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Amid today's extremely volatile business environment are the reverberations of a pandemic, a supply chain crisis fueled by that pandemic (which has been exacerbated by the war in Ukraine) and rising interest rates and inflation. Oh, and then there's also the Great Resignation. This volatility has triggered constant change and increasing complexity in the marketplace, forcing FP&A teams to move away from "planning as we know it"—a.k.a. the traditional budgeting and planning cycle—to a new planning paradigm fit for the "next normal."
This likely comes as no surprise to you—traditional annual budgeting is too time-consuming and not timely enough in today's business environment. Across data gathering, KPI creation, forecasting performance for the next quarter, year, three years or five along with constant revisions, it can take months to finalise the budget—which, these days, is likely to be out of date after month one, let alone month 12. All in, it's a daunting task that takes away from the finance function's ability to focus on value-adding activities—such as interpreting data to support agile, business-wide decision making. Agility, flexibility and a strategic mindset that accounts for the operational environment are vital in order to plan and thrive.
In Planning [as we know it] is Dead, the latest e-book from the Business Partnering Institute (BPI) which explores a new planning paradigm for the next normal, the authors—Anders Liu-Lindberg (CMO and COO), Michael Lykke Bülow (Founder and Managing Partner) and Benita Ulrichs Nilsson (Partner and CFO)—wanted to better understand the current state of how companies are managing planning in this volatile business environment. They spoke to Vena VP of FP&A Tom Seegmiller to learn more about how organisations should approach planning in this time of heightened uncertainty and rapid change.
"Planning is constantly evolving at this point in time," said Tom. "It is in a state of flux. Since the pandemic hit, you have two different camps: Companies that have chosen to evolve, adapt and understand that the environment they are operating in is different, and those that have failed to make the changes."
Tom's ultimate watchword for planning in the next normal? Adaptability.
In this blog post, we'll share five of Tom's tips on how you can adapt your planning process to help your business navigate today's volatile business environment:
Driver-based planning allows you to achieve planning agility with greater granularity, working with budget owners, breaking down key business drivers and accounting for how changes to those drivers will impact financial and operational performance.
"The more people are in there and reviewing results, the better they understand those drivers, those metrics and the levers that you can pull within the business to change outcomes. They're better informed to plan for the future," said Tom.
While it doesn't guarantee your success when used alone, and can be counterintuitive and time consuming (it's not easy to establish because it requires a deep understanding of your drivers), driver-based planning is valuable for your scenario analysis and agile responsiveness, both of which traditional budgeting lacks. You can still benchmark your performance, but now you can adjust for any changes in activities and resources.
"Those that have continued to adapt are probably doing scenario planning," said Tom.
If you're doing driver-based forecasting, scenario analysis allows you to be better prepared for changes in your key activities and resources. One benefit of preparing what-if scenarios—whether it's just best case, base case, worst case, or more scenarios than the best practice minimum of three—is that, as you're forecasting these scenarios, you're also exploring possible responses to possible positive or negative events.
From effective risk management to more proactive financial and operational planning, scenario analysis allows you to see how different internal and external inputs might cause business key performance metrics to change so you can help your stakeholders make proactive planning decisions that account for a range of possibilities.
Rolling forecasts came to be as a way to address the issue of timeliness inherent with traditional budgeting and have gained popularity over the past several years. They're effective for responding quickly and seizing opportunities and incorporating them into your planning amid market changes.
"When you're updating your rolling forecast and you see the triggers or levers or milestones that you had laid out in your scenario forecast, you already know which general direction you're going to head in. You've vetted it with your executive team, you've stress tested your ranges and the what-if scenarios, making it easy to adapt," Tom said.
They aren't perfect, though—you can run the risk of rolling forecasts becoming an endless budgeting cycle which can also inhibit the finance function's ability to focus on value creation.
When implemented effectively, how often should you update your rolling forecast?
" ... Probably quarterly updates, being realistic," said Tom. "You don't want to have knee jerk reactions every day or week. But you do want to monitor over a relatively short period of time and then adapt for one of two things: either risks that are prevailing in your business that you want to mitigate against, or extraordinary opportunities in the market that you weren't aware of when you planned. That annual budget that you set at the beginning of the year becomes dated and stale. And there's so many elements and factors that people sometimes can't predict what's going to happen in the next hour. So why would you think you're going to be right over the course of the next year?"
"When you think about the ecosystem of teams that work together—data analytics teams, CPM functions, FP&A teams—I would bring them all under one roof," Tom said.
Their roles are fundamentally connected, and with greater cohesion, they can work together to better inform your planning. Involving your business leaders and budget owners will not only improve planning efficiency, it will also increase the value your planning process provides. Planning more collaboratively can generate deeper insights than if your teams were to forecast without the involvement of, for example, someone who oversees drivers.
"You've gotten more cohesion amongst these processes," said Tom. "You're thinking about both the upstream and downstream effects of data, you've probably got more consistent leveraging of technology, generating efficiency out of the process, and you've thought about it together collectively as one team, enhancing the insights."
" ... Start out with, 'Where is the organisation going to be in five years?'" said Tom. "I try to think about our process evolution to get to where we would need to be in five years. As you shift out a year, you're still asking the same question, 'Where should we be in five years?' This is a constant evolution."
Breaking down your long-term planning into smaller steps can make it more manageable. While five-year forecasts belong in the old paradigm of planning, they can support your goal of planning adaptability and agility.
"You're not necessarily going to notice the progress on a daily basis. But if you reflect back, a quarter later, or six months, a year later, you're going to see the sum of all of the little steps added up to something meaningful on your journey towards planning excellence. But of course, after five years the organisation will have evolved. It's going to keep growing and scaling and morphing into something new. What you're targeting is planning excellence at the time, and being ready for that next state of evolution of the company."
In Planning [as we know it] is Dead, the authors explore a new paradigm for planning fit for the volatile realities we now face—one that harnesses Tom's approaches to enable an agile, iterative, business-wide planning process that focuses on the whole business and its strategic needs.
This new planning paradigm puts finance at the heart of strategy, leveraging three planning pillars—reporting on performance, real-time strategic tracking of key assumptions and predictive analytics—to create the most accurate view possible of the future. And this new paradigm features full engagement and understanding from key organisational decision makers and ensures that planning is a value-added activity in and of itself that enables businesses to react to new opportunities or changes in today's volatile business environment.
The e-book looks at:
The next normal is here and planning as we know is no longer enough. As BPI noted in the e-book, the only constant now for finance and business partnering is change, and from these challenges comes opportunity.
And what's that opportunity? A finance-led planning transformation that powers agility and proactivity amid continuous market uncertainty.
To learn more about the new planning paradigm and to read the entirety of BPI's conversation with Tom, download Planning [as we know it] is Dead for free.
