint's process director of business planning and performance reporting. Ultimately, says Livers, responsibility for the budget process will be "shifted away from the finance department and put into the hands of the people who actually run the business."
THE STATUS QUO
Sprint has good reasons for scrapping the current budget process. With $14 billion in annual revenues, the telecom has two core businesses: a local telephone business with 7 million customers and a long-distance service with 8 million customers. Through its emerging businesses--National Integrated Services, a competitive local service division; Global One, representing international telecommunications partnerships with France Telecom and Deutsche Telecom; and Sprint PCS, its wireless business--Sprint intends to provide a seamless array of local, long distance, and wireless services. The need to combine these complex and very different businesses created internal demand for an integrated budgeting and performance reporting system.
An additional incentive for reengineering the budget process was the company's rank in a benchmarking study of more than 650 companies conducted by The Hackett Group, a Hudson, Ohio, consultancy. Sprint placed in the bottom quartile. It needed more than four months-- about 137 days--to prepare the annual budget. Reengineering will aim to reduce that number to under two months, says Livers.
Sprint was also expending twice as many resources producing management reports as it did analyzing them, a ratio Livers says will change. "We hope to put more horsepower behind trying to understand the business--to facilitate decision making, as opposed to simply reporting what happens," he says.
TARGETS
In the first step of the new budget process, Sprint will set business targets. Once a year, in the fall, a team composed of corporate and division presidents, strategic planning representatives, and key business unit and finance management personnel will meet to set high-level performance targets for the next six quarters. Those targets will be specific, quantifiable, primarily financial, and fixed. Perhaps most important, they will be expressed in percentage terms rather than in absolute dollars.
"Let's say our business improves significantly in the period that directly follows the period in which we set our targets," explains Livers. "By using percentage growth off our base rather than absolute numbers, we will be continually challenging the business."
Performance targets will be set around the activities that drive the business and will be drilled down into lower layers of the organization, where they will be more operational in nature. "Drivers are things that are actionable and predictable," notes Livers. "By monitoring them, business managers can immediately assess what is happening in the business when there is a variance from target and can act immediately to deal with that variance." For instance, Sprint is putting in place a reporting mechanism that will tell not just how much revenue grew, but also why it grew--whether because of, say, an increase in the customer base or a marketing promotion, or a combination of both.
The determination of the drivers of output is a key piece of Sprint's reengineering project. "We have to be sure we not only are tracking the right drivers, but that we understand the relationships among them," says Livers. "If I increase sales, what does that do to my business? Do I understand that if I increase sales, that doesn't necessarily increase revenue? If I lose customers, depending on the types of customers that I lose, is that a favorable or unfavorable outcome for my business?" Identifying those causal relationships won't be confined to the project period alone, but will span at least the next two years, says Livers. In the end, managers will have a deeper understanding of the business.
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