Performance Based Budgeting Webinar - Financial … based budgeting webinar 682… · Mission Vision Vl Objective Measure ... orggg jypgganizational goals and objectives by operating

Implementing a Performance Based Budgeting System

ProfitStars

•Leading provider of best-of-breed productsg p p

•Jack Henry & Associates (Nasdaq: JKHY)

•M r th n 11 000 t m r n ti n id•More than 11,000 customers nationwide

•Solutions are core platform-independent

•Customers consist of the largest megabanks and brokerage companies to start-up community banks and credit unions

Focused Diversification Acquisition Strategy

Non-Core

Core

Non Core

Customer

The ProfitStars Solution Suite

• PROFITstar – ALM & Budgeting• Margin Maximizer – Product PricingRevenue & • Margin Maximizer – Product Pricing• PROFITability – Organization and Product Profitability• RPM - Relationship Profitability Manager• Enterprise Payments & RemitPlus – RDC & Remit

Revenue & Growth

Solutions

• Synapsys – Customer Relationship Mgmt• TeleWeb & TeleBank – Internet Banking & IVR

• ATM Manager Pro – ATM ManagementCost Control • Synergy – Document Imaging• ImageCenter & Genesys– Check Imaging • Enterprise Image Conversion Solutions

Risk

Solutions

• Biodentify – Biometric Security• Centurion – Business Continuity Consulting• Matrix & Gladiator – Networks & Network Security

Risk Mitigation Solutions

Performance Suite

Optimizer

Monitor Analyze Plan Execute

RPM

Customer

PROFITability

Org/Prod PROFITstarMargin

Maximizer SynapsysCustomer

Profitabilityg/

Profitability ALM/Budgeting Loan/Deposit Pricing

CRM/MCIF

Objectivesj

• Examine why budgets fail

• Define Performance Based BudgetingDefine Performance Based Budgeting

• Questions

Why Budgets Fail

There are 4 basic steps to budgeting:1. Gather input2. Make projections3. Present reports4 Fil i il b d i4. File it away until next budgeting season

Why Budgets Fail

Management Support (or lack of)Management Support (or lack of)“The budget is the bane of corporate America” –Jack Welsh, General Electric

“The budget is a tool of repression” Bob Lutz Chrysler–Bob Lutz, Chrysler

“Budgeting is right up there with root canal”g g g p–Peter Krebser, Pfizer Inc

Why Budgets Fail

• “Too complex”

• “Takes too long”

• “Too inflexible”

• “Not motivational”

-- Financial Managers

“Budgeting, so it seems, is nothing but an unproductive exercise that steals time from your real job.”

HBR Article

Why Budgets Fail

Why do budgets fail?Why do budgets fail?1. It’s out of sync with the strategic plan

2. It doesn’t motivate the right behaviors

3. It rapidly becomes obsoletep y

4. It takes too long to produce

Why Budgets Fail

1 It’s out of sync with the strategic plan1. It s out of sync with the strategic plan“It’s a strategic goal for us but it’s not in the budget.”

• The budget emphasizes financial performance versusThe budget emphasizes financial performance versus strategy

• The focus is tactical rather than strategic performance drivers

• Emphasis on “making budget” prevents managers from executing strategyexecuting strategy

Why Budgets Fail

121416

Budget Barrier•Incremental thinking

68

1012 •Incremental thinking

•Ceiling on growth•Floor on cost reductions

246

0Year 1 Year 2 Year 3 Year 4 Year 5

Budget ActualStrategic Goals Linear (Actual)

Why Budgets Fail

60+% of strategy never gets implemented60+% of strategy never gets implemented60+% of strategy never gets implemented60+% of strategy never gets implemented

•95% of the typical workforce doesn’t understand the strategy

•60% of organizations do not link the budget to the strategy

•70% do not link management incentives to the strategy

•85% of executive teams spend less than one hour per month discussing strategydiscussing strategy

Why Budgets Fail

2. It doesn’t motivate the right gbehaviors

• Budgeting GamesBudgeting Games

• “I’ve got to spend it or I’ll lose it”

• “It’s not my budget”

• “I don’t have control over that [expense]”

• No Buy-In!

• Expense manipulation

• Compartmentalization

B d d i i d• Bad decisions are made

Why Budgets Fail

3 It rapidly becomes obsolete

• Fails to respond to environmental h

3. It rapidly becomes obsolete

changes

• Outdated within months of completion

Why Budgets Fail

Year March June Dec

Prime rate change from previous August ( l i i d)

2000 9% 19% 19%

2001 -11% -26% -47%

2002 30% 30% 37% (planning period)2002 -30% -30% -37%

2003 -11% -11% -16%

2004 0% 0% 25%

2005 29% 41% 65%

2006 20% 28% 32%

2007 0% 0% -9%2007 0% 0% -9%

2008 -27% -39% ‐52%

2009 ‐35% ‐35% ‐35%

2010 0%

Why Budgets Fail

4 It takes toooo long4. It takes toooo long• Senior managers spend 10-20% of their time on

budgetingbudgeting

• Finance departments spend as much as 50% of their time on it!their time on it!

• Business Finance survey – “Two to Four months to complete the budget”to complete the budget

Performance Based Budgeting

• Why do we budget?

• Performance Based Budgeting• Coordinate financial plans with strategies

• Get alignment and eliminate the budget barrier

• Communicate financial expectations• Get buy-in from operational managers

• Track goal achievement• More than once per year

• Reward performance


Coordinate financial plans with strategiesCoordinate financial plans with strategies

• Part of the master picture for the organizationorganization

• Align individual units to the strategic plan

• Emphasis should be on key perforamnceindicators (KPI’s) and the efficient allocation of resources


Strategy Coordination

Objective Measure Target InitiativeFinancial

To succeed financially,how should we appear to

our owners?

To achieve our vision,how should we appear

to our customers?

MissionVisionV l

Objective Measure Target InitiativeInternal Business Process

Objective Measure Target InitiativeCustomer

ValuesStrategy

Objective Measure Target InitiativeLearning & Growth

What areas need tolearn and grow for usto achieve our vision?

To satisfy ourcustomers, at whatbusiness processes

must we excel?


PerspectiveF1 I i h

Strategic Objectives Strategic MeasuresN t i ( l )

Targets

Corporate Scorecard

Financial Perspective

F1 Increase earnings per shareF2 Add and retain high value

customersF3 Increase revenue per customerF4 Reduce cost per customer

Customer Perspective

• Net income (vs. plan)• Revenue mix (by target

segment)• Revenue per customer• Cost per customer

C1 Become a trusted financial advisorC2 Provide superior service

• Customer satisfaction (survey)• Share of wallet

+$100M30%(A) 70%(B)

$300$75

90%50%

Customer Management

nter

nal

spec

tive

Product InnovationOperations

C2 Provide superior service • Target customer retention

I1 Understand customer segmentsI2 Shift to appropriate channelI3 Cross-sell the product line

• Share of segment• Channel mix change• Cross-sell ratio

I4 Develop new products • Revenue from new products (%)I5 Minimize problems • Service error rate

90%

30%40%2.5

50%0 %In

Pers

Human Capital

ng &

w

th ctiv

e

Operations Management

Information Capital

I5 Minimize problemsI6 Provide rapid response

Service error rate• Request fulfillment time

L1 Insure readiness of strategic jobs • Strategic job readiness

L2 Insure availability of strategic info • Information portfolio readiness• Customer survey

Responsible Citizen I7 Build diversity reflecting community • Diversity mix versus community

0.%< 24hrs

1.0

100%

100%100%

www.bscol.com

Lear

nin

Gro

wPe

rspe

c

Organization CapitalL3 Create a customer-focused cultureL4 Build cadre of leadersL5 Align the organizationL6 Best practice sharing

Customer survey• 360° Survey (leadership model)• Strategic awareness survey• Personal goals aligned to BSC

(%)• KMS utilization/currency

100%70%90%100%100%

Performance Based BudgetingIntegrate the Budget into the Strategic Plan


2 Communicate financial expectations2. Communicate financial expectations

• Use participatory budgeting

F ll bl i /• Focus on controllable income/expense

• Provide regular, consistent variance reporting (to budget and strategies)

• Hold them accountable


Imposed budgets Top Mgtg

Middle Mgt

ParticipatoryOperational Mgt Participatorybudgets

Operational Mgt


Ad antages of imposed b dgets:Advantages of imposed budgets: • Increase probability that organization’s strategic plans will be

incorporated in planned activitiesincorporated in planned activities• Enhance coordination among divisional plans and objectives• Reduce the time frame for the budgeting processReduce the time frame for the budgeting process


Risks of imposed budgets:

• May result in dissatisfaction, defensiveness, and low morale among individuals who must work under the budgetR d h f li f k• Reduce the feeling of teamwork

• May limit the acceptance of the stated goals and objectives• Limit the communication process among employees and management• May create a view of the budget as a punitive device• May stifle the initiative of lower-level managers


Advantages of participatory budgets: • Provide information from persons most familiar with the needs and

constraints of organizational units• Integrate knowledge that is diffused among various levels of

management• Lead to better morale and higher motivation• Provide a means to develop fiscal responsibility and budgetary skills p p y g y

of employees • Develop a high degree of acceptance of and commitment to

organizational goals and objectives by operating management g g j y p g g


Advantages of participatory budgets: g p p y g

• Are generally more realistic• Allow organizational units to coordinate with one another• Allow organizational units to coordinate with one another• Allow subordinate managers to develop operational plans that conform to

organizational goals and objectivesI l d ifi i• Include specific resource requirements

• Blend overview of top management with operating details

• Provide a social contract that expresses expectations of top management and subordinates


Risks of participatory budgets: • Requires more time

M i d l k i h b d• May cause managers to introduce slack into the budget• May support “empire building” by subordinates• May start the process earlier in the year when there is more uncertainty about

the future year


Education:•Strategies•Budgeting Process

Variance Reporting:•Scorecard •Budgeting Process

•Variance Analysis•Budget

Buy-In

Budgeting:•Proper Toolsp•Immediate Feedback






3. Track Goal Achievement• Get the right tools – no spreadsheets• Rolling forecasts

• Multiple year forecasting (3-5 yrs min)• Monthly import from your core system• Top level versus sub level (branch, dept) forecasting• Subtotal budgeting• Subtotal budgeting• Formula driven account forecasting• Product rate ties to driver rates• Automated budget assumption documentationAutomated budget assumption documentation• Multiple what-if capabilities

• Rate forecasting


4 Reward performance4. Reward performance• Focus on progress toward strategic

objectives• Secondary emphasis on annual budgetsSecondary emphasis on annual budgets

• Use non-financial performance drivers


Performance goals Performance Measures Targets

Staff ScorecardPerformance goals

Financial Perspective

Performance Measures

Customer Perspective

• Revenue• Expense• Margin

• Customer satisfaction (survey)

Targets

$6 million$1.7 million$4.3 million

90%Customer Perspective

Customer Management

erna

lpe

ctiv

e

Product Innovation

• Customer satisfaction (survey)

• Share of segment• Channel mix change• Cross-sell ratio• N/A

90%

30%40%2.5N/A

Inte

Pers

p

Human Capital

g &

h iv

e

Operations Management

Information Capital

• Service error rate• Request fulfillment time

• Strategic job readiness

• Information portfolio readiness

Responsible Citizen • Diversity mix versus community

0.%< 24hrs

1.0

100%

100%

Lear

ning

Gro

wth

Pers

pect

i Information Capital

Organization Capital

Information portfolio readiness• Customer survey• 360° Survey (leadership model)• Strategic awareness survey• Employee goals aligned to BSC

(%)• KMS utilization/currency

100%100%70%90%100%100%

www.bscol.com


1 Ti d i l1. Tied to strategic goals

2. Gets buy-in from operational y pmanagers

3 More than a once per year exercise3. More than a once per year exercise

4. Ties incentives to performance


Budget Failures Performance Based Budgeting

Out of synch with the strategic plan •Focus on key performance drivers•Implement strategy mapping and strategic scorecards

Doesn’t motivate the right behaviors •Consider participatory b dgetsDoesn t motivate the right behaviors •Consider participatory budgets•Provide regular feedback on performance•Tie incentives to scorecard measures –not just the budget

Rapidly becomes obsolete •Get the right tools in place•Utilize rolling forecasts

Takes too long to produce •Get the right tools in place•Keep communication lines open•Provide continuing education

Questions

2110 Papillion Parkway #1102110 Papillion Parkway #110Omaha, Ne 68164

Phone: 800.356.9099Fax: 402.431.8822

Performance Enhancement Solutions:Martin Webster

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Documents

Performance Based Budgeting Webinar - Financial … based budgeting webinar 682… · Mission Vision Vl Objective Measure ... orggg jypgganizational goals and objectives by operating