Financial Modeling and Driver Based Planning Link operational drivers and key performance

indicators to financial forecasting

Measure the Right Things

Ben Lamorte President

President, OKRs.com

SME Driver-Based Forecasting, Accenture

Ben Lamorte, President OKRs.com

Business Activities

Customer Excellence, Adaptive Planning

VP at Alight Planning

Principal, Decision Consulting (Adobe, Kaiser)

Management Consultant, APM/CSC Healthcare

Today’s Speaker

Publications

Co-author of driver-based planning white papers

Introduction to Driver-Based Forecasting (Accenture eLearning course)

Education

MS Management Science & Engineering, Stanford University

BS Mechanical Engineering, UC Davis

Only 6% of companies with more than 100 employees do driver-based planning

Just 10% say they react to change in business conditions in a very coordinated fashion

37% say lack of coordination occurs frequently and is an issue

Who’s doing Driver-Based Planning?

Source: A Practical Look at Driver-Based Planning: Planning Benchmark Research

Where Are You on the Performance

Management Maturity Scale?

Level 1Unaware

•Spreadsheets

•Financial reporting risk

Level 2Opportunistic

•Mixed bag of applications to support different processes

•Limited users

Level 3Comprehensive

•Operational participation in planning

•Expanded financial analytics

Level 4Enterprise

•Connected, agile systems

•Enterprise metric analysis

Level 5Transformative

•Data-driven decision-making culture

•Driven by business strategy

Source: Adaptive Roadshow, Assess CPM Maturity to Rate Your Performance Management, October 2012

Tactical:

Use CPM to support more

efficient financial

processes

Strategic:

Use CPM to gain competitive

advantages

Level 1 – Disconnected Models/ChaosRevenue forecast totally separated from expense plan.

No analysis of outputs of one department serving as inputs to another.

Level 2 – Signs of IntelligenceRevenue & expense model in 1 file; 1 or more expense item changes in real time with change to a revenue assumption.

Revenue forecast based on high level estimates or manual inputs of sales forecasts across lowest-level dimensions.

Level 3 – Basic Driver-Based PlanningDepartments starting to jointly define shared drivers (e.g. marketing & sales agree on definition of a lead and customer).

Analyzing optimal level of detail in the revenue model rather than planning at lowest available level of sales forecast data.

Level 4 – Optimized Driver-Based Planning for Rapid RefreshExternal data feeds directly into centralized planning model (e.g. from CRM, Payroll, GL).

Minimal manager input set focuses on materiality rather than precision. All material variable expenses connected to revenue.

Management can get answers to “what-if” questions in near real time.

Level 5 – Strategic, Integrated Driver-Based PlanningTransparency into how outputs of each department drive activities of other departments

Drivers and metrics clearly defined and documented across all business functions

Sensitivity Analysis (e.g. Tornado Diagrams) communicate impact of variation in key drivers

Financial statements may include allocations to enable P&Ls by product, business unit, etc.

Sneak Preview: Driver-Based Planning Maturity Scale

Source: Adaptive Planning Blog: Why Integrated, Driver-Based Financial planning is Key to your Business. Oct 2013

Exercise: What describes your driver-based

planning maturity?

Level 1 – Disconnected Models/ChaosRevenue forecast totally separated from expense plan.

No analysis of outputs of one department serving as inputs to another.

Level 2 – Signs of IntelligenceRevenue & expense model in 1 file

Revenue forecast based on high level estimates or manual inputs of sales forecasts

Level 3 – Basic Driver-Based PlanningDepartments starting to jointly define shared drivers

Analyzing optimal level of detail in the revenue model rather than planning at lowest level data available

Level 4 – Optimized Driver-Based Planning for Rapid RefreshExternal data feeds directly into centralized planning model (e.g. from CRM, Payroll, GL).

Minimal manager input set focuses on materiality rather than precision.

Level 5 – Strategic, Integrated Driver-Based PlanningTransparency into how outputs of each department drive activities of other departments

Drivers and metrics clearly defined and documented across all business functions

Driver-Based Planning is:A best-practice approach that focuses on operational drivers and leading

indicators such as units and rates that serve as inputs that impact financial

results in a mathematical model

5 characteristics of good driver-based plans1. Meaningful: Financial models are easily communicated, documented

2. Material: Optimal level of detail (balancing precision with materiality)

3. Vertical: managers can connect their work to corporate goals

4. Horizontal: plans connect across departments, not just corporate rollup

5. Progress: ability to make and measure progress frequently

Driver-Based Planning – At a Glance

Source: Preview from Accenture eLearning course FPM238: Introduction to Driver-Based Forecasting

Driver-Based Planning: 5 best practices

Process Best Practice Other Practice

1: Communicate &

document

Predictive Logic Diagram Models in spreadsheets

2: Sensitivity

Analysis

Proactive ranking impact

of key drivers

Answer questions as they

arise

3: Defining Level

of Detail

Materiality: Start at

highest level, fill in details

later

Precision: Start with lowest

level (e.g. pipeline or chart

of accounts) and build off this

data

4: Integrating

Driver Models

Drivers from each business

activity feed one another

Driver models rollup to

corporate, but are in silos

5: Strategic,

metrics-driven

culture

Objectives & Key Results

(OKRs) in centralized and

shared metrics library

Brainstorming a list of KPIs

and Drivers with managers

Software

Licenses

Sold

Conversion

rate

# Services

Customers

Predictive logic diagram

for a software/services

business

It’s about Activities &

Rates

Hours Per

Customer

Billable

Services

Hours

Bill Rate Billable

Services

Revenues

1: Communicating & Documenting with a

Predictive Logic Diagram

Source: Is it Really Worth it to Replace Spreadsheets with a Planning Application.

An Insider’s Guide by Ben Lamorte, Alight Planning

Software

Licenses

Sold

Conversion

rate

# Services

Customers

Services

Staffing

Hours

Services Expenses

Salaries

PR taxes/ benefits

Supplies

Travel

Recruitment

Training

Etc.

Predictive logic diagram

for a software/services

business

It’s about Activities &

Rates

Hours Per

Customer

Billable

Services

Hours

Staff

Utilization

Rate

Bill Rate Billable

Services

Revenues

Hours Per

Month

Services

Staffing

Heads

Services

ProfitabilitySource: Is it Really Worth it to Replace Spreadsheets with a Planning Application.

An Insider’s Guide from Ben Lamorte’s SlideeShare

1: Communicating & Documenting with a

Predictive Logic Diagram, cont

2: Sensitivity analysis

Finds most important issues (drivers) that matter in a decision

Tornado Diagram: 1-way sensitivity analysis: examines deviation from base case by modifying one variable at a time

Case study:

You are in charge of the long-term planning forecast at a large business school. Depending on who you ask, the main profit driver is reported to be:

Average tuition rate per student

#students enrolled

#faculty on staff

Average faculty salaries

Questions you are asked to answer definitively:

1) Which is the most critical driver that impacts profits?

2) How accurate do you expect your forecast to be? In other words, don’t give me a point estimate, give me a range on expected profit.

2: Tornado Diagram

Shows #students is most impactful driver, #faculty is least.

Caveat: quick way to display impact of 1 variable at a time only

3. Defining Level of DetailEnable Managers to plan the way they think, at a level of detail that is

meaningful to them not dollar amounts in the chart of accounts that are

meaningful to finance department

Planning, Analysis, and Reporting Solutions Drive Financial Performance Management, January 2013

• Measuring performance

• Controlling costs

• Analyzing business trends

• Tracking initiatives

Operational

Effectiveness

Key Responsibilities Business Goals

This is the way managers think – help them plan like this

Not this!

Source: Adaptive Planning Roadshow 2013

Example: Driver-based model w/too much detail!

Source: Is it Really Worth it to Replace Spreadsheets with a Planning Application.

An Insider’s Guide by Ben Lamorte, Alight Planning

Precision of 1000+ static inputs may work for budgeting;

forecasting should be higher level

• Version 1: 10k line items

• Version 2: 3k line items

• Version 3: 1k?

Lessons learned over and over:

• Start plans at high level to reveal which details are missing

• Easier to add detail than to remove tons of data from a model!

4: Integrating Driver Models

Corporate Financial

Plan

Sales

Pipeline Forecasts

Manu-facturing

Production

Plans

Logistics

Inbound & Outbound Shipments

HR

Workforce Planning

Marketing

Lead Generation

Source: Adaptive Planning Blog: Why Integrated, Driver-Based Financial planning is Key to your Business. Oct 2013

In the absence of a clearly articulated and up-to-date

strategy or set of objectives, a KPI team must spend

significant time interviewing departmental executives

and corporate executives to understand the mission and

direction of their group before they can commence with

the actual work of defining KPIs.”

– Wayne Eckerson

2: Strategic, metrics-driven culture

1. *Mission: 1-2 sentences describing team’s purpose

2. *Objectives: Names 2-5 core components of

mission to achieve in a defined timeframe

3. *Key Results: Identify 1-4 measurable results to

demonstrate achieving each objective by set date

4. Metrics: numbers with a defined unit to help

measure and communicate progress.Strategic

AND

Measurable

Strategic

BUT

Not Measurable

5: Strategic, metrics-driven culture

Source: Never Before-Disclosed Oracle Planning Techniques by Jeff Walker, former CFO of Oracle who

deployed a “Mission Objective Key Results” system to help grow Oracle from $20M to $1B by more than

doubling revenue year after year in the 1980s.

My OKRs for remainder of session

Objective:

Provide as much value for free as possible to improve

planning and performance management

Key Results:

1. Everyone can name 3 driver-based planning best practices

2. 5+ sign up for FREE private, 1:1 OKRs drafting session

*Source: Inspired by John Doerr Presentation to Google, 1999

OKRs What, Who and Why

What

OKRS = Objectives and Key Results

Best practice performance management methodology

Who

1980s: Intel and Oracle

1990s: Google begins using OKRs w/just 40 employees

2000s: 100s of companies including Twitter, LinkedIn, Sears…

Google on “Why OKRs”

Source: BusinessInsider.com

OKRs Example: Marketing Team

O: Achieve lead targets provided by sales team

Notice how the “KPIs/Drivers” emerge organically as we define OKRs

O: Deliver quality leads cost effectively

KR: Deliver 100 leads in Q1, 200/Q2, 250/Q3, 300/Q4

KR: Identify best and worst marketing event by analyzing ROI of

at least 5 conferences

KR: Achieve an overall cost per lead below $65 in Q1

KR: 30% of leads convert to opportunity within 6 weeks of

creation

22

Even AP can be Strategic Driver-Based!

In each cost center

Identify metrics (volumes & ratios) to predict costs & revenues

# invoices

# applications products sold

# sales staff

Average price per sale

Measure MetricsPlan to drive metrics in desired direction

Plan objectives around influencing the metrics

Use metrics in forecasting where possible

Note: forecast drivers can emerge organically with your team as you define OKRs and create predictive logic diagrams to connect drivers to financial forecasts

5: Strategic, metrics-driven culture, Summary

Source: Never Before-Disclosed Oracle Planning Techniques by Jeff Walker

Summary

Driver-Based Planning: 5 best practices

Process Best Practice Other Practice

1: Communicate &

document

Predictive Logic Diagram Models in spreadsheets

2: Sensitivity

Analysis

Proactive ranking impact

of key drivers

Answer questions as they

arise

3: Defining Level

of Detail

Materiality: Start at

highest level, fill in details

later

Precision: Start with lowest

level (e.g. pipeline or chart

of accounts) and build off this

data

4: Integrating

Driver Models

Drivers from each business

activity feed one another

Driver models rollup to

corporate, but are in silos

5: Strategic,

metrics-driven

culture

Objectives & Key Results

(OKRs) in centralized and

shared metrics library

Brainstorming a list of KPIs

and Drivers with managers

FeedbackScoring performance

Objective:

Provide as much value for free as possible to improve

performance management

Key Results:

1. Everyone can name 3 driver-based planning best practices

(Score 1 if 100%; .7 if 75%, .5 if 50%, 0 otherwise)

2. 5+ sign up for FREE private, 1:1 OKRs drafting session

(Score 1 if 5+ completed, .7 if 4, .5 if 3, 0 otherwise)

*Source: Inspired by John Doerr Presentation to Google, 1999

LET’S DRAFT YOUR OKRS!

Thank You and Learn More!

Videos

• Google Ventures Startup Lab workshop on Google’s use of OKRs since 1990s for Performance Management

• Executioner’s Tale: 20 minute video by Christina Wodtke

• Small Wins (authors of the Progress Principle)

https://www.youtube.com/watch?v=FJ0rs9ZENgM&list=PLPkq59We34mujr0IYnY_rrQBx9TThnAqa

• Simon Sinek - Biology of OKRs and measurable progress on goals

Social Media

• Join Objectives and Key Results (OKRs) LinkedIn Group

• Quora has great Q&A on OKRs

Books

• High Output Management, Andy Grove

• Performance Dashboards, Wayne Eckerson

OKRs Performance Management Software Vendors

• BetterWorks

• WorkBoard

• 7Geese

5: (Data used to create Tornado example)