BRING IT ON
Be it for compliance or to adapt to speedy growth, CFOs are finally ready to address the budgeting process.
By Kate O’Sullivan

It’s no secret that budgeting is the bane of the CFO’s existence—an annual battle to wring information and concessions out of operating units while generating 45,000 spreadsheets that, in the end, provide a best-guess at the upcoming year’s results. But time-consuming as it is, the budgeting-and-planning process is also one of the finance department’s best opportunities to truly play the role of strategic partner to the business units. The top finance teams know this and are spending more on B&P.

“There are two areas in finance where world-class organizations have actually increased spending relative to revenues. One of those is compliance, and the second is planning and analysis,” says Bryan Hall, finance practice leader at consulting firm The Hackett Group. The best finance departments, which Hackett defines as those that perform in the top 25 percent on a variety of efficiency and effectiveness metrics, have upped their B&P spending, and they devote 5 percent more of their total finance dollars to planning than average companies do—23 percent versus 18 percent.

There are early signs that this is happening in the Asia-Pacific region as well, led by two markets with very different demand and growth patterns: Australia and China. IDC, the technology research firm, estimates that growth in purchases for financial performance software—a category that includes budgeting and planning packages as well as scorecards—grew 15 percent in the past year in Asia, with Australia included, versus 11 percent globally. Sharon Tan, senior analyst for IDC in Singapore, says, “Australia is the largest component of this growth, and the drivers there are very similar to the U.S., where compliance is the key factor.”

But Tan says that she’s also seeing growing deployment in China among financial services, telecommunications companies, and manufacturing firms. “The market for this software in China grew 45 percent between 2006 and 2007. This was from a very small base, but we don’t see the deployment abating.” Tan predicts that China’s share of total performance management software in the region will reach 25 percent in five years, up from 15 percent today. The cause of the increase in China, she says, stems from companies struggling with fast growth while still tethered to basic numbers analysis available on Excel spreadsheets.

Two recent IT upgrades relating to budgeting and planning indicate similar motives. Johnson Electric, the US$2 billion Hong Kong-based manufacturer of motors, has just began a consolidation of its finance department information systems, installing a Cognos package called Controller for rolling forecasts, cash-flow analysis and modeling of ‘what-if’ scenarios for planning purposes. The company operates in 30 countries and is structured into four different business units. Despite rapid growth in recent years, its 40,000 employees have relied on spreadsheet analysis for annual budgeting up until now. Another adopter of similar software in December—also as the result of recent rapid expansion—is Mapletree, a Singapore real estate firm with US$1.9 billion in assets.

Planning Ahead

An intensified focus on the budgeting process in slower growing markets such as the United States and Australia follows a long struggle with tech implementation and compliance at many companies. Jason Balogh, a principal in the finance practice at Archstone Consulting, a U.S.-based consulting firm, says, “There was the ERP craze, and finance had to make those systems work. Then they went right into Sarbanes-Oxley, and the company’s planning capability was never fundamentally addressed. Now, over the next 12 to 18 months, companies are really saying it’s time to look at planning.”

Simtek, a small U.S. semiconductor company, spent several hundred thousand dollars over the past two years to implement a new ERP system and develop additional forecasting tools internally. The finance team also just completed its initial Sarbox documentation.

Now, says Simtek CFO Brian Alleman, the company is using its new technology to better forecast things like “design wins,” which occur when customers include Simtek’s unique product in their new designs. “Based on the historical data we get from our information systems, we can tell when we should expect to see revenue from the design win and when revenue from old products will be trailing off,” says Alleman. “We never had the ability to see that data before.”

The best finance organizations are more likely to do such forward-looking analysis as part of their B&P process, according to Hackett. More than half of their analysis time is spent on planning rather than historical reporting, unlike other companies, where only 46 percent of the time is spent looking ahead. “It’s far more insightful to use the historical information to say what is going to happen in the next 12 months than it is to simply cobble together a trend line,” says Hall. “But many organizations struggle to accumulate the data needed even for the historical reports.”

Budgeting Redefined

An increasing number of leading finance teams are moving away from the traditional budget altogether, says Steve Player, managing partner of consultancy The Player Group and program director of the Beyond Budgeting Roundtable. Many finance executives are now looking four to eight quarters ahead in their forecasting. While a five-quarter forecast used to be the most prevalent, Player says that is trending upward. “There are a lot more six-quarter rolling forecasts now,” he says. “People are getting comfortable with the idea of a rolling forecast and moving on from there.” Archstone’s Balogh agrees: he says three out of four of his clients are at least considering rolling forecasts and thinking about when they might move to such a model. Some are making incremental changes, including one client with US$15 billion in revenues that is hanging onto its traditional budget while also introducing rolling forecasts.

Simtek currently does an annual budget, but Alleman says that is changing as the company gets up to speed with its new ERP system. “Budgeting is probably the wrong word for what we do,” he says. “We’re really doing more data analysis of what’s going to happen next month and next quarter. We’re trying to look at it more in real time rather than just having an annual process.”

Such a move conforms to the reality of today’s budget better than the static annual approach, says Alleman. “If you can tell me what your business is going to look like a year from now, I would argue you are probably not looking outside the business hard enough. There are going to be surprises.”

Kate O’Sullivan is a senior writer at CFO in the U.S.