Reinventing Management Processes
Posted by Michael Coveney
In this series of blogs I’m looking at a number of areas that FP&A departments must address if they are to add value to the organisations they serve in this technology driven age. In this blog I look at management processes.
There are many definitions of Business strategy but it seems they can all be summed up as “the intended actions organisations take in order to achieve its goals”. The mechanism by which this is carried out in larger organisations are its Management processes, whose focus is to ensure that the organisation is prepared, has allocated the resources it can acquire in the best possible way, so that it can compete in an envisaged market both now and into the future.
In the past, these management processes typically consist of the following date-based activities:
- Annual Strategic Planning that analyses market direction, where the business can compete and sets strategic goals.
- Annual Operational Planning that looks at how the organisation can structure itself to meet strategic objectives.
- Annual Tactical planning where budgets are set and actions defined for the coming year.
- Quarterly Forecasting that tries to judge what the immediate future may bring
- Monthly Reporting that looks at current progress against operational and strategic goals along with an outlook for the future.
- Risk assessment that identifies potential issues and assesses how they can be minimised.
However, this traditional approach is being disrupted by technology. Technology that not only reduces the forecast horizon to such an extent it renders the current date-based approach as being totally inadequate, but also impacts the cycle itself. For example if competitors are able to react faster to a changing market, then that will cause other competitors to be faster still, which alters the timing of what customers expect of the overall market.
Technology is able to do this by eliminating the impact of distance in communications; by automating sales and order processing; and by allowing adjustments to products/services ‘on-the-fly’ to meet the requirements of individual customers while responding to competitors.
For organisations to effectively plan and compete in this volatile business environment they need to transform their management processes away from regular, calendar-based activities to one that reacts instantly to constantly changing and often unpredictable events.
To do this, planning must become a continuous activity, split into two areas. The first is at a high level and deals with things that are ‘known’. It deals with the ambition of the company and how it plans to compete for the next few years. In this respect ‘Strategic Planning’ and parts of the ‘Operational Plan’ remain relatively unchanged in its timing.
The second area is in dealing with the unknowns that typically arise during the implementation of the ‘known’ plan. With this, lessons can be learned from sports where the tactical element of competition is dependent on what other competitors are currently doing. For example, in motor sport, the racing teams will have developed a car for the following season many months, sometimes years in advance. This is in line with the anticipated ‘rules’ - or perhaps more importantly how they interpret the rules - that will prevail in the future. The direction of development is dictated by the philosophy (which Ross Braun, ex Team Principal of Ferrari, cites as being another word for long-term strategy) adopted by the team.
However, during practice for the race as well as in the race itself, things don’t always work out as planned. This is typically down to the conditions experienced on the day and how competitors react and perform differently from what was expected. In these situations, the teams will have already planned out what they would do in some of the anticipated scenarios. But if these responses do not work or they come across a scenario they didn’t think about, then they will adjust their tactics based on the latest data. Many teams have an army of ‘number crunchers’ who are continually evaluating what is going on and how any changes they could implement may affect the overall outcome. In many cases, it’s the race strategy that has the biggest influence on who wins.
The lesson for FP&A is that planning has to be a continuous activity that is constantly adapting to the circumstances being faced. It’s not good enough to compare yourself, or even to be tied, to a budget that was set many months ago when the business world is now a different place from what was envisaged.
It means organisations have to constantly monitor what is actually going on, to gauge what competitors may or may not do, and to ‘crunch the numbers’ on a whole range of responses. When a decision is taken then the communication process and reallocation of resources should happen without delay.
It’s something that may happen multiple times throughout the year. It’s not because management do not know what they are doing but a recognition that the world is often governed by unknown and unpredictable events. Is it worth the hassle? Ask any successful F1 or other sports team. At the current time Mercedes are the No. 1 motor sport team to beat. Not because they necessarily have the best car, but because they are the best at adapting strategy.
Take a look at your current management processes and ask how relevant are they to a fast changing world; do they provide an early warning on things that could affect organisation performance; and how fast would they allow the organisation to adjust tactics.