I spent years building driver-based models to translate business activity into financial outcomes to support management decision-making. As “the spreadsheet guy,” marketing, sales, finance, business development and other teams all continually came to me for help when building models.
This gave me serious job security. While I liked being the guy that everyone hoped didn’t get “hit by the bus,” I now realize that our process was fundamentally flawed.
Flaw: Standalone, departmental, driver-based plans were each tied to the corporate strategy, yet each department’s plan was in a separate file. This was driver-based planning, but it was not integrated.
As Andy Grove noted in High Output Management, “The output of a manager is the output of the organizational under his or her supervision or influence.”
While the output of the sales team is easy to measure as revenue, the output of internal support organizations must clearly connect to other organizations. For example, marketing runs campaigns to produce leads. Sales asks for more leads and headcount. Finance asks for an ROI report showing the effectiveness of marketing campaigns. The sales team wonders why the marketing department is so upbeat about all the leads generated last quarter. Sales learns that marketing defines “leads” in a very differently way than they do.
The Solution: Conduct financial modeling that is focused on cross-departmental factors and collaboration. This helps managers build driver-based plans and gives departments a better understanding of things like how marketing drives sales, and how sales drives manufacturing.
I was surprised by a recent Ventana Research report indicating that only 6% of companies actually do driver-based planning. However, Ventana included “…persistent volume and price connections between plans of the various groups within a company” in their definition of driver-based financial and revenue planning.
So, it’s reasonable to conclude that most companies implement some sort of driver-based planning, though they do so in one-off models by department. Very few implement the best practice approach of integrated driver-based planning.
Since the 1990s, software vendors have continually claimed that 80% of planning is performed in spreadsheets rather than a dedicated planning application. Perhaps the bigger problem is that 94% of companies do not have integrated driver-based plans!
Here’s a metaphor that I heard from a leading CFO that brings home the importance of making the connections between organizations in a driver-based plan:
Think of your company as a ship in the middle of the ocean. Each manager is paddling in various directions, with various amounts of power. Once drivers are in place and in-synch across departments, everyone rows in the same direction at the same cadence and the ship shoots right across the ocean. We literally drive our business forward.
Every journey to an integrated driver-based plan is a continuous process. If you want integrated driver-based planning, we’re here to help. The Adaptive team is developing a 5-level Driver-Based Planning Maturity Scale.
Here is a preview:
Level 1 – Disconnected Models
- Revenue planning and forecasting totally separated from expense plan.
- No modeling to reflect how outputs of one department serve as inputs to another.
Level 2 – Basic Integrated Planning
- Revenue model in same file as expense model enabling at least one expense item to change immediately when making changes to revenue assumptions.
- Revenue plan based on manual inputs of sales forecasts across lowest-level dimensions such as product and customer.
Level 3 – Basic Driver-Based Planning
- Departments start jointly defining shared drivers (e.g. marketing & sales agree on definition of a lead).
- Analyzing optimal level of detail in the revenue model rather than simply planning at lowest available level of sales forecast data.
Level 4 – Optimized Driver-Based Planning
- Sales data from CRM solutions feed directly into planning models.
- Manager inputs minimized to focus on materiality rather than precision.
- All material variable expenses clearly connected to revenue.
Level 5 – Integrated Driver-Based Planning
- Transparency into how outputs of each department drive activities of other departments.
- Drivers and metrics clearly defined and documented.
- Financial statements reflect relevant allocations to enable P&Ls by product, business unit, and other structures required to support management decision-making.
So, how would you rate yourself on the Driver-Based Planning Scale? Is making the move to integrated driver-based planning a priority for you? Whether you use Adaptive or not, we’d love to hear from you!