The nine-foot Aviator

Leo Sadovy
Leo Sadovy|May 9, 2012

Integrated Business Planning.  Ever since I first mentioned this in a blog post late last year (“I wonder what the king is doing tonight”) as THE number one issue being tackled by the best practice organizations, I have been trying to get my head around not just a good, working definition, but also hoping to put some meat on its bones and nail down how to go about implementing such an endeavor.  Up to that point, I was, by and large, not happy with what I was hearing.

To that end, I accepted the offer to chair the IE Group’s Integrated Business Planning conference in Miami this past March in order to get a ring side seat to the discussion.  It was a lively, well attended conference, their second on this topic, and attesting to the market’s perceived importance of the issue, attendance was double that of their inaugural IBP conference a year earlier.

My problem, and it would appear that of several others also, had been that, with a couple of exceptions I will note below, up until now IBP solutions tended to be big on powerpoints and flow charts and consultant-speak, and a bit weak on actionable substance.  It is still early in its maturity cycle with few standards or generally accepted methodologies.

I got the distinct impression that the term “integrated business planning” can mean at least three different types or levels of integration.  First, there is a group of supply chain specialists who would walk away happy just to have an integrated S&OP processes –simply get everything lined up from one end of the supply chain to the other, from the initial supplier forecast to closing out any final warranty obligations.  A second stage would seem to be the linkage of financial planning, forecasting and budgeting with the S&OP process.  This isn’t where I wanted to stop, but if you are coming from the supply chain side, linking up with the next tier is often sufficient to declare victory and move on.

What I had imagined IBP to be was a third level of the integration of S&OP not just with finance, but further onwards and upwards with strategy as well.  Very few of the presenters touched on this strategic aspect specifically, and it was even somewhat difficult to address with a group of experts during our after-lunch panel discussion.  It was Noha Tohamy of Gartner who perhaps best put all of these components into perspective when she put forth her “east-west versus north-south” view of business integration: east-west representing what I just labeled a stage 1 functional linkage of S&OP elements, and north-south representing the hierarchy of connecting S&OP with finance and strategy.

Still, there exists an overall lack of clarity around IBP for someone who wants, maybe not a simple recipe, but at least something actionable they can take back to the office with them to tinker with or begin implementing.  I headed home from this conference with a lot to digest but little I might call “actionable”.  As I alluded to above, there have been a couple of leaders in this space that I have come across either at the IBP conference in Miami or during previous financial planning conferences who do seem to have a handle on defining and implementing IBP.  Jason Webster and Archetype have shown  some leading-edge clear thinking around the issues, benefits and implementation of IBP, and Jim Correll of Oliver Wight presented a comprehensible methodology and approach that was even coincidentally validated by a related but unsolicited presentation by a former client, Verso, who had previously implemented the Oliver Wight approach.  What I have learned from Jason, Jim and Noha is to stop thinking about IBP so much as an exercise in the integration of technology, software and systems, and start thinking about it primarily as an integration of processes.

But how to best integrate processes?

I was reminded of conversation I had with an artist friend of mine, Joshua Diedrich, a sculptor, seen above at the unveiling of his "Aviator".  He was aware that I, like thousands of others in this land of opportunity, am in the process of writing the Great American Novel, which is currently sitting in the digital equivalent of a desk drawer, on its fourth revision so far, and he wanted to understand my creative process.  I’m sure there are as many ways to construct a novel as there are writers, but I find that I need a backbone to hold it all together, and for me that backbone is a time-line, or perhaps a world-line that moves through both time and space, and which all of my characters must intersect with repeatedly during the course of the story.  The world-line provides a structure that keeps things ordered and connected, such as making certain that each character has the appropriate memories for their time, but still allows me a lot of freedom to develop character, scene, plot and dialogue as best advances the theme, objective or mission statement of the story.  The world-line serves to guide the theme and development at a higher level regardless of the changing details of the plot and characters necessary to express that theme.

Josh then shared with me how he goes about creating one of his large sculptures, like this nine-foot bronze WWII Aviator (you can see the real thing for yourself at the Jackson County Airport / Reynolds Field in Michigan, just south of Lansing and west of Ann Arbor).  Like with my novel, he has a larger theme or vision which guides the nature of the surface details he carves with his tools, the complement of my characters, scene and diaglogue, and is often, as was the case this time, based on a smaller model that he is copying or representing in the larger piece.  But also like my novel, his Aviator had a backbone, seen here to the left, an interior support structure/skeleton of welded steel tubing and angle iron upon which all of the wood lathe work, chicken wire and modeling clay will hang.  Whether or not he can bring his vision to life depends almost entirely on the strength and fit-for-purpose of the structural skeleton. It is not often appreciated that large piece sculptors have to be proficient welders as well; they actually begin to "sculpt" the piece through the design of the structural skeleton. The emotional quality of the finished piece depends heavily on having the vision to embed that passion into the piece while it is still at this early stage.

What it took to put it all into proper perspective for me was Michael Partridge’s (Verso Paper Corp) presentation of his Integrated Business Management CALENDAR.  There it was.  The integrated CALENDAR, serving as the one ring to bind them all, so-to-speak;  the structural backbone, the world-line, a master process overlaying the separate, independent and typically siloed monthly functional reviews for Demand, Supply, Finance, Production and Risk.  This master calendar was book-ended at the beginning of the month with a pre-planning session, and culminating on the other end with a final, integrated Management Business Review immediately before the commencement of the next production and fulfillment cycle.

Here’s a short list of possible agenda items for this final, capstone Integrated Business Review meeting:

[Even if you missed the conference, you can sign-up for membership for the IE Group's On-Demand conference content to get access to this, and many other, presentations, including videos and downloads]

This was what I was looking for – a place to start, an actionable action.  No matter where you are on the maturity curve for IBP, the development of a master calendar-driven process that lays out and aligns the separate functional reviews (i.e. supply, demand, finance, production, logistics, etc ...) concluding with an overall, capstone integrated business review, is an ideal place to start to both bring everything together, and to identify the gaps that will later need to be filled by technology, data, systems, workflow management and communications (i.e. who needs what information when, in order to make a decision?), additional/improved/aligned processes, performance management, and/or policy and procedures.  You don't need to have every piece of the puzzle in place in order to begin seeing the picture and adding value to the business decision process.

For me at least, simply filling in the boxes on a PPT flowchart still left me with the feeling of having nothing more than a pretty PowerPoint.  Perhaps it is our nature in finance, driven as we are by the monthly / quarterly closing, reporting and forecasting processes, to view the calendar as the missing piece that ties everything together and drives the results; someone with an engineering or information systems background might feel differently.  When I look for other viable candidates to serve as the backbone, such as data or reporting, my fear is that they cease to function effectively unless all of the components are in place and properly connected.  The master-calendar / integrated capstone review approach allows for action, progress and decisions, yet still accomodates gaps that can be filled in later.  The flow-charts, matrices and closed-loop feedback diagrams can all be adapted and deployed in due time as best befits your needs, organizational structure and culture.  Start with your vision/theme, and with your backbone/master calendar, mix in some planning, effort, talent, patience, and the necessity to outline/prototype, edit and rework your growing and evolving work piece, and in the fullness of time the final casting, published novel, or IBP, will become a reality.

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Triangles, tools and transformations

Leo Sadovy
Leo Sadovy|April 25, 2012

I have three children in college at the same time.  They are all in the school of engineering, and all attend the same college, which, if nothing else, makes paying the tuition bill convenient.  That’s all I’ll say about that.  My middle child, Weston, is studying to become a mechanical engineer, and has been through one co-op semester with a heavy equipment design and manufacturing firm where he has already been put to work using their sophisticated CAD/CAM software to design industrial components  (Warning to parents of small children:  Legos are a gateway drug to mechanical engineering;  purchase with caution).

I have been getting quite an education in mechanical engineering this past year.  Weston tells me that he sees triangles in everything now, as the triangle is the key structural element in mechanical systems, the rectangle being inherently unstable, collapsing into a flattened parallelogram under stress.  So I asked him: what about the arch?  He told me to stop being a wise guy, and by the way, could he borrow the car keys.

Another part of the education I’ve been getting has been in the practical use of CAD/CAM software.  It allows him to not only design components and entire systems an order of magnitude more complex than he could by hand or with only a pocket calculator, it also allows him to run the entire system as a simulation in motion before it ever gets physically fabricated, examining the stresses. strains and live loads under dynamic conditions.  For example, he can get a real-time graphical read-out of stresses at any position on any component as it goes through its 360 degree cycle of operation.  He says that without the software, engineers would only be able to manually compute and test a small handful of key, extreme parameters, and in the end would probably be left with no choice but to over-engineer the product with large safety margins, resulting in unnecessary weight and cost.

CAD/CAM software is an example of a “transformative” tool; it extends the power of the human body and mind in a non-linear fashion, venturing into the realm of the unknown-unknowns, enabling new capabilties that can't be achieved by simply doubling or quadrupling the manpower employed.  Contrast this with the “force multiplier” type of tool – the power shovel, the automobile, the lawnmower.  Multiplier tools take a basic human capability and extend it linearly.  This is true of most software as well – spreadsheets, airline reservation systems, ERP;  they simply automate what initially was a manual process.  Quite pedestrian, really - they make us more productive at the task at hand, but they leave that task pretty much unchanged.

By and large, to be honest, you’d have to say that most financial management software is of the Multiplier sort – it allows you to close the books for a complex organization in a reasonable amount of time using a reasonable amount of resources, but in the end all it does is close the books.  You couldn’t run your organization without it, but there is nothing about it either that facilitates organizational transformation.  However, just last week, my colleagues at SAS  introduced a truly transformative analytic tool for financial management.  Included in the recently released version of our SAS Financial Management software is an embedded, tightly coupled, business forecasting capability, the only such fully integrated offering on the market.  This is the sort of technology enabler we in FP&A have been talking about for years now, a capability that will allow us to shift from our less than productive transaction processing activities to primarily value-add decision support, using transformative approaches such as driver-based forecasting and scenario planning.

Moreover, it’s actually EASY! (fully integrated + wizard driven = EASY!).

Whether you know it or not, you are already doing driver-based budgeting and forecasting with your spreadsheets today, but in a very restricted fashion,  with only one primary driver, typcially 'headcount' for most line items, and defaulting to a weighting of 100%.  Not terribly sophisticated, not at all transformative, but ever since VisiCalc it’s been all we’ve had to work with.  Those days are now over.  Take a look at what CN Rail is doing with this type of analytical forecasting – it’s transforming how they manage their rolling stock logistics.  Prior to this implementation they did what my son says mechanical design engineers do – they over-engineered their logistics operations, incurring all the extra capital and operational costs this implies.

SAS Financial Management hasn’t been the only big analytical news, though.  A couple of weeks earlier SAS Visual Analytics made its debut.  Designed from the ground up with the business user, not the statistician, in mind, the user simply drags-and-drops the data elements he/she want to explore onto the screen and the high performance analytics takes over from there, drawing its cues from the data attributes themselves to automatically determine the applicable statistics and the appropriate contextual display mode.  If it senses geographic data, it will automatically display it as a map, attributes become bar charts, and time series data displays as a trend-line graph.  Millions of records analyzed and displayed visually in seconds.  For financial analysts in a decision support role, it’s about data discovery for insight and action where none was previously possible.   This is the Power to Know in action, transforming the redundancy and waste that resulted from not knowing into the efficient and effective use of resources.

Analytics as a whole has this non-linear, transformative property about it.  The leaders in each industry are going to encounter, adopt, and then incorporate the transformative power of analytics at their own speed, but once they get comfortable with it, watch out!  Simply doubling down on “force multiplier” software tools just isn't going to cut it when going up against  high performance analytics.  Leaders that can use such tools to transform their organizations may also find themselves concurrently changing the business model and the rules of the game for their industry as well.

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BI and better business decisions

Leo Sadovy
Leo Sadovy|April 11, 2012

Last week marked my four year anniversary with SAS, and I have to admit that prior to joining, the phrase “business intelligence” was not in my vocabulary.  I understood “analytics” just fine, and knew long before my hiring interview that it definitely didn’t mean spreadsheets.  I knew what “performance management” was, as well as “information management” and “data quality” and “customer intelligence” too.  But what was this “BI” stuff they were talking about?

Business Intelligence.  What’s the big deal?  Isn’t that what I did in finance?  I provided the numbers, right?  I gave you an income statement and a balance sheet - what more could anyone want?

I had a bit of an eye-opener while I was chairing the IE Group’s “Integrated Business Planning” Summit in Miami a couple of weeks ago (more on that in a future post – I learned so much that I need some time to digest it all).  I was pretty much the only finance person in the room, the attendees being primarily from the operations and supply chain side of the house.  We don’t speak the same language, I’ll have you know.

I speak “money” - financial numbers.  Present me with any business problem and I’ll have it translated into dollars and cents, at least as a rough cut, in 30 seconds or less. It’s what we do in finance.  90-day delay in the new product release?  That’ll be negative $30 million in revenue, negative $10M of margin, and a $6M hit to cash.  Engineering change to retrofit the old product out in the field?  $7M in labor cost, another $1M in travel, and an additional 8 days of A/R until we get this fixed.  Yeah, it’s what we do in finance.

The supply chain, however, thinks in terms of quantities, volumes, capacity, utilization, deviations, shut downs, safety stocks, lead times and shortages.  It’s what they do, and they do it well.  Their daily preoccupation is the customer at the end of a long chain of operational steps, each of which must be executed precisely for the order to be satisfactorily fulfilled.

When finance thinks about quantities, if at all, they are hidden away securely in some supplemental schedule or footnote or an element of spreadsheet cell calculation that yields $$$ as the output.  The supply chain is probably more versatile than finance in this respect, as “cost” is also one of their objectives or metrics, but still, you could tell from the conversation that quantities were primary and the dollars/euros associated with that quantity were somebody else’s problem.

So it was through the eyes a room full of supply chain mavens that I began to get a glimpse of what “business intelligence” might mean.  There is evidently more to life than just the financial numbers.  And to run the business, it apparently takes more than just debits and credits, more than just cost and revenue data.  Who’da thunk it?  It takes operational data, market data, financial data, customer info, industry and external data, supply chain data and real-time process monitoring.  All that and more.

Business Intelligence = Data (ALL the data) + Context.

In order to put finance, operations, the supply chain and the rest of BI into proper perspective, finance needs to see the financial data and the external and internal reporting they provide as just a part of the overall, larger, BI picture.  More importantly, though, you need to work backwards from the business decisions you need to make; not forwards from the data you may have available.

If you are going to work backwards from the business decision to the required supporting process and data, it bears to keep in mind that there are three levels to consider: strategic, tactical and operational.  Further, you need to also consider that there are different ways in which data becomes part of decision support:

  • Reporting
  • Rules-based decisions
  • Ad-hoc data discovery
  • Standard analysis
  • Collaborative decision making

REPORTING could be the monthly management reporting pack with KPI’s and metrics, or it could be a dashboard or a scorecard; typically it’s some combination of “all the above”.  There is inherently a “self-service” aspect to reporting – the decision maker knows that the information he/she needs is already available in one of these pre-packaged formats and retrieves it themselves.  Straight-up reporting is most valuable at the operational and tactical levels, and is always improved with the addition of “context”.

RULES-BASED could be either real-time process monitoring, or nearly/fully automated operational data, such as loan application approval, where human intervention is only required to handle the exceptions.  Here the data stays in digital format throughout the process other than when exceptions are presented “analog” to the human tie-breaker.

DATA DISCOVERY, with Visual Analytics, is a vital capability because often you “don’t know what you don’t know”, which rules out standard BI and reporting mechanisms, or because you can’t precisely map out your complete decision process ahead of time, so it’s not a “rules-based” decision either. There will always be decisions that fall outside of standard operating procedures, and these do tend to be important ones.  Data discovery could lead to better operational, tactical or strategic decisions in equal measure – that’s the thing about not knowing what you don’t know.

STANDARD analysis is what I call the process most common to finance / FP&A:  evaluate, model and/or simulate options and scenarios, and then provide a recommendation to a single decision maker for departmental/functional action, typically including acknowledgement of the secondary alternatives, along with the pro’s, con’s and  risk assessment of each.  Since the objective – strategic, tactical or operational – is well formed beforehand, standard financial analysis tend to be tailored narrowly but specifically toward supporting the appropriate level of the pending business decision.

COLLABORATIVE decision making is the least understood and most poorly supported decision process in your company.  Currently, very few organizations are good at facilitating a decision process that involves more than just one decision maker, such as budgeting, forecasting, capital investment or cross-functional processes, entailing as it does communications, governance, sharing and workflow.  Strategic, and often tactical, business decisions are fundamentally collaborative in nature, and suffer proportionally due to lack of proper collaborate support.

This is all related to what I deliberated back before Christmas (“Attack of the 50 Foot Cliché”), where we discussed Bill McCracken’s (CEO of CA Technology) proposition that the CIO of the future becomes the BIO – Business Information Officer, someone who might also be in a position to solve the cross-functional strategic process ownership problem (SPO – Strategic Process Office).  I’m going to conjecture that it could still be the CIO that reigns over this realm, but only if “CIO” stands for Chief INFORMATION Officer and not Chief IT Officer, as is often the case today.  All the other caveats still hold true: this is a BUSINESS role, not an IT role, and because of the implications of “The Second Economy” and cross-functional strategic processes it needs to reside at the C-level, probably reporting to the CEO and not the CFO.

As my parting shot, I leave you with this observation, distilled from chairing numerous financial planning conferences over these past four years with SAS.  I have been witness to many, many end-user presentations that tout the organization’s new financial reporting or BI capability, and I will give them due credit for seeing what I didn’t see – the function and value of BI.  But I wait and I wait through to the very end of their presentation for the “so what" moment that often never comes.  For the previous 30 minutes they have shared their new process and their new technology and their key takeaways and I am left completely underwhelmed.  After two years of effort and an investment of at least $1 million, all they have managed to do is dump their spreadsheets into some humungous cube and are for the first time able to produce all of the reporting and create all of the dashboards in a timely manner, but that’s where the story ends.   It should be, and it could be a value-add business decision support story, perhaps contributing to data discovery or rules-based decisions, but in truth they have gotten nowhere closer to supporting better decisions via value-add analysis because they didn’t start with the business decision in mind, they started with the data, with what they had, not with what they needed.  Critical, yes, but still, underwhelming, a missed opportunity to create a common language of both financial and operational BI that adds value at the strategic level as well as the tactical and operational, that supports collaborative decision making instead of just management reporting.  A missed opportunity to be transformative rather than just transactionally efficient.  (stay tuned next time for more on business "Transformation")

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Conversational analytics

Leo Sadovy
Leo Sadovy|March 28, 2012

When you begin your career your most important skills are your hard, technical skills; the finance and accounting, the statistics and economics, the physics and chemistry, the engineering and calculus.  But as I tell my business school mentees, as your career progresses, the emphasis changes such that much sooner than you might initially think, the most important courses you took in college turn out to be psychology, philosophy, literature, sociology and anthropology.  Of the trio of Technology, Money and People, people are invariably the most difficult component to manage.  As a manager it becomes far more important to understand the motivations of Iago, Gatsby and Yossarian than to be able to compute risk-adjusted discounted cash flows (besides, we have analytics for that).  The so-called “soft” skills of the technician become the hard skills of the manager.

The most valuable training I ever received in this respect came during a week-long management retreat focused on nothing less than the complete transformation of my company at that time.  Our coaches during this process included Claire Breeze, who continues as a partner for the consulting firm Relume she founded several years ago, and who is also the co-author of a new book, “The Challenger Spirit”, that focuses on the needs of “organizations that challenge the status quo”.  Of the many themes and concepts that emerged from that eventful week, including a song concept and title that ended up as part of “Sing for the Cure” (“Groundless Ground”), one has remained continually useful to me: the “Conversation Pyramid”.

It is completely unfair to the importance of the Conversation Pyramid that I condense two days of intense effort into just a handful of paragraphs, but so I must.  In fact, the entire first day of the event was dedicated simply to establishing how fundamental the concept of “conversation” is to organizational operations and effectiveness.  Most of us probably instead tend to view our internal functional PROCESSES as foundational, and as I don’t have the luxury of that amount of time, I will ask you to temporarily suspend your critical stance and accept for the purposes of this humble blog the premise that all human activity, including business operations, is predicated on conversations.

The pyramid consists of five levels, with Results at the top, conversations for Relationships at the base, and in between from bottom to top, conversations for Possibilities, Opportunities, and Actions.  The top of the pyramid, Results, speaks for itself – it consists of the objectives and outcomes of the supporting chain of conversations.  At the next level down, conversations for Action are of a rather unique sort.  Consider sports as an analogy.  What sort of conversations occur on the field of play?  Short ones, to be sure, often not even using words, just grunts and gestures.  When you are breaking down the right side with the ball you do not hand your teammate a white paper to let him/her know what you are going to do next.  In fact, the sports analogy has another lesson for organizational Action - that of simulation.  Consider how much time and effort in all sports (and likewise in the military) is dedicated to practice, which is essentially a simulation, compared to the time actually spent in a live game.  NASA and airline pilots being the noteable exceptions, the commercial arena spends almost no time practicing and simulating real world conditions, and ends up paying the price by not having the right action-oriented communication skills ready-to-hand when the need arises.

Moving down the pyramid, there is a most important distinction to be made between conversations for Possibility and those for Opportunity that trip up most organizations and turn well-intentioned meetings into frustrating free-for-alls.  Conversations for Possibility are your brainstorming types of conversations – anything goes, blue sky, nothing is off the table, no question is too stupid (YELLOW and GREEN hat approaches).  Conversations for Opportunity, however, are more circumspect, the critical eye is applied, options are evaluated, constraints considered (the purvue of the BLUE, BLACK and WHITE hats).  Nothing can derail a meeting faster than the attendees not having a shared understanding of which type of conversation they are having.  How many times have you been in a meeting for what you thought was a conversation for opportunity (even if only implied by circumstances), where you are perhaps evaluating the top three options that have emerged from weeks and weeks of discovery, examination and analysis, only to have someone who missed last week’s meeting turn the entire process into chaos by announcing that they have just come up with an unbelievably amazing new idea that absolutely must be considered.  Or, conversely, how often have you been in a conversation for possibilities, such as when you are simply attempting to comprehensively populate a SWOT diagram for later review, when the conversation degenerates into heated battles over blame and responsibilty for each of the Weaknesses, or when some wet blanket steps forward to announce that everyone might as well go home, that they have personally already solved the problem on their EXCEL spreadsheet, and by the way, we tried Jane’s idea six years ago and it didn’t work.

Lastly, there is the foundation itself, conversations for Relationship.  The basis for this model of human activity and interaction is that, being conversation and communication based, relationships are the bedrock from which all possibilities, opportunities, actions and ultimately, results, emerge.  If you do not cultivate your relationships, you can still proceed to take action on opportunities and achieve results, it’s just that your particular pyramid of opportunities, actions and results is going to be much, much narrower and smaller than for someone who takes the time to invest in relationships.

Just as the nature of the conversation at each level is inherently different, so too are the analytics applicable to supporting the business decision process at each stage:

Following the events of that week-long retreat, I became a convert to the primacy and power of effective conversations, and joined a group of like-minded colleagues in a year-long self-organizing team we called the ‘Committed Partners’, whose objective was to spread and develop the conversational skills that the entire organization would need to truly transform itself.  Not for the first time in my life did I find myself in over my head, enmeshed in a team of expert facilitators, coaches, interventionists and communicators, but that was precisely the point – any significant and worthwhile transformation is going to challenge and test and stretch you (to tell the truth, it was sometimes down-right intimidating to be working with a group of professionals who seemed to thrive, rather than shrink, from interpersonal conflict).  We all bring important skills to the myriad of different conversations we participate in every day, and while confrontation and intervention might not be your cup of tea, applying the right type of analytics to the problem, consistent with its level in the Conversation Pyramid, can immediately make you and your team valuable in either catalyzing your own organizational transformation, or simply improving your organization’s value creation or mission effectiveness.

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Can you draw this dog?

Leo Sadovy
Leo Sadovy|March 14, 2012

If you ask any four year old, and I know this for a fact since I once taught preschool, if you ask any four year old if they can draw, sing or dance, they will look at you as if you had lost your mind.  OF COURSE they can draw / sing / dance!!  Who can’t?! It takes considerable institutional effort and several more years of education, art appreciation and art criticism to teach us that we were evidently wrong about this.

Storytime.  Me.  Third grade.  My teacher is Miss Mullen, in her 50th and last year of teaching.  She had taught my father before me.  Whenever she called on “Chet” to answer a question in class I provided that answer.  My classmates wondered why I would answer to someone else’s name, an imaginary person no less, but I preferred not to incur her wrath since I knew she was referring to me.  Her favorite punishment was making us stand in the coat closet, in amongst the coats such that all anyone who might be looking would see of us would be from the knees down.  Amy McCullough practically lived in there.  Once when I got sent into the coats, Amy sneaked around from the girl’s coats to stand next to me in the boy’s coats, but we both got caught, resulting in letters home to our parents. No matter – Amy liked me!  (no kissing at that age, but we stood there silently holding hands, faces partially obscured from each other by the hanging coats surrounding us, two abandoned souls who had found each other in the midst of life’s cruel indifference).

Anyhow, one Monday morning Miss Mullen set us the task of drawing some goldenrod that she’d picked from the schoolyard and placed in a vase upon her desk. A still life, if you will.  If you didn’t draw it well enough you had to stay in during after-lunch recess and try again. There were about five of us stuck in the classroom that Monday afternoon.  There were still two of us Tuesday afternoon, but by Wednesday I was the only one remaining, the only one who could not properly draw a common weed.  I ended up staying in for recess all week.

The system at our house for my brother and I was that you got a clean shirt for school every day, but wore the same pair of pants all week.  We each also had two pair of good pants for school, and my mother would spend the off-week mending the rips and tears we’d put into last week’s pair. Coming home on this particular Friday my mother noticed that my pants were not torn again in the knees, were not in fact even dirty in the slightest, and asked me what that was all about, so I told her. Well, my mother, who NEVER interfered in school matters (she was a teacher herself at a different school), marched in there Monday morning and demanded that Miss Mullen put an end to this little game.  But the damage was already done.  I hadn’t learned how to draw, but I had learned something else – I had learned that I could not draw, and it became something I KNEW for the remainder of public school.

In a related story that I’ll have to save for another time, I eventually did learn to draw, finally laying to rest the ghost of Miss Mullen.  It was a short, swift and amazing journey lasting only as long as a six-week college summer session, but it taught me much more than just that I could draw (and probably could have all along), but that I could, with the proper instruction, learn to do anything.

Which brings me to the point of this week’s post – visualization and business intelligence.  One definition of BI is that business intelligence = data + context, with the context typically adding the most value when it is visual in nature.  Telling someone that the answer to their question lies in column G, row 37 is NOT context. If you think that BOLD, italic, doubleunderline is the ultimate in visual effects, you need to get out more.  Visual context is a map, a graph, a trend line, a plot, a histogram, a dashboard, a scorecard, a traffic light, a dial, a flag, an arrow, a bubble chart, diagrams, pictures, colors, shapes, shadows, depth, texture, movement, velocity, acceleration. Visual relationships.

There is more brain matter cortex devoted to visual signal processing than to the other four senses combined.  We are first and foremost visual creatures – speech was an evolutionary afterthought.  The guild symbols of the pawnbroker, the cobbler, the fish monger and the mercer were instantly recognizable to an illiterate, medieval population.  These past hundred years of neon signs and giant billboards have made us forget how to really “see” our environment rather than merely “read” it, but the innate visual capability is there.  Visual literacy is probably the most overlooked and undervalued of our treasured “communication” skills, as visual context can be so much more “information dense” than the auditory and literary modes.  In this age of Pixar animation and Wii and massively multiplayer online games (MMOG), business needs to take the hint and get with the program.  Spreadsheets embedded in PPT’s, even with dynamic, real-time updates, just aren’t going to cut it anymore.

Now I’ll be the first to admit, drawing 101 aside, I am as PowerPoint challenged as the next finance guy, but that doesn’t mean we all can’t start taking the first steps.  Here are a few examples of what’s at stake:

What do all of these have in common?  They tell stories.  They don’t just present DATA, they TELL STORIES.  A beginning, a middle, and an end.  They communicate.

I probably should give myself more visual credit than I do, for years ago, when I was presenting a product or market investment analysis to the board for review and approval, I quickly realized that I could best communicate the key financial data to the non-financial members through graphs, and got quite good at using brute force methods to incorporate multiple axes, scales and data types onto one, single slide that visually told the story, the projected life history, of the project under consideration.

Today, we have both much more data available, much more data to deal with and to analyze, much more information to communicate, but also, much better tools with which to do it.  But as I said above, the data is only half of the picture - CONTEXT is what pulls it all together and tells the story.  The logical place for finance to start is Office Analytics, which uses and connects the data and the analytics with the Microsoft Office products you are already familiar with (Excel, PowerPoint, Word and Outlook) to produce consistent views of data, automate reporting and add analytical insights while keeping the business users within their comfort zone.  The next place to take business intelligence is dynamic business visualization, which enables business users to interactively explore ideas and information and investigate patterns and relationships through visual queries. Most importantly, it allows you to tell your story in a way that static charts and spreadsheets can’t begin to match.

When you were four years old, this visual way of thinking and communicating was intuitive and easy.  As for the future of education, I think we are most definitely going to need to make communication skills, in all their varied media - visual, musical, kinesthetic - an imperative along with the 3R’s.  As for the present, we the living need to unlearn the limitations we’ve acquired over a lifetime of Miss Mullen-like encounters and start telling our stories visually.  With tools like Office Analtyics and Visual Analytics we don't need to become graphic designers ourselves, nor even take Drawing 101 (although if you do, trust me, you'll be pleasantly and spectacularly surprised at the results).  Not only can you now, with the help of technology, draw that dog, you can make it sit, jump, roll-over and speak as well.  WOOF!

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Relationships, relevancy, and changing the subject

Leo Sadovy
Leo Sadovy|February 29, 2012

Ten minutes into the first speaker of last week’s conference, I knew exactly what I was going to write about in this post.  The speaker was Rey del Valle, Senior Vice President of Finance for Live Nation, on the subject of "Growth Opportunities in the Music Business", and I was acting as chairperson for the IE Group’s  Financial Planning and Forecasting Summit in San Diego.  The second person on stage, Bob Peruzzi, Senior Director of Financial Planning and Analysis for LivingSocial, was speaking on "Forecasting and Planning in a Rapidly Changing Environment", which immediately confirmed my initial choice of topics.

If you combine some key threads from their two presentations with the subject of W. Brian Arthur’s brilliant article “The Second Economy”, which I wrote about a month or so ago in this post (“Encountering Analytics”), and with my admonition here (“The Attack of the 50-foot Cliché”) to just shoot me if I ever start off an article with anything as banal as the phrase, “The role of the CFO/Finance is changing …”, you get this:  The information age, big data, the digitization of the economy, whatever you want to call it, is causing such rapid market change that finance is left with no choice but to adopt an equally agile approach to budgeting, planning and forecasting, as our current methods are becoming increasingly irrelevant.

 Half of the speakers at this year’s west coast conference represented industries that are nearly 100% digitized when it comes to their products, services and processes:  banking, insurance, media, software, and entertainment.  Or their business model incorporates an underlying digitized business process, such as airline reservations, commodity trading, medical imaging, simulations, supply chain management, or public constituent services – all now primarily data or information driven.

When your development team can conduct a brainstorming session in the morning, clear it with legal at lunch, and have marketing launch a new digital product by 5:00pm, you cannot be stuck with a six month budgeting cycle.  When your competitor can do the same, or when someone in a completely different industry can blindside you with a competitive business model in which you have no core competency, it doesn’t matter how far out your rolling forecast goes.  Following the events of late 2008 we had budgets that were obsolete by the time they were introduced on January 1, 2009; now we will routinely see budgets that can be obsoleted on a daily basis by both internal and external events.

Here are some examples from the conference of the type of rapid change that I'm talking about:

-  Live Nation is allowing Facebook users to see which of their friends are attending the upcoming concert and also to see where they are seated, using social media to completely change how they market concert tickets.

-  LivingSocial not long ago introduced the Daily Deal, creating a daily variability in revenue that makes old, absolute financial measures obsolete.  As Bob Peruzzi put it, “for how long was your last budget relevant?”

-  Disney Music Group, Discovery Communications and Thompson Reuters are increasingly delivering more and more of their content digitally, linking strategy with operations at the speed of light, whether finance is ready for it or not.

-  Bank of America shared with us that 40% of all international payments are INTRACOMPANY payments, i.e. Ford Mexico to Ford Canada, or Walmart China to Walmart U.S., and that in response more corporations are considering in-house banks, cutting out the middleman and the float.

Against this digital background, finance is struggling to remain relevant.  Decades ago we could depend on the constraints of the physical world, the fact that real widgets had to be prototyped, the material sourced, manufactured, inventoried and finally shipped, to make financial management activities, well, manageable.  We don’t have that luxury any more.  It’s not so much that we’re part of the problem, simply that we risk becoming irrelevant to solving it.  Digital relevancy is going to require flat out speed, agility, scenario planning, options and adaptability, the ability to offer insight and recommendations for business decisions based on less than perfect information, communication (increasingly visual), better use of leading versus lagging indicators, better use of external data as a forecasting component, and the discipline of continually assessing the economy for pattern recognition and weak signals that provide early warning signs of market changes to come.  Relevancy for finance is going to depend on our links to the operational front lines through integrated business planning, integrated marketing management, and risk management.

Anyhow, that’s what I was going to say, but I had a change of mind during the afternoon of the second day of the conference, so instead I’m going to write about something completely different.  Something more important, something much more important.  A surprising, unexpected, unintuitive insight about the importance of relationships in the financial forecasting process.

Yes, you heard that right – relationships.  Good ol’, interpersonal, face-to-face, make a phone call and have lunch together, relationships.  In the midst of all this technology, systems, analytics, data, processes, diagrams, powerpoints, clouds, strategy and networks, the concluding takeaways from each of our panel members addressing the issue of “Driving more Actionable Forecasts” pointed to having effective, working relationships with key operational, sales, marketing, and development people as the foundation to any forecasting process.  Which upon a bit of reflection becomes quite intuitively obvious actually.  Accurate forecasting depends first and foremost on identifying the key people “in the know” and building working relationships with them.  It depends on identifying the best and the right sources.  It depends on having open channels that facilitate the timely communication of forecast data.  It depends on the trust you develop between and in your forecast sources.  Access to those few, critical, key in-the-know sources beats terabytes of best guesses by those who are, well, just guessing.

A year ago now I wrote about Michelle Meszaros, Finance Director at Burt’s Bees, and her concept of the white spaces (“Your Cutting Edge Tools of the Future”).  But I also remember another of her important messages, her insistence that her finance team get out of the office and “onto the floor”, working hand-in-hand with line managers, building those relationships that will turn them into effective finance business partners.  So maybe that’s the key to relevancy in this digital age: relationships, and that the primary purpose of technology and analytics, besides providing direct insight, is to make the analyst that much more productive, freeing up the time to develop those relationships.  Perhaps that was always the key, no matter the state of the technology.

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The future is not what it used to be

Leo Sadovy
Leo Sadovy|February 15, 2012

Although he later qualified much of what he said with the statement, “I really never said everything I said”, Yogi Berra is also well known for his famous phrase, “Prediction is very hard, especially about the future”. In an attempt to make Yogi’s dilemma slightly more manageable, three of my SAS colleagues, Lou Galway, David Pope and Robert Szczerba, are being awarded a patent on a process for “Computer-Implemented Systems and Methods for Determining Future Profitability”. I recently sat down with the team to better understand what they are trying to accomplish with this new process, and more importantly, what are the business benefits to be gained from implementing their suggested approach.

In a nutshell, what their process is about is extending the activity-based management approach of determining past profitability at the granular level of the customer or product, into the future, through forecasting techniques at this same, granular level. The value of knowing which of your products or customers are the most and the least profitable, and then taking appropriate action based on segmentation and target marketing, can be readily extended into future-focused actions based on data-driven forecasts. It’s still all about making better decisions, just that now the domain of your decision making time frame has been considerably expanded beyond just the present day.

Briefly, the idea is that just as you can utilize a set of independent variables to forecast most anything: costs, revenues, volumes, you can also utilize an appropriate collection of independent variables to forecast profitability at the very lowest levels. By combining the capabilities of SAS Forecast Server with SAS Profitability Management, what you can get is a forward-looking, pro-forma P&L statement for each of your customers. This is driver-based forecasting not just at the summary general ledger account level, but by customer. It is based on data you likely already possess within the organization, data that until now hasn’t been effectively turned into business intelligence.

This is truly one of those cases where the wizard-driven, automated forecasting capabilities of SAS Forecast Server can immediately be put to effective use, that 80% of the time where the analytical application can automatically create a valid forecast (10% of the time the situation is complex enough to require professional statisticians, and 10% of the time the data is completely random and cannot generate a valid forecast at all). If your financial analysts have had even just one statistics course, and all they can remember is the difference between a dependent and an independent variable, you are in business – the wizard-driven software can do the rest.

The real key to creating business value from such a process comes from integrating your customer demographic and attribute data with your financial data, incorporating the information contained in your CRM, loyalty and marketing management systems with financial cost and revenue data. A couple of examples would be beneficial at this point. For each example below, let’s assume that prior history indicates, by eyeball, on average, simply a flat “trend” line of past purchase behavior.

  • Adding demographic data, such as age, might lead to, say, an upward trending forecast for younger customers and a lower trend for those somewhat older (or visa-versa).
  • Adding attributes, such as the date they joined your frequent buyer’s club, might indicate a future upward trend with a three-month time lag.
  • A purchase history of three or more products from different categories, or one product plus related services, might indicate an upward trend in profitability compared with other buying patterns.
  • Use of coupons, only buying during certain sales events, or only buying after receiving certain target marketing offers could be matched with the planning of such future marketing events to better forecast volumes and production capacity.
  • Perhaps the data shows a switch in buying behavior over time from low-end, low-margin products to higher-end offerings that might portend improved future profitability that is not visible just in the revenue data by itself.
  • An industry attribute, combined with external market or forecast data, might indicate that going forward, customers of the same size and prior buying history may be headed in opposite directions based on their industry affiliation.

There is value in this sort of a granular forecast for both B2B and B2C businesses. In the B2C world, all of the targeted marketing approaches I listed above, combined with some segmentation and up-sell/cross-sell promotions gets you on the right road to be actively managing that elusive concept of customer lifetime value. In the B2B world, imagine if you could use such a process to set quotas and establish territories, by whatever criteria you run your business (i.e. geographic, industry, hunter/farmer, direct/indirect, etc …). Not only can you eliminate arbitrary, one-size-fits-all sales quotas that consistently are points of contention, the software also automatically identifies those outliers, those once-in-a-lifetime $10 million dollar deals that need to be factored into the setting of a proper sales target.

And if that wasn’t enough, there is a next step – optimization and “what-if” scenario analysis. Why? Because you still have constraints, constraints in resources or time or investment, that need to be included in your customer-level planning activities such that it is your most profitable customers and products that get priority.

It was just two weeks ago in my “Finance in more than two dimensions” post that I noted the long-term goal of FP&A to better position itself to engage in more value-add activities tied to business and decision support. While there are many paths one could take on that journey, forecasting profitability at the customer level in support of marketing and account management activities is certainly one path you could readily take using just the data you already have on hand. No, the future isn’t what it used to be, it’s gotten a whole lot better.

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Finance in more than two dimensions

Leo Sadovy
Leo Sadovy|February 1, 2012

I have been attending corporate financial management conferences for 20 years or more now, and there has been one consistent theme that has managed to survive the decades intact: how can finance and its FP&A function become more strategic, more focused on value-add decision support, and less transaction/ journal entry oriented, or as some have said, “we do F & P pretty well, but not very much A”.  I will admit that some progress has been made during this time span.  When it started out the ratio was 80/20 in favor of transactions, with the goal to be able to turn that number on its head, so that it became 80/20 in favor of value-add decision support activities.  The current consensus among FP&A types at the more recent conferences I attend or chair seems to be that we’ve worked ourselves up to a balanced 50/50 split, which means that while we’ve banished Pareto and his 80/20 band of unproductivity thieves from the latter half of the week, we are still stuck with him as a lunch partner through Wednesdays.

Just yesterday at the CFO CPM conference in New York, Mary Driscoll, Senior Research Fellow at APQC, moderated a panel discussion on this very topic entitled: “Profitability Management--How Finance Can Help to Deliver on Strategic Promises”.  In preparing for this panel, I ordered my own thoughts regarding how finance could play a more strategic role within the organization, which I share below, along with some of the additional ideas that surfaced during the discussion.

-   Integrated Business Planning.  Of the strategies that fail, 80% of them fail not because they were wrong, but because of poor execution. The typical 3-level model for IBP usually shows strategy at the top, operations at the bottom, and financial planning in the middle linking the two.  For finance, this is the ideal structure for us to exert influence and control so as to improve those execution odds, starting with assuring that top-level strategy is reflected in the business plan, and continuing the emphasis by also assuring that detailed operational budgets and metrics are linked and aligned with corporate goals.

-   Stratex, or Strategic Expenditure, is a term coined by Robert Kaplan to reflect expenses related to strategic programs and initiatives.  Once again, finance is in an ideal position to assure that strategic projects get their own staffing, budgets and resources, rather than depending on borrowing from benched or excess functional resources who somehow manage to find some cycle time for the project.  Furthermore, finance needs to assure that in difficult times, Stratex is protected from mindless, across-the-board 10% expense cuts.

-   Profitability as a Metric.  Too many organizations treat profitability as a residual, what’s left after expenses are subtracted from revenue.  Without some application of ABM, profitability can only be ascertained and incented at the C-level after all the books have been consolidated.  With ABM, profitability can be driven down to the division, region, department, product or customer level.

-   Risk. Are you incorporating risk into your business decision process, or are you simply going with the largest number, the largest ROI or IRR, the largest “return” irrespective of risk?  If you calculate return to three significant digits, but risk is still just sticking a finger in the air to get an order of magnitude, you are not doing all of your job.  Of the three components of “How Much, How Soon and How Certain” in every business decision, finance is very good at the first two, but typically neglects the associated risk.

-   Cross Functional Coordination. I talked about this one in my recent post, “The Attack of the 50-foot Cliché”. In the absence of a formal Office of Strategy Management, finance is the next most likely function to be in a position to assure that the key, cross-functional processes that create (or destroy) value in an organization are given their proper due; those cross-functional processes that no one person or function owns but that comprise the core of the organization’s value proposition.

-   External factors:  If the finance department is guilty of navel gazing, then most likely the rest of the organization will follow suit.  If the monthly financial reporting package is solely about internal measures and metrics, all neatly packaged in 10K format, then that will become corporate culture.  If instead, the monthly financial reports and dashboard metrics included operational metrics, third-party data, competition, SWOT information, external benchmarks, and if the forecasting process incorporated external sources into its consensus building process, this too would become the new norm, the example to be emulated throughout the company.

-   Business Models:   Once you start incorporating external data, you quite naturally continue to pay attention to the other non-financial external factors that at a minimum affect your business, and may even catch you completely out of sorts with where technology, products, media, regulations, or customer sentiment is taking the market.  I like to think that what Steve Jobs’ genius was about, was in working backwards from a new business model.  He didn’t so much as first invent iTunes and the iPod as he invented a new business model for music distribution – the physical device was secondary.  Same for the iPhone – primarily a piece of technology in support of a new business model for licensable “apps”.  One of the most valuable things finance can do is to get their operational business partners thinking in terms of the business model - how do they make money today, how can that be improved, what external business-model threats loom on the horizon, and what new models might they exploit.

Finance can be quite two-dimensional in its thinking, starting with our VERY two-dimensional spreadsheets.  If we’re going to be more strategic, however, it’s not enough just to think outside of the box, we need to use all the dimensions available to us and start thinking outside the dodecahedron, or outside the hypercube.  Or at the very least, go find yourself a REALLY big (three-dimensional) box.

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Metrics for the subconscious organization

Leo Sadovy
Leo Sadovy|January 17, 2012

Think about what it’s like to learn to ride a bicycle, or play the piano, or hit a fast ball, or to coach a group of middle schoolers to do the same. If asked to explain how you stay balanced on a bicycle, you probably couldn’t do it. If you tried to think about each finger finding the right piano key, you could never play a series of chords let alone an entire song. A fast ball reaches home plate in four-tenths of a second, two-tenths faster than your conscious brain can register it. Yet somehow, you still manage to ride a bike, play the piano, and hit that fast ball, often with considerable skill. What’s going on here?

A new book out by David Eagleman entitled, “Incognito – The Secret Lives of the Brain”, investigates these types of abilities and explains how much, how very, very much of what we do and what we think is managed by subconscious processes completely outside of our conscious control and often beyond our conscious awareness (i.e. temperature control, digestion). It was Freud who first described this “iceberg” of mental processes, with 90% of it below the conscious surface, now further advanced by modern science, which has discovered that your subconscious makes its own decisions several tenths of a second before the conscious mind is aware of that decision. The “you’ of your subjective conscious experience is a minor player when it comes to most of what it is your body does, primarily brought into action only when there is a tie vote or a conflict among your subconscious processes. How do we know this is true, that the brain really works that way? Because you can hit a fast ball. Some part of your brain made the decision to pull the trigger and swing away before your conscious self was made aware of that decision.

The organization you run, manage and lead is a lot like your brain with its autonomous subconscious processes. For the most part, it functions day-after-day, minute-by-minute, without your active control or even your conscious knowledge. R&D adds features, account execs make sales calls, bugs get fixed, equipment gets replaced, customers hit submit online, paychecks get deposited, the lights come on in the morning and the bathrooms are cleaned at night. Don’t call this ‘delegation’, you haven’t delegated anything at this level of detail – this is an organization that has long since learned what to do and pretty much runs itself. If it’s running well it not only doesn’t need you, it doesn’t even care if you are there or not.

But when it does need you, it’s probably crucial. You might only set or change strategy once a year or so, but without adjustments to strategy the organization will just merrily sail itself off towards the edge of the world. And when the problem is big enough that you have to be called in to break the tie or resolve the conflict, it can’t be good news for anyone.

All of this talk about subconscious processes has been a set-up for this question: What is the best way to implement major organizational or strategic change? What is the best way to change a corporate culture before the old one eats your shiny new strategy for breakfast?

The answer is related to how you would teach any complex “organism” a new skill. The early stages are going to require a lot of visible, hands-on leadership from yourself with a focus on the obvious, or as the legendary Vince Lombardi used to start out each summer camp, even with a roster full of veteran players – “Gentlemen, this is a football”. You are going to attach training wheels to the bike, or put a little red sticker on Middle C.

After that, though, you are going to rely on your own body’s, or your student’s body, or your organization’s innate ability to learn by itself. Coaching becomes more nuanced, pointing out the little things, making minor adjustments, trying out variations and interpretations, clarifying the rules. Repetition, repetition, repetition; or, simulation, simulation, simulation (i.e. training exercises).

In the final stage you have backed away even further. It’s now about asking questions and getting the student to question themselves, about encouragement and critique. It’s about game strategy and pre-game preparation and off-season training, situational awareness, developing their baseball or marketing or research IQ. Come game time, once they take the field, they are pretty much on their own, out of your control (I once described my role as an off-season parent coach of my sons’ lacrosse team as someone whose job was to focus them on the task at hand before they took the field to do whatever they were going to do anyhow).

Our final step in this imaginary journey is to establish what sort of feedback would be most appropriate, and if I’ve made my point clearly enough, it should be obvious that the right type of feedback will vary with the learning stage the individual or organization finds themselves. Early on it will undoubtedly appear quite authoritarian and autocratic, disruptive of established norms and accustomed behaviors. As the learning continues the feedback becomes more fine-tuned and focused, and the thresholds/window for acceptable results narrows, corresponding to the standard metrics and KPI’s that we typically employ in performance management.

What about that final stage where the organization is running on autopilot? We too often ignore the information, feedback and metrics that our organization needs at this point. It doesn’t need to be ham-handed or punitive as if there is no trust in our people. The business intelligence, metrics and feedback that the mature organization needs at this stage are what the employees themselves feel they need in order to assess and adjust their own performance, not what we decide we want for the more limited purpose of monitoring. Have you ever considered deploying metrics and feedback that play no part whatsoever in an employee’s or an organization’s performance evaluation?

I’m not advocating abandoning performance monitoring metrics; the captain still needs to know speed, direction, fuel consumption and dangers up ahead. What I am saying is that with so much of your organization running itself without your awareness or involvement, you need to make certain that they are provided with what they need to properly function. It’s no longer about you controlling the organization, it’s about the organization controlling itself in alignment with the big picture strategy you’ve set, communicated, coached and led. It’s about trust.

So where does this leave you, the strategy-setting executive? Free to take your hands off this bicycle and start working on your next big challenge, the next goal, the next transformation, the next strategic direction.

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Black holes and Integrated Business Planning

Leo Sadovy
Leo Sadovy|January 4, 2012

Black holes can be completely defined by just three properties; make that four if you count their blackness. The three properties are mass, electric charge and angular momentum. That’s it. No matter what falls into a black hole, the only quantities and qualities retained are its mass, net charge and spin. Throw in the complete works of Shakespeare or a shovel full of dirt and it’s all the same to the black hole. All the individuality and detail is crushed into oblivion. The black hole simply notes the increase in its mass and carries on doing whatever black holes do.

Does this sound anything like your budget?

Oh, I know, the black hole analogy can be overused at times, but as I noted in my previous post, for every cliché there was a first time, and it was undoubtedly based on some belatedly obvious truth.

As for your budget, you put a lot of time and work into its development, into getting it right, but then pass on a single number, the department or line item value, to the business unit, and it’s as if the detailed planning never happened. The department goes about its business as usual, spending without regard to changes in the underlying corporate strategy that informed the initial financial plan. The “number” comes out of the financial plan and becomes the black hole of some departmental spreadsheet, re-diced, re-sliced, reallocated and reprioritized, no longer aligned with the activities and priorities across the rest of the organization.

This is the disconnect represented by the division between the middle, financial/ functional section and the bottom, operational layer of this Integrated Business Planning (IBP) diagram - between the financial and operational plans. There are two primary approaches to solving this problem: 1) integrated enterprise-class systems, and, 2) integrated operational planning and supplemental schedules.

I recently became acquainted with the first approach, integrated systems, while getting up to speed on the capabilities of SAS’ recent acquisition of Assetlink for integrated marketing management. Too often a carefully crafted marketing spend plan resides on a spreadsheet outside the financial systems, such that actual spending cannot be matched with the budget; the budget, organized by G/L account , does not match the structure of the marketing campaigns; and committed-but-not-spent funds cannot be tracked and reconciled between the two systems. Integrating the two solves most of these issues, while assuring that top-level marketing plans are not ignored by having someone lump everything together on their personal black hole of a spreadsheet and then reallocate based on their personal preferences.

The other approach, integrated operational planning and supplemental schedules, is a capability already built into SAS Financial Management. Here, you can build out, in a spreadsheet-like approach, all of the details you need to plan at the SKU, employee, store, product, part number, project or asset tag level, feed them directly into the summary G/L account, yet keep them separate and secure INSIDE the financial application.  This approach directly aligns the operational budgets for R&D, production, marketing, sales and service with the strategy-driven financial plan.

That bottom half financial-to-operational planning link is probably the easier of the two disconnects to address. The more difficult challenge is between the upper components – strategy and the financial plan. While attending the Palladium Group’s 2011 strategy summit in San Diego last November I had the chance to talk with the Palladium staff about the feasibility of using strategy maps and diagrams as the linking mechanism between that top strategy layer and the financial plans. My conclusion is that such an approach is probably the best mechanism available today for achieving an integrated business plan (financial alignment with strategic objectives) at this level.

Mind you, I’ve made no mention of a balanced scorecard or metrics or KPI’s; those would be after-the-fact measurement and feedback tools. What I am talking about here is up-front alignment and integration, assuring that strategic initiatives and programs are adequately staffed and funded, what Robert Kaplan calls “stratex” for ‘strategic expenditure’.

In my post of November 15 (“I wonder what the king is doing tonight”) I listed the seven CPM best-practices that top organizations are focusing on, with the first two being Integrated Business Planning and Strategy Development. As you can now see, these two are in reality linked with each other, with strategy development not only being valuable in its own right, but a necessary component for achieving IBP. It is by doing strategy development properly, linking the objectives and programs, initiatives and campaigns, directly with the financial plans, and not as merely an afterthought used to justify an arbitrary metrics/ incentive scheme, that you avoid the bottom two-thirds of this diagram becoming a black hole that both eats strategy for breakfast and simultaneously turns it into an unrecognizable mess/ mass.

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