Replacing traditional planning and modeling with a real-time, multidimensional version that looks at your company's business drivers rather than its key performance indicators can give you the intelligence to be a more strategic CFO, planning consultants say.
Business drivers are internal and external inputs that affect your company's operational results, and they're distinct from the key performance indicators (KPIs) you're used to looking at if you do traditional planning and modeling, said Philip Peck, a vice president at Peloton Consulting Group, who talked about driver-based planning in a CFO webinar released this week.
Business drivers include salespeople, the number of stores in operation, website traffic, the number and price of products, units of production and production rates, the efficiency of the production process, commodity prices, the salary and benefits for employees, and the level of consumer awareness of your brand, among other things.
You want to plug these business drivers rather than your KPIs into your modeling software because they give you a much more dynamic set of inputs to analyze and to create forecasts.
"These operational drivers enable organizations to understand, plan around and influence inputs that have the greatest impact of financial importance," Peck said.
KPIs, which include inputs such as revenue and net price per unit, tend to be backward-looking because they measure results and don't necessarily touch on the underlying causes influencing your business, although some KPIs can be considered drivers, said Brian Kalish, principal of Kalish Consulting.
The secret to identifying drivers, in your KPIs or elsewhere, is to look for inputs that influence your sales figures, costs and cash flow — and that can be measured, compared to a standard, and acted upon.
"You’re trying to get out of the world of providing hindsight and into the world of providing insight and, ultimately, foresight," Kalish said.
Tech innovation key to modeling
Advances in technology — particularly cloud-based solutions — can help you move to a driver-based planning and modeling system because you can get both real-time and multidimensional analyses of your data. "There are tremendous tools out there today," Kalish said.
With cloud-based solutions, data can be widely accessible and continuously updated throughout the enterprise. The algorithms you use to do your calculations can be pre-written and applied to whatever metrics you want to look at, depending on the solution.
Solutions using online analytical processing (OLAP) cubing, an in-memory database (IMDB) and AI-assisted technology can give you powerful tools to get near-instantaneous insight into what your business drivers are telling you, said Chris Stevenson, a senior manager of Anaplan, a technology provider and a sponsor of the webinar.
"You think of a spreadsheet and it's XY — a grid — but your enterprise is living, breathing, and it works in three-dimensional space: height, width and depth," Stevenson said. "You can go beyond that. You’ve got account centers, time, geography, products, and, along with those, you have product hierarchies. I could go on and on, but these can all be modeled multidimensionally.
"The other thing that's come about in technology are in-memory solutions," he added. "For your [financial planning and analysis (FP&A)] team [prior to these technologies], you have solutions that rely on a batch process, or you have to wait to see the forecast numbers before you can aggregate them, calculate them, and wait to see the results. With in-memory solutions, as I input my forecast number, I see the aggregation and the calculations nearly instantaneously."
That tech capability enables you to do continuous planning because of real-time inputs. And the calculations can be done behind the scenes using algorithms based on rules and logic that have been preprogrammed and available immediately on the cloud.
"You go to one place where you're going to create a new model and the hierarchies are already there," Stevenson said. "For example, a product hierarchy: you don't have to rebuild that. Many of the business rules that might apply across hierarchies, logic, are already there. I just have to drag and drop these things into my model."
Buy-in needed across enterprise
Moving from static planning to a driver-based model requires buy-in from your FP&A staff but also throughout the company.
"You need to have people, process and technology all in place" to make the shift work, Kalish said. "Your people must be up to speed as you make these changes" given the amount of training it takes to move to these new technologies.
Kalish recommended you think carefully about your change management process first and be prepared to manage expectations. "Get buy-in that it's a better way than what they're doing now," he said.
As you set up your system, tap the expertise of people throughout the organization, including those outside of finance, to build in their insight as you identify your business drivers and add assumptions in your modeling.
"There are pockets of expertise in all organizations," Kalish said. "Leverage their expertise even if it's not formalized."
The end result will be richer, faster planning and modeling so you can bring more forward-looking and actionable insight to the company's decision-making.