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The Decision Factor offers insightful comments and observations on analytics—from views on new technology approaches and market dynamics to the latest industry trends driving demand for faster, smarter information analysis. This blog contains personal views, thoughts, and opinions from SAP employees, mentors, and friends working in the area of analytics. It’s not endorsed by SAP nor does it constitute an official communication of SAP.

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Yes, Performance Management means more than Planning and Budgeting

Yes, Performance Management means more than Planning and BudgetingAnalysts, consultants, and software vendors alike are espousing the virtues of end-to-end, integrated software solutions to enable financial planning and analysis processes. Despite this, the majority of organizations today still make do with a mix of spreadsheets and other tools that are frequently cobbled together by the departmental techie to give some rudimentary automation driven by complicated macros that only the techie really understands. For many, it’s a long journey that doesn’t go beyond making the planning, budgeting, and forecasting processes slightly less laborious and time consuming. But if you really want to tackle the problem head on, how can you really change the budgeting process for the better?

Out-of-Date Budgeting Processes Are Limiting

Most companies follow an “old school” approach to budgeting that has its origins in the early part of the last century and has not evolved that much. That is, budgets remain the de facto way of managing strategy by securing management commitment to deliver budgeted results. Budgets determine how resources should be allocated. But traditional budgeting processes have many problems:

  • Managers must spend within the budget or else seek approvals that can be difficult and time-consuming to secure. This impacts the ability of the organization to respond rapidly to new opportunities and changing business conditions.
  • Deliverables listed in the budget become the measure by which the performance of managers and business units are evaluated. This often encourages managers to under-estimate revenues and over-estimate expenses knowing that this gives them a better chance of making their numbers and achieving their bonus.
  • Budgeting has grown into unwieldy, time-consuming process that takes too long and is too expensive to live with today. They are also frequently out of date by the time they get completed, which begs the question: Why do it in the first place?

Do We Eliminate Budgets Altogether?

So what if most of this lengthy, time-consuming process was eliminated? Some progressive organizations have managed to do this by adopting the philosophy of the “beyond budgeting” movement. This movement started in the late 1990s with the consideration that the annual budget was a major problem and presented barriers for successful management in today’s tumultuous business environment. Is this the solution?

Or Do We Innovate and Improve the Budgeting Process?

The fact remains that, for most organizations, the budget is here to stay. So the best one can hope for is to make it more efficient. Yet, the usual approach seems to be to add lots of analytics and disregard the bookends of strategy formulation and cost and profitability analysis that are equally important in delivering sustainable financial results. This is true even though surveys suggest that CFOs are increasingly interested in broadening their involvement strategy and influencing operational priorities to ensure business initiatives achieve better financial outcomes.

The financial planning and analysis lifecycle: Financial Planning and Analysis

  • Starts with strategic planning (stage one)
  • Moves through detailed planning, budgeting, and forecasting (stage two)
  • Relies on cost and profitability analysis for driving continual improvement (stage three)
  • Includes ongoing internal feedback and review as well as specific external reporting requirements (stage four).

Primarily, organizations choose to implement software to address stages two and four while overlooking stages one and three. Of the many reasons why this is the case, we can highlight the lack of process maturity and corresponding scarcity of expertise in these functions. As to what should be done to address the issue, I’ll address that in my next post.