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Real time Dynamic Forecasting – Can it replace traditional budgeting and planning?

Traditional budgeting and planning involves rigid target set, resources allocated to meet those targets, on a very period calendar basis. In this post, inspired by some of thoughts from some visionaries in this space, trying to capture how companies that are best run are gearing up to be dynamic.But does this mean they do away with traditional budgeting and planning ?

Inspired by the blog written by Bjarte Bogsnes on how Statoil runs their business performance dynamically, I have tried to write my 40th birthday blog on Dynamic real time forecasting, but also putting forth my views that its difficult for many companies to move into a completely dynamic forecasting approach, but need a hybrid approach to cover the long term and near terms goals for business.

Let’s start with this picture that depicts how the world has changed …


So as you see, we live in a world of many competitors’, new innovations, new possibilities through mobile, internet with access to global talent, unexpected external events that are both natural as well as man created, no control over the economic climate, growing power of emerging markets etc.

Business leaders and managers are posed with the challenge of planning and forecasting their business in this environment – to seize all the opportunities, prioritize on the resources that would yield them optimized business results and also manage risks proactively.

Here is another picture that compares Traditional Budgeting and Planning with real time dynamic forecasting:


When I show this to the CFOs/Business Transformation Project managers I meet, they are really excited about the concept of dynamic forecasting. But from the conversations, its clearly apparent that both these approaches have to co-exist, as true corporate business leaders are here to build Long term sustainable businesses, while also trying to make sure short term quarter by quarter performance is protected. Today’s leaders cannot ignore a poor quarter and they have to react with corrective actions. But this does not mean that they overreact and lose their focus on the long term goals, but reallocate/adjust/channel their resources in short term initiatives that will help moving towards the long term goals . This is not just reacting to the negative situation, but also applies to exploiting an opportunity that may yield to good results.

So when it comes to Planning and forecasting, its really important business gear up to three key processes as best practice approach. I discuss each of this below :

1.       1. Strategic Long term planning – Every company need to focus on laying out a long term strategic plan, probably on a 5- 10 years time horizon (may vary by industry).  This is super critical as you cannot engineer and launch a car or build an airport in less than 3 years or best of innovations have not happened in fewer years – so it needs to be time tested. You cannot control how it could disrupt your business, what events may affect this – but you need to plan into a longer time horizon. Every size business – needs to think on these lines – as I have not heard a business executive say we are here for a short shot

2.      2. Rolling Period Plans – the classical annual budgets or plans is really non-existent with best run businesses. If anyone is telling us that they still do the annual plan, I would say its because they do it really measure the performance on a yearly basis for the purpose of external reporting and stakeholders. My analogy for annual plan and review is just like we taking a resolution in the New Year, and revisit it every year.

So essentially the best practice here should be on defining a rolling period plan (popularly known as rolling forecast), that retrospect’s on one previous quarter actual and plan out for the next 4 quarters plan. Again the 4 quarters is just an indicative standard, but can be fixed differently for different industry depending on the product life cycles, and other cultural aspects. Rolling period plan is  very useful exercise and process, as it is in the current context of the environment and also looks up for the next 4 quarters, so it does not stop into the current calendar year, but really continuous – and allows for initiatives to run through a decent time period in order to get the right results. The usual example is when you want to enter a new market/business model or channel, its ideal to run it in this rolling period plans.


3     3. Real time Dynamic Forecasting – now I get to the title topic and the most interesting of them. This is really a cool and different management perspective. I try to summarize this into 2 main aspects:

               Protect – Can you quickly react to an external or internal event, to adjust your plans and resources

               Seize – Can you quickly seize  an opportunity that you have on hand, redeploy your resources and gain from this opportunity

Protect is usually something you don’t control but you will have to start quickly reacting to a situation. It could be because of a natural calamity, government policies, internal fraud, leadership changes, a competitive product launch etc. Businesses have to dynamically change their plans to protect their performance and meet their goals.  Usually business react by changing and reallocating resources, people and adjusting supply chain models to cut costs, or gain efficiency.

Seize is usually connected to innovation that can lead you to a entirely new opportunity. E.g. electric cars/bikes to counter oil price surge, completely new products such as ipad or sony walkman that creates a new market.

So essentially business needs to be setup for handling this dynamism and it should be an agreed practice for people to come together and quickly make decisions. Often modeling different scenarios is very helpful to debate and take decision here.

So as you see, each of the above process is relevant, but if business is tuned to handle Dynamic real-time Forecasting, they can really protect the short term goals and react to long term opportunities.

Technologies definitely help in supporting the above process. SAP Strategy management (SSM) and SAP Business Planning and Consolidation (BPC)  provides a great framework to model the above process very effectively and in a more structured way. Often using technologies helps in transforming and adopting best practice business process more effectively.

Here is a very nice and simple example of dynamic forecasting using SAP BPC powered by HANA. This can be further extrapolated for more dynamic forecasting what if scenarios.

Another example is where cash forecasting can be managed dynamically using SAP Cash Forecasting powered by HANA, here is a short video on this one.

Another example where planning is taken across the functions – Sales, Operations and Finance, through the S&OP powered by HANA solution, to truly enable Integrated Business Planning, and fast response to dynamic forecasting, by quickly redeploying resources to meet changing targets and events.

Best run businesses need to rethink their traditional budgeting process, and focus on more innovative best practices with a holistic approach to cover “Strategic Long Range Planning “, “Rolling Period Plans” and “Real time Dynamic Forecasting”…

Welcome your views on this……..

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