Understanding what ‘What-if?’ is and how critical it has become

I just finished a customer demonstration of our software and heard the typical question mostly asked in demos: “Do you handle “What-if” scenarios? I answered with a “Yes,” and then described the method we use and went to that area of the application to show how it works (we are pretty proud of the methods we use). At that point, the customer interrupted and said they were good, and I didn’t need to show them any more.

I always find this question particularly frustrating, because the question should not be “Do we handle it?,” but, “How do you handle it?,” or “Is it easy enough to use that anyone in my finance group can use it?,” or “I have a ‘What if’ example I’d like to see how you would do in your application.” “Do you handle it?” is opened to too much interpretation. Put another way, I can successfully use a screwdriver as a chisel, but it is not the correct tool for the job.

There are many methods of performing “What if” analysis.

Many companies take their current Excel models, copy them, make some high-level formula changes, hope they didn’t break any links, hope they only have to change the driver values in one place, and hope when they copy a template it doesn’t break everything. This method typically means you have a “budget guru” who understands and owns the Excel model. The good news is it works almost okay, as long as the budget guru isn’t sick. It also means you can’t ask for to many “What ifs” at a time because replicating all the Excel models gets very confusing.

Other companies may have purchased sophisticated and expensive planning tools and their budget guru has become the “calc script guru,” or the “PIM guru,” or the “stored procedure guru.” The net-net is the company still has limited ability to do “What if” scenarios with only one or two people. Worse yet, the sophisticated software could give you all kinds of flexibility (and breakability) by allowing you to handle it in Excel. All a person needs to do is “lock and send” or upload the information from the Excel template back to the database (hmmm… is database a finance term?). In this situation, if a single driver changes across a hundred entities, your guru gets to open each Excel file, F9 (calc) the spreadsheets, and save them back to the database, while not falling asleep, remembering where they left off, and pushing people away when they say, “When you are done running it with the cost of gas at $4.00 per gallon, I’d now like you to run it at $1.86.”

The real problem is, “What if” analysis happens at both a macro level within the planning model and at the micro level, and a tool needs to be able to address both of those levels of planning. Examples of a macro level “What if” include:
-· What if we buy one of our competitors?
-· What happens if two of our largest customers merge?
What if Lehman Brothers goes belly up while holding our commercial paper? (Oops, sorry, that may be too close to home for some of us.)
What if we take our travel expense budget down by 20%? What problems will that create?

Examples of micro level “What if” scenarios include:
-· What if the price of a barrel of oil goes to $40?
-· What if we negotiate the labor contracts to a base $18 per hour rather than $18.50?
-· What if the shipping rates for region four go up?

The key is to provide a user friendly method (or methods) that does not require scripting or tedious Excel management, and that can handle both the macro and the micro “What if” scenarios.

I’d propose you need two methods, actually. One to handle the macro “what if” analysis, and another to handle the micro “what if” analysis. (And, of course, there is a gray area in between). To nail it down even further:

-· Macro level “What if” requires procedural modeling. That is the ability to model using business rules that can be applied to the entire model or just portions of the model (Host Business Rules).
-· Micro level “What if” requires discrete modeling. Discrete modeling emulates the type of calculations you do in a spreadsheet (Host Simulation Engine).

The reason for the two methods is many calculations can be cumbersome to construct in a procedural/rules-based modeling language, but can be expressed rather easily in a spreadsheet model.

As the speed of business increases with the economic turmoil, it is clear that “What if” analysis and alternate scenarios will become more frequent, and the required precision will go up. Companies can’t plan to survive and thrive in this economy with old planning and modeling tools.

Another Case for Measurement: Investors Are Getting It!

I am an investor. I invest in equities (except right now). I was just reviewing my American Association of Individual Investors Journal from August and the headline on the front of the magazine reads, “Measuring Managers’ Mettle: A Revealing Investment Gauge.” The article points out that just reading financials is not enough when making an investment decision. Rather, “management effectiveness, quality, character and values” also are important, though these traits are “often disregarded by Wall Street.” Well, I couldn’t agree more.

One of the key indicators to me, and apparently to other investors as well, is the degree to which company “measuring managers” assess management effectiveness and stock market returns. This concept is further supported by an article published in the November 20, 2006, issue of Investors Business Daily. Author J. Bonasia references a Hackett Group study that finds, “Public companies that use BI systems have stock market returns 2.4% higher than those of peers that rely on basic spreadsheets to do budgeting and planning, according to a survey of 200 global firms.” And this only addresses one aspect of corporate performance management (budgeting). It does not address scorecard methodologies that I would expect offer an even higher return.

I’m now doing some text searches on news articles to track announcements that public companies have hired or promoted someone to “CPM Officer,” one of the key principles to corporate performance management as identified in the book Five Key Principles of Corporate Performance Management by Bob Paladino. If Measuring Managers can be an investment gauge, how much more powerful is it if we know they are implementing a CPM solution by following the key principles ?

Can SaaS Keep Your Budget and Planning Processes from Becoming Victims of the Economy?

As I sit writing this blog today, the Dow industrial index has just hit a 5 year low. The natural reaction of many businesses in times like now is to back off any plans for process improvement especially if it involves technology. Conventional wisdom is to “make do” with your existing processes regardless of their ineffectiveness or inefficiency. However, a company’s ability to effectively plan and navigate rough economic times is critical to if and how it survives this economy.

Now you can call me biased but it seems to me that today’s economic situation is exactly why Corporate Performance Management Software-as-a-Service makes more sense than ever. To set the stage, let’s talk about those poor souls trying to slog through another year building their corporate budgets using Excel spreadsheets. Businesses will be taking multiple passes through their budgets as reductions in spending and hiring make the planning process a study in backward iteration and reverse engineering. Pity the poor budgeting or planning professional who will have to manage their spreadsheet-based budgeting systems through multiple passes collecting data, checking it for accuracy, aggregating the budgets and then running and distributing reports and dashboards. I can see all those “#Div/0!” errors now. Those of you who do this know what I am talking about… late hours, long weeks, unhappy budget constituents, stressed executives and a constant flow of requests for “another pass at the budget” or the ability to evaluate another possible outcome.

The above only focuses on the existing budget process stretched to accommodate a tough economy. It doesn’t address the proactive planning a company needs to survive. The above method focuses on “planning to the budget” rather than “budgeting to the plan.” Typically during these times, strategically managed companies make decisions based on known facts and financial models, while other companies just shoot from the hip. I’m sure stakeholders and stockholders don’t appreciate the shoot from the hip approach.

So where does SaaS fit into this scenario and how does it help? A SaaS-based solution is the most cost-effective and fastest way to improve your budgeting and planning processes. It allows you to “budget to the plan.” Imagine being able to shed your complicated and error-prone budgeting spreadsheets for a better way to run multiple iterations of your budget in a fraction of the time and automatically implement a methodology that results in more accurate data and calculations. Also, because SaaS-based services are purchased on a per user monthly subscription basis, it’s only an operating expense; no capital purchases are required, it doesn’t require any IT resources, and it leverages your existing knowledge of Excel. In a tough economy when cash is king, the cost for such a system for 25 users can be less than ¼ of an analyst FTE cost.

SaaS was designed for tough economic times like we have today. So if your budget process really needs to improve and your business has gone into capital spending and hiring shutdown, a SaaS-based budgeting solution may be exactly what you need. Think about it.

Why Software as a Service (SaaS) May Be The Best Transition Plan If You Will Be Implementing An On-Premise Application

Are you considering buying and implementing an on-premise application like an Enterprise or Corporate Performance Management solution (CPM)? Is your current budgeting and forecasting system good enough to carry you for an additional one to three years? Hope your answer to that question is “Yes” and you can live with your current system because you will be using it for some time before your new on-premise application is ready for use. Many companies are considering on-premise solutions for the right reasons… deep industry specific functionality, extensive solution customization, massive user base scalability etc. So why does SaaS make sense as a transition plan for a company about to buy an on-premise solution? Simply because the problems and deficiencies of a business’s existing application which drove them to make a replacement decision will still be around for at least another 12 to 24 months. There have been numerous stories that cite on-premise application implementations running way beyond 12 months. In a famous Meta Group study, the time to implement ERM applications ranged from 18 months to 26 months with an average time of 23 months. That’s two more years of living with your current application!

Using Corporate Performance Management (CPM) as an example, if the sales contract was completed today, it can take months to years to plan out the implementation, load the initial software and data, build the customizations, test the application, train the users and administrators and go live. A leading on-premise EPM solution actually requires weeks to load and test the initial software programs before any actual data loading or customization actually begins. A typical SaaS based on-demand application like CPM can be up, running and live within a few weeks. With a typical cost of $60-80 per month per user, the investment is small in comparison to the effectiveness gained by quickly moving your business to a more strategically aligned, comprehensive and less error prone solution for budgeting, forecasting, consolidation and/or scorecarding. This approach also has the benefit of reducing the risky tendency to accelerate and rush the on-premise implementation with disastrous results. With the typical on-premise application implementations running from hundreds of thousands of dollars to millions, a secondary investment amounting to a few thousand dollars per month into a temporary on-demand solution looks relatively small.

So even if your are committed to an on-premise CPM solution, say goodbye to that old budgeting and planning solution and enjoy the benefits of CPM much faster than you expected. Last time I looked, the next budget planning season is just a few short months away. Now how long did they say that on-premise application was going to take to implement?

The Art of Scorecarding

I just completed reading a book on Microsoft’s Performance Point Server and was surprised, not by the features and functionality of Performance Point, but how the author treated the subject of scorecards and balanced scorecards. It seems everyone has their own definition of scorecards, and they cover the spectrum from visual representation of data to complex GUI interfaces that show cool dials and graphs.

Sadly, most definitions miss the point. The term “Scorecards” originated with the Kaplan and Norton’s definition of the balanced scorecard and was meant to create a strategic method of management. Scorecard software, for its part, is intended to encapsulate a company’s strategic plan and allow operations to be measured against it.

In this way, the scorecard considers information not from the bottom up, with an “in all this data there must be a pony some where” perspective, but from the top down. In other words, What is strategic to our business and can we measure it from the highest levels through the lowest levels of detail to support decisions and action plans? The author of the Performance Point Server book treated scoring and weighting as an optional activity. Of course, scoring and weighting is the only way to effectively measure what seem to be obtuse strategic objectives.

It always amazes me that the balanced scorecard methodology—or any scorecarding methodology, for that matter—hasn’t taken hold in more companies. The balanced scorecard methodology has been around about 15 years, and companies implementing balanced scorecards have produced dramatic turnarounds.

The common refrains that “finance handles that (the finances of the business )” or “that is done in accounting,” would seem to suggest that financial management is a black art or something of magic. Scorecards help put these myths to bed by pulling back the wizard’s curtain to reveal critical business data that is specific to authorized executives, managers and departments, in a format which is graphical and makes clear the relationship between content. In effect, scorecards makes visible the results of all the “accounting” being performed in the organization and even step beyond what is typically thought of as accounting to include operational metrics.

Maybe companies that have successfully implemented scorecards as a strategic method of management understand the benefits and want to keep it a secret, but if I was hired as a new CFO of a company, the first area I would address to “make my mark” would be scorecards. I would not wait for the “perfect set of Key Performance Indicators,” but would start with the “perceived” key metrics or what I’m currently highlighting in management review meetings, and work as a facilitator to evolve the scorecarding process to a strategic method of management.

What Complex On-premise CPM Solutions Don’t Tell You About Managing Discretionary Initiatives, and Why the Economy Mandates You Understand This Now!

There’s common weakness shared by simple spreadsheets and complex on-premise CPM solution alike. With the economy growing more challenging, it is becoming apparent that budgeting and planning professionals need to avail themselves of different methodologies to effectively manage their organization’s plans.

Chrysler’s announcement last month that it planned to shutter a mini-van manufacturing plant in St. Louis is disappointing, particularly for us locals, though the move was not unexpected. The combination of a slowing economy and rising fuel prices have been a double-whammy for the auto industry in general, and Chrysler is not immune.

The decision to close the St. Louis plant comes only years after Chrysler spent billions retrofitting the facility. What seemed like a good idea at the time, ramping manufacturing for an increasingly popular product, was one of many discretionary initiatives determined by Chrysler to be a good use of capital.

Discretionary initiatives are a hot topic for finance executives these days. The term refers to projects that may or may not be funded in a given budget year. They may be massive in scope or very small, and all have cost / benefit associations which can be measured. Examples include basic cost-cutting initiatives such as buying a new color copy machine, implementation of equipment that offers a quick pay back, or perhaps the opening of a new store.

Executives choosing which initiatives to fund and which to stall require visibility into how the various options impact their over-arching strategic plan. Too often that visibility is limited by the tools used by businesses to manage corporate and departmental budgets. Many companies still rely on desktop-based spreadsheets, which are disjointed and rarely tie into cash-flow and available resources. Other companies have committed to behemoth enterprise software implementations, which appear flexible but actually require extensive and expensive configuration—also known as one of the ‘dirty little secrets’ about on-premises corporate performance management (CPM) software. In these huge implementations of CPM, discretionary initiatives get buried in extensive budgets and cannot be managed or controlled as individual budget line items.

Software as a Service CPM offers a refreshing alternative to spreadsheet and complex on-premises solutions. Leading on-demand budgeting and planning systems contain built-in support for discretionary initiatives, and web-based accessibility to data ensures executives have the information they need when they need it. Host Analytics solutions, for example, incorporate best practices gleaned from eight release cycles.

Today more than ever, companies must understand and plan for discretionary initiatives, and choose their CPM technology provider carefully. Only then will executives avoid surprises and retain the agility—and discretion—to operate successfully.