Business Planning Benchmark Shows No Improvement in How Companies Plan and Budget
Organizations engage in a range of forward-looking activities. Sales organizations have pipelines to forecast sales. Manufacturing organizations set and reset demand plans and near-term production schedules, often in response to longer-term production plans that determine what they will make and where and how they will make it. Logistics people plan inbound and outbound shipments. Marketing departments plan advertising and promotion campaigns. HR departments project staffing requirements and associated salary and benefit costs. A lot of planning goes on in any business, but most of it is done in business silos and little of it is integrated, so companies spend a lot of time on planning but get less out of the effort than they should. We recently completed our integrated business planning benchmark research, which followed similar research we completed in 2008. The research shows that companies have done little to mature their planning processes over the past four years.
Integrated business planning (IBP) is a term I coined several years ago to apply to bringing together the disparate strands of silo-based corporate planning in a way that increases the accuracy of plans, fosters internal alignment between plans and promotes agility. Today, the closest thing we have to an integrated business plan is the corporate financial plan, otherwise known as the budget. Although a budget is essential to managing any organization, it is inherently not well-suited to the task of planning operations and assessing operational performance. By integrating business plans, corporations can gain multiple benefits.
Accuracy is a key objective in any sort of planning, and our research shows that companies that directly link their individual plans with their budgets have more accurate budgets than those with indirect links or no links at all. Yet only 27 percent have direct links between these plans and the corporate budget. The lack of direct linkages limits the degree to which companies can coordinate efforts across multiple business units, and limits the ability of managers to understand how changes in their parts of the business affect others. Only one-fifth (22%) of participants said they can accurately assess the impact of their plan on the rest of the company.
Our research finds that when it comes to budgeting, a majority of organizations have a cadence that makes it difficult for them to sustain accuracy and adapt to changing business conditions in a coordinated fashion. More than half (55%) have an annual budget. Few (14%) use the forward-looking rolling quarters approach, which enables more flexibility in predicting and responding to change. Being able to quickly uncover the exact underlying details of major budget variances during review sessions fosters nimbleness, yet only one-fourth of companies (23%) have ability to do so.
Why haven’t most companies adopted IBP? Technology has been a major factor shaping how companies plan. In the days before computers and networks, organizations were forced to keep their planning simple because calculations and communications made it infeasible to do anything complex. They had to create a corporate budget, and there wasn’t enough time to do a separate integrated plan or do any substantial replanning more than once a year. When personal computers and electronic spreadsheets became commonplace, budgets became more detailed, but integrating plans remained difficult because of the inherent limitations of desktop spreadsheets in supporting repetitive, collaborative, enterprise-wide processes. Our spreadsheet benchmark research shows that even highly experienced users find it difficult to consolidate multiple spreadsheets – yet our research shows that a large majority of companies (69%) continue to use spreadsheets to manage their planning processes, even though a majority of those using spreadsheets for planning think doing so makes it difficult to manage the process. For companies with more than 100 employees, desktop spreadsheets are a barrier to more effective planning, because it is too difficult to rapidly and accurately assemble an enterprise-wide view of the disparate plans.
It’s not difficult to get started with integrated business planning. It’s not necessary to transform planning overnight, as I noted in an earlier blog post. Companies must take three essential steps. The first is to eliminate desktop spreadsheets and replace them with a dedicated application or an enterprise spreadsheet. For example, most dedicated planning applications now use a Microsoft Excel interface in which users can enter plan data and create private “sandboxes” of models and information that they can share with their immediate colleagues. A second, related step is to ensure that all of the planning data is easily accessible to all who are participating in planning activities, which is most easily done by centralizing the storage of plan data. The third, most crucial step is to have senior executives understand that integrated business planning makes the planning process more effective and improves a company’s results.
Robert Kugel – SVP Research
Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning.