This blog is the first of three on the topic of Strategy Deployment, and the role of technology in supporting the Finance function.
Today’s fast moving, complex business environment makes great demands of finance. In order to cope, the focus of the CFO and supporting staff is changing, as revealed in a recent survey by the Belgian Institute of Management Accountants and Controllers (BIMAC).
From the 157 respondents, the top area for improvement concerning the role of finance was in the deployment of strategy. Close behind and connected with strategy deployment was increasing the reliability of plans and forecasts while at the same time decreasing budget and forecast cycle times.
In some ways, none of this is new. For many years the Conference Board has cited the execution of strategy as being the number 1 aim of CFOs and it’s common knowledge that most organisations take too long to create budgets that, along with forecasts, need to be more accurate.
So where does this leave us? Unfortunately, with a lot of ambition, but a distinct lack of detail on how to improve these vital areas of management.
Focus on Strategy
For many years we have written concerning how strategy can be better managed, from ensuring it is well communicated and resourced, through to the monitoring of its implementation. To do this well requires technology solutions that can combine the functions of tactical planning, budgeting, forecasting, and management reporting, with strategy management methodologies such as the Balanced Scorecard and Performance Prism.
This is essential as it is technology that provides a common method for communication; that can highlight and promote action on what’s important from an ocean of data; and, when used correctly, technology can focus users attention on implementing corporate strategy.
But how exactly can technology do this? To answer this important question, organisations must first look at what they plan and how they engage with staff when it comes to allocating resources.
For many, budgeting is an annual task whereby resources are allocated for the coming year. But allocated to do what? Quite often budgeting involves setting numbers that show an improvement on what was obtained in the previous year. This typically means increasing revenues by an arbitrary amount and similarly, decreasing expenses. But what is missing is the ‘how’ – how is this increase/reduction going to be achieved?
There’s no point in setting a number that is devoid of reality and for which there is no logical explanation of how it can be achieved. And yet this is what happens if the budget process is set up as a ‘numbers guessing game’.
Linking resources to strategy
The business dictionary defines strategy as “A method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem.”
Methods and plans involve actions, and in the context of business, an improvement in revenues or a reduction in costs involves management making a choice in how resources are allocated. This directly affects the level of activity the business can support, which in turn affects the outcomes the organisation can achieve.
Of course marginal improvements can be made through ‘organic’ growth. For example, sales people get better, raw materials fall in price, and in-efficiency can be eliminated. But these factors only have a limited effect. For a real step-change in performance, organisations must change what they are doing – and this is where strategy comes to the front.
Strategy seeks to change the status quo of a business by either improving existing or implementing new business processes. This is usually accomplished through strategic initiatives that are those activities not currently being performed by the organisation.
They can cover a range of subjects such as increasing sales through the implementation of a customer relationship management system, or in reducing costs by installing more efficient production equipment. As initiatives are identified it is essential that they are properly resourced and tracked for effectiveness where they may be subsequently modified, cancelled or replaced depending on the overall view of the future and what is currently being achieved.
With this in mind, budgets should be developed in two parts: for both ‘business as usual’ i.e. the income and expenditure that reflects performance of the current business model, and for strategic initiatives.
Don’t attempt to mix the two, as you can be sure that any new initiative will soon be starved of resources. ‘Business as usual’ should be collected first, followed by individual budgets by strategic initiative. For those initiatives that cut across multiple departments, it is vital they are planned by all departments involved and that each department recognise they play a part in its overall success.
Separating out strategic initiatives from ‘business as usual’
From a technology point of view, it must be obvious to managers when budgets are to be set for the current operation, and those that are set for specific projects or initiatives. In both cases it’s important that budget holders are able to communicate the level of activity that each budget enables, and the level of outcomes that each would generate.
Finally, the budgets for ‘business as usual’ and strategic initiatives should be combined to give the total budget picture. However, when communicating the budget or reporting performance, it’s important that the two parts are kept separate.
Sample budget report showing business as usual (base line) and strategic initiatives
In my next blog I will look at the topic of strategy execution.