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Rolling Along

Many finance chiefs aspire to a dynamic budget, but most companies ''just aren't planning and measuring the right things.''
Janet Kersnar, CFO Europe Magazine
September 14, 2004

Not 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.

Analyse This
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.


"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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