“Managing Risk and Uncertainty”

“Managing Risk and Uncertainty” An Executive’s guide to Integrated Business Planning A FSN & Oracle White Paper “Managing Risk and Uncertainty” - A FSN & Oracle White Paper 2 Contents Introduction 3 What is Integrated Business Planning (IBP)? 4 Why spreadsheets do not work in an integrated planning environment? 5 Managing data in an IBP environment 6 Collaboration is key 8 Increasing productivity through workflow 8 Managing risk and uncertainty 9 Tying integrated business planning into performance management 11 Cultural challenges 12 Summary 12 “Managing Risk and Uncertainty” - A FSN & Oracle White Paper 3 Introduction Traditional budgeting and planning is a straight jacketed and hierarchical exercise. Goals and budgets are set at the top of the organization and cascaded down, yet plans on how to reach the goals are created per department and are then rolled up. Often, this tension creates a game of ‘ping pong’ that takes many months to resolve and the outcome rarely reflects the dynamic reality of business. No wonder there are so many budget games! Although this approach may help organizational control and accountability, it highlights the gap between how the business is traditionally managed, and the actual business model. Work doesn’t flow top-down; it flows from outside the organization into the organization, and out again, passing multiple nodes in a network of activities. Moreover, most current business models are networked as well. They are based on product componentization and mass customization, involve sourcing across multiple organizations, and are driven by customer self-service. Consider the pharmaceutical industry’s move towards personalized medicine and the configuration options car makers offer buyers. Examples are to be found in almost every industry. Insurers, telecoms providers and consumer electronics manufacturers routinely outsource customer service. Across all industries, production, logistics and even R&D are often outsourced, alongside support functions such as HR, finance and IT. The networked economy challenges the fundamentals of business organization, for example, where does the front-office stop and does the back-office start? Can companies still define product-market combinations themselves and launch go-to market plans? Is it still meaningful to plan for customer, channel, or product profitability, or is transaction profitability the only measure that counts? With businesses effectively organized as networks rather than hierarchies, product-oriented and functionally oriented planning mechanisms fall short. An effective plan connects the demand chain and the supply chain in an integrated manner. On top of that, economic circumstances ask for a different approach. Much has been written about the difficulty of forecasting business performance1 – even when times were good, but now the emphasis is different. There is a palpable shift in emphasis from strategy and long term planning to short term performance, cash preservation, working capital management and even business survival as some of the world’s largest businesses struggle to stay afloat. With prices constrained, dramatically shortened product life cycles, increasing market volatility, excess capacity in almost every market and costs cut to the bone, the room for manoeuvre is slim. Maintaining slender margins in these conditions needs deft management and complete mastery of business performance. The twin challenges of constant volatility2 and erratic consumer behaviour means that there has never been a greater need for nimble business planning. The classical planning and control cycles with a financial focus and aimed at internal control are not up to this speed of change. More modern management processes, such as Oracle’s “strategy to success” framework3 are needed. But how many businesses have planning and reporting processes that are smart, agile and aligned? For many decades businesses have been organized along functional lines, which has proven to be a convenient vehicle for grouping like-minded individuals with similar skills, outlook and culture. By and large this arrangement has served businesses extremely well even though most organizations execute their transactions through business processes which transcend functional boundaries. Despite the supreme importance of the process oriented view, most businesses carry out their business planning in discrete functional silos. Similarly, strategic planning tends to be vertically aligned with strategy being driven in a ‘top down’ fashion through the organizational structure. The downside for both strategic and operational planning is that the dominance of vertical alignment can give rise to dysfunctional management behaviour and inconsistencies when trying to resolve optimum operational performance across the business. In a robust economy and stable markets this vertical perspective of a business works agreeably well. Organizations can ‘forgive’ the fuzzy edges, inefficiencies and inconsistencies that arise between different functional areas. But in all other cases – actually the majority of cases - business plans should be horizontally aligned between different disciplines if, for example, resources available to the business are to be kept in balance with predicted levels of activity. Furthermore, more volatile trading conditions necessarily require a more agile, integrated and confident management response that can only be achieved by functional areas working in alignment with each other and in the context of overall financial and operational planning. “Managing Risk and Uncertainty” - A FSN & Oracle White Paper 4 At the same time our fundamental understanding of the organization is being challenged. The notion that an organization can draw neat boundaries around its operations is outmoded as organizations find themselves increasingly drawn into the networked economy in which business processes are constantly being re-written as suppliers, customers and even competitors (on occasion) collaborate to produce and consume products and services in all manner of imaginative interactions. Global trends such as mass customization of products and services, customer self-service, and sourcing are altering the balance between business transacted within a company and that carried out beyond the factory gates. “When the need for both vertical and horizontal alignment is not well understood performance management adds to misalignment in an organization.” Frank Buytendijk, Performance Leadership, Mc Graw Hill, 2008 These trends expose the inefficiencies of traditional departmental or functional planning processes.