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© 2016 IBM Corporation
Business Analytics
Welcome
Best Practices in Rolling Forecasting and Budgeting seminar
© 2016 IBM Corporation
This morning’s agenda
9:30 Welcome & Introduction
Andy Nelmes, Program Director, FPM Product Management,
Business Analytics, IBM
9.45 Forecasting in Turbulent Times
David Morton - Financial Performance Management Consultant
11.00 Coffee
11.20 Best Practices in Implementing a Rolling Forecast
David Morton - Financial Performance Management Consultant
12.00 IBM Planning Analytics demonstration
Colm Kenneally - Financial Performance Management Technical Sales, IBM
12.30 What do the latest research findings from FSN say about Planning,
Budgeting and Forecasting?
Gary Simon, Chief Executive of FSN* and Leader of the FSN Modern Finance
Forum on LinkedIn
1.00 Lunch (close 1.45)
© 2016 IBM Corporation
The worlds largest
Taxi company…
Owns no vehicles.
The worlds largest
accommodation company…
Owns no real estate.
The worlds largest
Retailer…
Carries no inventory.
The worlds largest
Media company…
Creates no content.
Disruption is upon us
3
© 2016 IBM Corporation
- David Christopher Morton, Financial Performance Management Consultant
Forecasting in Turbulent Times
© 2016 IBM Corporation
The technologies that CxOs expect to revolutionize business tomorrow are already in play today
CFOs’
opportunity:Be the agent
of innovation and
profitable growth
SecuritySecurity has emerged to become the top risk . 1
Social businessContent collaboration in the public cloud is expected to experience a strong
CAGR of 23.1%, while on-premises growth is flat at 0.8%.3
Next-generation analytics"By 2020, predictive and prescriptive analytics will attract 40% of enterprises'
net-new investment in business intelligence and analytics“. 2
Big dataThe digital universe will grow to 1.8 zettabytes (ZB) in 2011, up 47 percent
from 2010 and rocketing toward more than 7 ZB by 2015.3
Mobile enterpriseBy 2018, 5 million people will have enterprise-confidential information on
their smart watches . 2
Cloud computingBy 2018, 50% of the applications running in public cloud
environments will be considered mission-critical. 2
1 IBM 2015 C-Suite Study.
2 Gartner
3 IDC
© 2016 IBM Corporation
CFOs report they use sophisticated, enterprise-wide tools to support Finance one-third of the time
Intuition Spreadsheet ERP Analytic tool
14% 52% 19% 15%
50% 100%0%
Capabilities/tools used to support Finance
Source: Question CFO6--What capabilities / tools does your organization use for the following activities?
© 2016 IBM Corporation
“For 55 percent of companies,
their budget assumptions are
useless by three months into
the new year.”
Feb
2012
Budget
approved
Speed and agility do not match the marketplace volatility
Dec
Forecast Forecast Forecast
Jun
Source: APQC
2013 Budget
© 2016 IBM Corporation
Staff leverage is weak
Providing value-added
analysis
Collecting and validating the data
Administeringthe process
30%23%
47%
Source: APQC
© 2016 IBM Corporation
Forecasting has never been a more critical process......
© 2016 IBM Corporation
Plan/ Budget is what we
would like to happen
Forecast is what we
think will most likely happen
© 2016 IBM Corporation
A good example of forecasting
http://www.bbc.co.uk/weather/
▪Fact based
▪Forward looking
▪Flexible
▪Greater detail for nearer term
▪Focused on risks and opportunities
Admiral Robert Fitzroy(1805 – 1865)
© 2016 IBM Corporation
„The end result ... is not an
accurate picture of tomorrow,
but better decisions about the
future.“Peter Schwartz, The Art of the Long View
© 2016 IBM Corporation
The traditional approach...
J F M A M J J A S O N D
En
d o
f Y
ea
r
© 2016 IBM Corporation
The traditional template?
© 2016 IBM Corporation
How many spreadsheet links?
http://www.clusterseven.com
© 2016 IBM Corporation
Opportunities in Forecasting
▪What are you currently using to prepare your budget?
▪What are some of your biggest challenges?
▪What is the reputation of the forecast process in your
company?
▪What would you like to improve?
© 2016 IBM Corporation
Does the Budget process have value?
"We used to have what we called the annual plan, and we'd
spend six months of the previous year putting it together,
as soon as the budget was approved it was out of date. So
we decided to do away with it.“Neal Vorchheimer,
Senior vice president of finance for North America
UNILEVER
(CFO magazine May, 2011)
http://www.cfo.com/printable/article.cfm/14570220
© 2016 IBM Corporation
Best Practices in implementing Rolling Forecasts
© 2016 IBM Corporation
What is a Rolling forecast
J F M A M J J A S
O N D J F M A
M JQ1 Forecast
Q2
Q3
Traditional
forecast
Q1 Forecast
Rolling
forecast
© 2016 IBM Corporation
Some key points:
• Consistent time horizon
• Reduced reliance on outdated budgets
• Faster budgets
• Higher likelihood of objective forecast as focus on year-
end is reduced
• Increased business awareness...more to come on drivers
etc
© 2016 IBM Corporation
Top Performers Planning vs Peers
Hackett Group - Global EPM Study 2011
© 2016 IBM Corporation
Companies who have reduced reliance on annual budgets and changed to rolling forecasts include:
▪American Express, American Century Investments, Bank of
Scotland, Credit Lyonnaise, Svenska Handelsbanken,
Clements International.
▪Unilever, Brown Boveri, Belron, Borealis, Electrolux, Ford,
Volvo.
▪Cisco Systems, Microsoft.
▪Norton Lilly International, DHL, Federal Express.
▪British Petroleum, Shell, Statoil.
© 2016 IBM Corporation
There are several success factors
Time Horizon Participation Modeling
Risk &
Uncertainty MeasurementCulture
© 2016 IBM Corporation
„A rolling forecast is a 12 month quarterly process.“
No, it depends on your business!
© 2016 IBM Corporation
Match the time horizon to the rhythm of your business
Short cycles
▪Consumer electronics
▪Retailing
▪ Investment banking
Long cycles
▪Oil exploration
▪Pharma development
▪ Infrastructure investmentInd
ustr
yF
unctio
n
▪Advertising
▪Cash flow
▪Overtime
▪Plant construction
▪ Infrastructure investment
▪Research & development
© 2016 IBM Corporation
An example….
Economic
relevanceVariability Speed of
response
Revenues High High High
Labor costs High Low Medium
Fuel costs High High Medium
Maintenance spending Medium Medium Medium
Advertising spending Medium Medium High
Aircraft ownership costs Medium Low Low
Airport rates and charges Medium Medium Low
Other operating Medium Medium Medium
Update frequency
Forecasthorizon
Daily Quarter
Twice monthly Six months
Weekly Quarter
Twice monthly Six months
Monthly Six months
Quarterly Year
Weekly Six months
Twice monthly Quarter
© 2016 IBM Corporation
Common Time Horizon decisions*
▪Airline: Rolling 2 quarters; monthly
▪Semiconductor: Rolling 2 quarters; twice per quarter
▪Automotive: Rolling 2 quarters; quarterly
▪Chemical: Rolling 2 quarters; monthly
▪Telecom: Rolling 4 quarters; monthly
▪Technology: Rolling 4 quarters; quarterly
▪Engineering: Rolling 6 quarters; quarterly
▪Consumer goods Rolling 6 quarters; monthly
▪Pharmaceutical Rolling 6 quarters; quarterly
* The Hackett Group 2008
© 2016 IBM Corporation
An example of the time horizon decision
© 2016 IBM Corporation
„Best practice companies are moving towards more
frequent & event-drivenupdates.“
© 2016 IBM Corporation
But this typically requires a continous collection process
Infrequent &
Manual
Continuous &
Automated
© 2016 IBM Corporation
New
version
Update
Models
Load
Actuals
Distribute
Models
Collect
Data
Aggregate
data
Report &
Analyze
What-if &
Optimize
SAP
HR
DW
The Challenge
© 2016 IBM Corporation
There are several success factors
Time Horizon Participation
Measurement
Modeling
CultureRisk &
Uncertainty
© 2016 IBM Corporation
Who creates the forecast?
© 2016 IBM Corporation
© 2016 IBM Corporation
High participation creates value.
Sales
Marketing
HR
© 2016 IBM Corporation
And let’s not forget!
Accountability
Transparency
© 2016 IBM Corporation
There are several success factors
Time Horizon
Measurement
Participation Modeling
CultureRisk &
Uncertainty
© 2016 IBM Corporation
Remember this model?
© 2016 IBM Corporation
Can we answer critical questions with this information?
● Risk
● Opportunities
● Customers
© 2016 IBM Corporation
“What they needed to identify were the volume drivers, those that influenced 80 percent of the numbers. This turned out to be only fifteen lines on the profit and loss statement.”
Gary Crittenden –CFO of Amex when they implemented Rolling Forecasts
Focus on the critical few, not the routine many
© 2016 IBM Corporation
A simple test for selecting the right items
© 2016 IBM Corporation
The same applies to your time horizon
Today … Hourly Forecast
3 days time … every 3 Hours
5 days time … day and night
© 2016 IBM Corporation
© 2016 IBM Corporation
Do YOU forecast and plan like this?
© 2016 IBM Corporation
Probably not......you think about events & intiatives
SummerVacation
Plane Tickets£550
Hotel£430
Food£260
Entertainment£300
HomeImprovement
Lawn Mower
£950Fertilizer
£50New Appliance
£700
MonthlyExpenses
Food£760
Utilities£950
Other£320
© 2016 IBM Corporation
Think about initiatives
List potential tactics
Screen the most
promising
Watch for infeasibilities
Benchmark to identify
opportunities
© 2016 IBM Corporation
The language of our forecasts need to change
634172 – Revenue (New Accts)
665891 – Office Supplies (Paper)
665892 – Office Supplies (Pens)
677199 – Gifts, Misc.
VS.
Campaigns
Pipeline
Number of employees
Customer Satisfaction
© 2016 IBM Corporation
Revenue?
© 2016 IBM Corporation
There are several success factors
Time Horizon
MeasurementCulture
Participation Modeling
Risk &
Uncertainty
© 2016 IBM Corporation
The Forecast?
© 2016 IBM Corporation
PlaceYour Bets
What if?
What if?
Considering Uncertainty
© 2016 IBM Corporation
But developing scenarios can be very tedious
• Multiple scenarios
• Floating assumptions
• Data volumes
© 2016 IBM Corporation
Consider a simpler approach
Upside ExceptionsBase Case (most likely)Downside Exceptions
© 2016 IBM Corporation
Consider a simpler approach
© 2016 IBM Corporation
1,000 6001,400
Volume
Risk analysis based on statistical models
▪New product
▪Estimated demand: 1,000 units +/- 10%
▪Order: 1,000 units
▪Most likely profit margin: $10
▪Estimated Profit?
A.$10,000
B.More then $10,000
C.Less than $10,000
$10
Margin
$11
© 2016 IBM Corporation
Risk analysis based on statistical models
World of Watson 2016 57
The leaders are ahead in using
advanced analytics for decision support
Usage of Predictive / Prescriptive Analytics
1.4X
1.5X
1.5X
2.5X
2.1X
1.7X
2.1X
Source: IBM Market Development & Insights, Finance Analytics and Cognitive Customer Research, June 2016
Financial planning and budgeting
Cash forecasting
Profitability / margin analysis
Enterprise risk management
Fraud, waste & abuse
New products / services identification
Mergers & acquisitions
All others
Most effective Finance organizations
33
%
46
%
46
%
42
%
38
%
34
%
32
%
23
%
30
%
29
%
15
%
16
%
19
%
11
%
© 2016 IBM Corporation
There are several success factors
Time Horizon
Measurement
Participation Modeling
CultureRisk &
Uncertainty
© 2016 IBM Corporation
Nice forecast. But I don‘t
like the revenue numbers.
They are too low.
But this is the most
realistic estimate I can
provide!
Please go back to your
office and come back
with new numbers.
© 2016 IBM Corporation
Sandbagging?
… to intentionally understate one's strength,
with the intention of deceiving one's opponents into overreaching.
http://sandbaggersanonymous.blogspot.com/2006/12/what-is-sandbagging.html
© 2016 IBM Corporation
Is there evidence of sandbagging?
Source: ACCA Webinar Mar 26, 2013. 649 responses
© 2016 IBM Corporation
A typical case of sandbagging: Revenue forecast
Forecast substantially
lower than Actuals
© 2016 IBM Corporation
Management sets the tone
“Okay, clearly things have changed.
• What are the drivers of the change?
• What is the impact on our business?
• What actions should we be taking?”
“Why didn’t we anticipate
that in the budget? Who
screwed up?”
© 2016 IBM Corporation
“The forecast’s key role in
management of the company means
it must be brutally honestwhether we like what we see or not.”
Bjarte Bogsnes, Project Manager, Statoil
© 2016 IBM Corporation
A different approach is often required
Purpose of the
Forecast
Assessment of your
processes
New Compensation
Approaches
© 2016 IBM Corporation
There are several success factors
Time Horizon
Measurement
Participation Modeling
CultureRisk &
Uncertainty
© 2016 IBM Corporation
Some measures you should consider
© 2016 IBM Corporation
Forecast Accuracy – Select the appropriate term
Month 1 Month 3Month 2
Forecast – 2 months
Actuals – 1 month
Forecast – 1 month
Actuals – 2 months
© 2016 IBM Corporation
Forecast Accuracy - useful in different ways
Discover potential bias
Time
{ 5% gap
Model issues
Attention
© 2016 IBM Corporation
Consider using a Run Chart
Forecast Accuracy - error
© 2016 IBM Corporation
Forecasting Accuracy
Hackett Group - Global EPM Study 2011
© 2016 IBM Corporation
There are several success factors
Time Horizon
Measurement
Participation Modeling
CultureRisk &
Uncertainty
© 2016 IBM Corporation
Rolling Forecasts are not a silver bullet
▪No one-size-fits-all approach
▪Forecast culture required
▪Changes to models required
▪Technology upgrades
© 2016 IBM Corporation
Recommended reading
„Beyond Budgeting“
Jeremy Hope &
Robin Fraser
„Best Practices in Planning and
Performance Management“
David Axson
„Future Ready“
Steve Morlidge &
Steve Player „Beyond Performance
Management“
Steve Player &
Jeremy Hope
© 2016 IBM Corporation
Next steps
Review the summary documents
Assess the process of your company
Join our other events to learn more about IBM Cognos solutions
http://www-05.ibm.com/uk/analytics-customer-event/
Look at the IBM Global C-suite Study
https://www-935.ibm.com/services/c-suite/study/studies/cfo-study/
© 2016 IBM Corporation
This morning’s agenda
9:30 Welcome & Introduction
Andy Nelmes, Program Director, FPM Product Management,
Business Analytics, IBM
9.45 Forecasting in Turbulent Times
David Morton - Financial Performance Management Consultant
11.00 Coffee
11.20 Best Practices in Implementing a Rolling Forecast
David Morton - Financial Performance Management Consultant
12.00 IBM Planning Analytics demonstration
Colm Kenneally - Financial Performance Management Technical Sales, IBM
12.30 What do the latest research findings from FSN say about Planning,
Budgeting and Forecasting?
Gary Simon, Chief Executive of FSN* and Leader of the FSN Modern Finance
Forum on LinkedIn
1.00 Lunch (close 1.45)
© 2016 IBM Corporation
Planning Analytics demonstration
© 2016 IBM Corporation
This morning’s agenda
9:30 Welcome & Introduction
Andy Nelmes, Program Director, FPM Product Management,
Business Analytics, IBM
9.45 Forecasting in Turbulent Times
David Morton - Financial Performance Management Consultant
11.00 Coffee
11.20 Best Practices in Implementing a Rolling Forecast
David Morton - Financial Performance Management Consultant
12.00 IBM Planning Analytics demonstration
Colm Kenneally - Financial Performance Management Technical Sales, IBM
12.30 What do the latest research findings from FSN say about Planning,
Budgeting and Forecasting?
Gary Simon, Chief Executive of FSN* and Leader of the FSN Modern Finance
Forum on LinkedIn
1.00 Lunch (close 1.45)
Best Practices in Rolling Forecasting and Budgeting Seminar 23rd February 2017
0
10,000
20,000
30,000
40,000
50,000
60,000
2014 2015 2016
Membership Growth
Members
Gary SimonChief Executive FSN
& Leader of the Modern Finance
Forum
The Future of Planning, Budgeting and Forecasting Survey 2016/17
Demographics
955 Respondents 23 Industries 80% Senior Finance
Are CFOs in denial?
CFOs think they are doing a better job now than 3 years ago, with two thirds saying the organization has more confidence in the planning process, yet………
More than 50% struggle to forecast beyond 6 months
More than 60% still can’t forecast revenue within +/- 5%
Almost 50% take more than 1 week to reforecast earnings
Non-Financial Data - the Forecasting Game Changer
Findings Part I.
78 percent of the CEOs
surveyed say that financial
indicators alone do not
adequately capture their
company's strengths and
weaknesses.
87 percent of CEOs and senior
executives describe their ability
to track financial performance as
“excellent or good”, just 29
percent of them describe their
non-financial record as excellent
or good.
80 percent of the CEOs
surveyed said that the board
and management should share
responsibility in terms of
monitoring the financial
results of the company, when it
comes to non-financial
indicators, they said that the
monitoring should be done by senior managers
Harnessing non-financial data makes for more
accurate forecasts
More than half are able to forecast earnings
between +/- 0-5% versus just 29% where their
organizations reported they were not making
more use of non-financial data.
Harnessing non-financial data makes organizations more
responsive
CAN REFORECAST MORE QUICKLY
2.5 times more likely to reforecast within 24hrs
RESPOND MORE QUICKLY TO MARKET CHANGE
2.5 times more likely to be able to respond more quickly
to market change
Harnessing non-financial data allows organizations to
see beyond 12 month horizon
They were more than twice as likely to be able to
forecast beyond the 12 month horizon,
CFOs top 5 priorities
1. Greater simulation and scenario planning
2. Engage with more non-finance stakeholders in the PBF process
3. Shift to rolling forecasts
4. More sophisticated analytical techniques e.g. data science
5. Non-financial data capture
…………..but only 11%of finance professionals strongly agree that they are making more use of non-financial data than they were 3 years ago
CFOs and Heads of FP&A at Loggerheads
Findings Part II.
FP&A IS LOOKING FOR ITS OWN IDENTITY
44% 18%
Heads of FP&A strongly believe that FP&A will become a separate discipline
from the accounting function
vs
HEADS OF FP&A
STRONGLY AGREE
CFOs STRONGLY
AGREE
29% 11%
Heads of FP&A more convinced that FP&A
will become a separately recognized function with its own
accounting body
vs
HEADS OF FP&A
STRONGLY AGREE
CFOs STRONGLY
AGREE
33% 25%
FP&A heads place even more emphasis
on the need for greater simulation
and scenario planning
vs
HEADS OF FP&A RANK SCENARIO
PLANNING AS NO.1 PRIORITY
CFOs RANK SCENARIO
PLANNING AS NO.1 PRIORITY
Cloud Uptake is Rising but Outdated Processes Remain Unchallenged
Findings Part III.
CLOUD UTOPIA
1 Business Model
1 Software Vendor
AllStakehold
ers Connected
AllPBF in the
cloud
CLOUD REALITY
Only 50%
use one
business model
Under 50%
use one
software vendor
Only 11% have
fully deployed
Cloud solutions
across the entire
business
Only 55%
reported an
increase in the
number of
stakeholders
able to update
plans
themselves
THE CLOUD JOURNEY
WHERE WE ARE CLOUD UTOPIA
Connectivity Collabora
tion
Data
Standardization
Accuracy
Automation
Forecasti
ng
accuracy1/3rd more likely to be able to forecast earning within +/- 0-5%
Time to
reforecast
1.5 times more likely to be able to reforecast within 24 hours
Benefits of CloudThose that have fully deployed Cloud across all business units are:
More
stakehold
ersMore than twice as likely to have strongly agreed to having more stakeholder involved in the BPF process over the last 3 years
More
Integrated
1/3rd more likely to have plans that are more integrated between different business functions
Technology
benefits
50% more likely to have reported an improved ability to connect more easily to new sources of data and 1/5th more likely to be able to produce larger more detailed plans
1/3rd less likely to view automation as an obstacle to process improvement and 1/5th less likely to view standardization as an obstacle to process improvement
Automatio
n &
Standardiz
ation
CFOs Who Ignore Continuous Planning May be Putting Their
Business at Risk
Findings Part IV.
Continuous planning makes for more
accurate forecasts
Continuous planning encourages more stakeholders and crucially better
visibilityThose that have adopted continuous planning are:-
FORECAST MORE ACCURATELY
1 23
times more likely to
be able to forecast earnings between +/- 0-5% versus those that have yet to adopt continuous planning.
Continuous planning makes organizations
more responsive
CAN REFORECAST MORE QUICKLY
1.5 times more likely to reforecast within 1 week.
RESPOND MORE QUICKLY TO MARKET CHANGE
4 times more likely to be able to respond more quickly to market change.
Those that have adopted continuous planning are:-
MORE STAKEHOLDER ENGAGEMENT
Almost twice as likely to report having engaged more users in the BPF process over the last 3 years.
Those that have adopted continuous planning are:-
IMPROVED STAKEHOLDER VISIBILITY
Almost twice as likely to have responded in agreement to all users have visibility of their plans and changes in real-time.
What is the Effect of Bigger Models and More Stakeholders
Findings Part V.
Engaging with more stakeholders…..
Does not guarantee more accuracy
2.5 times - process is perceived more positively
2 times - react more quickly to market change.
BUT
30% more likely to trust the operational data
63% of respondents say they now engage with more stakeholder in the PBF process, but almost 25% of business fail to involve stakeholders outside of the finance function
We are building bigger models
What is the effect of bigger business
models?
40% more organizations being able to forecast revenue within +/- 0-5%
2.5 times more likely to be able to react more quickly to market change
25% claim to be able to forecast beyond 12 months
60% of CFOs say they can build much bigger plans to enable them to plan in more detail
60% of CFOs say their PBF process can handle more complexity
But………………
Not more accurate
63% of respondents say they now engage with more stakeholder in the PBF process, but almost 25% of business fail to involve stakeholders outside of the finance function
More stakeholders
• Builds trust
• Can react to change
Bigger Models
• Lets you see out further
• More accurate revenue forecasts
© 2016 IBM Corporation
Planning Analytics – Next steps?
▪ Planning Analytics WORKSHOPS
– Opportunity to see Planning Analytics in detail and to and undertake hands-on
exercises to explore scenarios for planning, analysis and score-carding.
– Wednesday, 1 March: End-User Workshop (half day)
– Wednesday 15 March: Modelling Workshop (full day)
– at IBM South Bank in London: http://www-05.ibm.com/uk/fpm-workshop/index.html
Please tick the box on today’s feedback form
▪ IBM Planning Analytics: free trial
– More details here: http://ibm.co/1VND8RY
© 2016 IBM Corporation
Thank you for joining us today