Sales & Operations Planning (S&OP) and Integrated Business Planning (IBP) are often seen as fundamentally supply-chain centred processes which offer somewhat limited direct benefit to other functions, especially Commercial and Finance. The criticality of cross-functional collaboration in S&OP/IBP is also often overlooked.
However, a good S&OP/IBP process offers major benefits outside the supply chain function. My previous post highlighted the key outcomes for Commercial leaders and here I extend these observations to the Finance function based on my experience as a commercial leader deploying S&OP/IBP in a global pharmaceutical company.
An increasingly important role for the Finance function is that of business partner. This demands that finance teams develop a detailed understanding of business performance and combine this with good insight on upcoming risks and opportunities in order to provide sound guidance and challenge to business leaders in addition to their more traditional regulatory/reporting responsibilities. A sound IBP process is a key enabler for this business partner role.
In particular, there are 3 key outcomes of a strong IBP process which are very significant for the Finance function and which enable not only improved planning outcomes but also empower Finance teams to add incremental value in this increasingly important role as business partners;
1. Transparency
Traditional planning processes often do not create integrated volume and value plans. It is also very common for financial planning/budgeting to be run as a major enterprise activity on an annual cycle. This annual planning exercise also often takes place under significant time pressure, with reviews taking place at various levels (eg local, regional, global) and with considerable effort required to achieve a common and aligned view on the business outlook across these levels before a final plan can be agreed.
The combination of these features mean that as financial plans are reviewed at progressively higher levels in the business, it is very time-consuming for the finance function to develop a joined-up and comprehensive understanding of the financial plans being presented by local commercial and supply chain teams and also to ensure that there is good alignment from local through to global level, especially in the context of a time-pressured annual planning cycle.
IBP supports increased transparency in two ways that enable the finance function to more rapidly and efficiently create reliable, integrated financial plans based on sound analysis;
Firstly, the regular IBP process reviews both volume and value forecasts with value figures being derived directly from volume forecasts. This analysis provides a much more comprehensive picture of business performance and outlook which is then readily amenable to debate (for example, what proportion of sales growth is due to volume and what is due to price? How robust are those trends? How realistic are the pricing assumptions being made to create the value forecast? etc). The IBP process is also based on common volume forecast data being shared between the commercial and supply chain functions. This means that where there is any misalignment between the commercial plan and the required capacity, working capital and expense levels in the supply chain this quickly becomes visible.
Secondly, as the IBP process runs on a monthly cadence this allows the cross-functional team (supply chain, commercial, finance) to continuously build their mutual understanding of both current business performance and medium-term outlook through the ongoing monthly IBP cycles. This allows the Finance function in particular to work closely with functional leaders to develop early awareness and build consensus on expected business scenarios and then facilitate enterprise responses to those as part of the evolving IBP process. The outcomes of these IBP discussions are also visible at the various aggregate levels so that emerging views on the business outlook are continuously visible and explored up to global level in the finance function without the need for a compressed planning period. This is important as it provides ongoing reliability and consistency of forecasts and avoids surprises materialising in an isolated annual planning process.
2. Foresight & Involvement
In the absence of a strong S&OP or IBP process, silo decision-making is the norm that leads to sub-optimal performance at enterprise level. For example, a commercial decision to shift promotion from one brand to another may have positive benefits on revenue and margin but may create negative consequences for inventory or operating expense. Such an outcome often becomes apparent in the first instance to Finance business partners who are then tasked with reconciling and optimising the enterprise benefit (and often this is practically impossible to achieve retrospectively).
However, IBP helps here by providing Finance with the opportunity to gain foresight on potential decisions. The cross-functional forums of IBP raises the level of discussion of these cases to an enterprise level. The IBP process also focuses on exception-based reporting and decision-making so that any proposed activity which takes either the supply chain or commercial organisation ‘off-plan’ or at variance with previous expectations is subject to appropriate discussion and agreement in the IBP cycle. This provides the Finance team with the foresight necessary to understand upcoming business challenges, the functional perspectives of these challenges and the ability to influence and facilitate optimal solutions for the overall business.
The early involvement of Finance in key business challenges provides the opportunity not only to advocate optimal enterprise approaches, but also facilitate cross-functional discussion involving commercial and supply chain partners. An important part of this role is to model alternative solutions in order to illustrate their impact on a balanced set of enterprise-level KPIs (eg market share, revenue, margin, working capital, supply chain flow etc). This combination of what-if analysis backed by an illustration of the outcomes for agreed company-level KPIs is a powerful tool for moving towards enterprise thinking vs siloed approaches.
3. Single Integrated Approach to Financial Planning
Corporate financial planning processes typically share common templates, milestones, high-level assumptions and top-down targets. However, in the absence of a disciplined process such as IBP they can often effectively default to silo-based planning where the finance function is then tasked with reconciling the various functional inputs with significant manual effort to achieve a balanced corporate plan in line with stated targets.
IBP addresses this problem by creating a company-wide standard for financial planning. The IBP process aligns the commercial and supply chain plans on an ongoing basis with volume forecasts (and the underlying business assumptions) being shared across the functions as part of the rolling monthly planning process used in IBP. This design, supported by regular cross-functional discussion at various levels in the IBP meeting cycle, ensures that the financial plan derived from IBP outputs is already aligned and balanced across the commercial and supply chain teams.
The IBP process also sets out clearly the key goals and metrics to be achieved by the business and these set the context for the ongoing monthly IBP reporting and discussions. This means that in addition to developing and updating an integrated cross-functional plan, IBP also provides the discipline to reconcile the evolving plan back to corporate goals and any deviation from the existing plan is clearly highlighted and discussed as part of the process.
The Benefits for the Finance Team – Business Partner Impact
An increasingly important role for the Finance function is that of business partner. This requires finance teams to develop a strong understanding of the business and its performance, along with good insight on upcoming risks and opportunities. An effective Finance business partner also builds strong cross-functional partnerships to allow them to leverage the insights they develop on business performance and positively influence enterprise outcomes.
A sound IBP process is a key enabler for this business partner role in several ways;
Participation in IBP provides Finance with a deep understanding of the business issues across commercial and supply chain functions. This depth of understanding (and the partnership formed from regular collaboration) is critical to support effective and timely influencing across the business and is simply not attainable from the traditional annual planning set-piece
IBP also provides the Finance team with an ongoing mechanism to gain insight on both current performance and foresight on the medium-term outlook of the business. In this way, IBP enables the Finance function to deliver an enhanced and proactive business partner role and in doing so, ensure that key decisions are made in line with corporate objectives and metrics and are therefore optimised at enterprise level
Overall, the efficiency of the IBP approach as a monthly rolling planning process means that the Finance function can spend less time on the mechanics of a major annual planning process and manually reconciling diverse functional inputs to create a corporate plan and instead focus on value-adding advice and input to optimise the enterprise response to the risks and opportunities it faces.