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The telecom giant is adopting a six-quarter rolling forecast and disconnecting the annual budget.
Susan Arterian, CFO Magazine
September 1, 1997
The 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.
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.
Meanwhile, Sprint wants to set targets much more quickly. In the past, it spent anywhere from two to seven months on target setting, tolerating an extended period of negotiation between divisions and corporate. Now, negotiation will be kept to a minimum, allowing business managers to move on to create tactical plans to meet those targets.
Once executives have agreed on the key financial targets and the drivers of the targets have been determined, those targets will be reviewed quarterly by business-unit and divisional management. "We will take our latest forecast and assess it for reasonableness and ask senior managers what they feel they are capable of producing in the future," says Livers. This new quarterly review, however, won't involve a wholesale, bottoms-up reforecast. Targets will be changed only under extraordinary circumstances--a price war, for example, or a major change in business strategy.
To further streamline the budget process, Sprint is now implementing an exception-based reporting and monitoring system connected to a data warehouse (see "Setting Standards," page 90). Instead of wading though reams of reports to uncover where the variances from budget lie, business managers will be given summary reports on those elements of business performance that are at variance with the budget. The managers will have the ultimate responsibility to revise business tactics and get their businesses back on track.
"We want to create a strong link between tactical planning and financial planning," says Livers. "We want to reinforce the fact that this is not just a high-level target- setting exercise."
For instance, if a particular division is missing its revenue target at the end of a quarter, the division manager will be able to quickly assess where the variances from budget occurred in the business drivers of revenues. Once the manager has determined which driver is causing the variance, he can formulate actions to put his budget back on course. Perhaps, for example, the division has failed to attract a sufficient volume of the right customer into its sales channel. The manager might decide to change marketing tactics to attract more of the desired customer, then reforecast his customer volume numbers to reflect what he expects that new tactic to produce.
"The manager is still going to be expected to meet his revenue target," comments Livers, "but he is going to get there another way. That is the kind of flexibility we are trying to reinforce, that you don't hold people accountable to a specific tactic that was conceived six or eight months prior. They need the ability to continually change what they are doing in the business to keep the business on track with what it was intending to deliver."
The reengineered process will also forge stronger links between revenue, or the outcomes of business activities; the current expenses that will be incurred to create those outcomes; and the capital expenditures that may need to be made to accommodate them. For instance, a marketing manager might conceive a major sales push that will require the Sprint telecommunications network to provide additional switching capacity in a certain part of the country. "We want to be sure that the marketing person who makes the call on that big marketing and sales push understands there is a capital correlation--that it isn't without a capital cost," says Livers.
All areas of Sprint's business must understand these types of linkages. "At the end of the day, you don't produce a revenue growth of 20 percent in the following period without an understanding that you had to put a million dollars in capital in the pot in order to do that," observes Livers.
A critical element in the reengineering process that Sprint must still address is the linkage between the business drivers and incentive compensation. "People have to care about the budget plan and about meeting their performance targets," says Serven of Deloitte & Touche. "If they blow the plan and there is no economic impact, that plan is just a paper tiger."
Although Sprint now sets its incentive compensation around financial performance measures, in many cases a particular business manager may have little or no direct control over those measures. Notes David Axson, vice president of The Hackett Group, a Hudson, Ohio- based consultancy: "If you don't change the incentive and reward mechanisms so that they are based more on what people can directly control and influence, the budget and planning process will simply continue to frustrate those who are forced to participate in it."
Sprint is now attempting to implement such changes. For instance, while a customer service manager may not have direct control over revenue growth, he may have control over an indirect driver of that growth, such as call answer time. In the future, his incentive pay may therefore be based on reducing customer waiting time by a predetermined number of seconds or keeping it within, say, a 5-to-10-second range.
Sprint expects to complete the budget-process redesign in June 1998. In the run-up to that date, the company will be reengineering not only its performance reporting, budgeting, and planning processes, but also its transaction processes--including the general ledger, accounts payable, fixed assets, and payroll. Data from these processes will be standardized and consolidated in an enterprisewide data warehouse, which will give Sprint budget makers an enormous information boost. Budget makers will access the warehouse via an exception-based reporting system built with MicroStrategy decision-support software, which will be delivered to the desktop of every business decision maker. The software is a ROLAP (relational OLAP, or online analytical processing) tool with powerful ad hoc query and drill-down capabilities. Different types of users will be able to do different types of analysis. High-level executives will still look at P&Ls with summarized data, while business managers ("power users") will be able to drill down to the transaction level.
Standardizing data across the enterprise is a key step in reengineering Sprint's budget process. Previously, for example, the company's various divisions defined revenue in slightly different ways. In order to use revenue data from these divisions for analysis and reporting purposes across the enterprise, it was necessary to perform time-consuming reconciliations.
"Now, before we put data into a [data] warehouse, we make sure that the users of that data have come to a consensus around the definition of it," says John Livers, Sprint's process director of business planning and performance reporting. "That very process of consensus building should, by the end of this project, translate into better information."
BUDGETING ACCORDING TO SPRINT
Source: Sprint Corp.