Need for Speed
Call it the real-time budgeting imperative. Traditional budgeting has long fostered a disconnect between promise and reality. The chief problem? Budgets are often way too old by the time they are put into actionand worse, they're based on old numbers. Indeed, by the time most budgets are completed, they're irrelevant. As many as three-quarters of all budgets and plans are never executed, according to Lawrence Serven, a principal at The Buttonwood Group, a Stamford, Conn.-based performance management consultancy. Planning, says Serven, "is nothing without execution."
The usual gambit is for business managers to dummy up a budget based on history and on the loose expectations of top management. More often than not, those expectations are reviewed and revised by senior management, sent down for perusal and kicked back up again in a process that's repeated so many times that when it's finally over, the budget bears little or no relationship to business strategy.
Truth is, though, many companies simply can't afford to keep doing things so slowly. "We are moving toward a real-time economy with much more direct feedback," says Andrew Odlyzko, director of the Digital Technology Center at the University of Minnesota. "What that means is companies are going to have to more closely monitor projects so they can make faster mid-course maneuvers." That means, of course, using technology to help close the reality gap. Wal-Mart, says Odlyzko, is a great example. "Its extensive use of technology helps it to keep track of inventory and respond to immediate changes in demand. If you have that, you'll kill the other guy. It's a do-or-die situation."
The Reality Gap
Such gaps between budgets and reality can cost millions. Consider Xilinx. Its forecast for the first quarter of 2001 was for 10 percent revenue growth, but by quarter's end, growth came in at just 3 percent. The following quarter, Xilinx expected 3 percent growth. That turned out to be 7 percent. The next quarter's revenues were expected to fall 10 percent; they fell instead by 22 percent. A 20 percent expected decline the following quarter ended up closer to 29 percent. "We just had to find a way to get a better feel for where we were," says Xilinx CIO Sheri Anderson.
Cluelessness at this level doesn't just affect strategy; it can also rob your firm of important mind share. "If you've got four or five financial analysts spending 24 weeks a year working and reworking the budget, that's 24 weeks of salary that could have been earmarked for financial analysis," says Delbert Krause, senior product marketing manager at Burlington, Mass.-based Cognos Inc. Traditional budgets contain roughly 230 line items and take four months to prepare, says David Axson, managing director of Answerthink, a Hudson, Ohio-based consultancy, yet only 20 percent of the time put into the budget actually goes to strategic planning. "The rest of the time is devoted to data collection, validation and endless manipulation," Axson says.
What to do? Many companies are turning toward a new breed of fast-track planning, budgeting and forecasting systems and analytical software designed to provide executives with a precise snapshot of financial conditions at any one time. "It's all about improving the inside visibility of the corporation so that executives can act faster to avert a problem or gain an edge in the marketplace," says PwC's Dunleavy.
These systemssold by IT consulting service providers such as Cognos, Hyperion and Adaytumhave been on the market for the last three or four years, but so far, they've been slow to catch on. Cultural resistance is one reason. According to Paul Hamerman, a research director at Giga Information Group, moving to real-time budgets means "a big cultural change for companies to manage, and many simply aren't up to the job." Even more significantly, faster and more realistic budgeting requires a rethink of the way entire corporations are organized and built.
At Xilinx, for example, it required moving the financial organization into each of the business units and rebuilding the financial infrastructure of the company so management would be part of the budget and planning process. "We didn't want finance guys sitting in the corporate headquarters pulling up numbers in some crunching exercise," Chellam says. The change, he acknowledges, "produced some hiccups"at one point early on in the process, finance executives refused to tell division general managers how inventory valuations work. At first, Chellam recalls, that led to some inventory write-downs. Now, though, finance has its ear to the ground, working more closely with the business unit executives to develop spending plans more grounded in realityand to manage realistic long-term goals and strategies. According to CIO Anderson, the integration of internal data with external, point-of-sale data held by Xilinx distributors helped executives follow the ups and downs of the marketplace every dayand improve their ability to synchronize company operations with customer needs. That integration has also helped encourage managers to work more closely together on budgeting. "Finance is now working with marketing people to benchmark at different revenue levels to determine how much they should be spending at a company like ours," Chellam says.
The CIO Role
In this new world of real-time budgeting and planning, CIOs must play a more significant role. "CIOs must share the driver's seat with the CFO," says Clarence Bastarache, CIO of DaimlerChrysler Capital Services, which completed a switch to a new planning and budgeting process in March 2001. "IT has a planning culture that other parts of the organization, such as the business lines, do not necessarily have," he explains. "We bring to the table a horizontal view of the enterprise, since we deal with all the different business lines in the organization, whereas business lines have a vertical view of just their department or function."
Further, says Xilinx CIO Anderson, it's critical in companies seeking to move toward more real-time operations for CIOs to sit at the strategy table along with other corporate executives. Anderson, who reports directly to Xilinx's CEO, says she doesn't have to rely on the CFO to learn about what's going on business-wise. "I have a macro level view of the business," she says. "I'm not treated as a cost center but as a profit center." In that way, she says, there's more pressure on her and her IT staff "to help deliver better data, and the move to better numbers is part of that."
Trouble is, though, says Anita Tilley, such reporting relationships are more the exception than the rule. Tilley, managing director in financial consulting at KPMG Consulting, says many companies fail to tap the strategic value of their CIOs when trying to fix the disconnect. "Since most of the technology out there is viewed as user-friendly, and the user often is finance, IT often gets involved only when it comes to the need to manage information," Tilley says. "That's a mistake. Any new technology requires process redesign and people skill retrofits. IT must be in this from the get-go."
Just ask Nationwide Financial. The Columbus, Ohio-based financial services company, with $3.2 billion in 2001 sales, decided to switch to real-time budgeting in 2000. "We used to budget a certain dollar amount for a project and kick it into gear only to find that our revenues could not support the project's ongoing costs"and some projects would have to be slowed down or scrapped, says John Davis, vice president of financial operations.
Nationwide wanted a way to "provide guidance to Wall Street analysts sooner," says Davis. "We also wanted a better decision-making process and a way to make everyone here more aware of our financial and nonfinancial objectives." Nationwide turned to Hyperion for the software, which collects data from Nationwide's Peoplesoft enterprise system.