Let’s Talk About Driver-Based Planning

Paul Hoch

February 22nd, 2018

Back in 2014, I gave a KScope presentation on Driver-Based Planning. Since that time, we’ve seen more companies adopt a driver based approach to their planning process. Why have they done it?

Looking at the “Classic” budget process, on average it takes 4-5 months to complete. 20-30% of senior management’s time and approximately 25,000 person-days per $1B of revenue. In addition, finance staff spends 79% of their time on lower value-added activities and only 21% of their time analyzing numbers. Most organizations treat the budget as a yearly bank although It’s only open once a year for a few months and you have to get all your investing and lending done in that time frame. [1]

When it comes to accuracy, it appears that the more details and decimal places we show, the better “quality” our numbers are. It gives us a sense of control – we see precision as being equal to having done our homework.[2] Having detailed financial results for reporting and historical purposes is of course crucial. Attempting to put that same level of detail into our budgets is where we get in trouble. One of our clients – Steve Beers from Hubbell, Inc. told me “We generally found that the level of precision in those grinding it up from the bottom each month was no more or less accurate as those working up the forecast on the back of a napkin. With the driver-based rules that TopDown helped us build, we get the best of both worlds. Users can now submit a full income statement and balance sheet each month by only changing a few assumptions”.

Using a driver-based approach allows us to adjust our numbers more quickly when conditions change. We can react to current events and twist a few dials in our plan to see the impact of what we are seeing. Budgeting, in general, is guesswork. Let’s focus on the 50 key things that we can impact versus 500 line items of detail. Let’s look at a quick example.

Company A plans their budget for T&E by taking a look at what they spent the previous year on Airfare, Hotel, Rental Cars, Meals, etc. on a line by line basis and then applies a growth factor of 10%. Company B plans their budget by using “Average Cost Per Trip” and “Number of Trips” as drivers. In the Company A example, if they are seeing a need mid-year for significantly more or less travel they need to adjust multiple different values. Company B can just ratchet up or down the “Number of Trips” driver and have that flow through quickly. Conversely, if we have a major event that causes travel costs to increase dramatically (war, act of god, etc.) we can increase the Cost component and see how that impacts us. We want to be able to adapt rapidly to changing conditions, internal or external and see what that does to our profitability.

How do we implement a driver-based solution for our planning process? Generally, we like to set it up so that our key drivers are established by Corporate or the Line of Business. Things like Unit Price, Cost, Discounts, etc. along with any Currency dependencies. End users and analysts enter the units sold as an example. This allows the business to focus on a strategic relationship with customers and suppliers.

If we take this further and look at Employee Based planning, we can extrapolate a fairly detailed plan by setting up drivers and calculations to take into account the impact of a new hire.

By taking out the need to plan all of these line items individually, we allow the analyst to spend more time considering things like: “When should we hire new staff?”, “Which department needs new hires now and which department needs new hires in the future?”, and so on.

The key to Driver-Based Planning is to focus on the values that drive the business without getting mired too deep in the details. Find the KPI’s that make the wheels turn and then establish a plan using those KPI’s.

[1] “Beyond Budgeting Jeremy Hope, Robin Fraser p. 6

[2] “Implementing Beyond Budgeting” Bjarte Bogsnes, p. 49

Paul Hoch

About Paul Hoch

Paul Hoch has over 18 years of EPM and Hyperion experience, specializing in Essbase and Planning. He has successfully completed large-scale EPM implementations for clients in industries ranging from retail to government and financial services to health care. Paul has served as solution architect and team lead for implementations and he has developed and delivered advanced team training. He also blogs and presents regularly on EPM topics, including Essbase, Planning, Hybrid Cloud implementations, PBCS, EPBCS, Smart View, Calc Manager, migrating to the cloud, and more.

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