Planning and Finance: A New Way in Eight Steps

In a volatile business environment, the tasks of targeting new markets and launching new products, or even growing existing markets, require greater agility in decision-making – and therefore in the content and execution of planning.
 
Traditional planning is dying. What is emerging in its place is a new planning approach that, among other things, calls for the following courses of action:
 
  • Focus on what matters
  • Incorporate a range of scenarios
  • Adjust for the impact of events
  • Take it to the front lines

 

  • Collect better data and step up the analytics
  • Build clear frameworks for capital allocation
  • Renew the focus on strategic planning
  • Incorporate intangible assets
 
Focus on what matters
Stated baldly, this sounds obvious – but it’s rarely done in practice. Planning and target setting can easily devolve into navel-gazing.
 
Consider that a company’s own historical performance remains the most frequently used benchmark for targets, as reported by more than 80% of organizations in a 2009 Accenture survey of 273 companies headquartered in North America, Asia Pacific, Europe and Latin America.
 
Although competitive data (80%), macroeconomic reports (75%), and market expectations (67%) are used, only half of all companies use three or more major sources of external data for planning purposes. In short, a lot of time and effort goes into tracking and assembling information that has little predictive power.
 
Ditch those immaterial items and focus instead on the most material and volatile aspects of the business, to a greater level of detail.
 
Accenture finds that higher-performing companies leverage external information – on customers, competitors, investor expectations, and regulators – more extensively than other enterprises. They incorporate external benchmarks into their business targets. These aspects are tracked through 10-15 key performance indicators that explain virtually all of the company’s financial performance.
 
One example is the case of Swedish Match, a global supplier of tobacco and lighting products. External pressures prompted the Stockholm-based company to make this shift from internal to external benchmarks.
 
In the early 2000s, after a long period of stability, the smoke-free tobacco products market in Sweden was attracting new competitors as well as younger consumers who were less loyal to certain brands. Swedish Match executives realized their planning would need a tighter connection with both consumer and investor priorities.
 
On the consumer side, Swedish Match began to more extensively incorporate A.C. Nielsen consumer ratings. On the investor side, the company incorporated expectations of free cash flow growth. By combining the two sets of information, executives then could define the few value drivers that mattered to total economic profit, which in turn is highly correlated with total return to shareholders.
 
These and other changes have made Swedish Match’s planning and resource allocation more aligned with strategic goals, resulting in greater predictability and control.
 
Incorporate a range of scenarios
Scenario planning in business, which dates back to the 1970s, creates pre-defined alternative views of the future—reasonable answers to “what if” questions about changes in GDP, disruptive technologies, the bankruptcy of a competitor with a high market share, and so on.
 
One of the scenario pioneers was Royal Dutch Shell, which invests in projects that can last 50 years or more. At Shell, scenario planning helped management prepare for the eventuality, if not the exact timing, of the 1973 oil crisis.
 
Again in 1981, when other oil companies stockpiled after the Iran-Iraq war began, Shell sold off excess oil before the glut became a reality and prices collapsed.
 
Scenario planning is a relatively new practice for many firms, but we expect a surge: While only 29% of organizations in our survey have practiced scenario planning for five years or more, three of four respondents that have this capability recently started using it more extensively because of economic volatility.
 
Scenarios can help managers anticipate material changes in the environment and, assuming tight links to business processes, make decisions and course corrections more rapidly and effectively.
 
An airline, for instance, may wish to evaluate the impact of an upcoming bitter winter on leisure travel as well as fuel prices. The scenarios selected should be evaluated by the impact they could have on the performance of the business, giving managers the chance to devise a response for a given situation.
 
In another example, one professional services company has upgraded its forecasting process and tools to incorporate scenarios around the supply and demand for skilled labor. This has allowed the Human Resources function to better manage hiring, capability development, contracting, and compensation practices.
 
Once that evaluation is completed, the company can define a series of actions that would be initiated if certain levels for metrics chosen as scenario triggers are reached. A course of action must then be communicated more broadly through the organization, in the form of specific targets and more qualitative guidance.
 
For instance, the emergence of new competitive threats or external economic factors might trigger postponement of discretionary and non-strategic initiatives, thereby freeing up cash for higher-priority operational expenses or capital projects.
 
Adjust for the impact of events
The calendar rules planning at most companies; managers even plan their vacation around it.
 
While eight in ten respondents to our survey now execute event-triggered forecasts in addition to their formal forecasts, only one in ten have chosen to substitute a formal planning calendar with an event-driven approach. That’s a major constraint on their agility, and substantially increases the workload.
 
Event-driven planning speaks to the reality that circumstances can change quickly. Military strategy offers a useful analogy here. Its decision-making approach, known as the “Observe, Orient, Decide, and Act” loop, has proven successful at adapting to the realities of an engagement more quickly and effectively than the enemy (see chart below).
 
Click image to enlarge
A military analogy to event-driven planning
 
The most useful way to incorporate events is by monitoring a set of value drivers chosen for their volatility and material impact on the business – say, patent expirations for pharmaceutical firms and grain price fluctuations for food companies. Tolerance ranges can be defined for each value driver.
 
When the tolerance level has been reached, the organization should revise its plan and reallocate resources in order to close the expected gap.
 
Take it to the front lines
At half of the companies we surveyed, the Finance function assembles forecasts with limited participation from operational line managers. Accenture research shows that when business environment volatility increases, these companies are more likely to report diminished forecast accuracy than are their peers that involve operations in forecasting, as shown in the chart below.
 
Click image to enlarge
Forecasting is more accurate when operations is involved
 
This confirms our experience that “what if” analysis, combined with the event-driven component, won’t succeed if restricted to a small, centralized team or to the Finance function.
 
Speed and intelligence in re-planning require far more involvement of front-line operating staff who have their antenna tuned to shifts in customer priorities, competitor pricing moves, and other changes in local market conditions.
 
Front-line troops are best placed to provide the assumptions for key value drivers, starting with an accurate forecast of demand, since changes in demand impact sales, inventory levels, production volumes, and staffing needs. People at the front lines also have greater awareness of shifts in their marketplace, and should bear the responsibility of updating forecast models.
 
Finance, meanwhile, still has the central role of building the planning model, challenging the assumptions of front-line managers, and coordinating the effort. Finance also must ensure that senior management understands the financial impact of its decisions and plans.
 
Collect better data and step up the analytics
By analytics, we mean employing quantitative methods to derive actionable insights from data, then using those insights to shape business decisions and, ultimately, to improve outcomes.
 
Accenture research confirms that high-performance businesses – those that substantially outperform competitors over the long term and across economic, industry, and leadership cycles—are five times more likely to use analytics strategically compared with low performers.
 
US casino company Harrah’s Entertainment, for instance, uses a database of 5 million individuals to track behavior at a minute level. CEO Gary Loveman, an analytics champion, regularly asks employees, “Do we think this is true, or do we know?”
 
Superior analytics starts with good data. Poor quality of underlying data remains a major problem worldwide, and investing in analytics while the underlying data remains dirty is a waste of money. For the purposes of planning, it’s essential to determine what the highest priority data is and then to validate, clean, and consolidate that data.
 
Part of data management involves assessing what additional data is necessary, especially external data, and where it can be obtained. Many firms possess surprisingly little solid information on the market share of their major product segments, customer repurchase intent, brand equity data for their own and competing brands, and so on.
 
Where available data is abundant, the information must be winnowed to determine which data points are most pertinent to various investment options and planning scenarios.
 
Build clear frameworks for capital allocation
Resource allocation processes are often flawed in that they tend to ignore the true cost of capital and its impact on shareholder value creation. Performance targets for individual departments often undermine capital cost effectiveness, because the metrics to assess managers are based on accounting principles rather than on measures that favor value creation.
 
Projects that do not meet the cost of capital, but appear to help meet revenue or profit targets, thus may proceed despite the fact that they destroy value.
 
A more effective capital allocation framework, such as that shown in the chart below, rewards employees who act like owners, by ensuring that only projects with a return greater than the cost of capital go ahead. The criteria should also include non-financial benefits such as employee satisfaction, enhanced capabilities, or customer service improvements.
 
Click image to enlarge
A structured capital allocation framework
 
A structured framework also explicitly links capital allocation with the strategic plan. When strategies are ambiguous and only qualitative, senior management decisions can best be viewed as merely gambles, not informed choices about value creation.
 
Capital allocation should be adjusted for risk, of course. In the Accenture survey, companies that explicitly tie risk management to planning report higher satisfaction with their strategic and capital planning and are more confident in the adequacy of their planning capabilities for evaluation of major investments.
 
Renew the focus on strategic planning
Some 13% of companies that Accenture surveyed do not execute any strategic planning. Yet the discipline remains relevant in addressing several key questions:
 
  • Are we getting a premium value for a differentiated strategy and plan? What components of our portfolio are driving the premium?
  • What are the critical drivers of strategy going forward?
  • How do we communicate those drivers to investors in order to maintain a premium valuation?
  • Which projects deserve our biggest bets?
 
Strategic planning also helps to maintain a healthy balance sheet. Companies with strong cash flow and balance sheet planning are more effective at executing their strategies and responding to new opportunities and challenges.
 
Over 90% of our survey respondents that are fully satisfied with their cash flow and balance sheet planning processes said that they are able to execute their strategic plans effectively and efficiently. That compares with 60% and 70%, respectively, for their peers that do not execute cash flow and balance sheet planning.
 
Balance sheet planning should address these questions:
 
  • What are the expected cash flows from operating, investing and financing activities?
  • What are the relevant ratio trends of a strong balance sheet?
  • What are the special needs of key assets over the projection period?
  • What are the forecasted internal sources of funds and needs for new external funding?
  • What are the scenarios to adjust the financial plan as economic and competitive events unfold?
 
Incorporate intangible assets
It’s no secret that intangible assets such as brand, intellectual property, channel relationships, and human capital drive a growing proportion of business value.
 
In 1980, 80% of the market value of an average S&P 500 stock could be directly tied to tangible assets such as factories and equipment. Twenty years later that proportion dropped to what we estimate as 25%. The remaining 75% is attributable largely to intangibles.
 
Yet traditional planning misses this trend. One-third of the organizations surveyed by Accenture do not plan for intangibles in any form. Several factors account for this lapse: Measurement of intangibles can be more difficult, as can devising direct links of intangibles to financial outcomes.
 
As a result, companies risk under-managing some of their most important drivers of value. For example, SG&A costs such as employee training, research, and customer relationship management clearly create future benefits.  But they are typically expensed as incurred, rather than recognized on the balance sheet and amortized over time. This intensifies the pressure to favor short-term market expectations over long-term value creation.
 
A broader perspective recognizes that certain SG&A costs should be managed strategically. This is particularly important for companies with a major portion of their enterprise value driven by intangibles.
 
About the Authors

Robert Bergström leads Accenture’s Finance and Enterprise Performance practice in ASEAN and the Enterprise Performance Management Strategy offering group in Asia Pacific. Sarah Batchelor is a senior manager in the Accenture Finance & Performance Management service line. George Marcotte is a Senior Director, Accenture Analytics, London. This article is an excerpt from the Accenture research report The Future Used to Be Easier: Planning for Success in Dynamic Environments, and was re-edited for clarity and conciseness.  

 

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