Strategy

Transformation of Budgeting and Planning Processes

Finance chiefs are relentlessly pursuing new ways to transform their budgeting and planning processes. It's much more difficult, time-consuming, an...
Cliff SaranNovember 1, 2000

Andrew Stoneman knew he faced a big challenge. In April 1999, he joined Jones Lang LaSalle, or JLL (www.joneslanglasalle.com) as its European finance director just weeks after Jones Lang Wootton of the US and LaSalle Partners of the UK, two property-services and investment-management firms, finalized their transatlantic merger. Even so, he was in for a surprise when he began looking at how his new finance team handled processes such as budgeting.

“We had a great team, but everyone was using spreadsheets,” he says of his finance crew spread across 18 countries in Europe. Not that Stoneman has anything against spreadsheets per se. But he could imagine the weeks — if not months — that finance staff would need to spend consolidating all the spreadsheets that came in from business-unit managers around Europe every budgeting season.

Stoneman’s mission was clear. He needed to find a way to automate and integrate budgeting and planning processes at JLL. Doing so, he reckoned, would finally put an end to the countless hours of data processing in his department, freeing up staff to concentrate on more value-adding work. “I wanted to turn finance from a back-office function to a heart of the house — freeing finance [staff] from routine number-crunching to understand the issues behind the numbers,” says the London-based finance chief. In turn, he also wanted to make it easier for business-unit leaders to have access to more accurate and more relevant information for better forecasting and planning.

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The solution is a new Web-enabled management planning and control software system from Comshare (www.comshare.com), which will let authorized managers at JLL log on to a Web site and call up all sorts of information, including an individual department’s current performance results compared with the budgeted, forecasted, and previous year’s figures. Now staff are being trained to use the software application, which cost around £200,000 ($291,000) to develop and install, for the 2001 budgeting cycle.

Stoneman, however, won’t be around to witness the fruits of his labor. With the integration process well under way at JLL, he left the firm in October 2000 to become, aptly enough, head of financial planning and analysis at Chubb, a UK security-services and equipment firm that is about to de-merge from its parent company, Williams. With or without him, however, Stoneman is confident that planning and forecasting at JLL is ready for a transformation thanks to new software tools.

But how long that transformation will take is a matter for debate. A multitude of CFOs who have embarked on similar planning overhauls are only cautiously optimistic about the progress they have made. For re-engineering planning and budgeting is turning out to be a lot more difficult, time-consuming, and expensive than many companies ever imagined, requiring sweeping changes throughout an organization.

Everyone agrees that the main goal is admirable: Devise a coordinated, faster system of top-down planning and budgeting that links the performance of business units to a company’s strategic vision. It also makes perfect sense: Eliminate unwieldy budgets that waste time and rarely reconcile, and replace them with up-to-date plans that are owned by department heads, not finance.

But as with many admirable goals, the devil is in the execution. This is where technology comes in. A raft of new and improved software — from the likes of Hyperion (www.hyperion.com), Comshare, Adaytum (www.adaytum.com), SAS Institute (www.sas.com), and the major ERP vendors with their add-on modules — is aiming to revolutionize corporate budgeting and planning. “The new generation of [budgeting and planning] tools are more flexible than their predecessors,” says Richard Creeth, an independent consultant based in Connecticut. He explains that a lot of the latest software can support thousands of users and has become “a collaborative tool for sophisticated analysis and planning,” rather than an application that churns out tables that only the CEO and CFO can understand.

Bill Clough, an analyst with IDC in the Netherlands, agrees that some vendors “have taken a major leap forward and are now saying to companies, ‘OK, you may have all this data inside your applications, but now the idea is to make that information worthwhile, take it and run it through analytic applications.’ “

And to make that information worthwhile, says Clough, budgeting and planning packages no longer work in isolation and are often linked with, for example, an enterprise resource planning (ERP) system. Consider Owens Corning of the US. It recently spent a year implementing a $75 million system from SAP (www.sap.com) that included a planning application. “As part of our planning and budgeting overhaul, we went from 200-plus different data systems to fewer than ten,” says Domenico Cecere, former CFO and currently executive vice president and chief operating officer of the $5 billion building-materials firm. The result has been an elimination of multiple data inputs and a shortening of the close.

All told, says Cecere, such moves also give CFOs a competitive edge well beyond the realm of budgeting and reporting. “I’m dealing with data that is close to the market,” he explains, adding that “I can get on my PC with 80 facilities and tell you exactly what my sales and profits are that minute. I know who I’m doing business with and making money with. We now spend our time on our customers instead of on these data-input exercises.”

Center of Attention

Another trend encouraging better budgeting is the Web. The beauty of Web-based products is that, with one application being shared throughout a company, both installation and maintenance are fast and easy. Creeth also points to the fact that Web technologies can “open up the budgeting and planning process to more people” by improving the flow of information that finance can share with other parts of an organization.

Until recently, however, few budgeting and planning products were available that could work on the Web. If companies wanted Web-based applications, they had to develop their own from scratch. That was the case for Alfa Laval (www.alfalaval.com), a E1.6 billion ($1.36 billion) Swedish conglomerate. For several years, Alfa Laval’s 150 offices around the world had been using an older version of Comshare that they found slow and cumbersome to use and that required a full-time member of the IT department to provide support. That’s why in 1997, Alfa Laval began searching for a Web-based tool that could roll together business reporting, budgeting and planning.

“We spoke to Hyperion, Comshare and Great Plains Software (www.greatplains.com), but we could not find a suitable supplier,” recalls Robert Claren, the systems manager responsible at the time for building the firm’s business intelligence system. “No one could deliver something with the level of functionality we required for our businesses and that operated over the Web.” Costs, too, were prohibitive at the time. Claren says that along with consultancy fees of E250,000 ($213,000), the off-the-shelf software license fees for all 150 Alfa Laval sites would have set the firm back around E500,000 ($426,000). “We decided that it was more cost-effective to build a Web system ourselves using two consultants from Intentia (www.intentia.com) [a local consultancy] over four months,” explains Claren, who has since joined Intentia as a consultant.

The results have been promising. “It used to take several days before we could see any financial information on our old system,” recalls Pernila Hed, systems manager for group reporting at Alfa Laval. “Now, once all Alfa Laval companies have loaded their budget, forecast, or reporting information on to the Web, the data is available to everyone else in the group [via an intranet] within 20 minutes.”

At the Control Panels

Planning redesigns like those at Alfa Laval often raise a central question about who owns the budget. For finance, which typically owns budgets, the answer involves relinquishing control and assuming the role of facilitator. That’s been the case at the International Air Transport Association, or IATA (www.iata.org), a not-for-profit clearinghouse for 95 percent of international scheduled air transport, handling $120 billion of airline business in 1999. With headquarters in Montreal and main offices in Geneva, London, and Miami, IATA began revamping its approach to budgeting five years ago as part of a larger effort to improve business planning and reporting.

“In 1995, we began devolving the finance function by giving greater responsibility [for reporting and budgeting] to our operational offices,” says Colin Craw, IATA’s newly appointed finance director. But it hasn’t happened quickly. The first stage was in 1997, when they began using decentralized ledgers based on Excel spreadsheets, which were then uploaded into a software package called Hyperion Enterprise for consolidation and reporting in Geneva.

But as Craw saw it, the arrangement still needed too much input from the finance department. So the next stage was to install Hyperion Pillar in 1998. Now, information in spreadsheet format is sent automatically from field officers to Hyperion Pillar. This information is then reviewed by each of IATA’s 63 country managers, which — in Craw’s words — allows them “to create meaningful budgets of their own” that they file into the Hyperion Enterprise system for consolidation.

Meanwhile, Craw explains that his staff’s main objectives have been “to increase the clarity and quality of the budget.” Says Craw: “Each month, we prepare projections [using Hyperion Enterprise] until the end of the year, which allows management to review resource allocations and adapt to changing business needs. Without a clear understanding of the original budget, it would be difficult [for them] to make these decisions.” That’s why Craw’s staff have endeavored to build essential information into the spreadsheets that the field offices need to fill out. They’ve also attached thorough documentation explaining each line of the budget, which can now be found in a single location on the corporate intranet.

And not a moment too soon. IATA has undergone dramatic organizational changes, arguably becoming much more complex by acquiring new lines of business. In particular, in 1998, IATA took over the revenue settlement systems for both cargo and passenger billing. As a result, says Craw, “we had an enormous increase in workload, adding 100 new entities to the organization with an annual budget of around $150 million.” Without the new budgeting system, Craw says it would have been a major stretch for the finance department to cope.

“The objective was to devolve the finance function or, more importantly, to build the culture of financial responsibility within the organization,” says Craw. “IATA has always used budgets to control expenditure, but in the past it was easier when it was mainly an expenditure budget with limited revenue. Now with the greater complexity of the operations, clear, transparent budgeting is important as regional and central management need to be able to monitor and control operations.” What’s more, he insists that “none of this would have been possible with our old system.”

A Web of Products

Many of the new budgeting and planning applications use complex databases designed to help firms monitor, report, analyze, and react to developments in their business in a timely manner. Latest developments in this area include support for activity-based budgeting, continual planning, and Web-based collaboration:

  • SAS CFOVision. A new version released in September 2000 provides Web-based financial consolidation, analysis, and reporting together with budgeting and planning.
  • Hyperion Pillar. This Windows-based enterprise performance management application has been on the market since 1999.
  • Comshare MPC 4.0. Released in October 2000, this planning, budgeting, consolidation, management, reporting, and analysis application runs over the Web.
  • Adaytum e.Planning. Introduced in January as a Web-based collaborative application for top-down planning and bottom-up budgeting.

Cliff Saran is a former technology editor for CFO Europe. Russ Banham provided additional reporting.

Alcoa’s Hot Commodity

In the autumn of 1997, storm clouds suddenly darkened the horizon for Alcoa (www.alcoa.com). Aluminum prices, a leading indicator of Alcoa’s earnings, plunged 12 percent during one 60-day period. The Asian crisis weakened demand, and Alcoa’s stock began to lag the industrial averages that it had beaten the previous two years.

CFO Richard Kelson was fresh on the job, having moved over from general counsel the previous May. With the company’s 20 business-unit presidents anxiously awaiting next year’s budget for their production and productivity goals, what was a new CFO to do? Kelson’s answer: plenty.

The then-23-year Alcoa veteran not only knew the company well, but he also understood the macroeconomic conditions surrounding its 180 operations in 28 countries. So, when Kelson suggested scrapping the existing 1998 operating plan and starting over with new metrics, then-CEO Paul O’Neill and then-COO Alain Belda listened. The two, now Alcoa’s chairman and CEO, respectively, ultimately agreed, putting into motion a dramatic redirection for the $16 billion US aluminum firm.

Gone now are the one-year plans, replaced by three-year stretch goals. And six-quarter rolling forecasts now focus on changing expectations. “The forecasts I was getting weren’t worth the paper they were printed on, and I didn’t care to see them,” says O’Neill of the old Alcoa planning system.

The metrics overhaul was equally enlightening. Previously, for example, the company used yardsticks considered too myopic by Kelson. While Alcoa knew the number of cans per hour or car doors per machine per year that could be produced, such data limited comparisons. “We said, it’s not enough to be the best of the metals anymore,” explains Kelson. “We tried to look outside of ourselves and ask, what do people expect of high-performance companies?”

Lofty Goals

Now Alcoa blends three main approaches to metrics — cash flow return on investment (CFROI), a tailored form of Stern Stewart’s economic value-added (EVA), and a balanced scorecard — strongly boosting the performance-based element at the company. To drive longer-term performance, Kelson created three-year horizons for all the redesigned Alcoa metrics. Then managerial compensation was tied in. Many goals that Alcoa set were lofty — for example, a stock-price boost to put Alcoa in the upper quintile of companies on the Dow Jones Industrial Average by year-end 2000.

To make progress obvious — or to highlight shortfalls — Kelson introduced unit-specific data books comparing monthly results with historical trends and tracking results alongside future goals. “The data books eliminate any temptation for ‘sound-bite’ management. You’re now looking at things very much in context,” he says. Introducing quarterly revisions to the forecasting process has added even more integrity. As a general guide to allocation decisions, Kelson devised a “philosophy book” that outlines positions on everything from off-balance-sheet financing to funding small joint ventures.

William Christopher, Alcoa’s vice president who heads the forged-products unit, says the business-review process makes “what-if” scenarios easier. “Now the challenge is analyzing the numbers rather than generating them,” he says. In one recent case, he planned for a slowdown seen far ahead in the heavy-trucking industry. “In the six-quarter rolling forecast, it became very obvious that the downturn was coming. In prior years, we would have been up to our eyeballs in meetings for two weeks about what to do right now.”

In the last quarter of the original three-year plan, Alcoa is now hitting most targets. The company as a whole, currently at a 13.9 percent ROI, is aiming for 15 percent in 2001. Alcoa’s stock was the top performer on the DJIA in 1999, gaining nearly 126 percent.

Standardized measures also allow the company, now with 25 business units in 36 countries, to close its books in less than five days. “There are very few companies in the world that operate on a global level that can do that,” says analyst Thomas Van Leeuwen of Credit Suisse First Boston.

Kelson is especially proud of the fact that internal processes have increased profitability enough so that Alcoa can both insulate itself against the cyclical industry’s downturns and gobble up competitors. Alcoa has been particularly active in the latter area, acquiring major US rival Reynolds Metals (www.rmc.com) for $4.5 billion in May 2000. Yet, despite all its acquisitions, Alcoa managers “haven’t seemed to increase spending. They’ve been very careful about how they’ve allocated capital,” says Wayne Atwell, a managing director of Morgan Stanley Dean Witter.

Kelson and Belda recently sent a draft version of their 2003 goals to business-unit heads for their comments. For now, they will say only that the goals will be designed to make Alcoa “the best company in the world”, and eventually double its current revenue base. “Not so long ago, such a vision would have been ridiculous,” says Belda. “Not anymore.” —Alix Nyberg

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