Recently I went to a great workshop run by Les Barnett on ‘The real measures of corporate performance’ at the Institute of Chartered Accountants event, Real Measures of Corporate Performance. Les has worked with many companies and has been in the performance management space since the 90s in the UK.

The theme of the day was business planning and the use of drivers to set up an integrated performance management framework.

Despite the frameworks being available and understood, the uptake, especially in Australia, is very patchy.

Many companies address budgeting and forecasting in isolation and focus purely on financial plans and targets. Although it is good to address budgeting and forecasting, Les explained the necessity of moving away from detailed financial plans to using business drivers as the focus. Drivers enable a common thread to run across the whole performance management cycle from strategy to performance reporting and review.

In the workshop, Les delivered great insights and strategies for setting up integrated performance management frameworks. My biggest takeaways from the day were around this use of drivers and the advantages of using them for forecasting.

Drivers

The use of drivers in planning is one of the most effective yet most underused tools. Les has been an advocate of this since early days of working in the UK. Drivers are a catalyst and enabler of the performance process. Here are seven benefits of using drivers in your performance management.

  1. Link financial and operational plans.
    When you review the consolidated budgets, do you understand the assumptions made to arrive at the revenue budget? Often not. It is hidden in working papers of the sales manager. For instance, a finance member in a retail banking customer grew frustrated with revenue numbers from the sales manager. What assumptions were behind the numbers? For instance, average loan size and number of loans.
  2. Accountability.
    Les made the interesting point that visibility of drivers can cause driver-based approaches to be undermined by individuals. If everyone can see the real measures and assumptions, people can be held to account. This alone is responsible for a great many companies failure to adopt driver-based methods that would save literally millions compared to the cost of maintaining broken (and hidden) performance management processes.
  3. Link strategy to planning.
    Strategy is often carried out in isolation from planning which, in turn is frequently disconnected from budgeting and forecasting. With no common thread running through the cycle, you will not be able to integrate your decision making. For instance, if revenue or market share drivers have changed, why have they changed?
  4. Drivers focus attention on the root cause.
    Financial variances are the financial consequence of a change to an upstream driver. Drivers focus us on what changes need to be made. For instance, the number of members renewing their subscription  may have slipped beneath the target and therefore we need to consider what initiatives to take to ensure we increase the number of members.
  5. Setting targets with drivers.
    Drivers are the logical choice for setting targets. However companies are still using detailed financial models. A financial target does not provide a link to what action is needed to get back on track. Drivers do.
  6. Plan top down and forecast bottom up.
    Top level drivers can be linked to multiple underlying drivers. High level drivers are good for setting strategic targets. Sometimes, these targets do not necessarily have to be achieved. We can agree that they are stretch or aspirational. Forecasting on the other hand, should be adjusted bottom up and then roll up to give a comparison to the planned strategic drivers.
  7. Forecasting.
    Updating the plans and budgets with latest forecast information becomes a breeze as you are updating the drivers not the detailed financial budgets.

So, are you one of those finance staff buried neck deep in detailed bottom up budgeting, planning and consolidation? If you are, get out into your business. Go and visit the operational staff to find out how the business actually runs. You will get a wealth of information on the business drivers you will be able to use to develop your business plan models.

 

You can read other budgeting and forecasting blog posts here.

You can read more about Professional Advantage and budgeting and forecasting here.
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