Leaders of the Pack:

Practices That Streamline

Financial Processes
As frustrations with planning, budgeting, and forecasting
processes mount, the APQC set out to determine whether leading
practices can shorten these cycles.

C
by Lisa Higgins ONSULTANTS TALK
perpetually about
Lisa Higgins is the chief
best practices. For
operating officer of the
managers listen-
APQC. She has led
ing to them, the
several APQC
obvious response is to ask, “But
departments since she
what is the business value of
joined the organization in
these practices?” It’s not logical
1993. She has served on
to undertake a major software
the APQC’s executive
upgrade or process reengineer-
team since 1995.
ing project if you’re not confi-
dent that you’ll achieve tangible
returns from your investment.

©2005 JOEL NAKAMURA

So the APQC, an independent
nonprofit dedicated to corpo-
rate performance benchmark-
ing, conducted a survey with

C/O THE ISPOT.COM

the help of IBM and Business
Finance to find out whether
today’s most popular business
performance management
(BPM) “best practices” are yielding results.

What’s Wrong With BPM?

Many companies are highly dissatisfied with both the process-
es involved in and the results derived from their planning, bud-
geting, and forecasting efforts. Our survey asked respondents to
evaluate their processes through a series of quantitative and qual-
itative questions. Some of their answers are compiled in exhibit 1,
at right. A large proportion of respondents leveled fairly harsh crit-
icisms at their BPM processes, saying that budgeting is mainly a
number-crunching exercise (47 percent), that the plan is not clear-
ly linked to strategy (56 percent), or that technology makes the
process neither faster nor more effective (63 percent).
Many respondents are also dissatisfied with the timeliness of
their budgets and plans. Forty-six percent said that their budget
quickly becomes outdated, yet only 40 percent said that the plan is
regularly updated during the year. This isn’t surprising in light of
the amount of time companies are spending on the budgeting
process. When we asked each respondent how long it takes his or
her company to prepare its annual budget, the median response

18 Business Performance Management November 2005

 was 78 days (see exhibit 2 on page 20). That means that only
half of respondents finish the process within two and a half
Exhibit 1
months. The fastest companies — those in the first quartile The Budgeting Process Is Disappointing
— prepare their annual budget in less than 45 days, but those
in the slowest quartile dedicate more than 90 days to each WHICH OF THE FOLLOWING STATEMENTS ARE TRUE
annual budget cycle. ABOUT YOUR COMPANY’S PLANNING, BUDGETING,
In the APQC’s experience collecting benchmark data, AND FORECASTING PROCESSES?
we’ve seen extensive evidence that decreased cycle times in The plan is clearly linked to strategy
planning, budgeting, and forecasting processes lead to better
44%
business outcomes. For one thing, decreased cycle time is
naturally associated with decreased process costs. For anoth-
er, time is often of the essence in a budgeting process. Targets are strongly linked to external economic data
Assumptions about the business environment or market 33%
behavior made 90 days before a budget is completed are
much more likely to be incorrect than assumptions made
Different functions talk to each other during the process
only 30 days in advance.
Because we believe that reducing BPM-process cycle 54%
times is crucial to improving corporate performance, we
used the survey to examine the relationships between a com- The plan is regularly updated during the year
pany’s budgeting cycle and its advancement in the areas of
40%
several popular focuses for performance management initia-
tives today: reduction of reliance on spreadsheets; usage of a
Technology makes the process faster or more effective
single instance of enterprise resource planning (ERP) soft-
ware, rather than multiple instances; rolling forecasts; activi- 37%
ty-based budgeting; and the alignment of the organization
around corporate strategy. The budget quickly becomes outdated
As exhibit 3, on page 22, summarizes, we asked questions
to identify which respondents use what we consider to be 46%
leading practices in each area, and which respondents still
use lagging practices. Then we compared the budgeting cycle The company often misses earnings targets
times of those using leading practices in these areas with 30%
those whose practices are lagging. Here’s what we found.

Spreadsheet usage. Only 37 percent of respondents said Budgeting is mainly a number-crunching exercise
that the technology they use to support planning, budgeting, 47%
and forecasting processes makes those processes either
faster or more effective. This means that 63 percent are giv-
ing a thumbs-down to their BPM systems.
One likely reason for this result is the prevalence of
spreadsheet usage in corporate budgeting processes. While we don’t mean to disparage the use
of spreadsheets by individuals, Excel is much less effective than specialized budgeting and plan-
ning software at managing the quantities of data required by BPM processes in a company of
any size. In addition to the management challenge of keeping up with which data resides where,
a challenge that arises anytime a company relies on a plethora of spreadsheets for BPM, these
tools cannot provide version control functionality, and they frequently experience broken data
links. Nevertheless, 64.4 percent of our survey’s respondents said that they rely heavily on
spreadsheets in their budgeting, planning, and forecasting processes. Only 5.3 percent said that
they rely on spreadsheets lightly or not at all; 30.3 percent stood the middle ground and said they
rely moderately on spreadsheets.
The impact on cycle time is telling. If we break survey respondents into two groups — the
first being those who rely heavily on spreadsheets and the second being those whose spreadsheet
reliance is moderate or less — we find that heavy spreadsheet usage substantially increases the
budgeting and planning cycle time. Those who use spreadsheets extensively take a median of 30
more days to complete their annual budget than do the people who rely less on Excel.
In our view, when planning software vendors come knocking, finance and IT managers may
do well to answer the door. Our research doesn’t necessarily mean that replacing spreadsheet-
based processes with a more sophisticated BPM software package is a magic bullet for cutting

November 2005 Business Performance Management 19

 cycle times, but it does indicate that the change can make a dramatic dif-
Exhibit 2 ference in a finance department’s efficiency. In fact, if a BPM software ven-
dor won’t promise to cut at least 30 days off your budgeting cycle time,
Annual Budget Cycle Time
perhaps you should ask why.
HOW LONG DOES YOUR COMPANY TAKE
TO COMPLETE ITS ANNUAL BUDGET? Single-instance ERP. Running only a single instance of your company’s
ERP software can make a significant difference in the amount of time you
require to prepare the annual budget. Companies with a single instance of
250 days ERP have a median budgeting preparation time of 62 days, whereas those
with multiple instances (including both companies with multiple instances
of the same software and those with implementations of different packages
throughout the company) have a median annual budget cycle of 90 days.
200 days
In our experience benchmarking these processes, we have found that
FOURTH using a single instance of an ERP system greatly reduces the need for
QUARTILE OF finance to spend time crunching numbers when creating the companywide
RESPONDENTS
150 days budget. A company with a single ERP installation is much more likely to
(IN TERMS OF have a single chart of accounts, standardized definitions for calculations of
THE SPEED OF
THEIR BUDGETING values such as gross margin, and common reporting capabilities — all of
PROCESS) which serve to ease the work of the department in charge of compiling the
100 days
corporate budgets.
THIRD QUARTILE Unfortunately, the finance department rarely has the authority to insist
SECOND that the company run a single-instance ERP environment because it is only
50 days QUARTILE one of many stakeholders involved in ERP decisions. But when a compa-
ny’s ERP environment comes up for reevaluation, there is empirical evi-
FIRST QUARTILE
dence that reducing its complexity leads to a faster budgeting cycle.
10 days

Rolling forecasts. The practice of rolling forecasting — preparing fore-

APQC Benchmarking
To benchmark your
organization’s finance
and accounting processes
with those of our survey
respondents, go to
www.apqc.org/
bpfsurvey. This is one of
the APQC’s Open
Standards Benchmarking
Collaborative databases,
which are available free
of charge and include
more than 1,200
participants. APQC serves
as the sole custodian
of the data, and all
collected data is blinded,
normalized, and reported
in aggregate.
casts on a regular basis (typically quarterly) that always have the same time
horizon, looking 18 months or so into the future — forces a company to
look beyond the end of the current fiscal year in its recurrent planning activ-
ities. Rolling forecasting is a hot topic often discussed at BPM-related conferences. In fact, it’s
popular enough that 44.6 percent of respondents to our survey said they are using it in one form
or another. This makes sense; a rolling forecast should eliminate some of the problems shown
in exhibit 1 — namely, that budgets quickly become outdated in 46 percent of organizations and
that only 40 percent of organizations’ plans are updated regularly throughout the year.
Businesses contemplating implementation of rolling forecasting often interpret this practice
to mean that every quarter they will have to go through the whole annual budgeting cycle again,
a prospect which leaves them mortified. My personal favorite among our survey responses is a
company that takes 40 days to prepare its new forecast each month. For 10 days each month, this
organization is working on two separate plans. Fortunately, our research indicates that this com-
pany is the exception rather than the norm.
Companies using rolling forecasting spend a median of seven days working on their quarterly
forecast, which is precisely the same length of time required by the median company that does not
forecast beyond the current year-end. This shows that rolling forecasts do not require an organi-
zation to rehash the entire budgeting cycle each quarter. In addition to the qualitative benefits that
our experience indicates companies achieve through improved planning outcomes, those that use
rolling forecasting save a median of 25 days on their annual budgeting cycle.
Activity-based budgeting. We define activity-based budgeting (ABB) to be the use of opera-
tional, nonfinancial measures in the creation of the financial budget. Organizations using this
practice may or may not have a full activity-based costing system. For example, a call center might
base its budget on the number of calls it expects to receive during the year, rather than on expect-
ed staffing needs, standard salary increases, and so forth. The effect is to formally incorporate
elements of a plan for business operations into the financial budget. This practice can move
budgeting away from an exclusively financial exercise and toward the incorporation of key busi-
ness drivers. A 2003 study by CFO Research Services indicated that only 27 percent of respon-
dents felt their budgeting process focused mainly on key business drivers. The other 73 percent

20 Business Performance Management November 2005


Exhibit 3
Leading Practices’ Impact on the Budgeting Process
LEADING PRACTICE
Spreadsheet usage
35.6% OF RESPONDENTS
Moderate, light, or no reliance on
spreadsheets in the budgeting
process.
Single-instance ERP
54.2% OF RESPONDENTS
Implementation of a single instance
of corporate enterprise resource
planning (ERP) software.
Rolling forecasts
44.6% OF RESPONDENTS
Preparing forecasts (typically
quarterly) that have a standard
time horizon looking 12, 18, or
some other number of months into
the future.
Activity-based budgeting (ABB)
26.4% OF RESPONDENTS
Using operational, nonfinancial
measures to help drive creation of
the financial budget.
Alignment with corporate strategy
42.5% OF RESPONDENTS
Budget is fully aligned with strategy
and aligned with rewards.
MEDIAN LENGTH OF ANNUAL BUDGETING CYCLE
Spreadsheet
usage
Single-instance
ERP
Rolling
forecasts
Activity-based
budgeting
Alignment
with corporate
strategy
22
said they focused mainly on standard line
items. Two years later, a similar question
on our survey revealed a similar distribu-
tion: Only 26.4 percent said they are using
activity-based budgeting.
LAGGING PRACTICE
It’s worth noting that most respondents
to the CFO study expected to change their
64.4% OF RESPONDENTS processes within three years to focus main-
Heavy reliance on spreadsheets ly on key business drivers — an expectation
in the budgeting process. not yet realized according to our survey
results. For those considering implement-
ing activity-based budgeting, our survey
45.8% OF RESPONDENTS reveals a strong business reason to do so:
Implementation of multiple The budgeting cycle is around 20 days
instances of ERP software within faster for companies that use ABB than for
the company. those that don’t.
Alignment with strategy. In contrast to
55.4% OF RESPONDENTS
the four budgeting practices that we have
Absence of rolling forecasts.
examined so far, aligning a budget with cor-
Typically means that the only time
horizon for financial forecasts porate strategy is not so much a business
is the end of the current quarter practice as it is an outcome of successfully
or fiscal year. implementing other best practices. How-
ever, having consulted with many compa-
nies who feel that their strategic-planning
73.6% OF RESPONDENTS process is disconnected from budgeting,
Absence of ABB. Typically means
we investigated whether companies take
preparing a budget focused on
longer to prepare a budget that is aligned
standard financial line items.
with corporate strategy than to prepare one
that is not linked. Is there extra effort
57.5% OF RESPONDENTS involved to achieve this end? The answer in
There is no relationship between our survey was a resounding “no.” In fact,
budget and strategy, or they’re preparing a budget linked to strategy
loosely aligned. appears to take less time. There are several
possible explanations for this; foremost
among them is that beginning a budgeting
process with clear business goals and out-
60 days
comes in mind should reduce the amount
90 days of time spent arguing about and adjusting
minor details. In other words, clearly link-
62 days ing strategy and budgeting likely reduces
churn in the budgeting process.
90 days Interestingly, though, we did not find
a significant relationship between respon-
60 days dents’ practices in the other areas of bud-
geting that our survey asked about and
85 days
their budgets’ alignment with corporate
strategy. Whether they use spreadsheets
60 days extensively, use a single or multiple
80 days
instances of ERP, use rolling forecasts,
KEY and/or use activity-based budgeting has no
Companies with impact on whether they consider budget-
63 days leading practices ing and strategy to be aligned. Companies
80 days Companies with looking to shorten their BPM cycles should
lagging practices consider the potential benefits of each of
these practices, but none is a panacea for a
strictly tactical budgeting process.
Business Performance Management November 2005