The Third Generation Of Budgeting – Agile Planning

Thorsten Jopp

With market trends shifting dramatically and technology reshaping businesses, leading finance organizations recognize that they have to move fast to capitalize on opportunities. And nowhere is this truer than in planning, budgeting, and closing.

For those who work in business intelligence and performance management – as I have for 13 years – this is not a novelty; having the speed and flexibility to change has always been important. But now, with a digital and globally connected economy, the impact of change on finance processes has significantly increased, maybe more than for any other corporate function. Of the different finance end-to-end processes, such as procure-to-pay or order-to-cash, I would like to explore one example: budgeting and planning.

From fixed cycles to dynamic, agile budgeting

Until about 10 years ago, budgeting was usually done in fixed cycles, looking forward a certain number of quarters. Once the end of the planning timeframe was reached, a new cycle started. As business became more dynamic, companies had to adapt their planning process, and a rolling budget was widely established – with the result that live plans could be adopted for the current situation, while an additional period could be planned at the same time.

Today we see the next big change in the way companies set goals – agile planning – which enables companies to plan based on new dimensions. It’s being driven by the fact that companies inside long-standing and stable industries are developing completely new business models.

One example that I found very easy to understand is airplane engines. The original business model for manufacturers was to produce engines and sell them. Today, instead of selling engines, leading organizations are selling “thrust” – which is what the customer ultimately needs.

Such business models become possible because of technological innovations like the Internet of Things (IoT), which, in our example, allows manufacturers to connect their engines to the Internet and gain live usage information that forms the basis for customer invoicing. I look forward to the day when airlines adopting this model provide a partial refund of my ticket price if a flight uses less thrust than they had originally calculated because of a strong tailwind. But maybe this idea will stay a dream…

The impact on financial planning

So what is the impact of these new business models on financial planning? As I said earlier, agile planning means companies can easily adjust the dimensions on which they create their plans. For instance, in our engine example, it would mean not only planning the “volume of engines sold,” but also the “thrust in newtons delivered.”

Technically speaking, this is an additional primary metric and a new dimension in our data model. Adding a new metric is more complex than just adding items to existing dimensions (like a new product). A new dimension has direct and indirect impacts on other parts of the planning process, for example, organizational responsibility (e.g., who controls the planned thrust). Adding a new dimension also affects the transactional enterprise resource planning (ERP) system, which needs to be flexible enough to adopt and deliver the correct actuals for the “plan vs. actual” controlling processes once a new business model is operating.

ERP and budgeting and planning applications have become significantly more flexible in recent years in order to fulfill such requirements. As a result, business planning and consolidation capabilities are now tightly integrated into one environment and include a number of new innovations, such as the “model extension tool.” The result is a very dynamic, flexible planning solution that can accommodate the new business models that are emerging and allow organizations to run agile planning cycles.

Join our Webinar on Sept. 15 at 4 p.m. CEST/10 a.m. EDT to hear PwC discuss the future of finance planning, along with a representative from Kering Eyewear, who will explain how SAP S/4HANA and SAP Planning and Consolidation are helping finance deliver greater value to the business. One of my colleagues from SAP will describe the solution in detail. Register here.

Learn how organizations are gaining instant financial insights and using them to make better decisions – both now and in the future. Register now for the 2017 Financial Excellence Forum, Oct. 10-11 in New York City.

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Thorsten Jopp

About Thorsten Jopp

Thorsten Jopp is part of SAP`s global business development team for enterprise performance management, finance and controlling, and analytics. With 13 years experience in budgeting, planning, and business intelligence, he is now focusing on growing innovative ideas and new business processes in the context of digital finance transformation.