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The idea is to reforecast expectations, and then change plans and budgets to reflect the new climate. At Nationwide Financial, Davis says when a change in the top line looms, "we adjust our bottom-line expenses, reprioritizing tactical objectives and then rebudgeting accordingly." Rather than revise forecasts each quarter, Nationwide now revises its forecasts continuously. Each month, a resource allocation committeecomposed of the CFO, Mark Thresher; the CIO, Mark Phelan; and the head of marketing, Susan Wolkenmeets to revise Nationwide's department budgets based on an analysis of the company's rolling forecast. Says Davis: "We set targets around earnings, revenues, sales and so on, then build tactical and financial plans that close the gap between the current forecast as it exists each month, and our targets up to 21 months (seven quarters) down the road."
The committee then prioritizes the requests it receives from the business units for new projects. The committee knows how much it costs to run the company at any given time, and how much those costs change monthly, Davis says, so it's up to that panel to decide how much money each department will getor loseeach month. Now, he says, the budget is always the last thing compiled, not the first and most likely to go stale. "Five years ago, someone might say, 'You can spend this much money,' and then the business would figure out what to do with it," Davis says. "Now, you get the money that reality dictates."
Nationwide has also gained speed. Case in point: Based on the company's improved ability to budget costs and forecast revenues, it recently was able to accelerate a project to reduce the amount of money it spent to issue insurance policies. Rather than paying for the project over three-and-a-half years, Nationwide was able to pay for it in threeto realize a savings of $3 million in the first year, Davis says. The goal of the switch was to shrink the cost of issuing life policies by paring the department's administrative costs and thus reducing budgeted resources.
To be sure, making such switches isn't easy. Cultural resistance to the new way of budgeting can run high. At Nationwide, Davis recalls, buy-in was achieved only when Nationwide decided to link improved budget accountability to employee paychecks. "We now have a scorecard that lists a dozen measurements, including traditional financial measures like return on equity, as well as nonfinancial measures such as customer retention and back-office productivity, and we use them to determine bonuses," he adds.
What it really boils down to is speed. Consider watch retailer Fossil Inc., with $546 million in 2001 revenues. For Fossil, based in Richardson, Texas, the switch to real-time budgeting meant being able to match resources to demand in the fast-changing world of fashion.
Each year, each department at the fashion accessories marketing and distribution company would submit a budget consisting of 90 spreadsheets that went up and down the chain of command so many times the strategic intent eventually was lost. "By the time we were happy with a department's budget, it was pure luck if it matched the corporate directive," says Christopher Lee, the company's finance manager.
So Lee and Randy Kercho, Fossil's executive vice president, spearheaded a two-month effort to consolidate dozens of spreadsheets into a single databaseFossil's general ledgeradding multiple charts of accounts across the global enterprise, all part of preparing for the advent of a planning and budgeting system from Cognos. "We had to make sure every line of dataand there were thousandshad a home," Lee recalls. "The volume was enormous."
But so was the change in how the company has been able to respond to the market. In the past, Kercho says, "we were so consumed with the budgeting process, analyzing each department's budget through multiple iterations, that we were unable to analyze whether it met our overall strategy." And the budgets that were produced could not reflect quickly enough where the demand was coming from, and where it would be coming from in the future.