Budgeting&Planning Deloitte

Perspectives on Budgeting and Forecasting

Agenda  Planning, Budgeting and Forecasting Processes  Tool Landscape  Contacts

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CFO Priorities in 2009

(Gartner survey)

• Performance Management is a top priority • 76% say measuring profitability constraint is top • Improving financial processes is a top concern • Integration of Performance and Risk Management is a growing trend

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Top performing companies employ world-class performance management processes 5 Year Total Shareholder Return vs. Industry Performance                          

The Sherwin-Williams Company (1) Renault SA (2) Hilton Hotels (3) Continental AG (4) SABMiller plc (5) British American Tobacco (6) Reynolds American, Inc. (7) Nexen inc. (8) KBC Group (9) The Royal Bank of Canada (10) Moody’s Corporation (11) Anglo Irish Bank Corporation (12) Thermo Fisher Scientific Inc. (13) Becton, Dickinson and Company (14) WellPoint, Inc. (15) Humana Inc. (16) Textron Inc. (17) Aktiebolaget SKF (18) Atlas Copco AB (19) Volvo AG (20) Autodesk Inc. (21) Cognizant Technology Solutions (22) Koninklijke KPN NV (23) Telekom Austria AG (24) Constellation Energy Group (25) Fortum Corporation (26)

Performance Management Related Benefits Experienced By Top Performing Companies Through the implementation of world-class performance management processes, these companies are able to:  Align corporate goals and business strategy

 Quickly respond to changes in business conditions

 Make better and more effective business decisions

 Increase accountability to plan accuracy

 Effectively communicate strategic objectives throughout the organization

 Tie business strategy to measurements and metrics

 Provide increased visibility into all elements of the plan Copyright © 2009 Deloitte Development LLC. All rights reserved.

 Simplify and standardize reporting to focus only on metrics that matter 4

Many elements of today’s business environment highlight the need for a more effective planning process Pressures & challenges Regulatory  Increasing regulatory oversight and scrutiny

Impact on current environment  Increased need for financial transparency  Migration from well-controlled lagging indicators to more leading indicator focus

Financial  Difficulty in raising capital due to credit community market constraints

 Increased need for accuracy and “defensibility” of forecasts and budgets

 High returns demanded by investors  Reliance of shareholders and analysts on “forward-looking” projections and indicators Markets  Increased competition for customers impacting retention and pricing and customers  Increased pressure and emphasis on profitability and cost reduction  Increased need to understand customer and product profitability Business  Need to efficiently integrate new acquisitions operations and business models  Increased need to align business operations with corporate strategy

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Ineffective performance management can lead to failure to achieve an organization’s strategic objectives Despite acknowledging the desire to better manage performance, organizations continue to struggle with issues that prevent them from achieving long-term strategic objectives

Symptoms of ineffective performance management  Targets, where set, are not aligned to the strategy and value creation  Long-range planning activity does not relate to the strategy  Resources are bound in projects which are not top priority to execute corporate strategy  Strategic objectives, initiatives and individual targets are not aligned nor clearly communicated across the organization  The budget process is time consuming and does not result in the effective deployment of company resources

 No clear accountability of operational managers for targets  Reporting and analysis efforts fail to highlight potential issues in a timely manner  Executive and staff behavior is not in line with achieving performance measure goals  Data exists across multiple systems with no standard set of business definitions across the enterprise  Inability of existing technology to effectively manage and analyze performance management data

Tackling the symptoms individually will prevent the resolution of long-term issues. Instead, the root causes should be addressed through the adoption of a performance management framework Copyright © 2009 Deloitte Development LLC. All rights reserved.

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Deloitte’s Performance Management Framework

Forecasting • Understanding the near future • Draws on known facts and realistic estimates rather than setting a course • Scenario planning and what-if analysis on critical risk factors • Risk threshold recalibration if needed Intervention (Forecast) • Acting on the information • Decision Making, Investigation, Reformulation of strategy, change processes, risk response, start new activity

Strategic Planning • Development of vision • Determining strategic objectives • Identifying strategic initiatives • Identifying threats to achieving strategic initiatives • Identify and manage enterprise risks impacting initiatives • Agreeing on desired results (i.e., performance measurement targets) • Establishing multi-year, high-level financial and operational targets

Forecasting Strategy Strategy Intervention Intervention Planning Planning

Analysis • Analysis of performance measurement gaps • Ad hoc financial analysis • Analysis of systemic and enterprise risk • Analysis of operational progress against planned initiatives • Determination of corrective actions

Analysis

Value Creation Budgeting

External Reporting

Reporting Management • Financial variance reporting and monitoring Reporting • Close, management & statutory financial reporting • Risk dash boarding and regulatory compliance reporting • Operational reporting and monitoring (i.e. status of key business plan initiatives) Performance Measurement • Reporting and monitoring of key, balanced performance measures (KPIs and associated KRIs) that reflect desired results of strategic plan • Communication of results of corporate and functional scorecards (performance and risk) throughout the organization Copyright © 2009 Deloitte Development LLC. All rights reserved.

Operational Reporting

Business Planning • Translation of strategy into annual business unit action plans (projects and initiatives) • Identification of business unit performance measurement targets (i.e. KPIs) • Identification of risks to achieving performance measures (i.e. KRIs) • Development of annual operational and capital spending envelopes Budgeting & Performance Target Setting • Identification and prioritization of capital projects to develop capital budget • Translation of business plans and capital budget into operating budgets (based on defined business model) • Translation of business unit performance targets to operational performance targets (i.e. KPIs) • Translation of business unit risk thresholds to operational risk thresholds (i.e. KRIs)

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Our view is that the planning process should raise questions and provide answers that are core to the business  What drives performance in the company’s market and in the company’s operations? ‒ How much should we invest in new products vs. line extensions? ‒ How will an ERP impact operational effectiveness and efficiency? ‒ Should we hire twenty new sales people or build a new warehouse?  How much investment should be shifted to those initiatives with the greatest promise? ‒ Business sustaining vs. Business growth  What key performance indicators would best measure progress towards strategic goals? ‒ Outcome/Risk Measures – Revenue, Earnings Per Share ‒ Process Measures – Cycle Time, Number of Hand-offs ‒ Predictive Measures – Unemployment, Consumer spending, Fuel cost, Commodity prices

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Planning/Budgeting is a top-down, bottom-up process with multiple stakeholders

Top Down Executive Guidance and Direction

Top Down Plan Finalization

CFO and Executive Management Create Strategic Plan (e.g., shareholder value, investment portfolio)

Start Planning Cycle

Define Financial and

Analyze Consolidated

Operational Targets

Results

Finalize Changes and Approve Plan

(e.g., ROIC, ROE, EBITDA Margins)

(e.g., pro-forma financials, KPI’s, risk modeling)

(e.g., “tweek” plan; obtain commitment)

Financial Planning & Analysis Push Targets Down to Actionable Level

Validate Plans and Consolidate Results

(e.g., Communicate targets, assess implications)

(e.g., verify plan assumptions, check results for reasonableness)

End Planning Cycle

Business Units Create Detailed Plan (e.g., driver based modeling, approval based workflow, scenario planning)

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Developing a Leading Practice Capability Companies typically mature from an unstructured planning process toward a more mature and structured process. The development often follows a path such as this: Leading Advanced Defined Developing Emerging  No formal planning process  No planning tools  Inadequate communication  Purely financial plan

 Inconsistent process  Basic tools (e.g. Excel)  Ad hoc spreadsheets  Highly manual process

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 More standardized processes  Some integration across BUs  Reliance on ERP system as planning tool  Little analytics

 Enterprise-wide processes  Use of web-enabled budget tool  Rolling forecast and other advanced processes

 Planning process fully integrated with strategy  Real-time forecasting and performance monitoring  Compensation linked to results

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Leading organizations are adopting a number of effective solutions to improve their planning processes and enhance their value  Identification of the most significant measures of business performance Key performance indicators

 Key Benefit: better alignment between strategy and execution

 Expansion of forecast horizon beyond current fiscal year Rolling forecasts

Driver-based planning

 Key Benefit: better insights into market conditions and expected performance

 Development of planning models based on major internal and external factors that impact performance  Key Benefit: more accurate plans and better insight into performance drivers  Focusing capital spend on projects or initiatives that drive value

Capital allocation

 Key Benefit: better return on investment for key initiatives

 Using various assumptions to gauge bottom line impact Scenario Analysis

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 Benefit: better decision-making that includes consideration of all business scenarios

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Blow-up the Budget! Leading organizations are beginning to move from a rigid, annual budgeting process that typically is painful and causes undesirable behaviors to a rolling forecast: Typical Annual Budget

Typical Rolling Forecast

• Internally focused, historical perspective, bottom-up plan development

• Forward looking, more marketbased, externally-focused, topdown planning

• Changes made to current plan, process and philosophy

• Multiple lines of targets provided, but not formal firm targets (e.g., revenue)

• Less overall effect

• Reduced data elements

…can be

• Multiple iterations of detailed budget preparation

replaced with this...

• Detailed data required at all levels • Excessive handoffs • Spring and Fall plans are separate activities • Forecast focus is only on current year

• Few top-down targets • Fewer iterations and less detail churn at sites • Fewer data lines sent to corporate • Tightly linked to strategy • Improved decision support • Planning horizon refocused to looking beyond year-end (e.g., 15 months)

• Fall plan process results in large spike in workloads

• “Annual Event” reduced in the Fall so increases continuous planning mind-set

• Incompatible systems/software used throughout

• Improved, uniform I/T tools and infrastructure • Smooth resource needs throughout year

Required Changes

• Timely and complete targets

…but only if changes made...

• Improved data collection tools • Close linkage with other planning processes • Continuous planning • Increased line management focus on quarterly forecasts vs. single event

…otherwise...

A rolling forecast will increase the planning workload

With Rolling Forecast, the need for budgeting is minimized or eliminated while producing a more externally-focused, market-sensitive process Copyright © 2009 Deloitte Development LLC. All rights reserved.

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Rolling Forecast – Leading Practices • Timely and complete targets • Reduced data elements • Efficient data collection tools • Increased line management focus on quarterly forecasts vs. single event • Expand the scope of forecasts to include financial and non-financial data • 4 or 5 quarters • Simplify and focus forecasts by relying on a few measures/drivers • Assign forecast ownership to operational units • Define threshold-level forecasting (i.e., scope and depth of forecast and action planning based on predetermined thresholds) • Define consistent methodology and timeline to complete forecasts • Automate and leverage (e.g., modeling and scenario analysis) rolling forecasts through information systems • Link incentive compensation to plan targets and relative value changes

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A Range of Operating Models Improving planning & forecasting often requires greater leadership from corporate to facilitate decisionmaking

Model Description

Corporate Planning Role

Divisional Planning Role

- Immature -

- Basic -

Decentralized

Coordinated

• Central Group defines • schedule only • Divisions develop all plans • to meet schedule

Central Group defines schedule and guidelines Divisions define content & deliverables

- Leading Practice Center-Led

• Central Group defines process, deliverables, schedule and standards • Divisions work within approach

Centralized

• Central Group responsible for overall plan • Divisions provide data and input

• Sets schedule only • Owner of Corporate Strategy • Owner of Corporate Strategy outputs • Summarizes divisional outputs plans into Corporate Plan • Sets schedule and financial • Overall Process owner • Develops approaches, guidelines deliverable standards, • Integrates & coordinates timeline divisional plans

• Owner of Corporate Strategy outputs • Overall Process owner • Develops approaches, deliverable standards, timeline

• Develops all deliverables • Develops deliverables within: • Develops deliverables within: to meet timeline/schedule • Timeline & financial • Timeline/Approach guidelines • Guidelines • Deliverable designs

• Develops deliverables within: • Timeline • Approach • Guidelines • Deliverable designs

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The landscape of PBF tools is quickly changing

Hyperion Planning

Cognos Planning

 Offers true out-of-the box system integration

 Consistently recognized as the leader in BI analytical reporting  Considered the leader in the Business  Cognos TM1 software Performance provides a real-time Management Space approach to consolidating, viewing, and editing data

BPC  SAP planning tool  Highly customizable with Excel front end, which simplifies user adoption  Built on a centralized services-oriented architecture

PerformancePoint  Leverages Microsoft’s Analysis Services (similar to Essbase and TM1)  Tightly integrated with MS Office Suite and MS SQL Server

Future Direction

Oracle integrated into OBIEE, Siebel, or other Oracle products

IBM will likely leave as a stand alone application

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SAP will incorporate into Net Weaver architecture

Will continue to market low cost solution to midmarket 15

Vendor Overview – SAP BPC Developer and provider of analytic portal-based budgeting, forecasting and reporting Product Offerings • SAP-BPC (Formerly OutlookSoft) ‒ Current product is basically OutlookSoft 5.0 , designed for consolidation, financial planning, and scorecarding based on a Sequel Server Architecture ‒ Next generation to be released in fall 2008 will include similar capabilities, but be integrated with SAP Netweaver platform • SAP-IP (Integrated Planning) ‒ Netweaver based planning product released in Fall 2006 ‒ Primary focus is on planning and forecasting • Though both products provide similar functionality IP is generally considered more robust and scalable, while BPC is consider more flexible and user friendly

Highlights • SAP-BPC ‒ Web centric messaging and portal positioning which supports collaborative, dynamic processes ‒ Provides workflow for managing the submission and approval of budgets, forecasts and plans ‒ Capable of managing complex calculations with complete Excel integration ‒ Reporting is limited and lacks formatting flexibility • SAP-IP ‒ Robust planning and forecasting capability ‒ Complete integration with SAP Netweaver and BI environment ‒ Highly scalable ‒ Limited installations ‒ Complete dependence on IT for support, no forward deployed or self-service administration

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Vendor Overview - Cognos Cognos is a leader in the business intelligence and analytics space coupled with business performance management capabilities Product Offerings • Cognos Planning ‒ Analyst is a localized modeling and analytics product ‒ Contributor is a web-based data collection and modeling product • Cognos TM1 ‒ Real time response to calculations, analytics with write-back capabilities, simple modeling • Cognos Controller (for consolidation & related reporting) • Cognos Report Studio and Query Studio (ad hoc querying, production report templates) • Cognos PowerPlay/Analysis Studio (BI, analysis)

Highlights • Cognos 8 allows for integration of Cognos BI products but limited integration of Cognos financial products • Ease of developing planning functionality by using builtin-functions (BIFs) or the Analyst product that does not require programming knowledge • OLAP engine • Distributed architecture pushes real-time processing to the client which may compromise performance of large cubes if client processing limitations exist • TM1 uses 64 bit technology and stores cube in memory for quick response times • Integrate with Microsoft Excel, PowerPoint and Word through Cognos Office Connection • Web or Excel interfaces • Highly configurable and flexible

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Vendor Overview - Hyperion Hyperion is a leading player in the Business Performance Management space Product Offerings • Offers a suite of solutions for financial management, business intelligence, and data management • Hyperion Financial Management (for consolidation) • Hyperion Analytic Services (Essbase) • Hyperion Planning • Hyperion Reports • Hyperion Analyzer (dash board)

Highlights • Hyperion Analytic Services (Essbase) is the dominant OLAP engine in financial analytics space offering a powerful and sophisticated multi-dimensional OLAP engine • Hyperion System 9 serves as an integration platform across all Hyperion products • Centralized architecture provides simpler administration and deployment of the various products but compromises end-user flexibility in defining rules, calculations, etc. • Server-based processing • Fully integrated with Microsoft office through SmartView • Web-enabled across products

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Contacts Vic Katyal Principal Deloitte & Touche LLP 612-397-4772 [email protected] Jeff Torstenson Senior Manager Deloitte & Touche LLP 612-397-4647 [email protected]

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