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Driving Success: Why Driver-Based Planning should be in every CEOs wheelhouse
What do Brad Pitt, baseball and your business have in common?
We bet an approach to management, that identifies key business drivers and creates business plans that mathematically map out how these key drivers can be affected by variables, probably wasn’t your first guess.
The concept of driver-based planning was brilliantly highlighted in Michael Lewis’ novel, Moneyball, and the subsequent cinematic adaptation starring Brad Pitt, Jonah Hill, and the late Philip Seymour Hoffman.
The movie illustrates how Billy Beane—played by Pitt—transforms the Oakland Athletics Major League Baseball team from zero to a team that consistently made the playoffs, they do this by using driver-based decision making. It’s a typical Hollywood trope, but the story is also true.
The team used statistical analysis, something that was unprecedented in the world of Major League Baseball, to identify the team’s key drivers for success. Through a detailed analysis, the team uncovered the true underlying drivers of success for a baseball team, revealing the massive inefficiency in how baseball talent was priced and exploiting this inefficiency to their advantage.
Whether you’re running a baseball team or any other type of business, there’s a good chance driver-based planning is a good fit for you. While driver-based planning might not be a very sexy concept, it’s an incredibly useful and powerful model that every CEO should have in their wheelhouse.
What is driver-based planning (DBP)?
Let’s start with the basics, what exactly is driver-based planning?
DBP is a management approach that identifies a business’ key drivers, essentially a business’ resources, processes or conditions that are vital to the continued success and growth of the organisation.
Once drivers are identified DBP involves creating a series of business plans that mathematically model how these drivers would be affected by different variables.
The goal of driver-based planning is to focus business plans on the criteria, or drivers that are most likely to deliver success.
Identifying those key business drivers can be tricky if done in a subjective or qualitative manner, as different individuals and stakeholders within the business may have very different ideas on which key drivers are responsible for success.
Rather than forecasting based on gut feel, detailed planning models constructed through more scientific means can be incredibly valuable.
Why driver-based planning?
When it comes to driver-based planning it’s important to look at the holistic and strategic view of the business plan rather than just a stand-alone budgeting process.
When used properly DBP can play a key role in more forward looking and proactive decision making across the business, which starts with deciding where the business needs to be going and how you want to reach that goal.
The first step is to pinpoint the most essential drivers, these can be both internal and external, that help propel the business and use these to build a plan.
When it comes to running a business effectively, the savvy business owners and financial professionals have a strong understanding of which drivers have little to no impact on the business and which drivers need to be leveraged in order to ensure the business stays on course.
Identifying the business’ main operational drivers or activities allows managers and leaders within the business to build financial forecasts that are robust.
In order for confident business decisions to be made and the best possible outcomes to be achieved there needs to be clear and well-established alignment on the part of the decision makers across the business.
Not only this, but businesses need to be able to respond to unpredictable events in an agile way.
DBP provides the ability to rapidly re-forecast with minimal effort, allowing businesses to be flexible and dynamic, something that is key is today’s rapidly evolving business world.
Implementing driver-based planning
Whether your business operates in a low tech environment or is a tech giant in Silicon Valley, implementing driver-based planning is something any business can do. In its most basic form, DBP can be set up using a spreadsheet environment for the purposes of scenario analysis with a very small, limited-use footprint.
When done manually the process of DBP typically involves 90% of the time being devoted to coordinating inputs from across the business, chasing accurate internal or external datasets and trying to integrate siloed data. A paltry 10% is then spent tweaking different scenarios and analysing various outcomes.
However, in order to work smarter, instead of harder, there are also great programs, platforms, and tools that empower business owners by making business drivers incredibly easy to model and perform endless what-if scenarios.
No matter whether you use traditional manual methods such Excel spreadsheets or opt for a fit-for-purpose corporate budgeting and forecasting tool such as Adaptive Insights or Cognos TM1 we assure you DBP is, ultimately, worth the effort.
In our view, to get the most value from driver-based planning we recommend investing in a Performance Management platform where you can see the consensus forecast across the company, measure performance against drivers, and run a collaborative and distributive process, regardless of organisation size.
Whichever path to implementation you take, it’s important that everyone in the business understands their role in the driver-based planning framework and the key drivers and their level of influence are well defined.
A clear understanding of the DBP framework and how it aligns with the business’ goals is a crucial step in getting buy in from all key personnel and importantly, getting the most value out of DBP.
Whether you’re a CFO, CEO, Financial Controller, Management Accountant or just a statistical analysis and business management enthusiast, driver-based planning is an excellent way to think about industry benchmarks, scenario modeling, and how to create value for shareholders.
Using DBP allows your forecasting, budgeting and planning to go beyond the simple P&L. Just as concepts, such as number theory, help you understand the guts of numbers in mathematics, DBP helps you understand the guts of your business and that knowledge is invaluable.
We all know that once an annual budget is set, plans seem to invariably change. One of the main advantages of DBP is that not only can forecasting be done in a more frequent and timely manner, it also improves the accuracy of forecasts, allowing businesses to ignore unnecessary items (the ‘noise’) and focus on material drivers—this is particularly helpful in times of great volatility.
Not only are the forecasts produced more trustworthy, but DBP provides more granularity and detail that is closely aligned with operational reporting and KPIs. With driver-based planning models, finance professionals can give leaders a clear picture, not just of what’s happening, but also why it is happening, due to the in depth variance analysis that is enabled by more detailed forecasts.
DBP gives businesses the ability to make decisions fast, by providing visibility into what’s moving. This way, if a business observes a change in a driver, they can buy the most valuable thing: time to respond.
Get the right tools
Whether you’re Brad Pitt running a baseball team, a large corporate or a smaller organisation, driver-based planning is an invaluable asset to have in your wheelhouse. The best planning tools allow a business to be agile and dynamic and DBP leaves room for both.
At QMetrix we’re dedicated to business outcomes, whether it is improved visibility, insight or control and helping businesses choose the best suited and most cost effective tools to achieve those outcomes.
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