He continues, “We ask, for instance, have we really moved towards our longer-term objectives? Was there significant tailwind or headwind to take into account? Are results sustainable; will they stand the test of time?”
Bogsnes concludes that, “Combined with the Beyond Budgeting principles [which provide guidelines for alternative approaches to budgeting, (see advice snippet below)], Ambition to Action becomes a much more robust manage-ment model, solving many of the problems that can occur in conventional Balanced Scorecard implementations.” Thus, addressing the issues outlined by Kaplan at the start of this chapter.
Agile Financial Management
An important lesson we learn from the Statoil example is that becoming more agile and adaptive in strategy execution requires significant alterations to other management models and processes, most notably, financial. If financial planning and resource allocation are not more “dynamic,” then it is impossi-ble for strategy to become so. Becoming agile/adaptive truly requires a funda-mental overhaul of how the organization is managed strategically, financially, operationally, and in managing people. In short, finally breaking free of the straitjacket that is Taylorism.
Armen Mnatsakanyan, CEO of the Moscow, Russia-based management consultancy ConconFM puts this spin into the dysfunctional, silo-based structure of organizations: “This problem has no solution within the Finance Department! We need to look at the entire “Company Management System.”
Considered from the point of view of the “Food Chain of the Company” (the critical functions that deliver value and horizontally), we should build the work of the financial department not as a self-sufficient system within the company (as it is typically practiced), but as an element of the end-to-end management system of the whole company.”
“Organizations have to rebuild (or rather adjust), not only the Finance Department, but other departments. This is the reformation of all the key functions under the control “of the Food Chain of the Company.””
Interestingly, over many years, research by firms such as the US-headquartered The Hackett Group have found that most organizations (including the leaders of the finance function) are very (oftentimes painfully) aware of the short-comings of the budget, and while many plan to replace it with something more useful and agile, few actually do. The dance continues.
Oftentimes, this is because although dysfunctional, managers are well rehearsed in the moves of the dance (and many do it very well to their advan-tage) and there is an absence of a generally accepted alternative model.
Organizations such as the Beyond Budgeting Institute have been working for several decades to provide other options, with Statoil being a leading example.
However, for many organizations, jettisoning the budget would be a fearful step. However, this in and of itself is not a showstopper to becoming more agile. Even with the annual budget left in place, organizations can become more agile by de-emphasizing the budget and emphasizing rolling forecasts.
Rolling Forecasts
Through this approach, a lighter budget (with fewer line items and completed more quickly than is generally the case) sets annual targets, while the rolling forecast becomes the main process for steering the organization on a day-to- day basis. The annual target retains its high level of importance, but senior managers are more interested in the veracity of the data that they receive on a regular basis from the rolling forecast, as this tells them what the future will look like and where course corrections are required (thus linking into the performance intervention element of target tracking).
A Rolling Forecast Explained
A rolling forecast is a projection into the future, based on past performances (trends) that are updated (typically on a quarterly basis, but perhaps monthly in fast-moving markets) to incorporate input and information reflecting changing market, industry, and/or business conditions.
At stated earlier and in the previous chapter, a forecast (be it rolling, dynamic, or, more conventionally, to the end of the financial year) is not a target, but rather, a best (and importantly honest) prediction as to the organi-zation’s financial and operational performance over a certain time horizon.
For a rolling forecast, that time horizon can be 12, 18, 24, or any number of months or quarters ahead from the present. It “rolls” because as time moves
forward, so does the time horizon of the forecast, unlike a traditional budget cycle that ends at a fixed point in time. Generally, there will be greater preci-sion over shorter timespans than longer.
Unlike traditional budgeting, where an organization basically starts from scratch and marshals significant resources (and contends with ongoing nego-tiations), a rolling forecast involves only minor tweaking—as you continually update on a short-term basis. This saves time and resources.
Importantly, as the rolling forecast typically looks at least 12 months ahead, there is always a forecast to the end of the financial year, so enabling the assess-ment of the likely performance to the annual budget. A commonly held mis-understanding of the rolling forecast is that it replaces an annual plan/budget.
This is not true; it is usually used alongside the annual plan/budget.
As the rolling forecast almost invariably looks out beyond the fiscal year, it provides useful insights into the robustness and continued appropriateness of the mid-term quantified vision and targets (see Chap. 3: Agile Strategy Setting), which in turn provides an early warning signal regarding the likelihood of delivering on the five-year strategic plan (Fig. 7.4). For this reason, we recom-mend integrating rolling forecasts into the strategy review meeting (see Chap.
9: Unleashing the Power of Analytics for Strategic Learning and Adapting.)
Constructing a Rolling Forecast
As with a de-emphasized annual budget, we recommend restricting the roll-ing forecast to a limited number of metrics. All that happens when an organi-zation de-emphasizes the budget in favour of an overly detailed forecast is that one broken process is replaced by another, which will not lead to performance improvements. Indeed, research conducted by one of the authors of this book, a few years ago, into the forecasting practices of large organizations found that the forecast (typically to the end of the financial year) was little more than a mirror of the budget.
Moreover, we found forecasting to be very politically/culturally biased. If the forecasters knew that the CEO/CFO preferred upbeat forecasts, then that was what he/she got. Conversely, if they liked pessimistic forecasts, then that is what they got. Hardly a useful alternative.
Driver-based models are effective for constructing a rolling forecast, (Fig. 7.5). This entails determining the drivers of major costs, then considering them according to two variables: rate and cost. The payoff is twofold: adjust-ing a simpler budget is relatively easy and far more valuable conversations with internal customers.
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4
2009 2010 2011 2012 2015
0 100 200 300 400 500 600 700
Actuals 6Q Rolling Forecast
Performance Gap Target
$M
Defined in the strategy planning
process
Defines the need for changing plans and reviewing initiatives
Determined using driver models and rolling forecast
framework
Fig. 7.4 Using rolling forecasts alongside Balanced Scorecard targets and initiatives.
(Source: Palladium)
Asset U liza on Expenses
Revenue Growth
Sales per Store
Merchandising Strategy
Malls
Current
Non-Malls
New
Average Store Size
Sales psf
Sourcing Plan
Human Resource Needs
Number of Customers
New Posi ons Key Posi ons New Services Current Services
New
Reten on Share of Wardrobe
•Vendor Scorecard
•Service Agreement
•Associates in Management
•Organiza onal Development Plan
• Shirts
• Bottoms
• Dress
• Accessories
# Stores
Sales per Customer
= Key Levers
ROI
ROI Driver-Tree
Fig. 7.5 Driver models provide the analytical framework to focus on key leverage points and to link operational KPIs and action plans to strategic priorities
Don Ryder, Senior Managing Director, Strategy Execution Consulting for Palladium (and a previous colleague of the authors of this book) provides this example. “Imagine asking your sales manager what she expects next quarter’s Travel and Expenses to be for the sales team. She’s going to make an educated guess. Now imagine that instead, you know that the trips the sales representa-tives she manages make are a primary driver of cost for the sales department, so you ask her how many trips her reps will make (the volume), which is a number she already uses to manage her department. She can give you these numbers with confidence, and you can then calculate the average cost of each trip (the rate) and immediately set or adjust the budget. What’s more, you can have a useful and productive conversation about opportunities for cost sav-ings – what if we spent a $100 less per trip? – instead of handing down a budget cut.”
Ryder also makes the valid observation that many organizations treat the budgeting process as a substitute for strategic planning, which simply doesn’t work. “There’s a temptation to wrap everything together – financial planning, strategic planning, etc. – into a single package, but it ends up far too compli-cated and convoluted to be useful,” he explains. “Typically, the short-term detailed budget takes so much attention that little, if any, strategic planning gets done.”
He concludes, “We obviously need financial control mechanism to deliver on our financial commitments, but beyond that role the budget is the wrong tool to use.”
Budgeting: Not a Performance Motivator
The conventional budgeting process is simply not fit-for-purpose for the digi-tal age. As well as the shortcomings already listed, it also sends confused mes-sages to employees. Through one channel, employees are informed that they are empowered, trusted, and so on, and through another channel, micro- managed through detailed budgets (not much empowerment and trust here).
Of course, in any conflict, the budget always wins.
In many ways, it comes back to a simple question. “What is the most effec-tive way to motivate better performance?” The answer is certainly not the annual budget. It never has been and is fast becoming a very dysfunctional approach to planning, management, and driving great performance in the digital age. It is now time to dance to a different tune.