|
Driver-Based Planning as Best Practice
A Literature Search of Performance Management brochures
and articles
Summary
-
Using Cognos definitions
-
driver: “An operational
cause with a financial effect”
-
planning: “..a strategic
prediction of business performance at a summary
level…process can be fairly frequent and must be
completed quickly.”
-
Budgeting: “..planning
distributed to individual areas ..across the
business.”
-
Forecasting:
..essentially, a recasting of the
budget--perhaps in summarized form--to reflect
changing market conditions, strategic plan
alterations, error corrections and revised
assumptions in the original budget.”
-
Rolling forecast: "To
overcome the forecasting wall (i.e., year end),
organizations use a rolling forecast with
consistent period in each forecast...the single
most valuable tool to...identify where changes
need to be made in order to maximize
profitability and minimize losses."
-
Rolling forecasts is a performance management
best practice which is enhanced significantly in
conjunction with driver-based planning..
Rolling forecasts are used to:
-
- overcome the forecasting wall (i.e., year
end)
- reflect changing marketing conditions,
strategic plan alterations, error corrections
and revised assumptions in the original budget
- Driver-based planning is a performance
management best practice because it allows a revised
forecast to be quickly translated into a revised
plan. A driver-based plan is, in effect, a
descriptive model.
Cognos
8 Planning Overview:
Applix/Player/BBRT brochure,
Feb 2007 “Developing Driver-Based Budgeting and
Planning”
-
"Development of a driver-based
plan is a key first step toward a rolling forecast
-
The first of the 7 steps to
rolling forecasts is driver-based approaches. There
are three types of driver-based analysis: 1) Top
line (i.e., revenue) drivers, expense drivers
(allocations explicit) and 3) balance sheet drivers.
Driver-based system should predict p/l and balance
sheet.
Expense drivers can also be
used to allocate costs normally viewed as fixed,
e.g. facilities. Specifically: “In many cases you
can benefit from grouping costs that track with the
same driver. As an example, let’s review headcount
driven costs. Most companies would include salary
and benefits costs in this category, but what else
should be included? Most companies issue each
employee a workspace, so a portion of facility costs
should be included...”
-
“Summary: Shifting from traditional budgeting to a
driver-based approach has many advantages. It links
key performance indicators to financials in a
dynamic way. Secondly, it encourages
cross-functional managers to enter a dialog rather
than sandbag hoping to negotiate a favorable target
for their department. It also sets up scenario
modeling and the development of multiple
alternatives to reach your desired outcomes.
Finally, it enhances your focus on the key factors
that drive your business and how they integrate with
the other parts of the business.
Cognos brochure, October 2008,
“Best-Practice Budgeting: The first Step in your
Performance Management Journey,”
-
"Cognos solutions tie budgets
to business drivers instead of outcomes.”
-
“Budget develops understanding
of business drivers and constraints…perhaps the
least-recognized reason for preparing a budget..i.e.,
in order to succeed, an organization must build a
clear view of the inter-relationships that drive and
constrain business performance….Another strategy is
to require budget contributors to use drivers key to
their business…
-
"For most purposes there are two
types of costs: centrally allocated costs and volume
x rate costs….
Applix/Player/BBRT brochure,
August, 2006 "Managing Through Change: The Power of
Rolling Forecasts"
-
"The pessimist complains
about the wind; the optimist expects it to change;
the realist adjusts the sails."
William Arthur Ward
-
"To overcome the forecasting
wall (i.e., year end), organizations use a rolling
forecast with consistent period in each
forecast...The process goal is coordination of the
different parts of the organization using the latest
available estimates of what is likely to occur.
-
"Summary: Rolling forecasting
is a strategic opportunity, not an onerous task.
Implemented correctly, rolling forecasts can be the
single most valuable tool to "adjusting those
sails," i.e., identifying where changes need to be
made in order to maximize profitability and minimize
losses."
Cognos/Player/BBRT/APOQC
brochure, September, 2008 “10 Best practices to
planning, budgeting and forecasting:”
SAP Brochure:
-
“The objective of driver-based
planning is simple enough — to provide a more
accurate picture of expected future business
performance by planning and monitoring the key
operational activities that drive these results.
However, achieving this objective can require you to
reconsider the way you approach planning. In
driver-based planning, you do not start the planning
process with the monetary values for the period,
such as dollars per line of business. Instead you
start with the drivers in sales and production, such
as the sales quantities and production quantities,
and use these to calculate how much work you’ll need
to put in to meet your targets.”
ALG brochure, “Driver-based
budgeting, The proven route to faster budgeting and
more-frequent re-forecasting,” paraphrased:
-
Driver-based budgeting (DBB)
where non-financial drivers like sales volumes and
resource consumption rates are used to project line
item expenses. First, model resources to meet
demand, then, capacitate the demands and, finally,
cost them. Unlike activity-based budgeting, DBB has
no activity layer and drivers are based on
experience. DBB relies on being able to write rules
that cross departments and can be calculated based
on demand.
LongView Planning brochure:
-
#1 Benefit listed is Gain
better understanding of financial and non-financial
business performance drivers. Continuing:
-
“An essential element of an
effective planning process is the ability to model
financial outcomes and the business parameters and
activities that ultimately drive those outcomes.
With Longview, this modeling can be either bottom-up
(i.e., vary the drivers to see what outcomes are
produced) or top-down (i.e., choose a desired
outcome and see how the drivers need to perform to
achieve it).
Alight white paper,
“Driver-based Planning for Forecasting and Budgeting” “
-
“Driver-based planning is a
best practice methodology where financial plans are
structured using models of underlying business
activities….It incorporates a series of step-by-step
sub-models within an over-all financial planning
system that integrate input assumptions about
activity levels that drive revenues, variable
headcount and expenses, and capital that roll up to
financial statements for a company. ..
-
rolling
forecasts with tight turnaround cycles are now
feasible and efficient…when using a driver model,
it’s easy to identify and manage the most important,
financially sensitive drivers in the business ..
true causal analysis of variances is now possible.”
Oracle Hyperion Planning Data
Sheet
-
“With driver-based planning
capabilities, nonfinancial users can enter business
and operational drivers, while sophisticated
business rules will then calculate their financial
impact. By expanding financial planning into
operational planning, you can attain more-accurate
forecasts, and consequently, better adapt to market
changes “
BusinessObjects Product
Overview
-
"While the planning
process is a cornerstone for controlling your
operations, it is often a time-consuming endeavor
without...best-of-class tools to help identify those
critical business drivers."
-
"Paramount to your success is
the ability to isolate, quantify, project and
analyze the effect of many factors-or drivers-...on
your income."
|
