Strategy

CFOs Need a Fresh Perspective on Long-Range Planning


by FEI Daily Staff

Six drivers can help financial executives overcome obstacles and push their long-range planning process to the next level — making it an even better asset to help organizations achieve their strategic objectives and react quickly to external changes.

This article first appeared in the May 2013 issue of Financial Executive magazine.
The long-range planning process needs significant improvement as data quality, project selection and technology remain obstacles to developing successful planning practices. Findings of a new study expose challenges in current long-range planning practices. The study also indicates the benefits from improving existing processes.

According to 289 finance and operational executives surveyed for the Long-Range Planning Benchmark Study — conducted by Ventana Research with sponsorship from Financial Executives Research Foundation (FERF) and Planview Inc. and published in February 2013 — the main objectives of long-range planning are to support annual budgeting, influence corporate strategy and optimally align capital. The study describes many attributes of the long-range planning processes, but focuses on six drivers of the process that provide a chief financial officer (CFO) with a clear action plan.

The six drivers are: participation of executive leadership, process training, streamlining the amount of time the process takes, integrating the long-range plan to the annual plan or budget, ensuring data quality and investing in purpose-built software.

Engaged Leadership Has Become A Competitive Advantage
The data in the study indicate senior executive leaders are not engaged in the long-range planning process. For example, only 25 percent of participants stated their senior executives communicate a clear and consistent organizational strategy as part of the process.

Active participation of senior executives is critical to a successful long-range plan; and now there is data to support this expectation. If senior executives do not contribute or communicate objectives to the long-range plan within an organization, it is sound advice to stop the process and schedule meetings with executive peers.

A paradigm shift may be necessary for financial planning and analysis (FP&A) managers to regularly approach the CFO to encourage individual or any C-level participation. However, the only person to foster that change in communication is the CFO. The reasoning is clear: Failure to get executives involved in the process will likely result in misaligned priorities and projects, wasted corporate resources and financial loss.

Hard data now also points toward how organizations conceptualize the investment of the long-range process in terms of formal training. Only 29 percent of organizations surveyed in the research provide formal training to ensure participants have consistent methods and proper professional skills to participate in the process effectively.

For CFOs, training should be a concern. More than two-thirds of organizations that provide formal training to stakeholders rate the skills of people involved in long-range planning as above average or excellent.

Without a global understanding of expectations, process, buy-in and terminology, an FP&A team is only as strong as its weakest source of information because the group has to modify behaviors to achieve the standards of the lowest common denominator. Empirically, training raises this standard and, therefore, the quality of the plan.

Developing a Procedure Pays Off

The next two drivers surfaced by the new research regard how long an organization takes to conduct its long-range planning process and how well those efforts result in understanding corporate goal variance. With regard to the duration of the process, three-fourths of organizations participating in the research perform long-range planning annually and about half take between a month and a quarter to complete the plan.

Surprisingly, 41 percent of participants review their plan monthly and another 29 percent review it quarterly. To learn that many organizations feel the need to review the plan monthly is surprising because it overtly identifies a business function that either needs so much inspection it requires explicit attention or the process is wrought with inefficiencies that resources are being wasted.

In either case, there are only a small handful of exceptions when a monthly review would be considered productive, such as a major strategic directional change or an influx of the economy, such as the 2008 financial crisis.

If an organization needs to review its long-range plan monthly, it is very likely the plan is much more detailed than required. If the organization is spending time reviewing its long-range plan, annual plan and quarterly plan, it’s a good idea to ask why. “Who is driving operations and customer service if the company is spending this much time on planning?”

According to the research, there is a “sweet spot” between the right amount of time  required (four weeks) and the areas of focus. The concept of “focus” points to supporting correlation regarding how an organization links the long-range plan to the annual plan and/or the budget. Just as the process pain points are described in the research, the lack of budgetary integration is just as worrisome. For example, 66 percent of respondents reported they have integrated their long-range planning with operational planning and budgeting. Furthermore, the research states companies that integrate long-range planning and budgeting react faster to changes in their environment. It is hard to believe that one-third of surveyed organizations have not integrated, but there is evidence that some companies operate their annual budgeting process without referring to their long-range plan.

A CFO or corporate planning officer needs to make sure that the annual plan is aligned to the prior year’s long-range plan. If not, the company has a major disconnect. All the investments of resources to complete the long-range plan are for naught if it is simply put aside when the annual planning process overrides or ignores those efforts.

Better, Accurate and Timely Information = Better Long-Range Planning

Using the correct tools for any job garners the appropriate results. The better the tools, the better the results. It is surprising then to learn:

• Close to two-thirds of respondents in the study said the data available for long-range planning is only somewhat adequate or indeed, inadequate; • Approximately 75 percent said the data available for planning major initiatives is only somewhat accurate or to some extent inaccurate; • Sixty-seven percent of respondents with a team of more than 20 people said that spreadsheets are a problem and more than 40 percent of all respondents agree. On the other hand, organizations with tools designed to support data accuracy, timeliness and underlying details are more than 80 percent more likely to make better choices about capital or major investments.

Purpose-Built Software Required

Software has a direct impact on the ability to support a more efficient process and do contingency planning, but companies need more effective software and they need to rely less on spreadsheets. It is difficult to imagine that today’s finance organizations are still extensively reliant on software and spreadsheets that are no longer suited to meet the challenges and requirements of the long-range planning process.

Only six percent of research participants believe the software used for planning and analysis of prospective projects and investments is very effective, and many participants do not think their software can perform key analytical tasks well. For example, a little more than half said their software could handle project return calculations.

Though data accuracy and timeliness is a continual issue for finance professionals, a major factor of this issue is the overwhelming use of spreadsheets. According to the research, organizations should reconsider the use of spreadsheets and instead employ dedicated planning applications that use a central relational or multidimensional data store.

These applications “facilitate consolidating data from multiple sources, reduce error, make it easier to do rapid contingency planning and enable automation of a considerable portion of process management.” For instance, two-thirds of survey respondents that have very or generally effective software said they can examine all relevant scenarios versus just 20 percent that do not have effective software.

Finance leaders need to drive this very important change in adopting analytical tools. With proper planning and a small investment, best-in-class software will automate, expedite and improve long-range planning. This will improve decision-making and give a company a competitive edge and greater potential for success.

If its software is not very effective, the company needs to act and act now. The improved quality of its plan will easily meet even the most aggressive return on investment (ROI) test.

Nearly 100 percent of the survey respondents said their organizations need improvements to long-range planning. The good news is that these enhancements can be achieved, making long-range planning an even better asset for helping organizations achieve their strategic objectives and react quickly to external changes.

Long-range planning has a significant impact on company’s success. It defines how the organization will operationalize corporate strategy into the specific investments that lead directly to corporate success for years to come. First and foremost, however, this assumes that an investment in the team, the process and the quality of the long-range plan is considered just as important.

Rich Murphy is an executive-in-residence for Planview Inc. and a former CFO who specializes in cost control and operational efficiencies. To learn more about the Long-Range Planning Benchmark Study, conducted by Ventana Research and sponsored by Financial Executive Research Foundation (FERF) and Planview, visit www.Planview.com/LRPBenchmarking