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Corporate Financial Management

How Last Year's Benchmarks Compare to the Latest Research

In part one, of this two-part blog series, I isolated the five characteristics of best-in-class financial planning organizations described in The State of Capital Planning Study, published in 2012. With new data from the 2013 Long-Range Planning Benchmark Study, it's time to revisit and ask, "How does the data compare to my current situation?"

Designed to isolate definitive characteristics, the new research reveals organizations should strive to improve the corporate long-range planning process. The results not only confirm what was described in 2012, but also provide insight and differences between successful organizations and those that struggle with the long-range plan. Here are some key findings from the research:

  1. Nine out of 10 companies with a highly integrated process create long-range plans that are well aligned to the corporate strategy.
    Take a tip from those organizations that are successful with their long-range planning. Integrating strategic and long-range planning with individual capital projects and initiatives is more likely to produce better long-range plans, enabling a company to make better long-term decisions on its capital projects and major initiatives. Furthermore, the data shows that 85% of companies with integrated long-range planning and annual budgets are more likely to have a more effective capital planning process.
  2. Sixty-seven percent of respondents rely on technology that is fundamentally incapable of supporting and ensuring accurate and timely data.
    More than half of the 200-plus organizations that responded to the survey are using spreadsheets. We know that while spreadsheets are indispensable for many finance-related tasks, they do not work well for long-range planning as they have inherent technological inadequacies.
    Perhaps more important, are the study responses that address the impact of access to accurate data during the long-range planning process. Companies plan and set a baseline of expectations can measure objectively against reality. The variances ‒‒ enable executives and managers to spot issues or opportunities that must be addressed. How quickly companies can react when variances appear has an impact on their ability to execute. The data provides a clear correlation between the time it takes to get answers and the quality of these decisions. It's common sense that corporations with shorter decision loops are better able to adjust and succeed.
  3. There is a direct correlation between the software a company uses and its ability to implement long-range plans effectively.
    The effectiveness of the software a company uses has a direct impact on its ability to do many of the important tasks related to the long-range plan. For example, contingency or what-if scenarios are critical to assessing alternatives and understanding the implications of specific choices. The ability to translate a set of assumptions into a detailed set of outcomes quickly goes a long way to give executives a clear understanding of the attractiveness of a various course of action.

Executive Communication

Long-range and strategic planning is, by its nature, an executive function. Communicating vision and tying it to specific actions and initiatives are important. Yet the research in 2012 and current findings show that too few executives are communicating effectively. According to the 2013 data, executives may think they are leading by communicating vision and goals but in reality, 73% are not.

It is also interesting to note that people in charge of running the long-range planning process are much more likely to say that their executives communicate strategy well. The analysts concluded that this is probably because those individuals are closer to the informal channels of communication among senior executives.

To quote Robert Kugel, SVP of Ventana Research and chief researcher of the study:

"The point here is: don't kid yourself and don't judge the effectiveness of commutations by how well the inner circles understand the strategy. It's only working when everyone is on the same page. Good communication of strategy promotes success. Almost all companies with good executive communications have a long-range planning process that is well aligned to their strategy compared to just 30% of those that do not communicate well or at all."

Beyond an ability to communicate, executives ultimately own how an organization will operationalize corporate strategies into specific investments. The effectiveness of technology systems that directly contribute to corporate success should be of paramount concern. With the, State of Capital Planning Study and the new Long-Range Planning Benchmark Study, we have two years of hard data to back up why change and investment is warranted.

To learn more about the new benchmarks download your complimentary copy of the executive summary.

Related posts: Getting Your Executives Involved in Long-Range Planning -- Part 1

Getting Your Executives Involved in Long-Range Planning -- Part 1

Benchmarking Your Company's Long-Range Planning Process as the First Step Towards Improvement

If you were given the opportunity to directly influence your company's success, would you take it? Would you want to help on develop the plans, direction, and spending of your organization? Or would you avoid such an opportunity at virtually all costs?

And yet judged by their actions, when given that very chance most executives choose to avoid such an opportunity. Why? Because the very process that seeks to achieve that corporate success, the long-range planning process, is fundamentally broken.

Long-range planning has a significant impact on company success, defining how your organization will operationalize corporate strategies into the specific investments that lead directly to corporate success for years to come. Given its influence, one would expect that participating in a process that shapes the company's future is precisely the activity executives would want to be involved in. Instead we all consider it the most painful processes businesses perform today. Why? Today's process is manual, labor-intensive, and not actually perceived to achieve any of those objectives. Instead it is considered tedious and frustrating, ultimately delivering a plan bearing little resemblance to current business realities. "Data confirms what many finance professionals know about the prevalent capital planning process ‒‒ it is broken and needs to be fixed."¹

Given the dissonance between the importance of the subject matter and the actual process, there is clearly need for change. How do we move the planning process from loathed and shunned to productive and powerful? To something in which people want to participate? Given that, the question we must ask is what defines a good planning process.

What sets the few organizations that do planning well apart? In search of an answer, I looked at the 2012 Benchmark Report: The State of Capital Planning² for start here for two reasons:

  • First, it distills the feedback of finance professionals dealing directly with these challenges. Its findings lead to five practices every FP&A organization should incorporate when looking to alleviate the burdensome nature and improve the quality of the long-range planning process.
  • Secondly, it will serve as its own benchmark for comparison against the upcoming 2013 New Benchmarks in Long-Range Planning Study and Webcast on February 27, 2013.

The Five Characteristics of Best-in-Class Financial Planning Organizations' Long-Range Planning Processes

  1. The priority of the major programs, projects, and initiatives is clearly defined both absolutely and in relation to each other.
    By understanding how initiatives align to strategic plans and the relative priority of every capital project, the organization can more easily allocate (or later shift) resources as needed. The process can consider the reallocation of resources as priorities change, becoming much more streamlined and efficient while providing the visibility to ensure the company maintains alignment with the strategic plan.
  2. The plan is developed iteratively through a low overhead process that emphasizes decision making and collaboration over simple data consolidation.
    A plan collaboratively built with all impacted groups (finance and business units) and a formal approval process for the final plan ensures buy in and agreement on what the major project, programs and initiatives are; and the business case for each. A streamlined and easy process for participants frees them up to iterate and ultimately produce a stronger plan.
  3. Understand how and where people and money become limiting factors for the business.
    When dealing with constrained resources it is important to be able to create scenarios in the long-range planning process to assess how they can be optimized and which mix of resources on each project or initiative make the most sense to help the business achieve its objectives.
  4. The cost (and projected benefits) of each project can be accurately forecasted both initially and adjusted throughout its lifecycle.
    Having a high level of insight and analysis on projects enables an organization to make informed decisions when they are considering whether to shift investments, kill an initiative or reprioritize it. There needs to be a simple way for both the business unit and finance to have downstream visibility into investment performance and ROI on every project.
  5. When a project is completed, the company knows how well it achieved its objectives.
    This insight is valuable in planning for the future ‒‒ not just at a project level, but at a corporate-wide level ‒‒ as comprehension will influence the outcomes of the long-range planning process on a holistic level; thus prompting even more procedural and conceptual improvements.

I invite you to join me during a live Webcast on February 27 where I will participate in a discussion hosted by Bill Sinnett, Director of Research at Financial Executives Research Foundation (FERF), and with new benchmark analysis detailed by Robert Kugel from Ventana Research, to discuss what are to be considered new benchmarks for long-range planning.

In Part 2 of this two-part series, I will compare what we discuss during the Webcast to these best-in-class characteristics of 2012. While I suspect these best-in-class indicators will not vary significantly; I will be interested to see how important they became over the past year in relationship to new benchmark levels.

Will more organizations using enterprise-wide portfolio resource management solutions top the list as "best in class"? Find out on February 27.

Related posts: Closing the Gap between Strategy and Execution Part 1 and Part 2.

1 Murphy, R. (2012). CFO View of the State of Capital Planning Benchmark Study

2 Carlson, M. (2012). Benchmark Report: The State of Capital Planning

The Annual Budgeting Process: Insanity is Expecting Different Results from Spreadsheets

Albert Einstein has been credited in saying, "insanity is doing the same thing over and over again and expecting different results."

If you are charged with some element of the fiscal planning process for your organization, such as capital planning, strategic planning, budgeting, and annual allocations, among others; chances are you've been inundated with spreadsheets, tab delimited fields, and pivot tables every January since… forever.

Has Your Expectation of Spreadsheets Changed Over the Years?

According to recent findings, your answer is probably "no." According to the 2012 Benchmark Study: The State of Capital Planning:

49% of companies surveyed indicated that the manual nature of planning and spreadsheet complexity is the top planning pain point.

The predominance of spreadsheet planning and forecasting is at the heart of many challenges long range planning professionals face every year. Coined as a "common pitfall" by Madison Laird in his white paper, 15 Common Pitfalls of Long-Range Planning, the connection between spreadsheets and the lack of productivity and flexibility is supported by many studies and the annual exercise you are likely participating in right now.

Stop the Insanity!

In this short video series, Madison delves deeper into the issues and solutions to the most common pitfalls, including spreadsheet planning.

Some of the solutions he describes tackle spreadsheet planning philosophically and are relatively simple; such as rewarding vision and consensus. Some of the solutions outlined dig deeper into the core of your organization's analytical culture.

As you make progress and conclude your annual planning; now is the best time to consider best-practices of organizations that have eased the intensity and challenges of juggling spreadsheets. Ensuring your next planning cycle is improved upon will not only improve your processes and decision making capabilities: it will also improve your sanity.

For more information watch the videos here or load them into your YouTube playlist.

What is your biggest headache during the annual budgeting process?

Seven Financial Planning and Analysis Trends 2012

As we start the fourth quarter, having just come back from the annual Association for Financial Professionals (AFP) national conference, it seems like an appropriate time to reflect on the trends of the last year.

Trend #1: The Rise of FP&A

Within the finance community, financial planning and analysis (FP&A) seemed to come together throughout the year. That helps, because it is more possible to define what we all do. With that trend comes responsibility for everyone involved. New FP&A tracks, conferences, and certifications, such as those introduced by AFP, will help. They create momentum for the community, recognition with the larger Finance organization and, perhaps more importantly, required knowledge among FP&A practitioners.

Trend #2: Receding Discussion of Proper Evaluation Criteria

The year started with a realization that models like "Economic Value Added" (EVA) held promise over traditional models like "Net Present Value" (NPV). The realization by the FP&A community that decision criteria like EVA had limitations led to an emphasis on the data and the way that activities like planning and analysis were conducted rather than the evaluation criteria that were used.

Trend #3: Increasing Emphasis on Strategy

The receding interest in merely quantitative evaluation criteria was replaced with an increased responsibility in corporate strategy. Many finance professionals discussed and shared FP&A strategy-related capabilities at the AFP. For example, the need to link units of measure like projects back to corporate goals became common.

Trend #4: The Role of FP&A in Strategy

Sharing information about the role corporate finance plays in strategy led to the conclusion that there was no single common role for finance. For that reason, generalization about finance responsibilities in strategic evaluation was problematic. Consensus seemed to emerge that whatever the role of finance in corporate strategy, FP&A should be at the heart of that support, even when that role is not just quantitative. For example, quite common was the expectation that FP&A assists both corporate executives and business owners in identifying critical business drivers.

Trend #5: The Relevance of Risk in FP&A

The FP&A community began to explicitly acknowledge that the term "risk" was no longer the proprietary domain of other elements of the Finance community. When finance organizations like GRC (Governance Risk and Compliance) or Treasury use the term "risk" they do so in very specific ways. Discussions of how to identify other elements of risk like execution, market demand, and competition were deemed to be critical to planning and analytical assessments.

Trend #6: The Emergence of Vendors Focused on FP&A

A stroll through the trade show floor at any major finance conference including the AFP conference last week shows vendors and mature software packages focused on treasury, audit, tax, and fraud. Many larger enterprise resource planning (ERP) vendors began to pay more attention to the role they play in supporting the "F" part of FP&A. Smaller vendors began to proliferate with value propositions focused more on the "P" and "A" in FP&A. For example, vendors began to stress the ability to use central planning tools to displace the inappropriate use of spreadsheets in Long Range Planning, and awareness of these solutions began to build. As the community continues to emerge, vendors and tool usage will flourish.

Trend #7: Confusion Over "Beyond Budgeting" and "Rolling Forecasts" Concepts

The year began with an emphasis on developing rolling forecasts, rather than traditional point forecasts. Many in the community struggled to understand the implication of rolling forecasts, but became more open to the idea. As the community began to embrace the rolling forecast idea, the logical conclusion that budgets were obsolete was also introduced. There was consensus that budgets were still considered a vital part of the FP&A role in most companies. Since rolling forecasts are a necessary prerequisite to eliminating budgets, emphasizing the development of a rolling forecast process seems to a be a more attainable goal -- once that has occurred the notion of "Beyond Budgeting" can be reintroduced.

I am interested to hear the perspective of anyone who attends many conferences, listens to many members of the FP&A community, or discusses the landscape of the space with industry analysts. Am I reading the tea leaves properly? Are there other trends? Please comment or link to your blog below.

Closing the Gap Between Strategy and Execution -- Part 2

How to Optimize Annual Budgeting to Increase Total Shareholder Return

In part one of this series, How to Use Annual Budgeting to Increase Total Shareholder Return I explained how most companies make minor changes in their budget allocations from year-to-year. I also referenced a recent McKinsey Quarterly study that found that over time, companies earned on average 30% higher annual total returns to shareholders by making more budget reallocations to reflect their corporate strategy, than those who did not (Hall, Lovallo & Musters, 2012). I concluded by discussing a resource allocation capability that would play a vital role in making these decisions -- a feature known as optimization. In this blog, I will continue the conversation around optimization and discuss what it is, why it is so important, and where to access this capability.

Financial Budgeting and Planning: What is optimization and why is it important?

Examining Corporate Financial Management DocumentsOptimization is the process of determining the best allocation of resources within given constraints. In financial budgeting and planning, the constraints would be the corporate targets and the corporate strategic goals.

Many people equate optimization with prioritization, but there is a difference. A prioritization process allocates budget to the investments with the greatest return and proceeds down the priority list until the available spending limit is reached. Even if the prioritization approach takes strategic dependencies between projects into consideration and even if this approach can incorporate alignment to corporate goals, it still often does not result in optimal budgeting. Here is why…

A true optimization approach recognizes that the best return on invested capital actually may skip some of the items in the prioritized list. For instance, if several high-priority projects require larger capital investment using prioritization may remove the option to afford a larger set of projects, representing a lower return. Whereas optimization considers every factor associated with the priority list and aligns investments with corporate goals so the company can forecast the highest return possible -- making optimization very important to companies who want to align their annual budgets to their strategic goals.

A company seeking to allocate its spending optimally will have visibility into the affects of various funding levels on different investments. Companies who treat their affordability and corporate goal alignment as constraints are in a perfect position to achieve visibility on the optimal spending levels; hence, the 30% higher returns cited in the McKinsey study.

Getting Your Hands on the Right Business Application

When optimization is done and with the right software, companies have more than one choice for their budget reallocation. Forward thinking companies usually have one or more optimal spending level given the corporate goals. A well-executed process supported by the right business application can help decision makers reallocate their budgets with a high degree of confidence in the expected outcome. If this seems idealistic and unattainable, it is not.

Few applications available perform optimizations. A well-documented pitfall found in The 15 Pitfalls of Long-Range Planning, notes that many companies try to "put square pegs in round holes" -- they assume that existing tools like enterprise resource planning (ERP) applications, strategic finance applications, or planning/budgeting tools will support this capability. But they do not. In fact, not many tools have optimization capabilities built-in to their product. A few do. Planview Enterprise, for example, takes a portfolio management approach to optimization and understands the need to align resource allocation and corporate goals.

This approach does not merely treat resources and goals as variables or constraints to be entered. Instead, this approach incorporates the investment and corporate alignment data and capitalizes on them. The result is a seamless integration of corporate goals and execution by harnessing the power of the planning and budgeting process.

Linkages like this empower executive teams to make decisions and increase total shareholder return by an annual average of 30%. The decision to adopt a business application with optimization capabilities is not just a bargain, it is a steal!

For more information on this subject, I invite you to read The 15 Pitfalls of Long-Range Planning white paper.

I'd like to hear from you. How could optimizing your financial budgets and planning help you close the gap between strategy and execution? What methods are working and which ones are not? Share your experiences by leaving a comment below.

Hall, S., Lovallo, D., & Musters , R. (2012). How to put your money where your strategy is. McKinsey Quarterly

Related post: How to Use Annual Budgeting to Increase Total Shareholder Return

Closing the Gap Between Strategy and Execution -- Part 1

How to Use Annual Budgeting to Increase Total Shareholder Return

The link between a company's strategy and the long-range planning process, which culminates in their annual budget, has always been, to put it nicely, a very loose one. For those of us close to the planning process, this has been a well-known problem for a long time. Yet we continue to be surprised when we find that companies cannot seem to execute on their long-term aspirations. A research study featured in the March 2012 McKinsey Quarterly titled, How to Put Your Money Where Your Strategy Is quantifies the impact of the strategy and execution gap and concludes that closing the gap requires more than corporate determination -- it requires the application of analytical insight necessary to make the right decisions.

The problem can be easily summarized. All companies create strategic goals but few companies use their long-range planning process to translate these strategic goals into actionable departmental based budgets. When it comes time to create an annual budget, most companies allocate their resources in roughly the same way they did in the previous year. Over time, this process virtually assures that the company will never meet its strategic aspirations.

This problem is not a secret. I can recall a recent, specific conversation the Planview team held with a prominent analyst who covers software applications used by finance departments. He highlighted this strategy-budgeting gap as one of the major issues facing companies today. I asked him how to go about quantifying the market for solution-based approaches. He started his answer by saying, "Well, just assume that almost every company of a certain size has this problem…" -- a recognition of how truly common this problem is.

The new McKinsey study has quantified the problem and the impact. The authors noted in their summary, "Most companies allocate the same resources to the same business units year after year. That makes it difficult to realize strategic goals and undermines performance" (2012, p.1). The authors found a few companies that did reallocate their budgets, and then compared the results of those companies with the results of companies who made minor tweaks to their budgets. They found that over time, the companies who made the budget reallocations "earned, on average, 30 percent higher total returns to shareholders (TRS) annually" than those who did not (2012, p.3).

How can a company link its corporate strategies to execution? What can a company do to make more significant and appropriate changes in its annual budgeting process? I found it interesting that the authors recommend that a company should use all available resource reallocation tools (Hall, Lovallo & Musters, 2012). They make the assumption in the article that a company has resource allocation tools available in the first place. And in my experience, most companies do not.

To allocate resources appropriately in an annual budgeting process, the feature required is called "optimization." Finding a tool that performs optimizations of resources according to a firm's strategic objectives is using the right tool for the job. Selecting a tool that enables budget optimization will help a company develop annual departmental budgets that allow a company to execute on its corporate aspirations and realize significantly higher shareholder returns. For further information on this topic read The 15 Pitfalls of Long-Range Planning.

Part II of this series examines the "Optimization" feature in detail, and discusses how to use optimization in your planning process. I'd like to hear from you. How are you closing the gap between strategy and execution? What methods are working and which ones are not? Share your experiences by leaving a comment below.

Hall, S., Lovallo, D., & Musters , R. (2012). How to put your money where your strategy is. McKinsey Quarterly

The Role of Spreadsheets in a Long-Range Planning Process -- Part 2

Part one of this series notes that 1) there are appropriate uses for spreadsheets in the planning process, 2) there is a key point at which spreadsheets fall short (alignment), and 3) an appropriate planning tool is one that makes the most of the strengths of spreadsheets in the data gathering process. In this blog, I'd like to focus on another positive feature of spreadsheets, and discuss why it's important to select a planning tool that maximizes this key strength.

We love spreadsheets because of their flexibility to create different tables, graphs, reports, and charts. In the planning process, trying to use spreadsheets to create a multi-faced view of different tables and graphs while attempting to optimize a portfolio is a bit like asking a mason to do wood frame construction. While it is possible to rig multiple spreadsheets to create various views, spreadsheets have no built-in optimization capability.

Further, managing tables, graphs, reports, and charts becomes cumbersome as numbers and requirements change. Frequently, broken links and nonsensical charts are the result. This is what prompts some companies to look for an automated solution.

Many planning tools tout their reporting and analytic capabilities. In fact, so many vendors offer these features that choosing a planning package without them would be a mistake. When looking for a planning tool, I always instruct clients to look for two key analytic capabilities, both of which are strong compliments to spreadsheets. The first of these features is portfolio optimization -- identifying the most efficient application of available resources (affordability). This can be achieved through a central repository that allows prioritization, working with targets, and efficient frontier capabilities. The second is the ability to create data "cubes" that are accessible through Excel. These cubes create the capability to store queries, create pivot tables, and generate output.

The combination of these capabilities is particularly compelling. Envision a planning tool that allows the creation of several potential optimal scenarios which can be accessed through Excel to populate desired tables, graphs, reports, and charts. Adopting a planning tool that will maximize your use of spreadsheets, both in data gathering and analysis, will turbo charge your long-range planning process.

For more information on this subject, I invite you to read the 15 Pitfalls of Long-Range Planning white paper.

How do you use spreadsheets in your long-range planning process? Are they working well or are they falling short? Share your experiences by posting a comment below.

Related post: The Role of Spreadsheets in a Long-Range Planning Process -- Part 1

The Role of Spreadsheets in a Long-Range Planning Process -- Part 1

On a recent Webcast, a finance professional asked me about the use of spreadsheets in the planning process. Because this is such a common theme, (over 70% of respondents said they use spreadsheets for their planning process) I decided to add my observations to the conversation.

Telling a finance person that they should not use spreadsheets is like telling a mason not to use mortar. Spreadsheets are so integral to the role of finance that we cannot live without them. The fact is, (despite what you may hear from some vendors) it is appropriate to use spreadsheets at many stages of the long-range planning (LRP) process. There are also certain places in the LRP process in which a better tool can and should be used. A good planning tool will not seek to replace spreadsheets but instead will help make the most of their functionality.

Because Finance is so accustomed to using spreadsheets, we tend to force them to commit unnatural acts. For example, using spreadsheets to align organizational budgets generally starts to breakdown when a company reaches any kind of organizational complexity. By the time an organization is matrixed, the purpose for the spreadsheet has reached its breaking point and intensive manual maintenance is required to sustain the resource alignment request. The spreadsheet approach relies on the creation and population of finance templates, followed by corporate parsing and redistribution of the relevant information to the relevant groups, and then the process repeats itself until alignment is achieved. There are Fortune 100 companies who still attempt to rollup resource requests this way. These companies often ask senior financial analysts to spend significant cycles to manage this process. In this case, a better solution is a centralized repository with access controls sufficient to let organizations manage their own alignment. This solution frees up financial resources to analyze data requests rather than simply monitor them. Even here, there is still an important role for spreadsheets.

Spreadsheets serve as an organizational database for financial planning and have become a common reference format to collect and analyze data. Because spreadsheets have exporting capabilities and functional templates that serve to help consolidate information, I recommend selecting a planning tool that will easily import and export data from spreadsheets. And to make the most of spreadsheets, a centralized planning repository needs to make it easy to get data from the spreadsheets into the system. After all, like a brick wall without mortar, a planning process without complete data falls apart.

In part two of this series, we will examine another instance in which it is appropriate use spreadsheets in long-range planning and how the right planning tool can enhance their functionality. For more on this topic, register and listen to the 15 Common Pitfalls for Financial Planning Webinar and get your very own copy of the paper.

How important are spreadsheets to your long-range planning process and where exactly do they fall short? Share your experiences by posting a comment below.

Are You Engaging in Rigorous Capital Planning or Shadowboxing?

Written by Maureen Carlson, Partner at Appleseed Partners

Maureen Carlson

In the last blog post, How Structured Is Your Capital Planning Process?, I wrote about my interview with Madison Laird, Executive-in-Residence at Planview. We discussed the extremes of highly structured processes and highly unstructured processes that exist in capital planning; inspired by the newly released report from The State of Capital Planning survey. We also highlighted the need for flexibility in structure, and discussed the key criteria required to ensure the financial planning structure has the requisite flexibility to meet the changing market demands. Here is a quick recap of the criteria Madison mentioned for a "flexible structure":

  • The process meets the strategic needs of the decision makers.
  • The process gathers both quantitative and strategic input from line of business stakeholders.
  • The process facilitates sharing of information as necessary to create alignment across lines of business.

Finally, we talked about the irony of structure -- that a highly structured process can be a more flexible one. Since highly structured process usually have all data-flows, meeting schedules, and roles and responsibilities defined, it is easier to make changes, then identify and adjust for downstream consequences and effects. A planning structure without as much structural definition is "flying blind" when it has to deal with unexpected changes. So, generally speaking, a highly structured planning process is desirable.

However, some organizations put a highly structured planning process in place, and then do not take advantage of its flexible nature. Madison calls this "shadowboxing" your way through the capital planning process and explains that a "somewhat structured" planning process can lull finance into a false sense of security. Usually this results in very dissatisfied planning constituents and a dysfunctional planning process. One of the most common enemies to a flexible process is shadowboxing your way through capital planning.

Shadowboxing Your Way Through Capital Planning

Shadowboxing is an exercise used in training for combat sports like boxing to maintain a fighter's rhythm and form. As part of their training, the fighter throws punches at no one in particular, sometimes even his own shadow. The purpose is to prepare for the actual boxing match. Much like boxing, capital planning requires some level of structure that is ideally flexible yet rigorous and defined. The actual planning process is somewhat similar to a multi-round prizefight, where the winner will be the person who adapts his strategy to defeat his opponent. The loser will be the one who refuses to adapt to the changing dynamics of the fight, treating the live event in the same way he was shadowboxing in preparation.

Most capital planning processes include a series of presentation templates, meetings, and financial spreadsheet templates. These tools represent the fighter's strategy and plan to defend his title. When Finance has these tools in place, it often feels like there is structure or a ”strategy for the fight", but often there is little room for discretion or flexibility.

Moreover, if the structured process is created to lead stakeholders through predefined paths, it is critical to ask if the three criteria for a flexible structure are really being met.

To extend the analogy further, stakeholders who are not absorbing the body blows are engaging in an activity that does not simulate real conditions. It is hard to have a business owner ready for next year's fight when they have not been in the planning ring.

Contrast this with a "flexible structure" where there is some hand-to-hand combat with the data. A flexibly structured planning process ensures data that can be relied on to play out scenarios and to optimize resource and opportunities. For example, those companies who responded that they were less structured than others were also reported a much higher risk of being unable to maximize opportunities, resources, and budgets (18% versus 45%).

Perhaps being somewhat structured versus truly structured is like the difference between hand-to-hand combat and shadowboxing. A company that is meeting the criteria for a truly flexible planning structure is able to rigorously review how to apply resources and budgets against the highest return opportunities.

Register for the 15 Pitfalls of Long-Range Planning where Madison defines the most common pitfalls that affect long-range planning, provides suggestions that help diagnose the issues, and suggests potential solutions. Is your organization engaging in effective capital planning or shadowboxing? Share your experiences by posting a comment below.

Related post: How Structured Is Your Capital Planning Process?, Planning Millions of Dollars of Capital Investments using a Spreadsheet, Is it Sustainable?

How Structured is Your Capital Planning Process?

Written by Maureen Carlson, Partner at Appleseed Partners

Maureen Carlson

I had the opportunity to interview Madison Laird, Executive in Residence at Planview, about some of the findings and nuggets from the State of Capital Planning Study. Madison shared some of his thoughts about portfolio management and long range financial planning which have been shaped by his career at companies like Cisco, Marimba and IBM. Together we looked at some of the top survey responses and examined their implications.

One of the top three risks reported by 45% of financial executives was an inability to maximize resources, opportunities, and budgets.Risks to Capital Planning

As we wondered aloud about the root cause behind this trend, we found ourselves asking the obvious question: "What is it about traditional capital planning that limits finance from being assured they are optimizing resource and budgets accurately and acting on the right opportunities?"

After talking through several possibilities, a trend caught our attention. In one section of the survey 17% of participants reported their captial planning process was "very structured" and nearly 50% claimed to be "somewhat structured."

I asked Madison, What is meant by structure in the planning process? He explained that structure refers to the definition and arrangement of elements in the planning process -- elements like roles and responsibilities, data flows, events, tools, etc. Think of it as planning for the planning. Two extremes exist in planning: highly structured planning processes and those with little to no structure.


Many companies with highly structured planning processes may be resistant to change. Highly structured processes use flowcharts to depict organization or stakeholder swim lanes, with the time component of the process defined from left to right. These highly structured flowcharts make up the planning process and outline the various data inputs, outputs, and milestones including meetings and targets, and the roles and responsibilities for each swim lane.

Little to no Structure

When companies lack structure in their planning process, they often experience difficulties managing a business with multiple stakeholders, or they tend to conflate the planning and budgeting processes. Companies with relatively little structure in the planning process usually are not maximizing the strategic input that their stakeholders can provide.

According to Madison, the planning structure needs to be flexible. For example, stakeholders need to see a clear path through the planning process, but they also need the flexibility to request productive, timely changes in the process (e.g. revise templates and meeting agendas -- things in the flowchart).How Structured is Your Capital Planning?

For Madison, a process with a flexible structure meets several key criteria.

  1. The process meets the strategic needs of the decision makers.
  2. The process gathers both quantitative and strategic input from line of business stakeholders.
  3. The process facilitates sharing of information as necessary to create alignment across lines of business.

An irony is that a highly structured process also tends to be the most flexible. The reason is that a highly structured process has all the elements defined, so it is easier to understand the implications when moving them around. A planning process that is somewhat structured (as most survey respondents indicated) may feel more flexible, but it is actually less flexible because a change can be quite disruptive. When an organization using a somewhat structured planning process has to respond to a requested change, the structure many not show all the effects that changes will have.

Consider a basic example. Suppose the decision-making stakeholders in a company decide that they would like to see information from the planning process reflect a five-year time horizon, instead of the typical three-year time horizon. A highly-structured process would allow users to be able to quickly identify the effected data flows, edit the effected spreadsheet templates, identify the impacted strategic shifts, edit the relevant meeting agendas and presentation templates, and leverage the appropriate communication mechanisms to convey the relevant changes to the effected stakeholders. For a somewhat structured planning process, it is unlikely that this type of change could be accommodated mid-stream. Even more likely, a somewhat structured planning process might not indicate the important impacts until it was too late. In these cases, a somewhat structured planning process would almost certainly fail to meet the criteria for a flexible structure.

Next week we will talk with Madison about what he calls 'shadowboxing' your way through the capital planning process, and how structure can lull finance into a false sense of security about the planning process.

I invite you to read the State of Capital Planning Study to gain additional insight on its findings. How would you rate the structure of your capital planning process?

Related post: Planning Millions of Dollars of Capital Investments using a Spreadsheet, Is it Sustainable?