From annual budget to rolling forecast - Karine Cochet

COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION

Karine Cochet, FP&A leader, APACAPRIL 19th, 2013

From Annual Budget to Rolling Forecasts

Agenda

Alcatel-Lucent:

Overview and challenges

Former Budget Process – Assessment

Budget Process as it should be

Exploring Budget Process Enhancements

2


Exploring Budget Process Enhancements

Driver-Based Forecast

Rolling Forecast

Alcatel-Lucent:

Enhanced Budget Process: where are we?

Alcatel Lucent – WHO WE ARE?

1000+ CUSTOMERS(NETWORK OPERATOR)

1M+NETWORKS

500K+ CUSTOMERS(ENTERPRISE)

My

computer

My

storage

My

communications

150+ COUNTRIES

3


~72,000employees

2012

revenues

€14.4b

2012

R&D/Sales

16.1%

Intelligent

Network

My

media

My

gaming

2012

Adjusted

operating

margin

−1.8%

Alcatel Lucent – WHAT WE DO?

PRODUCTSInnovation

R&DSERVICES

System specific

DELIVER

products

INSTALL

INTEGRATE

TEST

4


MANUFACTURE

SOLUTIONSArchitecture

Design

Customized

products

accessories

tools

TEST

MAINTAIN

OPERATE

Alcatel Lucent and the Planning process

ANNUAL

COMMITMENTTOWARDS OUR

CREDITORS

GUIDANCE TO

MARKET

COMMITMENT

TOWARDS OUR

SHAREHOLDERS The Annual Budget is a mandatory

5


ANNUAL

BUDGET

COMMITMENT

TOWARDS

OUR

EMPLOYEES

COMMITMENT

TOWARDS

OUR

CUSTOMERS

is a mandatory exercise

• Time Consuming, not enough time left for analysis

• Manual and labor intensive process: hundred of spreadsheets, difficult to update, subject to errors, heavy to consolidate, costly process

• Too many details, a lot of wasted energy and a false sense of security

• Tied to a rigid calendar, creating an inappropriate annual mindset and current year focus while business is an ongoing operation

Former Budgeting Process - Assessment

6


� When finally completed, it is already out-dated

• Lack of ownership of operational managers, they see no benefit and follow the process against their will

• Finance does much of the work, no buy in from the business

• Process is way too linear, lacking dynamic interaction between Strategy / Operations / Business, and opening the door to budget gaming / target negotiation

In a world of increasing competition and changing economic environment, companies need a better way to predict the future, more agile, more flexible, more focused, more reliable

Planning process should raise questions and provide answers that are core to the business

What planning process should we use?

7


• What drives performance in our market? In our operations?

• What is our strategy?

• How much investment should we dedicate to new initiatives?

• What are the key performance indicators that would best measure progress towards strategic goals?

1. Align with the Business Priorities:• Start with the strategic plan• Engage at the executive level• Measure what is critical to the strategy• Validate goals against key metrics/market data• Clearly communicate the metrics

2. Increase collaboration among functions: involve all department

How should the planning process work?

8


2. Increase collaboration among functions: involve all department managers and get more accurate forecast (engaging those closest to the information)

3. Be timely: get information in the hands of business owners quickly and regularly

4. Adapt, be flexible: revisit as often as necessary, run multiple scenarios, be ready for the unexpected

Benefits of a driver based forecast:

• Increased accuracy

• Reduced cycle time

• Limited interpretation

• Improved collaboration (same language as the business owners)

• Aligned with the business strategy

Implement driver based forecasting

9


• Aligned with the business strategy

Key prerequisites:

• Identify and manage the true business drivers

• Focus on activities - not financials

• Include key non-financial drivers

Driver based forecasting - examples

# of Cards# of Active

CardsMonthly Billing

Annualized Revenues

� Demographic� Market

penetration

� Promotions� Substitutes

Average Spending � Income� Credit limits

� Seasonality

Credit Card business:

10


Installed Product Base # of calls

per type of request

Hours required

Person Hours

requiredNew Product

Sold� Type of call:

warranty, technical support, training..

� Average call length depending on type

� Service Level Agreements

� Peak Volume Call

Customer hotline business:

• Balance Detail with Value

• Target Accounts that have material impact and high variability

• Combine Statistical and Judgmental methods:

Build a Financial Model (1/2)

Pros Cons

Statistical>Visualize patterns found in historical data and build predictive models

• Objective• Uses drivers• Models multiplerelationships

• Complex to build and to maintain

• Assumes information can be quantified

11


• Regularly re-examine models by examining forecast accuracy

predictive models (regression, time series…)

relationships quantified• Assumes that some past patterns will continue in future

Judgmental > Use judgment to choose variables, build structural equations, and adjust the model predictions

• Easy to set up• Handles novel situations (official announcement, “street” talk…)

• Open to bias• Drivers not proven

• Run “what if” scenarios

• The whole point is not necessarily to predict nearly 100% accuracy but to call to action with informed decisions

• Resources for capital projects and operational expenses can then be reallocated and new performance targets set

• Shift from Linear Process to a Continuous Cycle

Build a Financial Model (2/2)

12


• Shift from Linear Process to a Continuous Cycle

Monitor, Report and Analyze

Review and Set Strategy

Planning Input and

Collaboration

Allocate resources and

Execute

• A rolling forecast is a process in which key business drivers are forecasted on a continual basis, not associated with a specific financial year

• Expands forecast horizon beyond current fiscal year

• Scenario based: uses various assumptions to anticipate bottom line impact

Moving to a rolling forecast

13


• Predictive: recommendation is to have at least quarterly reviews of the process and run scenarios, use the added information to reduce, but not to replace annual budget process

• Fine-tuning the models can be challenging:

The difficulty is to re-inject Actuals and understand variances to adjust Forecasting… without getting lost in a rear-view mirror

Driver-Based Rolling Forecast – Challenges (1/2)

14


• Information System may be a hurdle:

Having the right tools, end to end, avoiding heavy manual data collection and scenario handling

• Change management is required:

Limit “budget gaming”, target negotiation mindset and adjusted projections to fill the gaps.

Promote collaboration, knowledge sharing and transparency on assumptions & dependencies

Driver-Based Rolling Forecast – Challenges (2/2)

15


assumptions & dependencies

� Embed forward-looking attitudes into the culture, create a consistent focus on the business issues, rely consistently on forecast intelligence to make managerial decisions

This requires strong Buy-In from management and discipline from everyone

Nowadays, corporate culture tends to focus on quarterly performance

It is essential to incorporate long term implications, foster innovation and growth

Incorporate a 3-5 year outlook in the planning process:

• Better focus on market conditions and strategy

Long Term versus Short Term?

16


• Better focus on market conditions and strategy

• Give business owners an opportunity to project themselves into the long-term future

• Build a consensus around corporate strategy and execution

• Build foundation for future planning

What is the situation in Alcatel Lucent?

Emerging

• No formal planning process

• No planning tools• Inadequate

Developing

• Inconsistent process

• Basic tools (e.g. Excel)

• Ad hoc spreadsheets

Defined

• More standard processes

• Some integration across Business Units

• Reliance on ERP system as planning tool

Advanced

• Enterprise-wide processes

• Use of web-enabled budget tool

• Rolling forecast and other advanced processes

Leading

• Planning process fully integrated with strategy

• Real-time forecasting and performance monitoring

• Compensation linked to results

17


communication• Purely financial

plan

spreadsheets• Highly manual

process

planning tool• Little analytic

� Harmonizing system >> One ERP� Introducing one common forecasting tool� Introducing Rolling Forecast� Some model based scenarios, but still very manual

Still too detailed bottom-up approachSometimes lacking discipline in data collectionNot yet real time nor integrated with strategy

Current processes

and philosophy

must evolve

ADDRESSABLE PIPELINE

ORDERS FORECAST

SALES FORECAST

ORDERS FORECAST

MARGINS FORECAST

ORDERS FORECAST

HEADCOUNTS/FIXED COSTS FORECAST

CASH FORECAST

INVENTORY FORECAST

A strong process but too manual

18


By product, segment, customer:• Market share• Trends• Reputation,

investor perception

Addressability still rather empiric

� Systematic

By product, segment, customer:• Delay from

Qualification to Contract

• Win/Loss ratio• Probability to win

Long run forecast thru models but empiric, not formal, lacking methodologyShort-run forecast is 100% manual and detailed by opportunity

� Systematic

By product, segment, customer:• Backlog/book ship

conversion ratio• Typical project

schedule - Revenue recognition rules in line w/ T&C

• Adjusting lead time to Demand Plan

By product, segment, customer:• For recurrent business:

historical trends adjusted with expected Cost Improvement / Price Erosion / Specific Provisions linked to T&C

• For key deals: detailed P&L analysis

� Systematic

Still too empiric, methodology not formal enough

� Systematic� Handled centrally

Conclusion for Alcatel Lucent

• Monthly Forecast Process is clearly embedded in the culture but remains too manual and cumbersome

• Improved agility with a strong methodology, practice alignment, converting understanding & assumptions into rules, and regularly challenging some long time habits

19


�Still some changes to implement before having a real

Driver-Based Rolling Forecast tied to our Strategy…

And now: tell me about the situation in your company??

Date post:	16-Apr-2017
Category:	Economy & Finance
Upload:	karine-cochet
View:	2,060 times
Download:	0 times

From annual budget to rolling forecast - Karine Cochet

Economy & Finance