Black holes and Integrated Business Planning

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.