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From annual budget to rolling forecast - Karine Cochet

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From annual budget to rolling forecast - Karine Cochet

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On April 18 & 19, 2013, I participated as a speaker at the FP&A Innovation Summit in Hong Kong,

Organized by IE. (Innovation Enterprise), the Financial Forecasting & Planning Innovation Summit brought together CFO and FP&A Directors from all around Asia.

During 2 days, we, Finance executives, were able to share our experience and discuss around the 2013 Summit Topic: “Today companies rely on a solid FP&A process, this requires the ability to access, collect and analyze both financial data and forward-looking non-financial measures such as trends in customer demand or commodity prices”

In my presentation, I focused on Driver-based forecasting and rolling forecast.
“Traditional annual budget process is often seen as a time-consuming exercise, with limited value, whose underlying assumptions are quickly outdated. In a time of increasing competition and fast changing environment, there is a need for a more agile way to predict the future. In the presentation, we will discuss the opportunity to introduce a more flexible approach based on driver-based forecasting and rolling forecast. We will consider the impacts of such a move on the organizations.”

On April 18 & 19, 2013, I participated as a speaker at the FP&A Innovation Summit in Hong Kong,

Organized by IE. (Innovation Enterprise), the Financial Forecasting & Planning Innovation Summit brought together CFO and FP&A Directors from all around Asia.

During 2 days, we, Finance executives, were able to share our experience and discuss around the 2013 Summit Topic: “Today companies rely on a solid FP&A process, this requires the ability to access, collect and analyze both financial data and forward-looking non-financial measures such as trends in customer demand or commodity prices”

In my presentation, I focused on Driver-based forecasting and rolling forecast.
“Traditional annual budget process is often seen as a time-consuming exercise, with limited value, whose underlying assumptions are quickly outdated. In a time of increasing competition and fast changing environment, there is a need for a more agile way to predict the future. In the presentation, we will discuss the opportunity to introduce a more flexible approach based on driver-based forecasting and rolling forecast. We will consider the impacts of such a move on the organizations.”

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From annual budget to rolling forecast - Karine Cochet

  1. 1. COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION Karine Cochet, FP&A leader, APAC APRIL 19th, 2013 From Annual Budget to Rolling Forecasts
  2. 2. Agenda Alcatel-Lucent: Overview and challenges Former Budget Process – Assessment Budget Process as it should be Exploring Budget Process Enhancements 2 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION Exploring Budget Process Enhancements Driver-Based Forecast Rolling Forecast Alcatel-Lucent: Enhanced Budget Process: where are we?
  3. 3. Alcatel Lucent – WHO WE ARE? 1000+ CUSTOMERS (NETWORK OPERATOR) 1M+ NETWORKS 500K+ CUSTOMERS (ENTERPRISE) My computer My storage My communications 150+ COUNTRIES 3 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION ~72,000 employees 2012 revenues €14.4b 2012 R&D/Sales 16.1% Intelligent Network My media My gaming 2012 Adjusted operating margin −1.8%
  4. 4. Alcatel Lucent – WHAT WE DO? PRODUCTS Innovation R&D SERVICES System specific DELIVER products INSTALL INTEGRATE TEST 4 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION MANUFACTURE SOLUTIONS Architecture Design Customized products accessories tools TEST MAINTAIN OPERATE
  5. 5. Alcatel Lucent and the Planning process ANNUAL COMMITMENT TOWARDS OUR CREDITORS GUIDANCE TO MARKET COMMITMENT TOWARDS OUR SHAREHOLDERS The Annual Budget is a mandatory 5 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION ANNUAL BUDGET COMMITMENT TOWARDS OUR EMPLOYEES COMMITMENT TOWARDS OUR CUSTOMERS is a mandatory exercise
  6. 6. • Time Consuming, not enough time left for analysis • Manual and labor intensive process: hundred of spreadsheets, difficult to update, subject to errors, heavy to consolidate, costly process • Too many details, a lot of wasted energy and a false sense of security • Tied to a rigid calendar, creating an inappropriate annual mindset and current year focus while business is an ongoing operation Former Budgeting Process - Assessment 6 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION When finally completed, it is already out-dated • Lack of ownership of operational managers, they see no benefit and follow the process against their will • Finance does much of the work, no buy in from the business • Process is way too linear, lacking dynamic interaction between Strategy / Operations / Business, and opening the door to budget gaming / target negotiation
  7. 7. In a world of increasing competition and changing economic environment, companies need a better way to predict the future, more agile, more flexible, more focused, more reliable Planning process should raise questions and provide answers that are core to the business What planning process should we use? 7 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION • What drives performance in our market? In our operations? • What is our strategy? • How much investment should we dedicate to new initiatives? • What are the key performance indicators that would best measure progress towards strategic goals?
  8. 8. 1. Align with the Business Priorities: • Start with the strategic plan • Engage at the executive level • Measure what is critical to the strategy • Validate goals against key metrics/market data • Clearly communicate the metrics 2. Increase collaboration among functions: involve all department How should the planning process work? 8 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION 2. Increase collaboration among functions: involve all department managers and get more accurate forecast (engaging those closest to the information) 3. Be timely: get information in the hands of business owners quickly and regularly 4. Adapt, be flexible: revisit as often as necessary, run multiple scenarios, be ready for the unexpected
  9. 9. Benefits of a driver based forecast: • Increased accuracy • Reduced cycle time • Limited interpretation • Improved collaboration (same language as the business owners) • Aligned with the business strategy Implement driver based forecasting 9 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION • Aligned with the business strategy Key prerequisites: • Identify and manage the true business drivers • Focus on activities - not financials • Include key non-financial drivers
  10. 10. Driver based forecasting - examples # of Cards # of Active Cards Monthly Billing Annualized Revenues Demographic Market penetration Promotions Substitutes Average Spending Income Credit limits Seasonality Credit Card business: 10 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION Installed Product Base # of calls per type of request Hours required Person Hours requiredNew Product Sold Type of call: warranty, technical support, training.. Average call length depending on type Service Level Agreements Peak Volume Call Customer hotline business:
  11. 11. • Balance Detail with Value • Target Accounts that have material impact and high variability • Combine Statistical and Judgmental methods: Build a Financial Model (1/2) Pros Cons Statistical >Visualize patterns found in historical data and build predictive models • Objective • Uses drivers • Models multiple relationships • Complex to build and to maintain • Assumes information can be quantified 11 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION • Regularly re-examine models by examining forecast accuracy predictive models (regression, time series…) relationships quantified • Assumes that some past patterns will continue in future Judgmental > Use judgment to choose variables, build structural equations, and adjust the model predictions • Easy to set up • Handles novel situations (official announcement, “street” talk…) • Open to bias • Drivers not proven
  12. 12. • Run “what if” scenarios • The whole point is not necessarily to predict nearly 100% accuracy but to call to action with informed decisions • Resources for capital projects and operational expenses can then be reallocated and new performance targets set • Shift from Linear Process to a Continuous Cycle Build a Financial Model (2/2) 12 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION • Shift from Linear Process to a Continuous Cycle Monitor, Report and Analyze Review and Set Strategy Planning Input and Collaboration Allocate resources and Execute
  13. 13. • A rolling forecast is a process in which key business drivers are forecasted on a continual basis, not associated with a specific financial year • Expands forecast horizon beyond current fiscal year • Scenario based: uses various assumptions to anticipate bottom line impact Moving to a rolling forecast 13 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION • Predictive: recommendation is to have at least quarterly reviews of the process and run scenarios, use the added information to reduce, but not to replace annual budget process
  14. 14. • Fine-tuning the models can be challenging: The difficulty is to re-inject Actuals and understand variances to adjust Forecasting… without getting lost in a rear-view mirror Driver-Based Rolling Forecast – Challenges (1/2) 14 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION • Information System may be a hurdle: Having the right tools, end to end, avoiding heavy manual data collection and scenario handling
  15. 15. • Change management is required: Limit “budget gaming”, target negotiation mindset and adjusted projections to fill the gaps. Promote collaboration, knowledge sharing and transparency on assumptions & dependencies Driver-Based Rolling Forecast – Challenges (2/2) 15 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION assumptions & dependencies Embed forward-looking attitudes into the culture, create a consistent focus on the business issues, rely consistently on forecast intelligence to make managerial decisions This requires strong Buy-In from management and discipline from everyone
  16. 16. Nowadays, corporate culture tends to focus on quarterly performance It is essential to incorporate long term implications, foster innovation and growth Incorporate a 3-5 year outlook in the planning process: • Better focus on market conditions and strategy Long Term versus Short Term? 16 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION • Better focus on market conditions and strategy • Give business owners an opportunity to project themselves into the long-term future • Build a consensus around corporate strategy and execution • Build foundation for future planning
  17. 17. What is the situation in Alcatel Lucent? Emerging • No formal planning process • No planning tools • Inadequate Developing • Inconsistent process • Basic tools (e.g. Excel) • Ad hoc spreadsheets Defined • More standard processes • Some integration across Business Units • Reliance on ERP system as planning tool Advanced • Enterprise-wide processes • Use of web- enabled budget tool • Rolling forecast and other advanced processes Leading • Planning process fully integrated with strategy • Real-time forecasting and performance monitoring • Compensation linked to results 17 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION communication • Purely financial plan spreadsheets • Highly manual process planning tool • Little analytic Harmonizing system >> One ERP Introducing one common forecasting tool Introducing Rolling Forecast Some model based scenarios, but still very manual Still too detailed bottom-up approach Sometimes lacking discipline in data collection Not yet real time nor integrated with strategy Current processes and philosophy must evolve
  18. 18. ADDRESSABLE PIPELINE ORDERS FORECAST SALES FORECAST ORDERS FORECAST MARGINS FORECAST ORDERS FORECAST HEADCOUNTS /FIXED COSTS FORECAST CASH FORECAST INVENTORY FORECAST A strong process but too manual 18 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION By product, segment, customer: • Market share • Trends • Reputation, investor perception Addressability still rather empiric Systematic By product, segment, customer: • Delay from Qualification to Contract • Win/Loss ratio • Probability to win Long run forecast thru models but empiric, not formal, lacking methodology Short-run forecast is 100% manual and detailed by opportunity Systematic By product, segment, customer: • Backlog/book ship conversion ratio • Typical project schedule - Revenue recognition rules in line w/ T&C • Adjusting lead time to Demand Plan By product, segment, customer: • For recurrent business: historical trends adjusted with expected Cost Improvement / Price Erosion / Specific Provisions linked to T&C • For key deals: detailed P&L analysis Systematic Still too empiric, methodology not formal enough Systematic Handled centrally
  19. 19. Conclusion for Alcatel Lucent • Monthly Forecast Process is clearly embedded in the culture but remains too manual and cumbersome • Improved agility with a strong methodology, practice alignment, converting understanding & assumptions into rules, and regularly challenging some long time habits 19 COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED. ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION Still some changes to implement before having a real Driver-Based Rolling Forecast tied to our Strategy… And now: tell me about the situation in your company??

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