by Robert D. Kugel CFA |
6/27/2008 | Article ID: V08-24 | Article Type: VentanaView
Summary
Ventana Research recently completed benchmark research on planning and budgeting that examined how companies plan, budget and review. Our benchmarking research not only measures efficiency (“doing things right”), as all benchmarks do, it also assesses effectiveness (“doing the right things”). We found that planning and budgeting consume a significant portion of the finance department’s time as well as that of others directly involved in the process. Consequently, it is not surprising that much of the discussion about reforming budgeting and planning revolves around reducing the time spent on these activities. However, our research showed that people are in fact more concerned with making the process more effective, not more efficient. They are more interested in gaining better insight into their performance, achieving greater forecasting accuracy and improving the alignment of strategy and budgets across and within business units, than they are in merely shortening the process. Ventana Research believes these are the main objectives companies should address when they try to improve the process.
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Much of the discussion about planning and budgeting focuses on the time spent (and whether it could be spent on better things) – for good reason. Our research (sponsored by Adaptive Planning and Infor, as well as our media partners Institute of Management Accountants, Montgomery Research, searchOracle.com and searchSAP.com) shows that about half of all finance organizations devote 15 percent or more of their hours to planning, budgeting and reviews – in effect, almost two months out of a year. On average, two-thirds of the individuals heavily involved in the process (either running it or part the team managing it) devote 10 percent of their time to it. Yet only 39 percent of the respondents said their company spends the right amount of time, and 40 percent said they spend too much. Companies should ask whether they are getting a reasonable return on such a heavy investment of time. If not, they may ask whether they should focus on efficiency and find ways to spend less time or try to make better use of the time spent. Ventana Research advises all companies to do the latter.
Our research shows that companies that make changes to planning and budgeting are more concerned with using the time more effectively than shortening the process. As to the objectives for improvements companies have implemented, more than half of participants noted that they want to improve their budget’s alignment to strategy and to improve performance. Almost as many said they want better insight into performance and to increase alignment across business units. All four of these objectives are directly related to making planning and budgeting a performance management tool. Only one-third reported that their objective is to significantly reduce the time spent.
Shortening time spent may not be the most important goal, but time is often related to the quality of the process. For those who spend too much time, Ventana Research believes it stems from effort wasted on inefficient and ineffective processes that prevent them from concentrating on the main purposes of planning and budgeting. Spending too much time could be a symptom of poor methods generally, and we advise assessing the process to determine the root causes of such problems. Similarly, companies that are not diligent enough in using the process to set workable objectives wind up with greater variability in their outcomes. In both cases, the goal should not be to save time but to make the time spent on budgeting and planning more valuable in contributing to corporate performance. Our maturity model, which blends measures of efficiency and effectiveness, suggests that the biggest payoffs are likely to be found in addressing how a company defines its process and the technology it uses to support it. In the case of the latter, this research confirms that companies that rely heavily or exclusively on desktop spreadsheets to manage their process have much less satisfaction with their results than those that use a dedicated planning and budgeting application.
Assessment
Planning and budgeting play a critical role in any company’s financial performance management because they are the best way to translate strategy into a coherent set of initiatives and objectives. They are the basis for objective assessment and synchronizing the efforts of all corporate units and individuals. From our research we conclude that a large percentage of companies don’t effectively use the planning and budgeting process to improve enterprise-wide effectiveness. The most glaring failure is that they do not make full use of the time they spend to enhance communication and coordination between the various levels and functional areas of management. We advise companies to assess their budgeting and planning process to see if they believe their current tools and processes are adequate to provide insight, accuracy and alignment.
Related Research Notes:
Spending the Right Time on Planning and Budgeting
Companies Should Focus Not on the Amount of Time but on How They Use It
Better Planning and Budgeting
Rethink the Purpose, Scope and Objectives of Your Process
Planning and Budgeting Remains Immature
Few companies have tied it to performance management
Plan While You Can
Seize the opportunity to adopt driver-based planning
The Importance of Planning in Midsize Companies
Appropriate planning and budgeting is key to performance management
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