Role of the finance organisation in the integrated business planning process
February 2015 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE
Integrated business planning (IBP) continues to be a hot item on the 2015 key initiative lists of organisations across every industry. However, IBP is not a new concept. It has been around for more than two decades in a formal sense. So why does it continue to be a highly prioritised initiative?
The answer is two-fold. Firstly, an effective IBP process can drive substantial financial benefits for an organisation, including increased revenue, reduced COGS, and lower overall inventory levels. Financial benefits such as these warrant the attention of the C-suite. Furthermore, IBP can be a difficult process to effectively adopt and implement. Most companies are attempting some form of IBP today, but few have truly mastered the process. A recent study at The Hackett Group found that 90 percent of organisations reported that they have some form of IBP present today. However, less than 30 percent of these organisations categorised their IBP programs as “standardised and consistently adopted across the company”. Therefore, companies are continuing to triage and refine their IBP programs in hope of greater adoption, improved performance and increased financial returns.
The benefits of IBP are widely accepted by CFOs and COOs alike. The word is out that IBP can be a very powerful tool. However, a clear understanding of how to identify and implement the correct process improvements to truly harness this power is much more elusive. There is no shortage of potential issues that could be causing your process to falter or sub-optimise. Identifying, triaging and correcting these issues will take time, an attentive eye, a collaborative spirit and a lot of patience. However, the best place to start this inquisition is the spot where organisations have most commonly stumbled in the past. In our experience, one question continuously surfaces as a pain point: what is the role of the finance organisation in the IBP process?
The finance organisation’s participation in the IBP process is critical to the realisation of desired benefits and results. Our research found that companies reporting the largest gains in revenue, margins, inventory turns and customer satisfaction have a monthly review process that incorporates the finance organisation and combines sales and operations plans with financial forecasts. The question of whether to integrate finance into the process is unequivocally ‘yes’. The more perplexing question many organisations still struggle with is how the finance organisation should be integrated into the process and what their key responsibilities should be? The answer to this question can be tricky, as a world class IBP process is highly integrated with the finance organisation. However, there are essentially four critical responsibilities of the finance group within a successful IBP process.
Generation of a gross and net revenue plan. Prior to meeting with the demand planning group each month, the finance organisation is responsible for the creation of a first cut gross and net revenue plan looking out around 18 to 24 months. This plan should take into account a series of different variables including previous actuals for volume and sales, previous forecasts, pricing changes, the statistical unit demand forecast, and known organisational initiatives. In addition, this revenue plan should factor in a number of key questions, including ‘What do we want to achieve?’ and ‘What do we think we can realistically achieve?’ The answers to these two questions are rarely the same. These initial forecasts should take around one week to produce and will form the basis of the initial conversation and meeting with the operations team.
Input into the unconstrained demand plan. The gross and net revenue plan described above should be shared with the sales and marketing teams through a formal meeting. The sales and marketing team will have created a first draft of what is called an unconstrained consensus demand plan. This is a view of projected unit demand over the next 18 to 24 months that does not factor in supply constraints. The sales and marketing team will have considered key variables such as statistical unit forecasts, promotional plans, customer plans and forecasts, seasonality, new product introductions and competitive activity to generate a unit and revenue forecast. The role of finance in this step is to work with sales and marketing to reconcile their gross and net revenue plan with the unconstrained demand plan. An important point to note is that these two forecasts do not have to match perfectly. You may hear a lot about a ‘one number organisational forecast’; however, getting everyone to agree to a single number is often more trouble than it is worth. Instead, the goal of this meeting should be to create an aligned set of numbers that are close.
Input into the constrained demand plan. The unconstrained demand planning meeting is followed by a constrained demand planning meeting. This meeting incorporates the supply planning team and is utilised in order to provide a rigorous process for understanding capacity, raw materials needs, and how to optimally utilise resources and assets given the agreed upon consensus unconstrained demand plan. For the finance team, this meeting is about working with the supply planning team to fully understand how supply constraints will affect the overall demand and revenue plans. Finance should utilise this meeting and the subsequent supply plan as key inputs into the development of a contribution margin plan.
Generation of a consolidated financial plan. The next step in the process is a series of final reconciliation meetings between demand, supply and finance. The first reconciliation meeting, the pre-IBP meeting, is designed to bring together demand planning, sales and marketing, supply planning and finance representatives in order to discuss gaps and issues between projected future demand, available supply and the consolidated financial plans. Most of the gaps should have been resolved prior to this meeting. However, bringing together all process stakeholders is essential to addressing any remaining discrepancies and aligning the organisation on a set of financial and operational forecasts. Following this meeting, the aligned set of financial and operational forecasts will be presented at the second and final reconciliation meeting of the planning cycle. This meeting, the executive IBP meeting, is a forum to present the aligned forecasts to the organisational leadership team, receive recommended top down adjustments, and provides an opportunity to resolve any high level gaps that could not be resolved in the pre-IBP meeting. Following this meeting, the finance organisation is responsible for the development of a final 18 to 24 month financial plan.
IBP is too often thought of as just an operational process. By definition, it is much more than that and requires the finance organisation’s continued involvement to be truly effective. If IBP is on your organisation’s 2015 initiative list, start by taking a long, hard look at how the finance organisation is integrated and whether they are owning the correct elements of the process. If your organisation can get this part right, they are well on their way to improved performance and greater realisation of the benefits IBP can bring.
Josh Peacher is a manager at The Hackett Group. He can be contacted on +1 (312) 325 2932 or by email: email@example.com.
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The Hackett Group