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sheet based planning systems for delivering useful budgets and rolling fore-
casts. A major problem is the disconnect between the operational elements of a
business and financial plans. In particular, managers have difficulty forecast-
ing headcount and expenses because spreadsheet templates do not contain
models that allow them to relate their spending to marketing forecasts or other
operating activities. Finance staff who roll up the numbers from the managers
have very little backup for evaluating the reasonableness of submissions or for
answering questions from the executive staff.
What’s missing is driver-based planning, a best practice methodology where
financial plans incorporate assumptions about business activities which are
modeled to drive financial data such as revenue projections, headcount, spend-
ing and capital requirements. With driver-based planning, managers are em-
powered to do better budgeting and, in particular, improve the accuracy and
decision making usefulness of rolling forecasts.
Alight Planning is a multi-user software package that incorporates architec-
tures, modeling tools and analytics that make driver-based planning accessible
to companies that want to improve their budgeting, forecasting and decision
making processes.
more accurate than the last. Revising her ` Staffing plans for sales reps are inconsis-
numbers takes three hours each time. tent. In four regions, headcount doesn’t
change for any of the three marketing
` To update the numbers, Helen pours forecasts—i.e. nobody paid attention,
through operating statistics for her de- perhaps for good reason. For other re-
partment which are in a separate data- gions, salaries and benefits vary, but
base. Metrics include number of opera- other headcount related expenses that in
tors, number of customers calling, calls theory should be impacted by new
per day, etc. Helen has no specific pro- hires, such as training and recruitment
cedure for tying out this operating his- fees, are unchanged. Peter rolls the
tory to the marketing forecasts. numbers into the forecast knowing that
` Helen enters headcount projections into expenses are probably understated.
an Excel template which updates sala- “Here we go again,” Peter says as he enters
ries and benefits. She does so with a lot the board room to pre-
of guessing; she’s glad when the exer- sent the forecast up-
cise is over; she hasn’t learned anything. date to the executive
But her job is done for this round. staff. The numbers add
Peter Forrester, Financial Planning Manager up on the PowerPoint
for Whitehorse, is studying the Excel tem- slides, but Peter has an
plates department managers have submit- incomplete under-
ted. standing of changes in
overhead spending, a
` The headcount increases Helen forecasts stated focus of the cur-
for the Call Center seem low in relation rent reforecast. Many
to the latest marketing forecast which times during the review he is asked the two
has sales up 20% in the next quarter. dreaded questions: “Where did that number
Helen provides no backup or justifica- come from?” and “Why did that number
tion. Peter has no special insights either. change?” Sometimes Peter has an answer.
He rolls Helen’s numbers into the fore- Other times he says: “I don’t know.”
cast.
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Driver-Based Planning for Budgets and Forecasting
Unlike budgeting, quarterly updates don’t cision usefulness of rolling forecasts. Fi-
have the luxury of a three month cycle time. nance staff like Peter also have the informa-
tion to understand the numbers, negotiate
At the operations level, responsible manag- with line managers, and explain assump-
ers like Helen and Harry do their best, but tions to higher ups like the executive staff.
the process is essentially manual, despite
the fact that the spreadsheet-based system Driver Model Fundamentals
captures information from the line manag-
ers and rolls it up to corporate. The spread- Driver-based planning is about modeling
sheet templates do not contain models that concepts. It’s based on the idea (or struc-
allow managers to relate their spending ture) that line items within a plan have an
plans to the market forecasts. Nor do Helen inherent units/rate/amount architecture
and Harry have information systems that that is the basis for linking up activity
integrate operational data into the forecast driver and financial relationships.
templates. Thinking about driver-based planning us-
ing units, rate and amount
Driver-based planning is a best practice makes it work. Here are the
fundamentals…
methodology where financial plans are
structured using models of underlying ` Start by identifying
important drivers in a
business activities… business. Drivers are
typically operating
What’s missing at Whitehorse is driver- activities that you can measure—
based planning, a best practice methodol- numbers of things such as units of prod-
ogy where financial plans—namely budgets uct, customers, installations, deliveries,
and rolling forecasts—are structured using transactions, throughput and the like.
models of underlying business activities The key word is units: if an activity can
that drive financial data. be thought of as units of something, then
Driver-based planning incorporates a series it may be part of an activity driver
of step-by-step sub-models within an over- model.
all financial planning system—e.g. a call ` Multiple operating activities—i.e. the
center sub-model for Helen—that integrate units—may have driver relationships
input assumptions about activity levels that between each other that are connected
drive revenues, variable headcount and ex- through a conversion rate. For example,
penses, and capital that roll up to financial 50% percent of customers who buy a
statements for a company. Such company computer also buy a printer. The for-
forecasts are the foundation for many ex- mula is: units of computers * 50% = # of
ecutive level decisions, allocation of re- printers. 50% is the conversion rate.
sources and communications with inves-
tors. ` A unit/rate/amount structure may be
applied to a series of line items that are
Using driver-based planning, companies linked. Below is a simplified example of
like Whitehorse can empower line manag- how an activity model might be con-
ers like Helen to do better budgeting and, in structed for Helen’s call center, starting
particular, to improve the accuracy and de-
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Driver-Based Planning for Budgets and Forecasting
from marketing’s forecast of new cus- Second, when using a driver model, it’s
tomers: easy to identify and manage the most im-
portant, financially sensitive drivers in the
9 # of New Customers * Calls Per business. The old saying now has meaning:
Customer = Total Calls “Don’t manage the dollars, manage the un-
9 Total Calls * Length of Calls In derlying units and rates that cause the dol-
Hours = Total Call Hours lars to be spent.” Managers can focus cost
reduction and performance improvement
9 Total Call Hours / Operator Utiliza- energies on the most important activities
tion % = Operator Hours and processes, knowing a payback is there.
That’s what the activity driver model tells
9 Operator Hours / Hours Per Month you.
= # of Operators
Third, with driver-based planning, true
9 # of Operators * Salary Rate = Op- causal analysis of variances is now possible.
erator Salaries When actual financial results differ from
9 Operator Salaries * Payroll Tax Rate plan, it’s a straightforward exercise to iden-
= Operator Payroll Taxes tify the operational drivers which caused
the variance. In many cases, the analyst can
9 # of Operators * Benefits Rate = Op- segregate financial variances by volume (i.e.
erator Benefits units) and rate (i.e. price/cost per unit) im-
pacts. Where the underlying unit and rate
9 # of Operators * Cost Per Work-
data is available, volume/rate causal analy-
station = Operator Workstation As-
sis by line item is a powerful analytic tool
sets
for the finance staff.
Once an activity driver
model is structured, several With driver-based planning, everyone can
important planning and see changes immediately and talk about
analysis activities are possi-
ble. the assumptions…the playing field is lev-
First, rolling forecasts with
eled and discussions are more objective.
tight turnaround cycles are
now feasible and efficient. Line managers Spreadsheets and BPM
like Helen can quickly respond to changes
in marketing forecasts. Updates to revenue Financial planning managers typically use
plans ripple through the activity model spreadsheets to model a few activity driver
automatically adjusting variable headcount relationships in budget and forecast
and related expenses. Managers spend no templates. The most common and easy to
time calculating offline what headcounts implement are driving fringe benefits from
should be. Everyone in the plan cycle can headcount and driving payroll taxes from
see changes immediately and talk about the salaries. However, true driver-based plan-
underlying driver assumptions and im- ning, where revenues or other higher level
pacts. The playing field is leveled and dis- activity drivers impact headcount and de-
cussions are more objective. partment expenses, is rarely implemented
in spreadsheet-based budgeting systems.
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Driver-Based Planning for Budgets and Forecasting
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Driver-Based Planning for Budgets and Forecasting
Page 6
Driver-Based Planning for Budgets and Forecasting
Here’s the summary statement about im- 9 How would call center headcount and
port: Alight supports importing actuals expenses (or any department spending)
from any outside database, financial or be impacted by a 10% volume (activity)
operational, to any level of detail. For ex- increase?
ample, you can import actual unit sales and
amounts by product from a sales database 9 What are the most important activity
or CRM system, and concurrently, you can drivers in the financial plan that impact
import total sales from the general ledger at sales or profit? What are the least impor-
the account level. Alight reconciles any dif- tant?
ferences between the GL total and the sum
of imported line items with a plug value. 9 How much of the miss in the sales
forecast for services was due to fewer
In addition to importing from any source to
product sales versus lower service con-
any level, Alight also allows modeling actu-
version rates?
als data with different algorithms and link-
ing than the plan model for the same line
item. 9 Why are salaries higher? More people or
higher wages? What’s the ripple
through affect of higher headcount on
other expenses?
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Driver-Based Planning for Budgets and Forecasting
CAUSAL ANALYSIS: Alight Planning’s causal interface lets users compute volume and rate variances for line
items that have underlying units and rates. The Units and Rate causal columns automatically calculate the volume
and rate dollar impact on the total variance. The Causal column automatically appears on all revenue, expense
and headcount reports.
` Goal seek analysis: Alight automates spread through out a plan, that consti-
goal seek operations. The planner tute a subset driver model. For example,
chooses a target for a time period then all drivers and resulting metrics for the
specifies a desired goal and input vari- call center model could be organized in
able. For example: profits in May are one key measures group for testing,
forecast to be $50,000; the planner enters analysis and discussion. You use Key
a goal of $75,000, then selects Unit Sales Measures to tell the story.
as the input assumption to be tested. A
dialog appears showing the required Summary
number of Unit Sales necessary to meet
the $75,000 profit goal. Driver-based planning is a best practice
methodology where financial plans are
` Causal analysis: Alight’s built-in URA structured using models of underlying
architecture allows producing vol- business activities. Alight Planning software
ume/rate computations that can be incorporates a unit/rate/amount architec-
applied to any activity driver or finan- ture, modeling tools, integration of actuals
cial line item. For example, an operator and analytics that make this powerful
column called Causal can be added to a methodology accessible for any company
revenue report that calculates the actual that wants to improve their budgeting, fore-
versus plan financial impact of unit vol- casting and decision making processes.
ume and price variances for each prod-
_______________________________________
uct. The same report format computes
volume/rate variances for headcount. Rand Heer is President of Alight LLC and the
creative force behind Alight Planning. He was a
` Key measures analysis: In a special Key
contributing author to “Business Intelligence:
Measures pane, Alight lets plan admin-
Making Better Decisions Faster” published by
istrators create custom dashboards for
Microsoft Press. He was also the founder of Pil-
activity driver models that allow users
lar Corporation and designer of Hyperion Pillar,
to analyze in one view multiple line the first enterprise software for budgets and fore-
items or plan subtotals, otherwise casting. (800) 960-7717
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