There are many reasons why many of today’s CFOs are not satisfied with their FP&A processes, not the least of which is having to perform activities that do not add value. However, driver-based planning—the focus of the latest meeting of the Dubai FP&A Club—can dramatically reduce these activities.

Teddy Murphy, CEO of global forecasting, planning and analysis consultancy MIAGEN, explained to attendees that the amount of non-value adding activities FP&A departments have to undertake comprises the majority of their time. After consolidating data, reconciling systems, finding “one picture of the truth” from a number of conflicting data sources, generating a huge number of reports that are probably are not needed, Murphy estimates the amount of time left on valuable analysis is roughly about 10 percent to 20 percent

In order to reduce non-value adding activities, Murphy said, planning and forecasting models should be based on drivers.

What is Driver-Based Planning?
Driver-based planning is the process of using operational drivers of performance to plan, rather than a one-dimensional value. After the FP&A team identifies the organization’s key business drivers, Murphy explained, it can test those factors against a number of variables and create a forecast. The resulting business plan will likely be dynamic, agile and easily communicated, resulting in a more responsive, aligned and aware organization.

There are a number of key benefits to driver-based planning, including:

• Quick, flexible and dynamic decision-making
• High quality forecasting/planning
• An unbiased analytics culture
• Quality collaborative planning
• Better analytics
• Better strategic planning.

Case study
Murphy gave an example. Australia-based hospital group Ramsay Health Care was enjoying strong growth as a relatively new company, therefore looking at previous history was not relevant. RHC determined its drivers and connected them to the market demand. In RHC’s case, this meant demand for hip operations resulting in the number of consultants required, number of x-ray hours required, the number of nursing hours required, and the number of bed nights and the related costs for each in comparison to the National Health Service (NHS) rate for each operation. Planning by drivers is more related to the future activity of the organization than historic, Murphy noted.

Driver-based planning and modern FP&A systems also transformed DHL’s FP&A process to a quick, flexible and dynamic one. The logistics provider’s budget had become obsolete, and it was using error-prone spreadsheet templates. Overall FP&A had become a very inefficient and slow process. To fix the problem, DHL created a rolling forecast based on actuals and drivers that can be easily validated and interpreted by finance department. The result was a faster, better and unified approach.

Many popular FP&A processes that are easier to implement with driver-based models:

• On-demand planning and forecasting
• Scenario planning
• Risk-adjusted planning
• Flexible budgeting
• Rolling forecasts
• Participative planning.

Driver-based planning can also help to remove bias from the FP&A process. Projects and initiatives will be based on clear assumptions, and target negotiations will be challenged through numbers.

Of course, it can often be difficult to define an organization’s drivers. Murphy recommends that the FP&A team go through profit and loss (P&L), and ask what drives each item. Once drivers are identified, see if they can be connected to anything else. Then put them on your P&L and shorten it.

Conclusions and Recommendations

Murphy closed by providing some pointers on implementing driver-based planning. Organizations should:

• Automate any data collection
• Get more people involved in contributing less data more frequently
• Use drivers as the language of performance
• Get sponsorship for change from the top of the organization
• Deliver in phases, bit-by-bit
• Know the desired outcome: and agile, aligned organization
• Keep the number of drivers at the reasonable level (e.g. around 10-15)
• Do not implement the system before understanding your drivers
• Educate people.

The next Dubai FP&A Club will be held on May 26. Also in May, AFP is holding an FP&A Leadership Summit in Amsterdam—sign up today!