How should a company get started with driver-based planning?
Driver-based planning derives financial forecasts from the organization's operational drivers.
It is analogous to flying an airplane. Each instrument on the flight deck drives the pilot's decisions. In principle, there's no value in measuring a flight variable if it has no influence on pilot decision making. The most important variables, such as altitude, compass and airspeed, are positioned prominently on the flight deck, and should receive the most attention.
In the context of running an organization, there are many inter-dependent variables and moving parts that comprise the business. Knowing when, where and what to measure can profoundly affect the quality and responsiveness of your tactical and strategic decision-making processes.
When getting started with driver-based planning, here are a few key considerations:
1. Think about the business strategy. If your business is highly predictable with simple, repeatable processes, this approach might not be appropriate for your organization. Driver-based planning should be justified based on need, not opinion. Does your business really warrant this level of detail?
2. Take an inclusive approach. Driver-based planning is not an isolated, back-room activity. All key stakeholders across the organization need to understand their roles and accountabilities in the driver-based framework.
3. Define accountability. Driver-based planning is not solely the CFO's responsibility. Many of the operational drivers will be drawn from various parts of the organization, and as such, assigning specific accountabilities for maintaining the accuracy, timeliness and relevance of the data derived from these drivers is a critical factor for success.
4. Identify the important drivers. Not all operational drivers have the same influence on cost, margin or other financial outcomes. Depending on the sophistication of your organization and the value placed on accurate planning, it could be worthwhile to conduct a statistical analysis on the drivers considered to be important, to validate that they, in fact, are.
5. Know your $ conversion rates. A critical element in the success of driver-based planning is the accuracy in the $ conversion rate for each variable. There needs to be a consensus on the rates being applied for each driver among the key stakeholders.
6. Understand the correlations among the key drivers. For example, 20% of customers buying a tablet PC will also buy extended warranty. If the correlations among the drivers are poorly understood, using the appropriate multivariate regression analyses to the reported variances would be helpful in identifying these relationships.
7. Slow data is dead data. In driver-based planning, waiting for missing information could slow down and jeopardize the overall planning and variance management process.
Most importantly, understand how your business works. Not having a solid understanding of the key processes within the organization will place you at a disadvantage when accounting for inevitable variances between actual and forecast.
About the author:
Rob Livingstone is a former CIO with over three decades of experience in the corporate world. In addition to running his IT advisory practice, he is an author and commentator, providing authoritative, independent insights on a range of IT topics including emerging technologies, governance and IT security. Rob is the author of the book Navigating through the Cloud, and is also a Fellow at the University of Technology Sydney, Australia, where he teaches leadership, strategy and innovation in the school's flagship MBITM program. Visit Rob at www.rob-livingstone.com or e-mail him at [email protected].
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