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I think one of best epigrams attributed to Mark Twain is, “Everyone talks about the weather but nobody ever does something about it.” This also has relevance to the situation with corporate planning and budgeting. Bemoaning its lack of value and calling for some sort of change goes back a long way, but few companies have matured their process. In the 1970s something called “zero-based budgeting” was all the rage in business and accounting periodicals. It was energetically advocated by President Carter to counteract the incremental budgeting that made it so difficult for the U.S. Congress to cut spending. (Of course, nothing changed.) Efforts to reform budgeting gathered steam in the 1990s as software vendors began offering dedicated applications designed for planning and budgeting. Even if one doesn’t fully embrace the idea of going budgetless, the book Beyond Budgeting is full of sensible management approaches (such as using league tables for internal benchmarking or using relative rather than fixed measures of performance). Of course, unlike the weather, people can change company practices. Yet when it comes to budgeting and planning, the same old stuff persists even as people like me continue to point out how using the right software can help transform the process into a valuable business tool. I’ve discussed why it’s important to adopt integrated business planning from my research, in which the budget is an automatically generated end product of the process, not the objective itself. And I’ve explained why driver-based planning produces better results. If it were just me advocating change, I might take its absence personally, but there have been scores of people, libraries of books and years of webinars focused on this topic for decades. Why has so little changed? 

I believe the sad truth is this: While budgeting is centrally important to the career of people in charge of financial planning and analysis (FP&A), and is a core process for controllers and CFOs and a staple for consultants and business writers, it hasn’t mattered enough to anyone else in a company to energize them to want to change. A budget is something you have to do; it’s an organizational ritual. People expect it and don’t wish to take the risk of change or have to learn to game some new process to their advantage. And there isn’t a lot of empirical evidence that companies that do a better job of budgeting always achieve better results than those that don’t. But I believe this is so largely because few companies have adopted advanced planning and budgeting methods. Indeed, companies that waste time performing poorly designed budgeting processes can also be recording record revenues and profits. Moreover, some corporate cultures even sneer at planning, believing that their success is based on rapid innovation and the ability to be opportunistic. (How these traits aren’t better enabled through an effective planning process is beyond me.)  

I believe that another factor preventing companies from adopting better planning and budgeting methods is that they confuse and conflate corporate-wide planning and budgeting. Budgeting is done company-wide yet the detailed planning processes are performed on a silo-by-silo basis (often in desktop spreadsheets). The results of these planning efforts at best are shared only at a summary level. When these plans change, it’s usually too time-consuming to assess the impact of those changes on a broader company outlook. It’s difficult for those working in one part of the business to understand the underlying assumptions going into another business unit’s plan. Likewise it’s difficult for senior executives to see how changes in one part of the company will affect another. I assert that companies need to expand the focus to enterprise-wide planning, where individual business units’ plans are integrated into a single coherent model from which a budget can be derived almost automatically. This is what I call integrated business planning. 

While little progress at maturing planning and budgeting has been made, I suspect that attitudes toward planning (and budgeting) are beginning to change, though it’s not yet a groundswell. The reason the needle is moving is the high degree of volatility in businesses and the world economy over the past three years. Both in the downturn and in the recovery, assumptions made when annual budgets have been put together have turned out to be laughably wrong just three months later. With commodity prices and currency exchange rates continuing to go up or down by percentage points on a weekly basis, businesses are learning that they need to do more contingency planning, use predictive analytics more effectively and speed their planning cycles. All of these efforts can help executives and senior managers achieve greater agility and – very likely – better results.  

In a nutshell, companies need to plan more and budget less. A more effective planning process can help senior executives manage better. Integrated business planning, rather than budgeting, enables them to mediate the competing objectives of individual divisions and business units. As those running a company recognize that more effective planning produces superior results, planning will become more important and change will occur. But as long as the company-wide activity focuses on budgeting, it will remain unimportant to the company as a whole. 

Regards, 

Robert Kugel – SVP Research

Over the past six years big technology corporations have been acquiring all sorts of software companies, accelerating a general consolidation of the software industry since the dot-com boom ended in 2001. The consolidation has been driven in part by the deceleration of technology innovation in the business software market. Technology evolution, however, has been steady and progressed far enough now that I think we’re about to witness a revolution in how companies use analytics in business processes. I don’t used that overworked term lightly: I expect this to be as revolutionary as the impact that client/server computing had on transaction processing and related systems such as ERP and CRM. These analytical processes address performance management processes of all kinds, including planning, budgeting and reviews.     

The revolution in analytics-driven business processes will come about because of the convergence of in-memory computing, big data, mobile computing and the cloud. In all areas of performance management, including planning and budgeting, companies will be able to work more interactively and in context with “the numbers,” which will broaden to include operating as well as accounting data. Through its acquisitions, IBM has assembled the necessary components to be an important player in the revolution.    

IBM recently briefed analysts on upcoming product releases and its technology direction. Since the specifics are covered by a nondisclosure agreement, my comments are intended to connect what I see as general market trends to the company’s existing capabilities, which I believe it will strengthen in the coming months.   

Cognos Planning has been an important dedicated planning and budgeting application. The addition of the TM1 server from Applix gave it in-memory capabilities. With in-memory computing, planning and review sessions can be more dynamic, enabling users to shift quickly from what drove exceptions to its possible impact on future results. It’s one reason I expect budgeting to evolve into what I call integrated business planning and our research shows as critical to optimizing business processes. Executives will be able to get fast answers to detailed what-if questions and go beyond determining what happened. In that case, monthly planning sessions can shift from a rear-view-mirror focus to one where the main objective is to decide what to do next. People will be able to anticipate what happens, for example, if the price of copper stays where it is or if it goes up 10 percent. If sales exceed expectations, they can consider how many people the company will need to hire in which positions in order to increase production by a certain percent within two months. It used to take days to get answers to these questions. Now, thanks to technology, they can be answered in moments and not just in terms of a basic income statement. A revised budget, cash flow statement and balance sheet can be available at the same time to determine the financial implications.   

In-memory computing goes hand-in-hand with being able to handle very large data sets (“big data”) and gives organizations the ability to work with an unprecedented range of information about operations in addition to the financials. Performance indicators can be built around a more comprehensive set of non-financial data and ratios as well as a better integration of financial and operating data. The ability to work with large data sets will bring predictive analytics into the mainstream (as my colleague David Menningercommented in a recent blog. IBM’s acquisition of SPSS has given it the ability to incorporate predictive analytics in performance management processes. Predictive analytics can be especially useful in spotting anomalies and exceptions fast and to drive real-time alerts, rather than waiting for period-end reviews.   

Mobility and cloud computing give executives and managers the ability to use these more capable management analytics wherever they are, not just in a boardroom or behind their desk. More informed discussions can take place in context, wherever and whenever they occur, and decisions can occur immediately. Mobility is a quality software vendors need to incorporate in software design and, as our Value Index assessment of Financial Performance Managementapplications shows, IBM has done well in a range of areas including mobility.  

IBM’s acquisitions of Cognos, Applix and SPSS supply the ingredients for it to be a significant player in the coming revolution in how companies execute analytics processes. I expect we will be hearing a lot more from IBM over the next year about specific products that will support the revolution. 

    

Best Regards, 

Robert Kugel – SVP Research

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