Tag: control

Building an Integrated Planning and Control System

tomkapostasyLeave a comment

In the process revolution since WWII, we have seen every business function discover that input-process-output descriptions of activities followed by a “say what you do, do what you say, be able to tell the difference” feedback structure are the key to long-run success.  Firms need to evaluate and consolidate these planning and control systems into a single fully integrated system, since they are all attempting to reach the same goals using the same tools.  There are at least five different sets of systems independently active in most firms today.

Strategic planning systems operate at the highest organizational level, attempting to evaluate the situation, set direction, identify critical success factors, define strategies and key performance indicators, and approve major investments and projects.  More evolved frameworks, like the balanced scorecard, attempt to link strategic goals to operational performance.  Many firms have learned to link strategy to measures and projects.

Modern financial planning and control systems have evolved for more than 100 years.  Strategic plans are translated into long-term financial plans to guide borrowing, investment, operations and risk analysis decisions.  The financial plan is translated into a negotiated annual budget.   A financial performance management system evaluates managers against business unit, department, product, customer and project goals.  The key transaction processes are defined and monitored.

Risk management has evolved to become a separate discipline apart from classic P&L management.  Regulatory compliance and external financial reporting have become more technical and legal.  Internal controls have moved to secondary and tertiary levels of safety with an emphasis on “defensible positions”.  Emergency preparedness and disaster recovery have developed into new disciplines.  Risk management tools have evolved from insurance policies to include hedges, contracts and outsourcing.

Human resources systems have grown to become parallel factors.  The regulatory side has greatly increased the emphasis on compliance and risk reduction.  HR performance management systems have become linked to business performance through SMART goals.  HR has been charged with helping managers professionally address frequent change management issues.  HR has also become a senior management partner in attempting to create cultural alignment.

The process or quality systems approach has been the greatest innovator.  At the highest level, a management or total quality management system attempts to incorporate all activities.  The quality approach requires clearly defined customer goals.  All processes must be defined and documented at the staff and system level.  Operations measures are defined to provide simple and direct feedback.  Quality goals are set and quality improvement is defined as a separate goal.  Processes are defined within the generic framework of product, sales and delivery.  IT systems are positioned as facilitators, requiring technical and user documentation.  Individual application systems become more complex, incorporating best practices, but allowing many exceptions.  Change management becomes a sub-discipline, with growing project management expertise.  Process changes are driven by re-engineering, kaizen and continuous process improvement efforts.

Ideally, a firm defines and operates a single planning and control system which integrates the strategic, financial, risk, human resources and quality management dimensions.  Failure to integrate these components leads to added costs, political conflicts, waste and missed opportunities.  A performance management cross-team with representatives from sales, product management, finance, HR and operations is needed to coordinate this effort.

There ARE many components.  We need to overcome the desire to have a fully integrated system that encompasses all possible components as exhibited by the US military in their Afghanistan plans.

http://www.nytimes.com/2010/04/27/world/27powerpoint.html

Goals of an Integrated Planning and Control System

tomkapostasyLeave a comment

The proliferation of planning and control systems has led to a large number of goals.  Fortunately, they can be consolidated and categorized to facilitate the development of an understandable consolidated system.  The essential goals are eternal, but the growing complexities of the business environment and processes have increased the number of goals worth monitoring.  On the planning side, firms need to prioritize, clarify, align, communicate and prepare. 

In spite of the countervailing winds of entrepreneurship and empowerment, in a dynamic world with greater value at stake, firms need to set key priorities at the top for direction, values, strategies, investments, projects, critical success factors and key performance indicators.  Without them, even in the best conditions, managers and staff will ineffectively make decisions “as well as they can”.  Clear priorities and expectations can significantly reduce the zero-sum game of internal politics.  Senior management needs to proactively clarify the priorities, trade-offs and commitments made to all stakeholders, including investors, customers, suppliers and internal departments. 

A well-designed strategic plan and its related structures effectively align the decentralized, specialized, outsourced, matrixed and virtual resources of today’s firm.  Intentions, decisions, opportunities, authorities and best practices are clearly communicated.  The well-defined expected and desired future state allows individual functions to optimize within their frameworks.  Long-term commitments are made and managed, allowing business units and functions to flex within the context and pursue immediate opportunities.  Commitments are made at every level at the right time, with confidence.  Scarce resources are devoted to priority objectives and secondary projects consume no resources.

An effective planning process prepares the firm to face the unknown.  Participants at all levels have devoted time to organization level thinking about direction, situation, gaps and solutions.  If simulations, sensitivity analysis and emergency preparedness work has been done, some level of preplanned formal responses and tools has been defined, providing a base and confidence for managing the challenges that were not expected.

On the controls side, the system needs to deliver results while managing assets and risks.

“What gets measured gets done”.  Objectives that are measured and reported receive priority management and staff attention.  Today’s digital dashboards expand the number of goals to be pursued and more clearly communicate their status to everyone in real-time.  This greatly increases the motivation by staff to improve their real performance (and sometimes beat the system).  The quality revolution attempts to move this feedback loop to a higher level, with staff understanding customer needs, defining their own goals, measuring performance and developing quantum leap improvements to serve easily understood definitions of success.

The accounting staff has always been charged with safeguarding the firm’s assets.  In the analog world, this was straightforward.  Today, it requires a deeper understanding of intangible assets such as patents, supplier relations and brand value.  In spite of the loss of firm loyalty, it is apparent today that employees are the most valuable assets for most firms.  Employees need to feel valued for their skills and contributions, and be given opportunities to build their skills and apply their talents.  The human resources management system (job descriptions, evaluations, compensation) needs to be effectively integrated into the overall planning system.  An effective process system also builds the knowledge management value of the firm by documenting processes, accumulating knowledge and improving the rate of knowledge transfer through training and sharing.

In the post-Enron, Sarbanes-Oxley informed world, risk management has become an important board level topic (because board members have new responsibilities).  Developing basic and advanced internal controls to prevent and detect theft is a classic controller responsibility.  Administrative policies and procedures have long been used in large and small firms to increase the degree of compliance with management’s expectations by managers and staff.  Most firms have been subject to some level of regulatory oversight, audit and compliance.  All firms have reported financial results to external stakeholders within generally accepted accounting practices and tax laws.  Firms have always thought about the risks of natural disasters, but today’s decentralized and electronically supported worlds require much more attention to a variety of 10%, 1% and 0.1% risks.  Firms have used insurance policies for basic risks for centuries, but today they must evaluate and guard against a much wider variety and degree of business risks.  Finally, complex and decentralized firms are subject to Murphy’s Law and the role of the weakest link.  The sheer number and impact of risks has caused them to make openness and transparency a top value.

An integrated planning and control system needs to address all of these goals.  Planning must prioritize, clarify, align, communicate and prepare.  Reporting must deliver results while managing assets and risks.