Beyond Budgeting: Case Studies in North American Financial Services

Journal of Performance Management, 2005 by Max, Mitchell

In this journal two years ago, I identified a number of challenges that traditional Planning and Budgeting processes present to banks and other companies, and presented the "Beyond Budgeting" approach that banks were beginning to investigate. Over the past two years, the Beyond Budgeting Round Table has presented this research to hundreds of organizations, and has worked with a number of large, successful financial services organizations that have evaluated and embarked on paths to dramatically change their Planning and Forecasting processes. This paper highlights the experiences of six leading North American-based financial services organizations along this path.

Each of these organizations has recognized that incremental change to these fundamental performance management processes is insufficient to address the fundamental gaps between their existing performance structures and the levels of performance that they desire. In our analysis, however, we note that each had unique challenges and approached the changes in very different ways. In this article, we will identify the underlying forces which drove these organizations to change their planning and forecasting processes, describe the key changes that each undertook, and examine the value realized from these changes.

WHAT IS DRIVING BANKS TO CHANGE?

We have identified four key business needs responsible for this change activity, listed in decreasing order of importance and prevalence:

1. The desire for improved forecast accuracy

2. The need to drive focus on high business performance

3. The need for increased agility and business responsiveness to market and competitive conditions

4. The desire of CFO's to increase the level of value from the planning and budgeting process

1. Accurate Forecasts

Forecasting is not a new process. Most banks use forecasts over various time periods: to the end of the current quarter or to the end of the fiscal year. Some banks have developed rolling forecast processes, which may extend 6 or more quarters ahead. Yet these forecasts are consistently plagued with deficiencies in both timeliness and accuracy.

For many banks, forecasts represent slightly higher-level budgets, and are completed through a bottom-up build across the organization and consolidated. This represents significant effort - only slightly less than the original budget - and rarely produces any additional insight. This is because subordinate management provides the forecast up the ladder based on what they want to show, not necessarily what they expect will occur. If results are running below plan, they prefer to hide that fact and hope that the problem corrects itself in the coming quarters. If projected performance is higher than plan, management may choose to keep the surplus "in the bag" in case results turn down in the near future, to prevent the bar from being raised, or to showcase their ability to deliver results under pressure at year-end. Some examples from our experience:

* FinServA, a leading financial services industry service company, found that aggressive revenue forecasts were being used to justify higher spending levels.

* FinServB identified the need for a more timely planning process, with less detail and more flexibility, based on key performance drivers, as a critical element in its investment spending decision process.

* At BankX, senior management commented that "... the level of conservatism in our plans and forecasts is causing us to make poor decisions... Sand-bagging the forecast has become the norm.'' For this bank, improved forecast accuracy was the catalyst that drove the need for an overhaul of its planning and forecast processes.

Increasing requirements for forecasting the impact of business events on future performance will continue to drive the need for timely and accurate forecasts. Beyond Budgeting banks are learning to develop "lighttouch" forecasts that provide insight without requiring undue effort and time-consuming forecast processes.

2. Driving a Focus on Business Performance

For BankY, making budget just wasn't good enough. On the heels of a major merger, and literally in the shadow of the rival bank, management determined that a focus on growth was the key to success. Achieving this required a major change in business philosophy and culture, and bank management felt that only by dramatically changing the way in which performance was measured and managed could dramatic growth actually occur.

BankY had initiated a new measurement system which identified and rewarded key metrics for growth in markets, products, and financial performance. However, the traditional budgeting system which they still followed rewarded performance based on achievement of plan. As a result, achievement of the growth targets did not receive the appropriate amount of line management attention.

Most banks that we have studied operate in highly competitive environments and have a strong need to outperform their competitors. In fact, it is only true competitive performance that the market ultimately rewards. Beating the budget is insufficient if your competitor's performance still exceeds yours. But when incentives are tied to meeting a pre-determined (or pre-negotiated) budget amount, focus is directed solely to meeting these financial targets.