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Cognizant 20-20 Insights

Replacing the Annual Budget


with Rolling Forecasts
Executive Summary Turning Rolling Forecasts into Reality
Gone are the days when annual budgeting and A rolling forecast is a process in which key
planning steered the business, with only predict- business drivers are forecast on a continual basis.
able, minimal budgeting changes. With increasing Its objective is to foresee the risks and opportu-
competition and a changing economic environ- nities presented by a dynamic business environ-
ment, companies need a better way to predict the ment, revisit strategy in the light of new business
future. As a result, new forecasting techniques scenarios and align resources/activities for com-
have emerged to help anticipate changes and petitive advantage at periodic frequencies. Rolling
better inform strategic direction. forecasts are not simply periodic updates against
the annual budget and are not associated with a
Traditional forecasts take a structured approach specific financial year.
to scoping uncertainties within a specified
timeframe. Those predictions have a reasonable A rolling forecast, also called continuous
chance of being accurate. In todays highly volatile planning, is a leading planning technique that
business environment, however, organizations will help organizations find opportunities amid
are forced to be dynamic in adapting to changes persistent volatility and intense competition.
to ensure their very survival. Companies that However, there are many practical difficulties in
dont expect to encounter economic or political converting the theory
turbulence and operate via annual budgeting and of rolling forecasts into A rolling forecast is
forecasting exercises are finding it difficult to reality. Organizations a process in which
create plans and deliver results that meet expec- that want to embrace
tations, be they internal management objectives rolling forecasts should
key business drivers
or external performance goals set by financial focus on the following are forecast on a
and industry analysts. key steps: continual basis.
In such an environment, chief financial officers 1. Move toward driver-based forecasting: A
need reliable and relevant insights into risks and common decision-making challenge is having
opportunities. By embracing continuous planning too many details to work with. Forecasting
or rolling forecasts, companies can remain agile, should focus on drivers that are relevant for
focused and flexible in meeting internal and analysis and decision-making. This will provide
external performance expectations. This white organization-wide alignment and control over
paper discusses the essentials for making rolling forecasting, as well as consistency in decision-
forecasts a reality. making.

cognizant 20-20 insights | may 2011


2. Link forecast to strategic and operation should cover in detail the knowledge sharing
decisions: A key objective of the rolling and training programs required to adapt to
forecast is to revisit strategy and align new processes and technology.
resources quickly and efficiently. Risks and Finally, the policy should list the key metrics to
opportunities identified during a rolling measure the success of change management
forecast should trigger what-if analyses policy (e.g., communication effectiveness).
and scenario planning. From the strategy
postulated by scenario planning, resources Data and Analytics Essentials for
for capital projects and operational expenses
Rolling Forecasts
should be allocated and new performance
targets set as key performance indicators. While changes in strategic thinking and the
planning process are essential, equally important
3. Ensure direct ownership and involve- is the focus on data to support the rolling forecast
ment of budget owners in forecasting: A initiative. Rolling forecasts should quickly analyze
rolling forecast is primarily a reality check; it current data (both internal and external) and
is not a process for adjusting predict where the business is heading. The
Risks and numbers to fill the gap and whole process of moving toward effective rolling
opportunities meet a target. For this process forecasts, in a true sense, is more dependent
identified during to be successful, budget owners
should be directly involved and
on data, data-related processes and tradition-
al forecasting techniques. Organizations that
a rolling forecast provide unbiased data. Wider want to make the transition should consider the
should trigger what- involvement will ensure that following:
if analyses and decision makers gain a more
accurate picture of the current Focus on relevant data and data-related
scenario planning. position and future outlook. processes: Rolling forecasts should focus on
4. Deploy appropriate tools and technologies: a small set of metrics and drivers that are
Rolling forecasts work on multiple budget essential for keeping track of changes in the
assumptions and iterations. Also, they are environment. This should include external
largely dependent on timely integration, market and demand information, along
analysis and interpretation of information with internal business details. Since rolling
to ensure meaningful decision-making. It is forecasts happen at smaller intervals and are
essential to implement robust technology that expected to produce current and future state
supports driver-based forecast modeling and views of business within a shorter period of
reacts to changes in key performance drivers. time, it becomes mandatory to more quickly
integrate and aggregate relevant data.
5. Design appropriate change management
policy: As a continuous planning practice, >> For the forecasting to generate quality
rolling forecasts are radically different from results, processes around data generation,
fixed forecasts, where projections are adjusted consistency, maintenance and integration
to fill gaps. Moving to this new process will should be well-supported by the organiza-
be a major cultural change for all levels of tions data policies and technologies.
employees, from top management, through
budget managers. Many participants in the
Apply proven statistical techniques and
predictive models: The goal of forecasting is
process will need to jettison their monthly
to be as accurate as possible. In the case of
budgeting and target negotiating mindset.
business-demand forecasting, it is naive to
Organizations should create a solid change
think that an accurate forecast is unnecessary.
management policy to embrace and drive
On the contrary, the more accurate the fore-
process change.
cast, the more profitability options there are
The change policy should primarily explain to deploy allocated resources against.
the objective of the change, which is that the >> Rather than relying only on historical data
rolling forecast initiative is a reality check to understand what just happened, rolling
to explore profitability opportunities, not forecasts apply real-time data to see what
the measurement of numbers. The policy is happening or is going to happen. Compa-
should also clearly explain the communica- nies can anticipate the future by visualizing
tion routines and practices related to rolling patterns found in historical and transaction-
forecast policies, such as review meetings. It al data. Predictive models can be created

cognizant 20-20 insights 2


for scoring data and simulating scenarios with the interdependent functional modules, such
using statistical techniques to identify risks as sales, revenue, etc.
and opportunities. This information will
Operational cycles are aligned by periodic rolling
become more useful in making meaningful
forecasts and adaptive actions for changing
decisions during the forecasting process.
scenarios through an organized hierarchy flow.
Cognizants Forecasting Offerings The FAST steps for creating a rolling forecast
With 400-plus consultants and 700-plus are as follows:
technology specialists, our dedicated Corporate 1. Monitor performance areas
Performance Management (CPM) Practice has
All financial and non-financial metrics related
successfully executed more than 120 engage-
to the organization are identified and tracked.
ments for leading companies around the world.
These metrics include both internal and market
The practice is recognized for a robust and
metrics to help the business remain on top of
tested CPM methodology, with a complete set of
market changes and challenges.
blueprints for CPM implementation. Forecasting
solutions are among the key offerings of the CPM 2. Forecast
Practice. New assumptions and a new basis provided by
performance monitoring will trigger the fore-
Our CPM Practice can provide rapid scorecard- casting process. A detailed risk opportunity
ing with lead/lag indicators from pre-defined analysis will be made using the appropriate
industry-specific KPI repositories and scorecard technique applicable for the industry.
templates. The practice partners with many of 3. Revisit strategy
our technology Centers of Excellence to extend
A what-if analysis and scenario planning are
best practices, reusability assurance processes
carried out to identify alternative strategies to
and knowledge management.
adapt to wider opportunities and risks.

FAST is our framework for a structured approach 4. Align operations


to building a rolling forecast. It is an organized tool For the newly identified strategy, priorities
to help businesses achieve proper coordination are redefined for the operative processes,
between the operation and strategy, facilitate the and adaptation measures and activities are
planning process and ensure a smooth handshake proposed by operational managers.

Rolling Forecasts Made FAST

Strategic Plans Strategy Formulation

KPI & Target Treasury &


Review
Setting Sensitivity Analysis

Strategic Funding

Financial Plans
Operating initiatives

O
P
M E
A R
R A
S K T
A E I
Align Plan L T O
E I N
S N S
G O
P
O E
P M R
E A A
M R
A
R
R
A Operations Plan S K
T
I
T A E O
S K T
I L N
A E
O Monitor E I S
Forecast L T
I N O S N
E S G
S N P
G M E
A R
R A
S K T
A E I
L T O
Execute E I N
S N S
G

Figure 1

cognizant 20-20 insights 3


Among FASTs benefits are the following: Forecasting System: Model-
Vertical integration of strategy with the Building and Forecasting Phases
continuous planning/rolling forecast.

Horizontal integration across different Past Data &


functions in forecasting. Model
Specification Management
Judgement
Greater visibility and monitoring capabilities.
Driver-based functional process outcomes con- Model Estimation
solidated and integrated at corporate levels.

Enhanced what-if analysis/simulation capa- no Is the Model


Adequate?
bilities, as projections are linked to drivers.
Model Building
Forecasting
Application Evaluation for
Forecast Generation
Rolling Forecast
New Observations
Technology plays a vital role in the success of any
rolling forecast initiative. Rolling forecast CPM no Is the
applications should be Model Stable?

Rolling forecast CPM able to create and manage


applications should different scenarios to facil- Forecast Updating
itate scenario planning,
be able to create and as well as integrate with
manage different actual information for ana- Figure 2

scenarios to facilitate lyzing trends and extrapo-


lating the future. These
scenario planning. systems should have dif-
Automated data input and different user
ferent user interface options, as well. interface options.

A CPM application for generating rolling forecasts In our engagements, all rolling forecast applica-
should be evaluated for specific business fit and tions are evaluated using EVAL, our CPM Tool
strategic features, such as: Evaluation Framework. EVAL is a systematic
analytical hierarchy processing-based scoring
Forecasting ability across months and years. framework to evaluate tools based on a well-
defined mathematical and analytical model. The
Driver-based planning and scenario approach consists of two steps:
management.

Integration of sales, revenue and cost rolling Step 1: Feature Comparison: Compares a
forecasts. detailed listing of the tools.

Ability to integrate projected information and Step 2: Proof of Concept (Optional): Focuses
compare it with the user-created forecast. on finding the working behavior of the enlisted
features.
Technical features should include:
The deliverables include a tool comparison report,
Ability to customize. a proof of concept (PoC) and a final tool recom-
Scalability to meet current and future business mendation. Figure 3 describes the steps involved
needs. with the EVAL tool.

cognizant 20-20 insights 4


Assign prioritization (optional)
technical and other for detailed evaluation Identify strengths Finalize
parameters line items and constraints
Focus on to-be Prepare scorecard
process state

Working Through the Rolling Forecast Process

Identity Weigh Screen Finalize

Identify selection criteria Identify key stakeholders Evaluate fit Comparative scoring
(consolidation, Assign weights for Rate the line item Strategic and financial
financial planning) evaluation categories level fit on Proof of concept
Functional, non-functional, Assign prioritization scale of 0-4 (optional)
technical and other for detailed evaluation Identify strengths Finalize
parameters line items and constraints
Focus on to-be Prepare scorecard
process state

Figure 3

About the Authors


Narsimha Rao Garlapati (GNR) is a Senior CPM Consultant within Cognizants Data Warehouse Business
Intelligence and Performance Management Practice. GNR holds a post-graduate Business Administra-
tion degree in Finance from Victoria University, Australia, and a professional degree from The Institute
of Cost and Works Accountants, India. He can be reached at NarsimhaRao.Garlapati@cognizant.com.

Ramya Durga is a Senior CPM Consultant within Cognizants Data Warehouse Business Intelligence and
Performance Management Practice. Ramya holds a professional degree from The Institute of Chartered
Accountants, Cost and Works Accountants and Company Secretaries, India. She can be reached at
Ramya.Durga@cognizant.com.

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 111,000 employees as of March 31, 2011, Cognizant is a member of the
NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 1000 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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