Everyday, organisations are steering blindly into the future with strategic plans and annual budgets that are outdated and fail to correspond with reality. In the current business environment, where today’s plans may differ from tomorrow’s reality, organisations need to forecast faster and more frequently.

Although organisations invest a lot of time and energy in their planning and budgeting process, they still get it wrong. Research conducted by PwC shows that 90 per cent of organisations spend more than three months on their planning and budgeting activities, and of that, nearly 40 per cent spend as much as six to 12 months.

This mandatory annual exercise is carried out by too many people, in some cases more than 25,000 man-days are spent every year. Only a handful of these individuals need to be fully involved in the process. Nevertheless, most organisations seem to be reasonably satisfied with their planning and budgeting process and continue to accept working inefficiently.

PwC is convinced that time spent on the planning and budgeting process can be reduced fairly easily to less than three months. This is supported by benchmarks that show best-in-class companies spend less than three months on the process and around 700 man-days. Through rigorous process management and use of intelligent features supported by modern planning tools, a more effective and efficient planning and budgeting process can be achieved.

Linking to your strategy

The disconnection between strategy and the planning and budgeting process is one of the main reasons why organisations do not know which direction they should steer towards. Critical to the planning and budgeting process is the identification of the organisation’s key value drivers.

Key value drivers refer to activities in which an organisation needs to excel at in order to achieve its strategic objectives. It is precisely these activities that should be included in the business plan and subsequently considered in the preparation of operational budgets.

Our survey shows that only 54 per cent of organisations use key value drivers. This leads to a weak or no link between strategy and the planning and budgeting process. Therefore organisations steer blindly, often without realising it.

However, our study shows that majority of the organisations (73 per cent) perceive their strategic and operational planning to be highly integrated. Yet, this result is contradictory as nearly half of the organisations responded that they do not use key value drivers and therefore do not know what drives the direction of the organisation.

Our notion that organisations often tend to steer blindly unconsciously is supported by over 35 per cent of the respondents, who indicated that they are dissatisfied or even very dissatisfied with their planning and budgeting process.

Therefore, key value drivers are essential for linking strategy and the planning and budgeting process. Key value drivers are commonly used in strategy methodologies, such as strategy maps and balanced scorecards. The application of these methods typically leads to a positive influence on the integration of strategic and operational planning. This is supported by the fact that organisations using strategic methods are clearly more satisfied (7.5 out of 10) with their process than organisations that do not (5.2).

Start thinking about tomorrow

In the current business environment, accurate forecasting is essential for one to succeed within the industry. This significantly affects the strategy of an organisation and makes it increasingly difficult to align the planning and budgeting process with strategy. But fear not, the crystal ball does offer a solution - organisations should forecast less far ahead and more frequently to anticipate and respond more efficiently to the dynamic environment.

Only 26 per cent of the respondents regularly make use of scenario analysis. The rest of the organisations continue to rely on traditional methods, such as sales, profit, cost and cash flow analysis even though these methods are known to only monitor current results. In contrast, scenario analysis can help organisations to respond quickly to the future.

So, it is not surprising that the study showed that a growing number of organisations are willing to adjust their planning more frequently. This method is called ‘event driven rolling forecasting’.

This means that whilst the planning horizon remains constant over time, new developments (events) are incorporated into the planning as they are forecasted. Rolling forecasting is much more responsive to the rapidly changing environment as it encourages managers to always think about what will happen tomorrow.

Changing people’s mindset

People have to increasingly focus on the future and envision the future state of their organisation. All this really means is a different way of working yet most people find it difficult to adopt this new approach. This is because most people find it hard to even have an opinion about the future, let alone steering their organisation towards an unknown future.

On the other hand, one cannot help but wonder how uncertain can the future be if organisations have competent employees onboard, who understand well the business environment. So, it is not surprising that when organisations start to view their employees as individuals who are deeply involved in the business processes, a better performing organisation is born.

Constructive guidance and feedback from your employees is essential particularly in these types of processes.

(*) Gaskill is a partner and Ziemerink is a manager in the Advisory Practice of PwC Vietnam. Both have extensive working experiences in advising organisations globally.

The research mentioned in this article is conducted by PwC Vietnam focussing on how organisations are managing their strategy execution process.

Source: VIR.