VideoNot many people have heard of European Metal Recycling. But since the early 1990s, UK-based EMR has been building a formidable empire, and is now one of the largest metal recyclers in the world. Its international network of 65 processing sites handles more than 8.5m tonnes of scrap metal a year, thanks to machines like its Liverpool shredder, the largest in the world, which Peter Armer, the company's director of finance and IT, likes to boast can crush 350 cars an hour.
EMR's record of profitable growth is equally impressive. Revenue at the privately held firm grew threefold in three years, from £200m ($324m) in 1999 to £600m in 2002 (the latest available). Operating profit grew even faster, from £8m to £33m, in the same period.
Pivotal to that growth is a real-time system that allows the firm's five regional managers to monitor purchasing, stocks, sales and the like. That information is not only used to help set annual budgets, but also turned into detailed forecasts every month. Meanwhile, operations reports that are available to all operating managers are prepared at the end of each working day.
"In a sense, we're 'rolling' the budget every day," explains Armer. And in EMR's world, this dynamic budgeting and planning process is a must. "We're a slave to world metal prices," says Armer, "so this isn't the easiest business to budget for." Armer is bringing in even more information support this November, when EMR goes live with web-based software from Coda that will help the entire company keep abreast of budgeted and forecast performance targets. The end result? A budgeting and planning process that he reckons will be "the lifeblood of the company."
The "dynamic budget" — it's the Holy Grail for finance chiefs. But, the fact is, a lot of corporate Europe's budgeting and planning processes are ready to be sent to EMR's shredding machines. "Companies just aren't planning and measuring the right things," says Michael Coveney, UK-based director of business services at enterprise-performance software vendor Geac, and a performance management lecturer at the American Management Association. "I've been helping organisations for 30 years....and nothing much has changed."
That's a worry, not least because of the vast amount of groundbreaking work that went into overhauling budgeting and planning in the late 1990s. Borealis, Svenska Handelsbanken, Volvo and Rhodia are among the companies that gained notoriety back then for their bold attempts to free themselves from the time-consuming, costly and often ineffective exercises that traditional budgeting requires. But more often than not, they did not reach their ultimate goal — to replace the fixed 12-month budgeting cycle with a dynamic, rolling process that continuously plans five or six quarters ahead. (See "There and Back Again" at the end of this article.)
The truth of the matter is that budgeting and planning have become more complex, not less. Pressured by boardrooms for more accurate forecasts, front-line managers and senior executives often have to juggle myriad processes and systems that combine both annual and rolling exercises. It's becoming a huge frustration for everyone involved. Horvath & Partners Management Consultants in Germany found that nearly all of the 50 companies it recently polled said they want to reduce the complexity of their planning processes.
The economic downturn is partly to blame for backtracking on efforts to bin the annual budget, says Bernd Gaiser, Stuttgart-based CEO of Horvath. During the go-go days of the late 1990s, companies felt the need to streamline and speed up planning to keep pace with their changing markets. But as the economy worsened, projects to abandon the annual budget were....well, abandoned.
"Companies went straight into cost-cutting environments and senior executives wanted to keep an eye on every detail of spending rather than focusing on high-level items," says Gaiser. That meant many companies reverted to old habits that bog down budgeting.
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Research from The Hackett Group, an Ohio-based business advisory firm, shows clearly that better companies have less complicated, more streamlined budgeting. Benchmarking European and US firms, The Hackett Group found that companies in the second quartile have an average of 200 line items in their budgets and need 100 days each year to complete them, while top finance organisations average 70 line items and need only 79 days. (See the tables at the end of this article.) Firms in the second quartile also were less likely than world-class companies to have a central data repository to generate business performance reports, and were unlikely to have fully integrated budgeting and planning applications.
Yet for all its flaws, many finance chiefs like the discipline of the annual budget. "I'm not a believer in binning the budget," says Peter Sands, group finance director of Standard Chartered Bank, a $4.75 billion (€3.85 billion), London- and Hong Kong-listed bank. The annual budget "is really a way for us to take stock every year of what we're doing," he says. It's also a way to gauge external expectations. More and more, Sands says, the bank asks analysts what their expectations are for the next year.
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