Ceb Maximizing Budget and Forecast Process Productivity

CEB Financial Planning & Analysis Leadership Council
Maximizing Budget
and Forecast Process
Productivity
1
A Framework for Member Conversations
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management. When we bring leaders together, it is crucial that our discussions neither restrict competition nor improperly share inside information. All other conversations are welcomed
and encouraged.
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its sources, or b) reliance upon any recommendation made by CEB.
2
sTudy Findings
A sizeable Productivity gap: 80% of companies are earning less than one-half of their potential productivity from
budgets and forecasts. Companies with top-quartile process productivity are more likely to drive accountability for
performance, use budgets and forecasts to inform key decisions, and do so at a lower cost to both Finance and the
business.
speed and Accuracy Are Part of a Bigger Productivity equation: Focusing on process automation and accuracy alone
will not improve process productivity, unless it’s matched by improvements in 1) the insight value of planning deliverables,
2) the right level of detail and process transparency for business stakeholders, and 3) the cost of forecasting and
budgeting to the business (not merely to Corporate Finance).
What the Best companies do
■ establish a clear Role for Budgets and Forecasts in Business decisions: Leading companies avoid using budgets and
forecasts as catch-all tools for decisions they are not fit to support. Instead, they ensure executive teams have agreed
upon the goal of budgeting and forecasting efforts before attempting process improvements.
■ Right-size Process depth and Transparency: Leading companies don’t rely solely on corporate finance cost
benchmarks when they plan process improvements. The true costs of poorly designed processes are grossly
underestimated and rarely tackled because they are hidden from view within the business. The best FP&A organizations
gain disproportionate efficiencies by tackling process complexity in the business, not just the corporate center.
■ Learn from your Variances (Timeliness and Accuracy): Leading companies avoid taking a black and white approach to
budget and forecast deliverables being on-time and on-target. The best FP&A teams treat the root causes of variance
by distinguishing controllable from uncontrollable performance drivers, and segment critical information points to
ensure deadlines meet the criticality of decision-making windows.
© 2013 The Corporate Executive Board Company.

All Rights Reserved. FPA6981613SYN
3
The majority of
companies have recently
IN A STATE OF CHANGE
undergone several
process improvement Number of Significant Process Changes in the Past Five Years
projects. Percentage of Companies
Budgeting Process Changes Forecasting Process Changes

■■ On average, companies have
completed 2.4 significant 60% 60%
budget process changes, 51%
49%
and 3.1 significant forecast
process changes in the past
five years.
30%
30% 30% 26%
17% 18%
7%
2%
0% 0%
One Two or Four or More One Two or Four or More
Three Five Than Three Five Than
Five Five
n = 138 global FP&A directors. n = 138 global FP&A directors.
Source: CEB, CEB Financial Planning & Analysis Leadership Council Budget
and Forecast Productivity Diagnostic, 2013.
Sample Budget Process Improvements Sample Forecast Process Improvements

■■ New planning systems implementation ■■ Forecasting systems implementation
■■ Cycle time reduction ■■ Addition of scenarios in short-range financial
forecasting
■■ Streamlining the chart of accounts or cost
account structure ■■ Changes to input assumptions used for forecasts
■■ Re-engineering of the budget process due ■■ New forecast variance rules
to changes in the organizational structure ■■ Replacing detailed forecasts with driver-based
■■ Changes in top/down versus bottom/up budget forecasts
target setting process ■■ Elimination of low-value forecasts

4
Efforts to improve
budget and forecast
Resisting Our IMPROVEMENT EFFORTS
processes have yielded
disappointing results. Cost and Value Savings Accrued from Budget and Forecast Improvement Initiatives
Percentage of Expected Total, Average
■■ Despite significant 100%

investments in planning
technologies and process 49% 46%
reengineering, almost half of
respondents did not achieve 50%
the added value or the cost
savings they expected. 54%
51%
0%
Expected Cost Savings Expected Value Capture
n = 138 global FP&A directors.

Source: CEB 2013 Budget and Forecast Productivity Diagnostic.
Three Common Complaints
Stuck in a Rut Cannot Let Go of the Details Misguided Focus on Accuracy

“We don’t really know if our “Despite our best efforts to “We’ve spent many hours trying
forecast data delivers what the streamline the budget, business to analyze a variance; we look
leadership team needs. Are there unit management insists on afterwards and say ‘well what does
decisions that could benefit from holding on to very granular this actually tell us?’ and it tells
a slightly revised output? Probably, plans. Because every business in us that something has changed
but we never pull up to evaluate our portfolio has a unique data but it doesn’t tell us why. How can
if the way that we’ve been doing orientation profile, we are still we stop looking at accuracy for
things is still the right way.” trying to cater to everyone at accuracy’s sake and generate real
once.” insights?”
Head of FP&A Head of FP&A Head of FP&A

Industrials Company High Tech Company Construction Company

5
Today, Finance and
its business partners
INTENSE DISSATISFACTION
believe that budgets and
forecasts are not worth Business Partner1 Satisfaction with Time Required to Complete Each Process
the effort. Budget Process Forecast Process
10%
Satisfied 18%
Satisfied
90%
Dissatisfied
82%
Dissatisfied
Source: CEB 2013 Budget and Forecast Productivity Diagnostic. Source: CEB 2013 Budget and Forecast Productivity Diagnostic.
Perceived Value of Budgets and Forecasts

Percentage of Respondents Rating Each Process as “Valuable”
80% 73% Corporate and Business FP&A

Directors’ Perception
FP&A Directors’ View of Business

55% Partners’1 Perception
40% 35%
21%
0%
Budgeting Is a Valuable Activity Forecasting Is a Valuable Activity


1 Business partners or stakeholders refers to the Financial Planning & Analysis team’s internal customers, including general managers from operations,
All Rights Reserved. FPA6981613SYN functional areas (e.g., sales, marketing, HR), Finance (e.g., CFO, Controller, Treasurer) and the Board.
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The most important
measures of process
you Miss What You Don’t Measure
efficiency and quality
are rarely tracked. Usage of Process Metric Today… …Versus Importance of Process Metric
Percentage of FP&A Directors Using Percentage of FP&A Directors Ranking
Each Process Metric Metric as “Important”
■■ While many companies look
at timeliness and accuracy,
few evaluate total process 71% 73%
Accuracy of Final Analysis
costs or the value of the
output.
48% Timeliness of Output 86%
31% Finance FTEs Dedicated to Process 59%
31% Process Cycle Time 82%
26% Number of Iterations Required 73%

to Finalize Analysis
23% Degree of Completeness 55%

or Accuracy of Input Data
Clarity and Value 86%

11%
of Output
6% Business/Functional FTEs 55%

Dedicated to Process
3% Repeatability of Process 73%
Number of Insights Included 73%

3%
in the Output
0% 50% 100% 0% 50% 100%
Source: CEB 2012 Leadership Council Agenda Poll. Source: CEB 2012 Leadership Council Agenda Poll.

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HIDDEN BELOW THE SURFACE
Total Cost of Budgeting and Forecasting
Illustrative
Corporate FP&A Costs

Only a small percentage of total
costs are observed.
Business Finance Costs

A large percentage of embedded
finance costs go untracked.
Costs to Management and

Operating Staff
An even larger percentage of costs
incurred by operating managers
and functional leaders is “hidden”
and vastly underestimated.
Source: “File:Iceberg.jpg,” Wikimedia Commons website, last accessed 13 May 2013, http://commons.wikimedia.org/wiki/File:Iceberg.jpg.

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Embedded finance and
operating teams bear
OUR ICEBERG—BY THE NUMBERS
the brunt of poorly
designed budgeting and Number of FTEs Involved in Forecast and Budget Preparation
forecasting processes. Average
90
Corporate FP&A1
6.6 Business Finance2
General Management
6.2 and Functional Leaders3
Business Analysts4
35.9
27.3
45
30.7 29.6
11.7 10.9
0
Budget Forecast

Definitions
1 “Corporate FP&A” is financial planning and analysis and CFO office staff who reside in the corporate center,
performing corporate-level budget and forecast consolidation and analysis.
2 “Business Finance” is all finance staff who reside in the business or functional areas (Sales, HR, IT), or are aligned
to these areas, creating business-specific budgets, forecasts and analysis.
3 “General Management and Functional Leaders” are operations leaders at the corporate center and in the
business, such as business unit general managers, operations leaders, Heads of Sales, IT, HR, Procurement, etc.,
who have responsibilities for providing inputs for, or creating the budget or forecast.
4 “Business Analysts” are non-finance analysts who also contribute to the creation of the budget and forecast.

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Focusing improvement
efforts across these
A BROADER, MORE VALUABLE PERSPECTIVE
seven process attributes
provides a balanced Differentiators of Top and Bottom-Quartile Process Productivity (Budgeting)
approach to establishing Average Productivity Index Scores and Differences
valuable budgeting and 175 43 43 43 43
180
forecasting processes.
43 43 43 43 Typical loss
in budget process
productivity due to
46 46 46 46 declining process
90 value and high
process costs
43 43 43 43
0
Average Clarity and and
Depth Timeliness and Average
Top-Quartile Insight Transparency Accuracy Bottom-Quartile
Productivity Index Productivity Index
Score Score
Differentiators of Top and Bottom-Quartile Process Productivity (Forecasting)

Average Productivity Index Scores and Differences
210 201 51 51 51 51
46 46 46 46 Typical loss in
forecast process
productivity
46 46 46 46
105 due to declining
process value and
58 58 58 58 high process costs
0
Average Clarity and and
Depth Timeliness and Average
Top-Quartile Insight Transparency Accuracy Bottom-Quartile
Productivity Index Productivity Index
Score Score

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These seven efficiency
and effectiveness process
FOCUSING ON PIECES OF THE PUZZLE
attributes provide a more
balanced view of value. Seven Process Attributes of Efficient and Effective Budgeting and Forecasting Processes
■■ When making process

Where Most Companies Focus
changes, companies often Improvement Efforts
place a large emphasis on
efficiency, timeliness and
accuracy.
Timeliness Efficiency Accuracy
Budgets and forecasts are Budgets and forecasts are Budgets and forecasts
completed on-time and created with the fewest costs accurately reflect potential
enable timely responses and resources possible. risks and opportunities
to changes in the and variances regularly fall
operating environment. within the organization’s
tolerable variance
thresholds.
Clarity Depth
The granularity of both
Data used in budgets
input and output data
and forecasts is easy to
is tailored to fit decision
understand and is not support needs at corporate
ambiguous when presented. and in the business.
Insight Transparency
Budget and forecast Budget and forecast
deliverables contain processes, models, inputs,
information that is relevant, and timelines are well
authoritative, newsworthy, understood by all finance
actionable, and memorable. and business stakeholders.
Source: CEB analysis.

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THE Benefits OF Getting this Right
The Effectiveness of Top Quartile Versus Bottom Quartile Companies’ Budgeting and Forecasting Processes
Percentage of Respondents Rating Their Processes “Effective” or “Very Effective” in Achieving Each Outcome
Budget Process Ratings

100% Top Quartile Budget
Productivity
79%
Bottom Quartile Budget
63% Productivity
53%
50% 41% 45% 41%
37%
30%
24%
13% 15%
9%
0%
Drives Stewards Business Generates High Generates High Incurs High Incurs High
Accountability Costs Value for Finance Value for the Finance Costs Business Costs
Business
Forecast Process
100% 94% Top Quartile Forecast

Productivity
Bottom Quartile Forecast
59% 59% 59% Productivity
50%
38%
24% 28% 25%
16%
6% 6% 9%
0%
Drives Helps Avoid Generates High Generates High Incurs High Incurs High
Accountability Performance Value for Finance Value for the Finance Costs Business Costs
Surprises Business

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The majority of FP&A
directors believe that
STRUGGLING from ALL directions
they can significantly
improve all seven process Companies’ Performance Against Individual Productivity Index Components
attributes. Percentage of Respondents Rating Each Process Attribute as “Somewhat High Quality” or “High Quality”
Process Value Attributes Process Cost Attribute
Budget Process Ratings
50%
48%
36%
31%
25% 22% 22%
17%
8%
0%
Clarity Insight Depth Transparency Timeliness Accuracy Efficiency
Forecast Process Ratings

50% 45%
33%
24% 25% 26%
25% 22% 21%
0%
Clarity Insight Depth Transparency Timeliness Accuracy Efficiency


13
We found that several
popular techniques have
Table stakes
no (positive or negative)
impact on process Process Attributes That Have No Impact on Productivity
productivity, and do not Based on Correlation Analysis of Survey Results
differentiate top quartile
from bottom quartile
No Impact on Budget Process Productivity
performers.
1. A calendar of submissions and ownership guidelines
■■ Attributes such as clearly 2. One standardized budget model and set of templates across all parts of the organization
defined responsibilities,
3. Knowing which managers are most likely to game or sandbag their budget estimates
deadlines and transparency
into how budget and 4. Bottom-up versus top-down budget target setting models
forecast models work are
table stakes (i.e., there are 5. Budget-setting techniques (e.g., Y-O-Y, external benchmarks, charge backs, etc.)
bare minimums that you
need to facilitate processes
in a global operating
environment). No Impact on Forecast Process Productivity
1. A calendar of submissions and ownership guidelines
■■ Other attributes that are
specific to operating models 2. One standardized forecast model across all parts of the organization
such as bottom-up versus
3. Education of business partners about how forecast models work
top-down target setting,
rolling forecasting, etc., 4. Role clarity about what forecasting tasks are owned by Finance versus the business
do not have clear winners
among them. 5. Use of automated tools and systems to generate forecasts
6. Scenario-based forecasting techniques
7. Rolling forecasting (i.e., extension of the forecast outlook beyond the current year)
Negative Impact on Forecast Process Productivity

1. Use of manual forecast templates

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There are 15 specific
activities that have a
KEY ACTIVITIES THAT DRIVE PRODUCTIVITY
disproportionate impact
on budget and forecast Top 15 Budgeting and Forecasting Techniques That Have a Positive Impact on Process Productivity
process productivity. Average Impacta of Each Process Attribute on Increasing Process Productivity
Provide Transparency into Resource

0.54
Allocation Decisions
Focus Management on Controllable Drivers
0.46
of Performance
Create a Link Between Spending I. Clarity and
0.38
and Strategic Outcomes Insight
Drive Constructive Dialogue About What
0.37
Management Should Do Next
Establish a Clear Role for Budget/Forecasts
0.28
in Business Decisions
Include the Right Amount of Detail 0.50

Provide Straightforward Process Instructions
0.41 II. Depth and
for Business and Finance Teams
Use Different Models Depending Transparency
0.30
on Functional Need
Create Time Limitations (Start, Stop Dates) 0.27
Limit Number of Budget Negotiations 0.26
Surface Internal and External Performance Risks 0.37

Engage Business Partners About Uncertainty
in Their Forecasts
0.31
III. Timeliness
Adjust Accuracy Expectations for Each Business 0.30
and Accuracy
Root Cause Variance Drivers 0.23
Designate Interdisciplinary Teams Who Vet and
Set Key Assumptions
0.20
0.00 0.30 0.60


a Standardized regression coefficient (or beta) of single variate regression analysis where the dependent variable is the Process Productivity Index and the
All Rights Reserved. FPA6981613SYN independent variable is the attribute listed.
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discussion RoAdmAP
solutions Productivity imperative 1:

Productivity imperative 2: Productivity imperative 3:
increase clarity and insight by
Right-size Process depth improve Timeliness and Accuracy
establishing a clear Role
and Transparency by Learning from your Variances
for Budgets and Forecasts
Purpose-Driven Planning and Budgeting Forecast Standardization Protocols Forecast Bias Tracking
Decision Materiality Thresholds Business Planning Simplification Budget Assumption Management

16
discussion RoAdmAP


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Companies use budgets
and forecasts to meet a
Too Many Budget and forecast applications
variety of performance
management objectives. Frequent Applications of Operating Budgets and Forecasts
Percentage of FP&A Teams Frequently Using the Budget and Forecast for Each Purpose
■■ Budgeting Challenge: Operating Budgets
The budget has become a Forecasts

catch-all tool for a variety
of management objectives,
reducing its effectiveness 100%
as a resource allocation
90%
instrument and driving 88%
86%
unhealthy managerial
behaviors. 79% 79%
74%
■■ Forecasting Challenge: 69%
Forecasting activities, having 65%
63%
evolved to support highly
59%
politicized annual budgeting
processes, generate the 53%
50% 51% 51%
wrong type of information 50% 46%
and deliver it on a timetable 43%
that is usually out of sync
with external market cycles.
31%
23%
0%
Basis for Bottom- Performance Cost
Translation Precise Identification Assurance/ Behavioral
Incentives Up Target Management Management of Strategic Prediction of Resource Controls Contract
Setting Priorities of Future Allocation Mechanism with
into Performance Trade-Offs Employees
Operational
Plans

18
FP&A directors are
dissatisfied with
BUDGET AND FORECAST DECISION SUPPORT
the effectiveness of
budgets and forecasts in
EFFECTIVENESS
supporting key business
decisions. Percentage of FP&A Directors Rating Budgets and Forecasts “Effective” in Each Decision Support Area
Budget Decision Support Quality % Rating Forecast Decision Support Quality

Effective
Strategic Decisions
40%
Staffing Sales and Marketing
Financial Decisions
Operational Decisions
Pricing Operational and Supply Chain
Sales and Marketing Pricing
G&A Cost Optimization G&A Cost Optimization
Non-Staff Resource Reallocation Financial and Capital Structure
Financial and Capital Structure Tax Planning
Tax Planning Staffing
Operational and Supply Chain Non-Staff Resource Reallocation
8%
R&D R&D

All Rights Reserved. FPA6981613SYN Source: CEB 2013 Budget and Forecast Productivity Diagnostic.
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MAXIMIZE INSIGHT VALUE OF DATA
Techniques for Increasing Productivity of Budgets and Forecasts
Percentage of FP&A Teams Consistently Using Each Technique
Establish a Clear Role for Budgets and Forecasts

Top Quartile Budget and Forecast Processes
Bottom Quartile Budget and Forecast Processes

Create a Link Between Establish a Clear Role
Provide Transparency Drive Constructive Focus Management on
Spending and Strategic for Budgets/Forecasts in into Resource Allocation Dialogue About What Controllable Drivers of
Outcomes Business Decisions Decisions Management Should Performance
Do Next


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PURPOSE-BUILT Planning and Budgeting
Overview
Motorola Solutions evaluates information needs for discrete budgeting, forecasting and long-range planning activities
to establish decision support requirements for each deliverable and improve integration between the processes.
Company Snapshot
Motorola Solutions, Inc.

Industry: Electronics Motorola Solutions provides communication solutions and services
Employees: 21,000 for business and government clients, including two-way radios, mobile
computers, bar code scanners, and wireless broadband products used
Headquarters Schaumburg, IL
in private voice and data networks and public safety communications
Ticker: MSI (NYSE) systems. Motorola changed its name to Motorola Solutions when
it spun off its handset and set-top box business units as Motorola
Mobility in 2011.

21
Most companies have
multiple, distinct
TYPICALLY MISALIGNED VIEWS
planning activities that
do not always feed into
OF BUSINESS
a common, consolidated
model to provide Process Map of a Typical Planning Process
Illustrative
an aligned view of
performance.
Time
Q1 Q2 Q3 Q4
Frame
■■ Due to disconnected
planning processes, Establishing Process
businesses develop Defining Corporate Detailed
Steps and Strategy
Strategy and LRP Budgeting
competing views of Direction
the current operating
environment, slowing
decision making and the Stage
Conducting Formulating Finalizing and
annual planning process
External and and Aligning BU Communicating
itself. Internal Analysis Annual Plans Annual Plans
JAN Q1 Forecast APR Q2 Forecast JUL Q3 Forecast OCT Q4 Forecast
Source: Motorola Solutions; CEB analysis.
Problems Companies Face in the Typical Planning Process
Poor Resource Allocation Decisions Budget Negotiations

As business leaders develop plans and budgets, Because general business conditions (and thus
they focus on performance from the previous year assumptions) change between the creation of the
and the current year rather than the strategy. This LRP and the creation of annual plans, business units
often manifests itself in a feeling of entitlement from develop their own inputs. This creates significant
business leaders and budget owners who expect rework for BU FP&A teams as Corporate rejects
incremental increases to investment funding. proposed budgets which contain overly conservative
assumption inputs.

22
Motorola’s team found
that existing budgeting
MOUNTING CHALLENGES FOR PLANNING
and forecasting
mechanisms did not Pressures Facing Motorola Implications for Budgeting, Forecasting,
perform well under the Illustrative and Planning
increasing pressure of Illustrative
short-term shocks and
competitive risks.
1. Capital planning models fail to review target
1. Cost of capital is rising faster than expected. debt/equity split and are too cumbersome
to analyze alternative debt structures.
2. Higher than expected FX volatility in key

2. Forecast models strain to account for
markets has caused Motorola to expand
multiple marginal and extreme FX scenarios.
earnings guidance ranges.
3. Operating and capital investment models

3. Business managers are making investments must incorporate risk appetite metrics and
that exceed Motorola’s current risk appetite. thresholds. Must educate managers about
the consequences of over-promising.
4. Motorola is in the last quartile of

investment peers in terms of capital 4. Must integrate operational funding, growth
returned to shareholders; peers have funding, and capital return projections into
ramped up buybacks and dividends one forward-looking model.
faster than Motorola.
5. Need to incorporate external risk drivers and

5. Disruptive innovation by new competitors is
competitive metrics into the forecast and to
reducing the value of products and services
increase focus on qualitative risk discussions
sold today by Business A.
in performance reviews.

23
MAP BUDGETS AND FORECASTS TO DECISIONS
Budget and Forecast Process Alignment to Key Decisions
Illustrative
Manage Product Develop Strategy Set Spending

Decision Manage Demand
Portfolio and Deploy Cash Guidelines
Biannual Product Continuous Long Annual Budget Quarterly Forecasts

Process and Goals
Strategy Range Plan
Goals Goals Goals Goals

1. Increase attractiveness of 1. Evaluate the current and 1. Determine operational 1. Understand short-term
mature product portfolio projected value of business spending based on the current and future quarter
strategies current and projected value execution gaps
2. Take advantage of a
of business strategies 2. Review production plan
competitor’s quality and 2. Evaluate alternatives for cash
control problems deployment 2. Evaluate scenarios for base, against forecast
merit and incentive payout
levels; set baseline levels
Required Budget xternal, non-financial,

E Segment value analysis Original AOP assumptions Regional forecast by SKU
and Forecast Data market-share data
ercentage of revenues and
P Run rate assumptions Production capacity
egment revenue forecast
S costs in at-risk portfolio
G&A spend category floors
S Current and forecasted
analysis segments
and ceilings inventory
apacity adjustment
C oot cause and analyze large
R Customer data
scenarios, profit curves sharp shocks in results of
high-velocity products Macro- and microeconomic
data, by region

24
Integrate discrete
budgeting, forecasting
INTEGRATE SHORT- AND LONG-TERM
and planning activities
to ensure historic
PLANNING ACTIVITIES
and forward-looking
performance data Motorola Solutions’ Rolling and Annual Planning Activities
generated in each cycle
drives decisions.
Dividend Refinancing Acquisition
■■ Motorola Solutions Strategic
integrates updates to its
five-year Long-Range
Continuous Five-Year LRP
Planning (LRP) model with
Nature of Capital Deployment Focus

bi-annual strategy reviews,
annual and quarterly
budgeting, and forecasting
Bi-Annual Regions and Products Three-Year Outlook
activities.
■■ As a result, the FP&A team

is able to reprioritize local Annual Budgets
and corporate capital
deployment and profitability
improvement plans.
Quarterly Forecasts Tie to Annual Plan
S&OP
Operational
1–2 Quarters 1 Year Multiyear

Outlook

25
By maintaining and
communicating an
Create A UNIFORM DECISION LENS
up-to-date LRP model,
Corporate can enable Timeline of LRP Model Updates
business leaders to Illustrative
make informed decisions
that align to long-term
strategy. Q1 Q2 Q3 Q4
Model Update
April May June
Critical Cash
Decision
R&D Investment Share Repurchase IT Upgrade Dividend

Decision Decision Decision Decision
Example Updates Made to the LRP Model
Date Event Model Update Level of Impact Source of Update
Refinance with Change WACC Corporate

5 April Medium
bank assumption Treasurer
“Doing a P&L model is Adjust pension
Pension fund VP, Corporate
easy, but what is more 27 April accounts payable Low
adjustment Finance
complex (and why we to $X MM
built this model) is linking our Increase Year 2
capital allocation framework to BU A’s competitor SVP Sales, North
8 May marketshare High
our strategy and our financial exits market America
prediction to XX%
statements.”
Marty Henning
Senior Director, FP&A An event with a high level of
Motorola Solutions impact triggers an ad hoc
update to senior leadership.

26
Motorola has achieved a
high ROI from its process
DERIVING GREATER VALUE FROM
improvement initiative
by focusing on decision
PLANNING
making needs.
Value Accrued from Budget and Forecast Process Improvement
100%
80.0%
80%
53.0%
53%
50%
0%
Motorola Solutions Benchmark Average
Annualized Total Shareholder Return

Post Implementationa
20%
17.0%
9.6%
10%
0%
Motorola Solutions S&P 500
Source: Standard & Poor’s Compustat.

All Rights Reserved. FPA6981613SYN a TSR calculated from 1 July 2011–30 January 2013.
27
DECISION MATERIALITY THRESHOLDS
Overview
Roche sets materiality thresholds for event-driven performance information included in monthly forecasts. This approach
focuses management on the few decisions that must to be made on a monthly basis in order to react to significant shifts
in the business or regulatory environment.
Company Snapshot
Roche Holding AG
Industry: Pharmaceuticals Roche operates two segments, pharmaceuticals and diagnostics,
Employees: 82,000 and sells its products in some 180 countries. Roche’s prescription
drugs include cancer therapies, anemia treatments, hepatitis drugs,
Headquarters: Basel, Switzerland
transplant drugs, and other therapy drugs.
Tickers: ROG (SIX)
RHHBY (OTCQX)

28
Increase the decision
support value of forecast
FOCUS ON MATERIAL CHANGES TO SUPPORT
data by reporting only
on changes that 1) have a
DECISION MAKING
high degree of economic
importance and 2) signal Thresholds for Including Information in Monthly Forecasts
Illustrative
need for specific action.
Roche Division-Level Thresholds

■■ While most traditional
forecasts are evenly detailed, Type of Material Materiality Threshold Decision Points
Roche’s FP&A team sets Business Change (Impact on Operating Profits)
thresholds for material
changes in the business that 1. Product Y delays +/- X% of operating profit Capacity planning and marketing
must be included in monthly resource reallocation
forecasts.
2. US healthcare reform CHF +/- XXX Revise profitability projections
■■ Thresholds vary by divisions, for x, y, z therapies
pharma business unit, region,
and function, and are set at
Roche Function/Region-Level Thresholds
a level supporting decision
making at each respective
Type of Material Materiality Threshold Decision Points
organizational level (i.e., not
Business Change (Impact on Operating Profits)
a one-size-fits-all approach).
1. Research CHF +/- 10 M (per quarter) or ■■ Assess impact on group-level

CHF +/- 25 M (per year) thresholds
■■ Update monthly outlook
accordingly
2. Group Informatics CHF +/- 1 M (per project) ■■ Assess impact on group level
thresholds
■■ Track risk
■■ Update monthly outlook
accordingly
Thresholds provide high-level …define when Roche’s finance …and focus management
definitions of material changes and business teams have to on decisions and corrective
that impact the current forecast a material business actions they must immediately
quarter and full-year forecast, change, evaluate or take.
Source: F. Hoffmann-La Roche Ltd.; CEB analysis.
29
what purpose is right for my organization’s budget
and Forecast application?
Key Questions to Ask Yourself
1 What purposes are we currently using the process for?
2 Which decisions are we supporting most effectively?
3 Which decisions have the biggest impact on the organization?
4 What decision(s) are we able to effectively support without a budget/forecast, or with minimal input from the budget?
Budget Forecast
1 What budget application is best supported with the data that we currently 1 Does the business provide regular updates on risks and opportunities as
have available? part of their regular forecasts? Are the risks quantified?
2 What does senior management expect from the budget and want it to 2 Do we effectively identify areas for senior management focus in our
accomplish? forecast cadence?
3 How does the application of the budget currently differ among 3 Do we establish predetermined triggers and action plans for our top
business units? prioritized risks and performance variance?
4 Are there regulatory considerations that inhibit us from effectively and/or 4 Do we have the right set of data in our forecasts to make decisions at the
efficiently pursuing specific budget purposes? enterprise and business unit levels?
5 Are there capital allocation requirements that inhibit us from effectively 5 Do we test business driver assumptions to ensure continued relevance to
and/or efficiently pursuing specific budget purposes? our strategic and operational plans as frequently as we need to? Do we
reflect this within our forecast?
Litmus Tests
■■ What level of detail is management comfortable with?
■■ How quickly do our budgets and forecasts significantly deviate from reality?
■■ How closely does the budget reflect operating priorities?
■■ How many ad hoc or re-forecasts to we perform across the annual cycle?

30
KEY TAKEAWAYS
Process
Clarity Depth and Timeliness Process
and Insight + Transparency + and Accuracy x Efficiency = Productivity
Index
Process Value Process Costs
Establish a Clear Role for Budgets and Forecasts in Business Decisions: Leading companies avoid using budgets and
forecasts as catch-all tools for decisions they are not fit to support. Instead, they ensure that their executive teams have
agreed upon the GOAL of budgeting and forecasting efforts before attempting process improvements.
Practice-Level Recommendations
Determine which decisions the budget and the forecast is best suited to support. Consider the wide range of compliance,
cost, and strategic investment decisions that management needs to make, and weigh how well-suited the forecast and
the budget is for each purpose. Consider a flexible long-range planning model that complements short-term budgeting
and forecasting, and is more effective for supporting capital deployment and strategic planning activities. (See Motorola
Solutions practice)
Set materiality thresholds to direct management action on the biggest performance risks. Develop risk materiality
thresholds (e.g., event’s impact on revenues or profits) that will guide 1) which risk/opportunity data businesses include in
their forecasts, and 2) drive constructive dialogue about how management should prepare or react to each risk. (See Roche
practice)

31
discussion RoAdmAP


32
The majority of
productivity drain
THE CUSTOMER ISN’T ALWAYS RIGHT
happens outside of
corporate FP&A’s purview. Stakeholders Who Over-Invest in Process Precision
Percentage of Respondents
■■ FP&A directors feel that

general managers, Sales Corporate Finance 24%
leaders, and business unit Corporate and
finance managers are most Business Finance
responsible for slowing down BU Finance 33%
budgeting and forecasting
processes.
GMs—Operating Budget 43%
Sales—Revenue Forecast 38%
GMs—Topline Growth 19%

Business Leaders and
Corporate Functional Leaders
Marketing 24%
IT 19%
Supply Chain 14%
0% 22% 45%
n = 21 FP&A directors.
Source: CEB 2012 CFO FP&A Leadership Council Meeting Poll.
“We wanted to simplify information requirements on the business, so we sat down with management to
go through budgeting and forecasting templates to select some cuts. Unfortunately, at each juncture,
business managers came up with justifications for why they need the information. FP&A certainly tried to
help free up some of the business’s time, but we haven’t been able to convince them to give up anything.”
Head of Corporate FP&A

© 2013 The Corporate Executive Board Company. Manufacturing Company
33
FP&A teams struggle
to balance corporate
FINDING A MIDDLE GROUND
command and control vs.
decentralized decision Tradeoffs Associated with Level of Detail and Transparency
making about process Illustrative
design.
Too Detailed and In-Depth
Over-Simplified
Large volumes of granular
Too little data is included Right Level of Detail
data is included, wasting time
leading to critical gaps, and
and effort in aggregation and
frequent ad hoc budget and
analysis; key drivers are lost in
forecast analyses.
the granularity.
Standardized Model Customized Model

Processes are rigidly Flexible Model Unique models are used
standardized across all for each business requiring
businesses, limiting the ability significant manual analysis and
to align drivers with each rework during consolidation.
group’s distinct business
activities.
Finance-Owned Process Stakeholder-Owned Process

Finance takes complete control Stakeholders own every
Key Stakeholder Engagement
of processes; stakeholders step of the process, giving
have limited understanding of central finance teams limited
data aggregation, and output visibility into the underlying
reconciliation, and decision- assumptions and tradeoffs.
making usage.

34
REDUCE THE STRAIN ON THE BUSINESS
Right-Size Process Depth and Transparency
90%
83%
72%
58%
53%
48% 48%
45%
26% 24%
21%
3%
0%
Limit the Number of Provide Straightforward Include the Right Create Time Limitations Use Different Models
Budget Negotiations Process Instructions for Amount of Detail (Start, Stop Dates) Depending on Functional
Business and Finance Needs
Teams

35
Forecast Standardization Protocols
Overview
Intel standardized three different forecast models across its global operations using simple rules for driver selection.
Company Snapshot
Intel Corporation
Industry: Electronics Intel is a multinational semiconductor chip maker. The company
Employees: 100,800 also makes motherboard chipsets, network interface controllers
and integrated circuits, flash memory, graphic chips, embedded
Headquarters Santa Clara, CA
processors, and other devices related to communications and
Ticker: INTC (NASDAQ) computing.

36
Forecast and budget
models can be either too
IDENTIFY AN OPTIMAL SET OF MODELS
granular or not granular
enough.
■■ In both cases, the processes Number of Forecast/Budget Models Implications

fail to inform decisions at the
right level and can create
One-Size-Fits-All Approach
additional costs. 1. Over-aggregation of sales and cost drivers prevents alignment with
each group’s distinct business activities.
2. Too many costs are pooled under each category, making cost
management and profitability analysis difficult for Finance and non-
actionable for business partners.
Just Right 1. Sales and cost drivers are aligned to distinct, recognizable activities
that happen in each part of the business.
2. Costs are broken out into manageable pools without excessive
detail, facilitating clear communication up and down the
organization.
3. Finance can more easily evaluate other performance drives and
aggregate data for weekly/monthly/quarterly flash forecasts.
1. Excessive number of different forecast and budget methodologies

Too Many Unique Approaches requires more consolidation effort.
2. Businesses are prone to analysis paralysis and load up their
templates with too much granular, non-actionable data.
3. Cross-enterprise cost accounting discussions more difficult due
to methodology complexity.
4. Smaller drivers of cost and sales performance get lost in the detail.
Source: Intel Corporation; CEB analysis.

37
Define budget/forecast
process needs across
DEFINE A PROCESS HIERARCHY ACROSS
business groups so that
FP&A can allocate the
BUSINESS GROUPS
appropriate process
granularity and scope. Intel’s Business Hierarchy
Excerpted
■■ After seeing negative results

from over-standardization,
Intel now uses more than Intel segments Global Factory Network Technology and Innovation SG&A Groups
one standard model. business
groups
based on + Ireland + R&D + HR
key planning
characteristics.
+ China + IT + Finance
+ New Mexico + Architecture + Sales
+ + Mobile and +
Israel Marketing
Communications
Budget and Complex Driver-Based Model Project-Based Model Simple Driver-Based Model
forecast
models are The manufacturing sites require Technology- and R&D-focused Headcount-driven functions
aligned to each complex forecast and budget groups require unique models like HR and Finance need very
segments’ models that can account for that allocate capital and non- simple budget and forecast
unique all the different drivers of cost financial resources to discrete models. These include just a
planning
performance. projects with unique payoff few key event and issue drivers
needs.
horizons. accounting for the majority of
performance variation.
Source: Intel Corporation; CEB analysis.

38
BUSINESS PLANNING SIMPLIFICATION
Overview
Recognizing that its legacy planning processes were becoming costly bottom-up financial plans, General Electric
reduced the level of granularity included in its planning presentations to refocus conversations on trends and strategic
decision making.
Company Snapshot
General Electric
Industry: Conglomerate General Electric Company (GE) is a diversified technology and
Employees: 305,000 financial services conglomerate with operations in more than 100
countries. Its segments include Energy Infrastructure, Aviation,
Headquarters: Fairfield, CT
Healthcare, Transportation, Home and Business Solutions, and GE
Ticker: GE (NYSE) Capital. GE’s products and services range from aircraft engines, power
generation, water processing, and household appliances to medical
imaging, business and consumer financing, and industrial products.

39
GE’s operating system
contained three planning
A TEN YEAR TRADITION
cycles which produced
long- and short-term GE’s Operating System
outlooks and reviewed
progress against targets.
October March
■■ Twelve–month plan for future year 3 ■■ Long-range plan, 3–4 Years
Operating
■■ Sets business performance targets 1 ■■ Top-down total-year financial
and incentive levels Plan outlook
Growth
Playbook ■■ Establishes strategic direction
for each business
■■ Incorporates high-level
financials, external landscape
(economics, competitors), and
big ides
2
Session II
July–August
■■ Eighteen–month plan (July of
current year to December of future
year)
■■ Review expected current-year
financial results
■■ Detailed, bottom-up financial
plan for future year, by quarter, by
business
■■ Sets the baseline for the Operating
Plan
Source: General Electric Company; CEB analysis.

40
Over time, each of the
three planning sessions
TOO MUCH FINANCE, NOT ENOUGH STRATEGY
devolved into detailed
bottom-up financial Stated Versus Actual Focus of Each Business-Level Planning Session
roll-ups.
Growth Playbook Session II Operating Plan
■■ Planning sessions that were
meant to be strategic in Stated Purpose ■■ External landscape ■■ Key performance ■■ Session II baseline
nature became bottom-up and Focus metrics
■■ Business initiatives ■■ Corporate targets
detailed financial exercises, ■■ Program funding
taking three to four months ■■ Investment prioritization
to complete and consolidate ■■ Performance target
up to GE corporate center. ■■ Strategic roadmap for discussion
the business
Actual Focus Bottom-up financials Bottom-up financials Updated bottom-up

focused roll-up focused roll-up financials focused roll-up
Example Consolidation Lengthy Three Month-Long Consolidation of Each Planning Session:

for Each Planning Session
GE Capital GE Capital GE Capital GE Capital
Australia Asia Corporate Global

41
Structure planning
sessions such that
CURTAIL UNNECESSARY BOTTOM-UP BUDGETING
business managers spend
more time discussing Restructured Planning Focus: Blueprint 4
strategy (informed by Illustrative
key numbers), not
numbers informed by
strategy. Growth Playbook Session II Operating Plan
New Focus ■■ Focus only on strategic ■■ Focus on new product ■■ The only bottom-up
objectives and scenario launches, projects that financial planning exercise
planning support GE global left in the year
initiatives, adjacency
■■ Eliminate bottom-
opportunities, and other
up financials and
business decisions
comparisons of detailed
financials against prior ■■ Evaluate execution quality
plan to date
■■ Eliminate bottom-
up financials and
comparisons of detailed
financials against prior
plan
Criteria for Topic Importance: criticality Materiality: Financial Business-Specific Focus:

Inclusion in the of business objective to attractiveness of initiative Estimates of key areas of
Discussion business goals emphasis (cost, capacity,
Long-Term Alignment:
backlogs)
Stability: Likelihood that If the initiative needs
the business objective or to be protected in the Resource Reallocation:
supporting performance short-term and allowed Proposals for cutting or
measures will fluctuate to realize LT growth initiating new programs,
due to changes in the potential moving headcount and
business environment other resources
Strength of Synergies in
Ambiguity: Accuracy the Portfolio: Likelihood Leadership Directives:
of success KPIs used to that the initiative will be Financials and key points
measure performance accretive for many parts of interest based on
against business of the business leadership messages,
objective macro, industry, and GE-
Ambiguity: Availability
specific trends
of complete and
accurate data to assess
© 2013 The Corporate Executive Board Company. performance

42
Screen out unnecessary
detail in strategic and
AVOID DETAIL OVERLOAD
financial planning
presentations that do not GE Pitch Decks
directly inform key trends Before and After
or decisions.
Detailed Pitch Decks Streamlined Pitch Decks
Prior Approach New Approach
■■ GE is reducing the volume Length: 30–40 Pages Length: 10 Pages
of data included in
planning pitch decks and Contents: Detailed P&L submissions, four years out, Contents: Qualitative narratives, macro and micro
also refocusing executive by quarter, by product economic trends and key risks; backed by three pages
presentations on strategy of relevant financial detail
Purpose: Defend financial performance; justify ROI
rather than financials.
projections for new growth initiative funding requests Purpose: Customer and competitive landscape
discussion; quick update of financials
Nature of Narrative and Financials:
Nature of Narrative and Financials:
Historic: Establishes baseline trends
Reactive: Focuses on gap to goal and possible Current: Diagnoses problem areas and benchmarks
action against competitors
Detailed: Thousands of inputs and line items rolled Proactive: Evaluates management action that may
up for review need to be taken to combat problems and enables
quick decision making
Synthesis: Combines diverse financial and
operational data into high-level observations,
insights, and trends
etric Consistency: One definition, one set
M
of drivers of each key performance indicator

43
KEY TAKEAWAYS
Process
Index
Right-Size Process Depth and Transparency: Leading companies don’t rely solely on corporate finance cost benchmarks
when they tackle budget/forecast process cost and complexity. The true cost of poorly designed processes are grossly
underestimated and rarely tackled because they are hidden from view within the business. The best FP&A organizations gain
disproportionate efficiencies by tackling process complexity in the business, not just the corporate center.
Avoid the pitfalls or budget/forecast model over-standardization. Different business areas have fundamentally unique
information requirements, and budget/forecast models must flex accordingly. When you seek to standardize models, identify
common elements among departments and business areas that can serve as the baseline for developing the minimum
number of unique standard models. (See Intel practice)
Reduce unnecessary bottom-up detailed planning in the business: Most FP&A teams struggle to engage business
partners to reduce granularity in business-level plans without compromising local performance visibility. Teach management
to be pragmatic in how they choose the level of planning detail, establish clear parameters for when local plans can diverge
from corporate standards, and review changes in local management’s information needs frequently. (See GE practice)

44
discussion RoAdmAP


45
Companies experienced
high forecast and budget
NOT MEETING OUR OWN internal STANDARDS
variance in 2012, with
cash flow forecasts Acceptable Versus Observed Level of Forecast Variance in 2012
performing the worst. Average, By Forecast/Budget Type
10%
■■ Over one-half of companies 9.1% Observed Variance
exceeded their forecast and 8.7% Acceptable Variance Threshold

budget variance thresholds 8.7%
in 2012. The size of error
varied by forecast type—see
data at right.
5% 4.7%
5.7%
4.3%
4.0% 3.9%
0%
Revenue Earning Cash Flow Operating
Forecast Forecast Forecast Budget

46
It is important to
understand the drivers
ROOT CAUSE DRIVERS OF VARIANCE
of change since even
the best predictions will Sample Variance Drivers
be eventually proven
incorrect.
Wrong
Assumption
Natural
Volatility
Variance
Process
Defect
Incentive
Bias
Operating Business Unit Business Unit Supplier Lowers Customer Operating

Margin Forecast Managers Forecasts Apply Prices Instead of Demand Margin Actual
Sandbag the Wrong Raising Them as Increases More
Forecast Probability in the Expected Than Expected
Forecast Model
“When we had a forecast

review, BUs would come
in with a presentation of
business performance, but it was Critical Minimize Process Maximize Learning
hard to understand the underlying Imperatives Bias and Defects from Meaningful Variances
drivers that were causing that
change.”
Director, FP&A
Construction Industry

47
IMPROVE ACCURACY BY UNDERSTANDING SOURCES OF VARIANCE
Learn from Your Variances

70%
63%
41%
38%
35%
35% 32%
21%
15%
13% 13%
6%
0%
Regularly Review Original Designate Interdisciplinary Surface Internal and Engage Business Partners Adjust Accuracy
Assumptions Teams Who Vet and Set External Performance About Uncertainty in Expectations Based on
Key Assumptions Risks Their Forecasts Businesses’ Profiles

48
Forecast Bias Tracking
Overview
Unilever evaluates the track record of each business and sets triggers to review business unit forecast methods
and underlying assumptions if there are several consecutively high or low bias results.
Company Snapshot
Unilever plc
Industry: Food Unilever is an Anglo–Dutch multinational food, personal care,
Employees: 169,000 and household products manufacturer. The group’s portfolio of
consumer products includes a dozen global brands, including
Headquarters London, United Kingdom
Rotterdam, Hellmann’s, Knorr, Lipton, and Dove and Lux. Unilever’s
The Netherlands consumer goods are sold in more than 190 countries.
Tickers: UNA (Euronext Amsterdam)

ULVR (LSE)
UN (NYSE)

49
Record bias in business
unit forecasts over time
IDENTIFY MANAGERIAL BIASES
to isolate bias trends.
Forecast Bias Report
Illustrative
■■ For example, BUs are
required to submit a point Business Unit J
estimate that should have Underlying Sales Growth (USG%)
50% probability of being too
Q1 Q2 Q3 Q4 Average
high or too low. Central Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov.
Forecast Aggressive Bias
3.7% 3.1% 3.6% .3% (1.2%) (4.2%) 7.3% 3.7% 2.1% 5.2% 5.2% 5.2% XX
(Actual)
■■ In this slide, Business Unit 2.6% 2.6% 2.6% (5.7%) (5.7%) (5.7%) 2.1% 2.1% 2.1% 2.0% 2.0% 2.0% XX
J’s forecasts are consistently

biased, falling more than Above
8.3%
Hit-Rate
50% below the actuals, while Below 91.7%
Business Unit K has about

50/50 odds of forecasting Business Unit K
performance above or below Underlying Sales Growth (USG%)
the actuals.
Central
Q1 Q2 Q3 Q4 Average Unbiased
Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov.
Forecast
(Actual) 3.6% 0.0% 8.9% 8.5% 8.9% 2.5% 0.2% 1.9% 4.9% 4.7% 3.8% XX
0.0% 0.4% 8.5% 8.9% 8.9% 0.2% 3.2% 0.2% 5.3% 5.3% 5.3% XX
Above 54.5%
Hit-Rate
Below 45.5%
Evaluating Criteria
Three consecutively high or low hits trigger a bias pattern and operating company analysis.
Hit-rate average is assessed against a target of 50%.
0% 50% 100%
Overdelivery Target Underdelivery
Forecast Bias League Table

Business Unit A I H K G E D B J
Bias Score 50% 50% 54% 45% 73% 67% 25% 27% 92%
Minimal Bias Significant Bias

All Rights Reserved. FPA6981613SYN Source: Unilever; CEB analysis.
Note: Data points are for illustrative purposes only.

50
Range forecasts
determine the real
A Window, Not a Point
volatility for different
businesses, while Business Unit Range Success Rate Report
preserving forecasting Illustrative
accountability.
Business Unit J
■■ Business units determine Central Forecast (Point
(USG Percentage)
forecast range bounds Estimated by Business Unit)
Sales Growth
Underlying
with historical volatility
Actual
and upside and downside
expectations. Range Forecast
■■ Range forecasts should

have 90% probability of
actual results falling within Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov.
range, not on meeting point
estimates. Yearly
Period Q1 Q2 Q3 Q4
Average
Range
67% 100% 67% 67% 75%
Success Rate
Source: Unilever; CEB analysis. 90% Target
Not Accurate Enough Too Accurate

Range Is Too Narrow to Reflect Market Volatility; Unrealistically Wide Range Ensures Accuracy
Ensures Constant Surprises
Max.
Max.
Min.
Min.
Time Time
Source: Unilever; CEB analysis.
Deviation from Central Forecast
Central Forecast (Point Estimated by Business Unit)

51
Assessing forecasts
through a dual lens of
Two-Dimensional Insight
bias and range accuracy
differentiates operating Hypothetical Model of Business Unit Forecast Error Diagnosis
company finance Illustrative
problems from corporate
finance problems.
Operating Company Operating Company
Finance Remediation Steps Finance Remediation Steps
■■ Challenge Business Units ■■ Root-Cause Analysis (Market
to Address Bias. Volatility or Behavioral)
■■ Root-Cause Analysis ■■ Process and Staff Review
High
Frequency of Biased Forecasts
Intentional or Market Volatility

Process-Induced Bias Learning Failure
Corporate Finance Remediation Steps

Risk
No ■■ Portfolio Management Decisions to
Management
Problem Offset Volatility
Failure ■■ Refine/Clarify Corporate Risk
Management Messaging
Low
■■ Review Strategic Assumptions
Low High
Frequency of Actuals
Outside Forecast Range

52
Budget Assumption Management
Overview
Mondi views coordination and incorporation of unique and informed vantage points into the forecasting process as a key
step. The company appoints different leaders to own critical assumption setting and distinguishes timing for finalizing
critical assumptions from those that aren’t likely to change.
Company Snapshot
Mondi Limited
Industry: Paper and Packaging Mondi is an international packaging and paper group, with production
Employees: 23,400 operations across 30 countries. Mondi is fully integrated across the
paper and packaging process, from the growing of wood and the
Headquarters Johannesburg,
South Africa manufacture of pulp and paper, to the conversion of packaging paper
into corrugated packaging, industrial bags, extrusion coatings, and
Tickers: MNDI (LSE)
release liner.
MNP (JSE)

53
Mondi meets with Group
Executives to discuss
Openly COMMUNICATE ERROR RATES
past variances and
the pitfalls of overly Variance Discussion Agenda
optimistic accuracy Illustrative
expectations.
From: Group FP&A

To: Group Executives; BU Executives
Cc: BU FP&A Team Managers
Subject: Budget Assumption Variance Discussion—Agenda
Past Variance Analyses

Assumptions 2011 Variance 2012 Variance 2013 Variance
Pulp Price 5% 6% (2%)
Kraft Paper Price (4%) 5% 4%
Energy Price in South Africa (8%) (13%) 5%
Production Volume 2% (1%) (4%)
… … … …
“The single greatest
realization from
reviewing our budget
process is that the actual results
from the previous month are what
they are, and there is nothing you
Allowing each business to input its
can do to change them. The only
own numbers for every assumption can
thing you can do is look forward result in compounding inaccuracies.
and ask ‘what can we do
differently to make our process Source: Mondi Ltd.; CEB analysis.
more valuable?’”
Darren Ghavalas
Group Financial Controller
Mondi Ltd.

54
Mondi separates
assumptions by speed
Four Assumption Archetypes
of change and level of
group-wide impact to Critical Assumption Identification Matrix
identify the critical few
on which it should focus
its efforts.
Group Standard Assumption Group Critical Assumption
■■ Mondi defines “group critical
Actions: Actions:
assumptions” as those that
have a large impact on
■■ Identify BU to Own Assumption Creation ■■ Identify BU to Own Assumption Creation
Group-Wide
enterprise-wide strategic ■■ Track on quarterly basis via BU forecast ■■ Track on weekly or monthly basis via BU
decisions and are likely to report forecast report
experience rapid changes.
Example: Example: Assigning one
owner allows
■■ USD/Euro FX Rate ■■ Hardwood Pulp Price for group-wide
Catalyst Prices Rand/Euro FX Rate assumption
Impact Level
■■ ■■
standardization.
BU Standard Assumption BU Critical Assumption
Actions: Actions:
■■ Develop BU-specific assumptions ■■ Develop BU-specific assumptions
BU-Specific
in a bottom-up manner. in a bottom-up manner.

■■ Track on quarterly basis via BU forecast ■■ Track on weekly or monthly basis via BU
report forecast report
Example: Example:
■■ Energy Price in Italy ■■ Industrial Bag Demand in UK
■■ Compensation Expenses ■■ Energy Price in Russia
Slow Quick
Speed of Change
Source: Mondi Ltd.; CEB analysis.

55
Corporate FP&A assigns
assumption ownership
DELEGATE ASSUMPTION OWNERSHIP TO TEAMS
to the business unit team
with the most experience
CLOSEST TO THE ISSUE
and exposure managing
that issue. Four Questions to Identify Which Business Unit Will Model and Monitor Each Group-Wide Assumption
Which business unit should own this assumption?
1. Which BU has the most experience modeling the assumption in question?
2. Which BU has been most accurate in modeling the assumption in question?
3. Which BU is most sensitive to changes to the assumption in question?
4. If the assumption forms part of an internal supply chain, which BU is most upstream?
Group Standard Assumptions

Set and Forget
■■ Assumption owner generates point assumption which is

submitted to group FP&A for distribution prior to BU budget
creation.
■■ Must achieve point buy-in from other affected BUs.
■■ Do not revisit assumption after buy-in is achieved.
Group Critical Assumptions

Set Ranges and Review
■■ Prior to BU budget creation, assumption owner generates
a range for the assumption and submits to group FP&A
for distribution.
■■ Must achieve range buy-in from other affected BUs.
■■ Track the assumption across budget creation process.
■■ Before Board submission, issue a point estimate within the
range for use by the group.

56
Mondi establishes
ranges for group critical
Prepare, don’t predict
assumptions upfront and
quickly finalizes point Mondi’s Scenario Testing Tool
estimates at the end. Scenario Case, Illustrative
Budget Assumptions—Packaging Paper

■■ Mondi’s model provides ASSUMPTION RANGE
70% accuracy, affording FX Rates Critical assumptions are
management with the ability Euro/Ruble TBD €35–45 tracked on a monthly basis
to make decisions quickly Euro/USD €1.30 - and updated in the model.
to maximize impact.
Input Costs
Softwood Pulp (Euro/tonne) TBD €700–900
Scenarios are identified by
Paper for Recycling (Euro/tonne) TBD €90–120 group management based on
Water (Euro/1,000L) €0.30 - either risks and opportunities
Bleach (Euro/1,000L) €0.50 - tied to strategic decisions or
operating trends.
Overhead
Payroll €4.2M -
Standard assumptions are
T&E €3.3M -
populated through forecast
update reports.
P&L Statement Baseline Scenario
Revenue $XX $XX

COGS $XX $XX Financial
“If you increase the statements are the
Operating Costs $XX $XX result of simple
number of variables, you
Labor Costs $XX $XX driver-based
may get more accuracy, multiplication.
but you will make the model too G&A Costs $XX $XX
complex to run quickly. It’s much
Gross Margin $XX $XX
more important to make quick
decisions.”
Darren Ghavalas
Group Financial Controller By producing scenario-based financial statements rather than detailed scenario-based budgets, Mondi focuses the
Mondi Ltd.
conversation around strategic decisions instead of cost control.

57
Mondi sets standard
assumptions in the first
A DIFFERENTIATED APPROACH
month of budgeting to
allow FP&A to focus its Assumption Management Steps During the Budget Cycle—Before and After
efforts on monitoring the
critical few.
Sept. Oct. Nov. Dec.
Set all Develop BU and Revise Second Board

assumptions budget Group review assumptions review prep
Before
15 Days 10 Days 6 Days
Time
20 Days 10 Days
Saved
Finalize group Develop BU and Board

standard budget Group review prep
After
assumptions
Set ranges for group Track group critical assumptions Finalize group
critical assumptions and analyze scenarios critical assumptions

58
Mondi’s focus on
scenarios has resulted in
Reducing Total costs of budgeting
a budgeting process that
is both more valuable Budget Cycle Time Time Spent on Developing Assumptions
and less costly. Number of Working Days, Before and After Number of Working Days, Before and After
Pre-Implementation
Post-Implementation
70 16
70 16
60
10 10
35 8
6
5 5
0 0
Pre-Implementation Post-Implementation Group FP&A BU FP&A Business
Partners
Additional Benefits
Increased Value
■■Time is spent on value-added conversations around critical assumptions rather than on reworking standard
“Because we only
assumptions.
require one iteration,
where in the past we ■■ Mondi is able to focus the agenda of budget review conversations on the areas that matter, and to make them more
have required multiple, I have forward-looking.
definitely seen a much more
positive mood than I’ve seen in
previous budgeting cycles.”
Darren Ghavalas
Group Financial Controller
Mondi Ltd.

59
KEY TAKEAWAYS
Process
Index
Learn from Your Variances (do not Seek Accuracy for Accuracy’s Sake): Leading companies avoid taking an accounting-
driven, forensic approach to forecast accuracy. The best FP&A teams treat the root causes of variance by distinguishing
controllable versus uncontrollable performance drivers, and doubling-down on accuracy in underlying assumptions.
Identify managerial biases. Managers, under stress of uncertainty, typically make one of several predictable mistakes in their
forecasting process. Improve forecast accuracy and accountability by using historical data to isolate trends and biases in
business unit forecasts and engage business managers accordingly. (See Unilever practice)
Work with internal experts to set assumptions. Assumption management is the single most important factor in the
budgeting and forecasting models. Set critical assumptions at the group level with the help of an interdisciplinary team, and
only revisit assumptions that are volatile, material, and likely to change before annual plans and projections are finalized. (See
Mondi practice)
Supplement forecast point estimates with ranges. Point estimate forecasts place undue pressure on management to
accurately predict performance, often contributing to conservatism. Ask businesses to supply ranges for key line items to 1)
understand their underlying assumptions and 2) evaluate the probability of risk events that determine the high and low limits
in their ranges. (See Mondi practice)

60
sTudy Findings
A sizeable Productivity gap: 80% of companies are earning less than one-half of their potential productivity from
budgets and forecasts. Companies with top-quartile process productivity are more likely to drive accountability for
performance, use budgets and forecasts to inform key decisions, and do so at a lower cost to both Finance and the
business.
speed and Accuracy Are Part of a Bigger Productivity equation: Focusing on process automation and accuracy alone
will not improve process productivity, unless it’s matched by improvements in 1) the insight value of planning deliverables,
2) the right level of detail and process transparency for business stakeholders, and 3) the cost of forecasting and
budgeting to the business (not merely to Corporate Finance).
What the Best companies do
■ establish a clear Role for Budgets and Forecasts in Business decisions: Leading companies avoid using budgets and
forecasts as catch-all tools for decisions they are not fit to support. Instead, they ensure executive teams have agreed
upon the goal of budgeting and forecasting efforts before attempting process improvements.
■ Right-size Process depth and Transparency: Leading companies don’t rely solely on corporate finance cost
benchmarks when they plan process improvements. The true costs of poorly designed processes are grossly
underestimated and rarely tackled because they are hidden from view within the business. The best FP&A organizations
gain disproportionate efficiencies by tackling process complexity in the business, not just the corporate center.
■ Learn from your Variances (Timeliness and Accuracy): Leading companies avoid taking a black and white approach to
budget and forecast deliverables being on-time and on-target. The best FP&A teams treat the root causes of variance
by distinguishing controllable from uncontrollable performance drivers, and segment critical information points to
ensure deadlines meet the criticality of decision-making windows.

61
Appendix
Information About Our Proprietary Budget and Forecast Process Diagnostic p. 72

A Different Look at Budget and Forecast Process Productivity p. 73
What Actions and Techniques Drive Productivity? p. 75
Budget Models and Process Improvement Tools p. 76
Forecast Models and Process Improvement Tools p. 77

62
BudgeT And FoRecAsT PRocess diAgnosTic
Our diagnostic survey is designed to benchmark key

attributes of forecast and operational budgeting processes.
Participants will receive custom results, recommendations

and guidance from our Executive Advisory® team.
Note: CEB will publish only aggregate results, and individual responses will remain confidential.

63
A DIFFERENT LOOK AT BUDGET AND FORECAST PROCESS PRODUCTIVITY
CEB FP&A’s Budget and Forecast Productivity Model and How It’s Different from Existing Research
Our Hypothesis: FP&A has a significant opportunity to improve forecast and budget process productivity by implementing techniques that increase the
value of output data and deliverables. Focusing process improvement efforts solely on minimizing corporate finance process costs is insufficient.
I. Selecting Budget and Forecast II. Maximizing Process Productivity III. Validating Expected Outcomes
Process Attributes We created the Process Productivity We evaluated the impact of highly
163 Unique Attributes Tested in the Index to evaluate total process productive processes on the following
Survey productivity potential. The index is outcome measures:
calculated separately for budgeting and
Types of attributes tested:
■■ Accountability for performance targets
forecasting.
and results
■■ Use of different types of forecasting ■■ Stewardship of business costs and cost
The Process Productivity Index
and budgeting models cutting efforts
is calculated using a combination
■■ Process cycle time, horizon and depth ■■ Assurance about ability to meet
of the following process attributes:
of detail targets and avoid surprises
■■ Accuracy focus and variance analysis ■■ Insights included in the deliverables ■■ Perceived value of budgets and
techniques ■■ Clarity of information forecasts
■■ Purposes for budgets and forecasts ■■ Process transparency ■■ Total process costs
■■ Decision support value of forecast and ■■ Depth of detail
budget deliverables ■■ Timeliness
■■ Degree of process automation ■■ Accuracy Rationale: To validate if companies benefit
■■ Process governance and transparency ■■ Process efficiency from having highly productive forecasting and
budgeting processes.
attributes
■■ Budget and forecast process post-
audits Rationale: To define a holistic measure of process
productivity using process value attributes in
■■ Degree of collaboration between
addition to process efficiency.
Finance and the business
Rationale: To explore if different budget and

forecast models, measurable differences in
cycle time, and specific process management
techniques can impact process productivity.

64
CEB’s Forecast and
Budget Process
CALCULATING THE INDEX
Productivity Indexes are
calculated using the sum Our Methodology for Calculating the Process Productivity Index
of equally weighted six
process value attributes, Process
with process efficiency as Clarity Depth and Timeliness Process
a multiplier. Index

■■ Process attributes are self-
assessed on a 1–7 scale and
the combined index scores
are grouped by quartiles.
■■ Separate productivity
indexes have been Sample Survey Questions Assessing Strength of Each Process Attribute
calculated for budgets
and forecasts for each Q4: Rate the quality of your organization’s forecast process characteristics?
participating company. For
7
illustrative purposes, we are 1 4 (High
only referring to the forecast (Poor) 2 3 (Average) 5 6 Quality)
process productivity index.
Timeliness
Efficiency
Analysis of Attributes Differentiating Companies in the Top Quartile Versus

Bottom Quartile of the Productivity Index
Forecast Process Productivity Mean Index Scores, By Quartile
300
294 Maximum Potential
Index Score
201
Minimum Index Score
143
150
105
58
0 6
Bottom Quartile Second Quartile Third Quartile Top Quartile

65
CEB identified and
tested 163 budgeting and
WHAT ACTIONS AND TECHNIQUES DRIVE
forecasting techniques
that could have an impact
PRODUCTIVITY?
on process productivity.
Partial List of Process Productivity Drivers Tested in Our Diagnostic
Decision Support Value Governance and Transparency Accuracy Focus

■■ Transparency into resource allocation ■■ Degree of process standardization ■■ Focus on improving accuracy and
decisions ■■ Different models depending on controls
■■ Adjustments to plans in the face of business and functional need ■■ Level of variance thresholds
rapidly changing conditions ■■ Centralized assumptions management ■■ Root causing of variance drivers
■■ Assurance about ability to hit targets ■■ Regular reviews of original assumptions ■■ Accuracy expectations adjusted based
■■ Identification of external and internal ■■ Interdisciplinary teams who vet and set on business’ profiles
performance risks key assumptions ■■ Identification of managers who game
■■ Redirection of management focus on ■■ Straightforward process instructions for and bias submissions
controllable drivers of performance business and finance teams ■■ Use of ranges in internal forecasts and/
■■ Constructive dialogue about what ■■ Process milestones scheduled to avoid or input assumptions
management should do next peak business periods ■■ Guidelines about non-financial data that
■■ A clear role for budgets and forecasts ■■ Process ownership guidelines for can be used to improve forecast quality
in business decisions business and finance teams
■■ Stewardship of business costs
Applications of Budgets and Forecasts
■■ Link between spending and strategic
outcomes Collaboration Between Finance and the ■■ Target setting
■■ Understanding of how management’s Business ■■ Performance management
information needs are changing ■■ Degree of Finance influence over ■■ Translation of strategic priorities into
business-level processes operational plans
■■ Education of business partners about ■■ Cost management
Cycle Time and Depth how budget/forecast models work ■■ …
■■ Clear guidelines for managing
■■ One standard calendar for budget and
disagreements and disputes
forecast submissions
■■ Engagement with managers about Process Post-Audits
■■ Budget and forecast update frequency
uncertainty in their forecasts
and horizon ■■ Assumption quality reviews
■■ Engagement of with managers about
■■ Working days and FTEs required to ■■ Process efficiency, error, time audits
trade-offs in their budgets
complete each cycle ■■ Feedback from business stakeholders
■■ Number of process iterations about process flaws
■■ Start/stop date limitations on cycle Forecasting and Budgeting Models ■■ Feedback from business partners about
time information value
■■ Driver-based
■■ Limits on number of budget
negotiations
■■ Rolling
■■ Number of line items, levels of drill-
■■ Zero-based Data Governance and Automation
down ■■ Scenario-based ■■ Streamlining of the underlying data
■■ Right amount of data and detail ■■ Charge-backs infrastructure (e.g., chart of accounts)
■■ Sufficient capacity in FP&A to fulfill all ■■ Top-down versus bottom-up budget ■■ Degree of automation in budget and
© 2013 The Corporate Executive Board Company. budget/forecast update requests target setting forecast templates

66
BudgeT modeLs And PRocess imPRoVemenT TooLs
Budget Process
scenario-Based Budgeting Rolling Budgeting Zero-Based Budgeting
complexity Reduction
Trigger-Based Trough Planning Rolling Budgeting Process Zero-Based Budgeting Budget Process Cost Estimator
Implementation Guide
Budget-Scenario Triggers Funding Opportunity Pipeline Zero-Based Budgeting Budget Cycle Rationalization
Tailored Scenario Planning Resource Allocation Trade-Offs Strategy-Driven Budgeting Financial Data
Standardization Protocols
Risk-Based Budgeting and Planning Divorcing Incentive Targets

from Budgets
G&A Budget Floors and Ceilings Budget Process

Improvement Roadmap
1 Pseudonym.

67
FORECAST MODELS AND PROCESS IMPROVEMENT TOOLS
Forecast Accuracy Thresholds Driver-Based Forecasting Rolling Forecasting Cash Flow Forecasting
Forecast Accuracy Reinforcement Driver-Based Rolling Forecast Variable Driven Forecast Schedule Periodic Cash Forecast Exceptions
Controllable Forecast Model Factors Forecast Variable Determination Rolling Forecast Implementation Forecast Assumption Validation
Roadmap Process
Forecast Accuracy Bias Tracking Process and Owner Defined Range-Based Cash Forecasting
Metric Selection
Risk-Adjusted Forecasting Demand Forecasting
Forecast Accuracy Scorecard Cash Forecast Analysts Capabilities
Risk and Opportunity Forecast Update Demand Forecast Incentives
Risk Triggers and Scenarios Assumption-Adjusted Demand

Forecasts
1 Pseudonym.

68
FPA6981613SYN
69

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CEB Financial Planning & Analysis Leadership Council

Confidentiality and Intellectual Property

What the Best companies do

© 2013 The Corporate Executive Board Company.

Budgeting Process Changes Forecasting Process Changes

Sample Budget Process Improvements Sample Forecast Process Improvements

© 2013 The Corporate Executive Board Company.

■■ Despite significant 100%

n = 138 global FP&A directors.

Three Common Complaints

Stuck in a Rut Cannot Let Go of the Details Misguided Focus on Accuracy

Head of FP&A Head of FP&A Head of FP&A

© 2013 The Corporate Executive Board Company.

n = 138 global FP&A directors. n = 138 global FP&A directors.

Perceived Value of Budgets and Forecasts

80% 73% Corporate and Business FP&A

FP&A Directors’ View of Business

Source: CEB 2013 Budget and Forecast Productivity Diagnostic.

© 2013 The Corporate Executive Board Company.

31% Finance FTEs Dedicated to Process 59%

31% Process Cycle Time 82%

26% Number of Iterations Required 73%

23% Degree of Completeness 55%

Clarity and Value 86%

6% Business/Functional FTEs 55%

3% Repeatability of Process 73%

Number of Insights Included 73%

0% 50% 100% 0% 50% 100%

n = 35 global FP&A directors. n = 35 global FP&A directors.

© 2013 The Corporate Executive Board Company.

Corporate FP&A Costs

Business Finance Costs

Costs to Management and

© 2013 The Corporate Executive Board Company.

n = 138 global FP&A directors.

© 2013 The Corporate Executive Board Company.

Differentiators of Top and Bottom-Quartile Process Productivity (Forecasting)

© 2013 The Corporate Executive Board Company.

■■ When making process

Source: CEB analysis.

© 2013 The Corporate Executive Board Company.

Budget Process Ratings

100% 94% Top Quartile Forecast

Source: CEB 2013 Budget and Forecast Productivity Diagnostic.

© 2013 The Corporate Executive Board Company.

Process Value Attributes Process Cost Attribute

Budget Process Ratings

Forecast Process Ratings

n = 138 global FP&A directors.

© 2013 The Corporate Executive Board Company.

Negative Impact on Forecast Process Productivity

© 2013 The Corporate Executive Board Company.

Provide Transparency into Resource

Include the Right Amount of Detail 0.50

Create Time Limitations (Start, Stop Dates) 0.27

Limit Number of Budget Negotiations 0.26

Surface Internal and External Performance Risks 0.37

0.00 0.30 0.60

Source: CEB 2013 Budget and Forecast Productivity Diagnostic.

© 2013 The Corporate Executive Board Company.

solutions Productivity imperative 1:

Decision Materiality Thresholds Business Planning Simplification Budget Assumption Management

© 2013 The Corporate Executive Board Company.

Required Budget xternal, non-financial,