Video"That helps us build up the external context for our broader strategic objective ... before head office sets the key financial parameters and the framework for the business units to deliver the numbers," says Sands.
That kind of external information could be a welcome addition at many companies struggling to build a link between their strategic vision and their budgets. Indeed, cases abound of boards communicating plans to shareholders that are completely divorced from the financial budgets to which the rest of their companies are working.
Still, since becoming CFO in 2002, Sands has made efforts to streamline the budget process. He has reduced the amount of time it takes to prepare the budget to around two months, and says that budgeting "has become a process that we consciously manage heavily." And to stay on top of the numbers throughout the year, he also requires the business units to prepare quarterly rolling forecasts that look six to eight quarters into the future.
From the Top
It's usually the flow of information internally, rather than externally, that needs improving. What a lot of companies don't understand is that "a budget goes deep into how a company is managed," says Gaiser of Horvath. Improving the budgeting process requires a big shift in management control to drive budget responsibility far down into an organisation.
Coveney of Geac says there are a number of ways that top companies have found to bring about this change. One is to divide the process into three steps that can provide both a top-down and a bottom-up perspective of the budget. Step one is to set high-level goals three years ahead; this includes broad guidelines on how the goals will be achieved, along with the definition of the strategy. Next, operations will determine how the plans will be implemented — "Lots of companies miss this step out," Coveney says. It's only at this point that a company is ready to develop a budget, which he reckons should take only two to three weeks to complete.
"It's a different frame of reference. It's saying, 'What level of spend can I afford in order to achieve these tactics?' not, 'What tactics can I afford with this level of spend?" he explains.
Yet instilling a new frame of reference among managers doesn't happen overnight, as BASF IT Services is finding out. It's been three years since Germany's BASF Group set up an IT subsidiary in Switzerland, and building a new budgeting and planning process is still a work in progress. "When you have a living organisation, you just can't say, 'Stop, we need some time to build our processes,'" says Eva Hartmann, director of controlling for Europe at the €442m subsidiary.
To start BASF IT's implementation a top-down annual budgeting process was put in place. Then, a balanced scorecard was introduced, comprising 12 key performance indicators (KPIs), including non-financial metrics such as customer satisfaction and market share, against which actual performance is compared. Crucial to this stage of the project was securing the support of the board. "If you only have the finance director involved, you lose," says Hartmann.
The next part begins in 2005 with the introduction of monthly trend reporting and a 12-month rolling forecast that will be updated three times a year. The third and final stage will roll out a bottom-up balanced scorecard, which will be linked to incentive schemes.
The key, says Hartmann, is collaboration. That's why she's been put in charge of controlling for both strategy and operations. "It's an unusual role," notes Hartmann, "since controllers normally have no involvement in business development strategy." One of the main benefits of combining the two roles, she says, is that now strategic processes and operating processes will stay synchronised.
Then there's reporting. Unlike many companies, BASF IT has decided to make internal and external reporting one and the same, so that "we're not living in our own little worlds and we know where the company is in the whole market," she says. Intranets and video streaming are also used to communicate the firm's strategic vision, along with budgeting and planning targets. Hartmann says she's already seeing the benefits. "There's a lot more communication going on, and now everyone understands how the company works," she says. That may not be the Holy Grail just yet, but it's progress.
Janet Kersnar is the editor-in-chief of CFO Europe.
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