1. Gérard Naulleau, 2006 1 Management Control Management Control Systems and Procedures PART 2 MBA 2006 Gérard Naulleau

2. Gérard Naulleau, 2006 2 (3) Planning and Budgeting Procedures Current Trends and Developments

3. Gérard Naulleau, 2006 3 Planning and Budgeting Procedures Budgeting A procedure for : Financial alignment Financial forecasting Performance analysis Compensation Planning A procedure for : Business development Strategic Alignment Financial Alignment And Budgeting

4. Gérard Naulleau, 2006 4 Planning and Budgeting Usual Procedure Step 1 Step 2 Step 3 Step 4 management Controlling Responsibility Centers Strategic focus Objectives Strategic AlignmentValidation Final decisions Presentation Valuation hypotheses N+1 1st semester result Assistance to RC Preliminary budgets SWOT analysis of RC preliminary budget draft Updating business plans Modification of preliminary budgets Budget as a contract for N +1 Consolidation Consistency analysis Final budget

5. Gérard Naulleau, 2006 5  What are the issues with the acceptance of planning and budgeting procedures ?  Why managers do not commit to the planning and budgeting Procedures Latest Trends and Best Practices in Planning and Budgeting Procedures

6. Gérard Naulleau, 2006 6 A lot of gaming around budgeting  The 5 Shenanigans (See LK Johnson article) What are the issues with planning budgeting processes ? Do the BU managers really believe in the process ? Do they view the planning and budgeting process as a serious vehicle for identifying and debating critical decisions regarding their units ? Most of them approach the process as a “review and approve” ritual rather than a two ways “debate and decide” communication channel ! Hope and Fraser, 2003. Do the top managers really believe in the process ? A research conducted in 156 US companies in 2005 showed that only 11 % of the executives surveyed believed that strategic planning and budgeting processes were worth the effort in their company. Mankins and Steele, 2006 Planning and budgeting processes seldom a vehicle for identifying, debating and funding strategic decisions WHY ?

7. Gérard Naulleau, 2006 7 Why managers do not commit to the planning process ? Most of the time the formal strategic Planning Process is disconnected of the Budgeting Process  Strategic Planning Review in the 2nd quarter. Involves BU top managers and HQ Top managers only.  Budgeting Process in the 3 rd and 4 th quarters. Involves all units managers and mainly Finance/Controlling HQ managers This disconnection between both procedures proves harmful for the empowerment of managers

8. Gérard Naulleau, 2006 8 For decisions like : Should we enter China, outsource manufacturing of a special product, close a JV deal with a distributor, launch a new product, drop a segment of non profitable customers… ?  Are those kind of decisions taken mainly during Formal Planning and Budgeting Processes ?  In many (most) cases, these decisions are taken on an ad-hoc basis Why managers do not commit to the planning process ?

9. Gérard Naulleau, 2006 9 Why managers do not commit to the budgeting process ? Traditional Budgeting Procedure serve 2 purposes : 1)Financial forecasting. Forecasts should be realistic ! 2)Performance target setting for management. Targets should be challenging ! How do you cope with these different purposes that might be contradicting ?  How do you communicate on strategy through budgeting ?  How do you monitor strategy implementation and action plans through a monthly budget review and variance analysis ?

10. Gérard Naulleau, 2006 10  Misuse of resources Conventional budgeting is time consuming for finance and control department : A research conducted in 1999 concluded that finance and control personnel spent only 21 % of value added work such as in depth analyses of planning / budgeting and reporting figures leading to recommendations / meetings with managers  Reinforce wrong cultural habits (silo cultures) Conventional Planning and Budgeting processes reinforce “Silos” and boundaries culture : Each business unit wants to keep and grow his budgets. We against others culture ! Does not facilitate an internal collaborative culture ! Some collateral damages of conventional Budgeting

11. Gérard Naulleau, 2006 11 Recommendations (1/2) 1 For improving the procedure  Plan and Budget issue by issue or process by process (instead of center by center)  Extend the process all year round  Promote on-demand allocation of resources for investments.  Promote focused targets beyond budget time instead of general targets in annual budget ( such as reducing fixed costs by 30 % over 3 years)

12. Gérard Naulleau, 2006 12  Rolling financial forecasts : for financial forecasting only, for next 5 to 8 quarters ahead, revised each quarter.  Relative Target Setting through Balanced Scorecard approaches (based on internal and competition benchmarks)  On-demand allocation of resources for capital investments  Activity Based Cost Management approaches (process management) instead of budgetary line item expense categories  Ad-hoc Performance Programs approaches (cross units teams and supply chain teams) to reengineer processes 2 For reengineering the procedure Recommendations (2/2)

13. Gérard Naulleau, 2006 13 Further Readings BOOKS Cost Accounting : a managerial emphasis Horngren C., Foster G., Prentice Hall, 2002 Management Control and Performance Processes Giraud F, Saulpic O, Naulleau G, Delmond MH, Gualino, 2005 Rethinking Performance Measurement, M W Meyer, Cambridge University Press, 2002 ARTICLES Stop Making Plans; Start Making Decisions MC Mankins, R Steele, Harvard Business Review, January 2006 Beyond Budgeting Integrating Shareholder Value and Activity-Based Costing with the Balanced Scorecard - R S Kaplan, Balanced Scorecard Report, 2001