“Essays on Business Transformation”

Foresite SPA’s Brian Hawkes contributes to the “LESS!” Book “Essays on Business Transformation”.

Publishing early 2012. This book will be an essential read for all ambitious business leaders and managers. Watch this site for release details.

It is very rare that you see so many global thought leaders from around the world (including Foresite SPA) cooperate on one definitive work. Following the success of the Lean Enterprise Software & Systems (LESS 2011) Conference in Stockholm on 01 November 2011 at which Foresite SPA presented under the ‘Beyond Budgeting Round Table’ (BBRT) stream, it was decided to publish a book based on material from the conference. Foresite SPA contributed an informative presentation on Dynamic Growth Management and Commercial Intelligence which resonated well with other contributions from BBRT, Handelsbanken and The Norwegian School of Economics.

LESS 2011 Conference streams covered…

• Transforming Organisations
• Beyond Budgeting
• Lean & Agile Product Development
• Complexity & Systems Thinking

LESS 2011 showed how the ideas of conference contributors from very different backgrounds and with different experiences converged. The differences were small compared to the ideas they shared which sparked curiosity and a desire to learn more. The organisers recognised that they had something very important that should be shared as widely as possible. Over 20 speakers have contributed chapters to the book. Foresite SPA is in excellent company with contributions from important authors on leadership and management such as Dr Peter Bunce (co-author of “The Leaders Dilemma” [Jossy-Bass 2011]), Henrik Martensson (author of “Tempo!” [Lulu 2011]) and Steve Denning (author of “The Leaders Guide to Radical Management” [Jossy-Bass 2011]) and many others.

Foresite SPA are presenting in the Beyond Budgeting stream on Tuesday 1st November 2011:

Agile software development changed the way the software development is perceived today. The journey started in Helsinki, Finland in October 2010. This year it continues in Stockholm, Sweden, October 30 to November 2, in the new era where the software business meets software practice in a novel way. The second International Conference on Lean Enterprise Software and Systems (LESS) is a non-profit collaboration between the Lean Software and Systems Consortium and Mälardalen University.

LESS joins three strong communities together to form a platform for innovative ideas and future developments. We foster the interaction by joining the lean product development community with the agile community coupled with innovative ideas nurtured by the beyond budgeting school of thinking. These communities are supported by well-defined educational tracks to involve the university lecturers deeply in the network where future software and business managers are educated.

LESS 2011 is part of the LeanSSC European Conference Series with:

• Lean & Kanban Benelux
• Lean & Kanban Central Europe

The LeanSSC is also supporting the ALE2011 Unconference

Foresite SPA are presenting in the Beyond Budgeting stream on Tuesday 1st November 2011:

Driver-Based Forecasting and Performance Management

Foresite SPA explains the practical application of driver-based rolling forecasts and performance analytics for realising sales targets and avoiding forecasting becoming an unachieved prediction or statement of aspiration. We explain how up to 95% of commercial activities are inadequately analysed in business reporting and reveals how getting the right information from the right place can be a rich source of analytics for business drivers, limiters and inputs; their impact on sales trajectory and the remedial capability to close forecast gaps. Whilst this information is critical for supporting performance management and financial control, it often does not warrant the complex BI or prescriptive SFA systems that have been the traditional solutions for so long and can distract management from the real issues in their business. Lean and agile systems are robust, easily understood and essential to establishing business forecasts and insights that are both provable and evidence-based.

How to build an empowered and adaptive organization without losing control.

Many leaders realize that in today’s economy it will no longer be the smart, highly paid people in the corporate centre that drives success. This book is about rethinking how we manage organizations in a post-industrial world, the so-called creativity age where innovative management models represent the only remaining source of sustainbale competitive advantage.

Drawing on their work in the ‘Beyond Budgeting’ movement over the past twelve years, including many interviews and case studies, BBRT Directors Jeremy Hope, Peter Bunce and Franz Röösli set out in this book an executive guide to building a more empowered and adaptive organization based on the 12 Beyond Budgeting principles.

Foresite SPA are supporters of the Beyond Budgeting Partnership – Meet Foresite SPA’s CEO at the Beyond Budgeting stream of the LESS2011 (Lean Enterprise Software & Systems) Conference at the Clarion Hotel, Stockholm on 1st November 2011.

Foresite SPA discloses its remarkable Green credentials in the light of the recent report “How Dirty is Your Data?” published by Greenpeace on 5^th May 2011.

Foresite SPA is aware of its environmental responsibilities and justifiably proud of its ‘green’ credentials. Carbon footprint was one of the criteria when selecting its data centre for hosting its world-leading cloud software product. It selected UKFast who is a carbon neutral business, working with one of the world leaders in carbon management to offset carbon emissions.

UKFast has achieved PAS 2060 certification – making them the first certified carbon neutral hosting company in the UK (100% carbon neutral office and data centres).

Foresite SPA’s dedicated servers sit in green racks within the new UK data centre, to be powered by hydro energy, a renewable energy source that will directly offset the operating emissions from servers and devices, and massively reduce the CO2 output from Foresite SPA’s data centre.

This exciting development will make Foresite one of the first hosted solutions to be powered by hydro-electricity, a green power source that will prevent the emissions from happening in the first place.

The Greenpeace report estimated dependence on coal for Apple’s data centres at 54.5%, followed by Facebook at 53.2%, IBM at 51.6%, HP at 49.4%, and Twitter at 42.5%. Top marks in Greenpeace’s clean energy index went to Yahoo, followed by Google and Amazon.

Cloud computing relies on large data centres, rather than in-house based IT services, to power internet-based services. Data centre energy demand already accounts for 1.5% to 2% of world electricity consumption and is set to quadruple over the next 10 years.

Jonathan Koomey, a project scientist for the End-Use Forecasting Group at Lawrence Berkeley National Laboratory, whose work was cited in the study, said that the IT industry wrongly attracted criticism: “The use of IT often reduces environmental impacts. When we compared greenhouse gas emissions for downloading music to buying it on a CD, for example, we found downloads reduced emissions 40-80%.”

Make rolling forecasts the primary management tool
Most CFOs want to spend more time managing the future rather than dwelling on the past. So the ability to help managers to prepare quality forecasts is fast becoming a core competence. But most finance teams have much to learn. The mistake that most of them make is assuming that forecasts are about predicting and controlling future outcomes. The purpose of forecasting is to inform decision making (to help shape future outcomes), not to predict the future. In reality, forecasting is necessary only because organizations cannot react instantly to changing events. That’s why fast reaction is more important than (even accurate) prediction—because accuracy is rarely achieved. Indeed, the only certainty about a forecast is that it will be wrong. The question is by how much. Narrowing that variation comes from learning, experience, decent information systems, and ultimately, judgment.

The more practice managers have at preparing short term forecasts, the better they will become. That’s why adaptive organizations focus less on annual budgets or long-term views and more on rolling views—usually rolling forecasts that always look twelve to eighteen months ahead. Rolling forecasts, if well prepared, form the backbone of a new and much more useful information system that connects all the pieces of the organization and gives senior management a continuous picture both of the current position and the short term outlook. In effect they are the aggregate of business as usual forecasts (extrapolations of existing trends), all the action plans in progress, and all plans in the pipeline. In other words, forecasts should be “baseline plus anticipated events,” with the effort being focused on “events.” An honest view has no bias, so managers should expect to see half of their forecasts to be on the high side of actual outcomes and half on the low side. The ideal forecast has clean data that enables managers to improve decision making. Forecasts must not be seen as commitments, otherwise bias and distortion will be inevitable—that’s why implementing rolling forecasts under the umbrella of fixed targets (usually focused on “closing the gap”) rarely works. If managers at any level interfere with the forecasting process on the basis of giving it “more stretch” or “bridging the gap,” the outcome is almost guaranteed to be a dangerous distortion of reality.

Figure 3-2 shows a typical five-quarterly rolling forecast. Let’s assume we are just approaching the end of quarter 1. The management team gets the rough figures for that quarter and starts to review the next four quarters. Three of those quarters are already in the previous forecast, so they just need updating. A further quarter, however, needs to be added (Q1 for the next year). More time will be spent on the earlier quarters than the later ones, using as much relevant knowledge and business intelligence as can be gathered.

Leading organizations are placing forecasting at the center of the management process. It becomes an essential tool for business managers to support their decision making, not just another management chore that needs to be done to feed the corporate beast. Focusing on only a few key drivers, the process should take no longer than a day or two and it should be done not by specialist finance people but by the business team itself.

Make forecasting a management, not a measurement, process
Forecasts must not be seen by senior managers as a tool for questioning or reassessing performance targets. Nor must they be used to demand changes or improvements. What happened at Procter & Gamble in 1999 was a classic example of mixing forecasts with targets. After abandoning the budgeting process for 1998-1999, the company introduced “stretch” forecasts and asked their managers to set their goals at more ambitious levels than they would have done under the old budgeting system. So managers did just that. They estimated revenues and resource requirements at a higher level; this obviously pleased their bosses, but in the event caused great damage to the company’s reputation with suppliers, customers, and shareholders. The forecasts were far too optimistic, causing costs and inventories to inflate and ending in huge write offs. The problem was that their forecasts were just that—forecast numbers unrelated to the reality of the business. Managers gave supervisors what they wanted to hear rather than what customers were telling them. And despite suspending the budgeting system, the ingrained culture of negotiation and gaming was still intact—it simply moved into the stretch-forecasting process. In best practice organizations, leaders neither demand certainty from managers, nor do they expect them to use single-point forecasts.

If forecasts are used by senior managers to demand immediate action from frontline teams, then trust and confidence will rapidly evaporate. A senior manager at a large French company made this point: “Forecasts and targets must be independent if we want to obtain both relevant action plans and reliable forecasts allowing risks and opportunities to be identified and relevant corrective actions to be taken. They must not be produced for control purposes. There should be no wishful thinking. It is also important to be realistic. Forecasts should reflect the fact that some businesses are cyclical and thus cannot always grow, even if this is politically incorrect.”

How long should forecasts take to compile? In a financial services business, for example, with no physical supply chain and inventories to manage, there is no reason why forecasts should take longer than a day. However, in a fast-changing, capital-intensive business, where forecasts are used to make key decisions about capacity requirements often involving significant capital sums, forecasts can take several days.

Just as there is no precise amount of time it takes to create a forecast, there is no precise answer to the issue of the forecasting horizon or revision intervals. These depend on how long it takes to make and execute key decisions about operations, capacity, and capital spending. In other words, if it takes two years to bring new facilities onstream or deliver new products, then this might be a reasonable guide. At an airline where changes are happening at lightning speed, it would be advisable to revise forecasts each week or month. In a public-sector organization, quarterly forecasts would normally be sufficient. Most adaptive organizations spend more time and effort on near-term periods and less on the longer-term ones.

To be useful, forecasts should tell managers something about the trajectory they are on compared with their medium-term goals and thus whether further action is necessary. That means they are concerned with constantly “managing gaps” rather than closing them to reach a fixed target (as noted earlier, this invariably leads to tampering). Medium-term goals are best viewed in terms of ranges of desired outcomes rather than specific targets.

Managers should also learn from their forecast record. Borealis always carries out post-mortems on its forecasts. The purpose is not to attribute blame but to learn if forecast accuracy is improving and how it can be further improved. Forecasting inaccuracy can be seen in the same light as process variability; teams therefore need to better understand the causes of that variability and work to reduce them.

Using rolling forecasts to manage the business at Tomkins
At Tomkins, managers used to produce what was called a financial digest. It was due on the eighth working day following the month-end and was geared to explaining variances from budget and whether any further action was needed to meet agreed year-end targets. While six-quarterly rolling forecasts were part of this process, not much attention was paid to quarters beyond the fiscal year-end. They were also the last thing to be done during the monthly closing process and usually by the finance people. In other words, they were neither taken seriously, nor were they treated as a key part of the management process.

In recent years, however, this has changed radically. The forecasting process is now the key management tool for managing the business at every level. As CFO of global operations Dan Disser notes, “there is now as much energy put into preparing the forecasts as closing the books.” That’s why Tomkins has decoupled the monthly forecast process from the month-end close.

While there is still an annual strategy formulation process, during which the big issues are discussed (e.g., Have we got the right products? Are we focused on the right markets? Have we got the right value proposition?), action planning is now a quarterly event. These quarterly business reviews, together with supporting six-quarter rolling forecasts, are completed around three weeks after the quarter end. Forecasts have been separated from performance measurement (and targets—there are no targets), thus taking much of the gaming out of the forecasting process. Although an annual financial plan remains, it is simply the four quarterly forecasts that fall within the fiscal year. This is what is communicated to analysts.

Another important element of the forecasting process is the monthly “flash” forecasts, which are prepared in the middle of each month (when there is more time available) and look to the end of the current month and a further two months ahead. So senior managers now receive monthly results and short-term forecasts for the following two months, the current quarter, and the full year four working days prior to the month-end. Given that average organizations take six days to close the books, a further eleven days to finalize reports, and fifteen days (concurrently) to prepare forecasts, this is a real breakthrough in information management.

According to Group CFO Ken Lever, the impact on managerial behavior has been dramatic: “Managers now have no option but to strive for maximum performance,” he said. “Whereas before they would spend weeks negotiating targets, they now spend their time improving the business. All the gaming that we had to accept as part of the old process has also gone. There is no number to game. Better still, there are no excuses and no time wasted explaining variances against a useless budget. They are all now focused on what action to take to improve customer and shareholder value.”

Implementing driver based rolling forecasts at American Express
American Express has learned a great deal about forecasting techniques and has now developed a “driver based” rolling forecast model. Changing direction from its old forecasting system was not easy. Each of its three operating segments—Travel Related Services, American Express Financial Advisors, and American Express Bank—had its own approach to forecasting using simple spreadsheets based on their different markets (75 percent of forecast data had to be manually keyed in). The company then had to consolidate the data from these individually prepared forecasts. It took weeks to prepare the forecasts, making the end result redundant rather than relevant. CFO Gary Crittenden relates how the company went about implementing a new forecasting system:

In my opinion, the key lesson is to cut out the detail and focus on key drivers. Under the old system, it took one business unit alone eight weeks and hundreds of person-days to assemble the bottom-up forecast. This made doing meaningful business reviews and timely investment analysis almost impossible. To create the framework for a new system, business units had to identify key performance drivers based on company-specific algorithms. The key question was: How would $1 in billings or one additional card member impact the bottom line? Previously, the staff had focused much of their attention on the impact of salaries and benefits on net profits. Managers had believed that all they needed to know was the cost of adding or eliminating an employee. However, they found that these numbers only had a 5 percent effect on the net figures. What they needed to identify were the volume drivers, those that influenced 80 percent of the numbers. This turned out to be only fifteen lines on the profit and loss statement. We found that billings were what really drove American Express’s businesses: how much card members spent at restaurants, on airline tickets, and for major purchases. Two specific drivers behind this volume were the number of American Express cards and the average spending per card. Knowing those two items allowed business teams to calculate the billings numbers. These numbers, in turn, affected quite a few other items on the profit and loss statement. From billings numbers, they could project the rewards usage, level of delayed billings, amount of interest income, measure of risk for bad debt, and so forth. The trick was to create the algorithms that accurately forecast the billings.

Using driver-based forecasts together with dedicated systems and Web technology enables hundreds of managers to work on forecasts together and aggregate the outcomes to the highest level, thus providing more control than ever. The new approach has enabled us to standardize with a single methodology and align key assumptions and algorithms across the organization.

Figure 3.2: Five-Quarterly Rolling Forecast

	Year X				Year X + 1
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
1st review
2nd review
3rd review
4th review
	KEY: = Forecast = Actuals

Excerpted by permission of Harvard Business School Press from Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add Greater Value. Copyright 2006 Jeremy Hope; all rights reserved.

We thought that Tim’s article on the BBC website was first class and wanted to share it with our audience so that they have a current view of the platform upon which Foresite SPA is delievered.

Cloud computing is taking off on a massive scale, so what should companies look out for as they move their information technology into the cloud?

Cloud computing is not just a buzzword anymore. If 2010 was the year that cloud computing went mainstream , then 2011 will be the year that companies have to get their cloud strategy sorted. 

At it’s most basic, cloud computing is “just another word for something that’s been going on for a long time – the internet,” jokes Rowan Trollope, in charge of cloud services at web security firm Symantec. 

In reality, though, cloud computing is a fundamental change of how we – companies and consumers – use computer technology. 

Cloud computing is the delivery of computing power over the internet. It turns software into a service where customers don’t pay for a licence but for how much they use; it makes computing power and storage space a commodity, bought when needed and scaled up when necessary. 

The rush

The cloud is such a “major technology disruption” that the new chief executive of computer giant Hewlett Packard, Leo Apotheker, has decided to refocus his whole company around a cloud strategy.

The early adopters are both the very big and the very small beasts in the corporate world. 

“This year, especially for service providers like big telecoms companies, there is an extraordinary rush underway to deploy and go live with their cloud offerings,” says Bob Beauchamp, CEO of BMC Software, a firm that helps large companies to build their own cloud solutions. 

“The people who are most keen are those who see new revenue streams,” says Mr Beauchamp. 

One telecoms boss told him that “time is of the essence, we must hurry and get our cloud offering out because the market is very competitive, and we don’t want to be late to the market.” 

Not everybody is quite ready yet. Many manufacturers, says Mr Beauchamp, haven’t even started to think about their cloud strategy. 

Many established small and medium-sized firms don’t even know what the cloud is, reports Martin Leuw, until recently chief executive of Iris Software Group. 

From zero to server in 30 secondsIronically, small firms would be best placed to take advantage of the cloud. Indeed, it is usually start-ups that are seizing the moment.After all, information technology is costly. It requires capital expenditure – for servers, software licences – and a team to maintain it all.  

And it is slow. “Twelve years ago, it took a company six to eight weeks to commission a server,” says Lanham Napier, chief executive of Rackspace, a webhosting and cloud services company.Putting your IT into the cloud allows “you to have a new server in 30 seconds, and to innovate and grow faster,” he promises. 

But going into the cloud is not without pitfalls. Companies have to think strategically how to “enable the cloud, get the road map, embrace the implementation and work out the security dimensions,” says Nick Coleman, in charge of cloud security at IBM. 

The price of cheap
The global economic crisis is helping with cloud adoption. Big IT providers report that customers’ budgets are so squeezed that there’s a huge reluctance to invest. So finance directors hope that moving to the cloud allows them to replace capital expenditure with operational expenditure.Getting your IT from the cloud may be cheap, but it comes at a price: standardisation. Using the cloud means opting for off-the-shelf solutions. 

There will be no, or hardly any, customisation. On the upside, instead of having the same big, pricey software package for everyone, your staff should be able to select smaller and cheaper applications with the functionality that is just right for them. 

Mobile demands
 

The cloud is also the perfect answer to the surge of corporate mobility. Workforces are becoming ever more mobile, while staff – from the chief executive down – carry smartphones and tablet computers, and expect that they can use them to access their work files everywhere.Old school IT systems don’t cope with that, but attempts to force users to comply with old IT rules are doomed to fail, says Rami Habal of Proofpoint, a web security firm. “Users will revolt instead of going through the normal IT channels,” he says. 

Using cloud services saves companies from building the expensive infrastructure to support mobile solutions.  

Agile growth
Most companies pay good IT money for little return. Their servers usually run at 15% to 25% of capacity at most.Shifting the computing workload to a cloud provider is more efficient. Companies like Rackspace or Amazon run their cloud servers at 75% or even 90% of capacity. That’s both greener and cheaper. 

More importantly, extra storage or computing power can be switched on in an instant, and it is this agility and scalability that persuades most companies to venture into the cloud – even more important than cost, according to a survey by Gartner, a technology consultancy. 

Cloud spotting�
Not all clouds have been created equal, though. Asking for a cloud solution is like asking for a “vehicle” instead of specific type of car. 

For starters, there are public cloud solutions that deliver a service, but you won’t know in detail how it is delivered. “The public cloud is a really cheap place to do business,” says Dave Coplin, until recently the chief technology officer of Microsoft UK.Big companies, however, often feel queasy about sharing their IT service with other companies. They want the “commercials of the cloud”, paying only for what they use, but stay in full control as well, says Nick Wilson, the man in charge of Hewlett Packard in the UK and Ireland. 

The solution is private clouds, where companies know exactly where their own software and data are, maybe even down to the server racks dedicated to their computing. 

Realistically, though, most established companies won’t even go that far and opt for a hybrid cloud instead, where a private cloud solution is closely integrated with a company’s legacy system, says BMC’s Bob Beauchamp. 

As companies phase out these old systems, “cloud will ultimately become the prime architecture to deliver IT services,” he predicts. 

Cloud enthusiasts like JP Rangaswami, chief science officer at Salesforce.com, one of the earliest firms to bet on the cloud, wants companies to ditch their legacy systems much faster. “It’s the sunken cost fallacy,” he argues, where IT departments feel more comfortable supporting old mainframes and enterprise software instead of supporting their company’s business strategy. 

The cloud check list
Still, even the biggest cloud cheerleaders counsel companies to compile a thorough checklist.The starting point for any such list will be a self-examination, because one size won’t fit all. 

Nick Coleman at IBM reels off a long list of vital questions: How much management do your data or applications need? What’s the right measure of security for your company? Where is the workload? Which data are sensitive, which are not? Do you have specific regulatory issues like audits, compliance and privacy? 

“Map your company’s IT needs early for the right cloud strategy. In a start-up, the source code might be really sensitive; for others it is not a core issue. Ask yourself what you should put in the cloud,” says Mr Coleman. 

“Think of the cloud as a tool, an enabler, you have to think about what you want to have as an outcome,” says Microsoft’s Dave Coplin. For one company, security may equal reliability; for another it may be the safety of the data. Rowan Trollope at Symantec has six tips for companies moving into the cloud: 

• Check out the reputation  of the service provider: How long have they been offering cloud services, bearing in mind that size isn’t everything; many big companies are piling into the market but don’t know what they are doing
• Security is key. Really understand how secure your data have to be, and ask the vendor how they would solve your security problems
• Investigate how the cloud provider makes back-up copies of your data, how you can move the data to another provider, and what happens if the provider goes out of business
• Work hard to get a good service level agreement with clear financial penalties to ensure a good service.
• Be wary of industry certifications, because they capture just a moment in time. Do your own research on how the vendor is performing
• Finally, try the service.  The beauty of cloud computing is that it’s easy to switch on and off. Obviously don’t start your cloud adventure with confidential data or mission-critical systems, but if the service works for you, you can expand.

In today’s value-driven culture the CFO has become the front line profit manager and the person to whom investors look for real business insight. Conditional projections are not acceptable – senior management must have a firm control of value generation under the confident navigation of the CFO.

Financial control and performance management now extends to the control of business drivers and limiters. Core to this philosophy is the ROCE value chain, and in particular the sales value chain to which most business functions add value and which yields a rich vein of driver analytics.

Since we now focus more towards assuring future results, it makes sense to centre our attention on driver-based forecasting systems, which both provide the mechanism for driver measurements and are influenced by them. Their key purpose (other than forecasting) is to continuously identify sales gaps and provide management with the information needed to close them.

They have three core features:

1. One central real-time database that provides rolling forecasts on demand – multi-dimensional data views, consolidations, translations, analyses and what-if capabilities can instantly provide new perspectives on forecast potential.
2. Accurate projection of sales gaps is the first step in budget attainment – the sales value chain forms the spine of the value creation model. Landmark value steps are the vertebrae from which ultimate conversion rates are calculated (i.e. the % rate at which leads that have experienced this landmark convert into a sale) and are used in the roll-up calculation of forecasts thus avoiding subjectivity and providing a mechanism for a) sensitivity checking, and b) filtering speculative sales tails
3. Sales value chain – value steps are the points from which we capture valuable analytics pertaining to performance, lead attrition and sales churn which are used to manage the closure of sales gaps. They provide invaluable data on the 90% of business activity that is not analysed in financial statements except as overheads.

Identification and measurement of drivers/limiters

The best data capture points for drivers/limiters are lead attrition and sales churn. Front line managers can usually obtain details of why an opportunity was lost and to whom. While not all prospective customers will provide this feedback, any data is valuable because such events occur 20+ times more frequently than sales.

Recording this data against the opportunity when it is closed identifies the value step (and business function) at which it occurred and enables the forecast database to provide valuable analysis of causes and competitors:

• actual conversion rate and time calculation
• value step (process) success rate calculation
• driver/competitor impact analysis by any criteria  over any horizon
• driver/competitor trend analysis by any criteria adds perspective and provides feedback on remedial actions
• analysis of competitor strengths
• identifies value step performance and causal analysis

These practical analytics enable firms to identify and quantify a wide range of business issues ranging from supply chain, product lifecycle, process performance and market trends to the more everyday customer service and pricing matters which enable organisations to:

• reduce the impact of competitors
• improve value-added process performance and times
• identify and justify areas for investment
• improve sales conversion rates and times
• prevent opportunity leakage
• drive sales churn replenishment
• reduce sales costs
• close sales gaps

Aggressor companies may take this methodology one step further. Having acquired strong control over their business drivers and limiters and with good performance management, they can effectively reverse engineer the driver-based process to achieve impressive organic growth rates – typically 30+% p.a. compound.

Stakeholder confidence demands provable forecasts backed by insight and control of business performance and the drivers and limiters that impact it.

Foresite explains how reliable driver-based forecasting and performance management adds shareholder value and credibility to your business proposition.

Executive Summary:

In today’s value-driven environment, the adoption of leading budgeting and forecasting practices is critical to achieving strong financial control and performance management. The forecasting process should be part of an overall integrated performance management framework, ultimately driven by value-based measures. More importantly it should foster a value-centred culture that enables managers throughout the organisation to create shareholder value at every value step.

The Driver–based forecasting methodology provides two core planning essentials:

1. Superior budgeting and forecasting capabilities, and…
2. Performance management control

Although much has been published on leading practices in forecasting and performance management, most have been academic or theoretical and relevant only to large organisations that have the budgets to meet the high development and implementation costs. Today, however, applications such as Foresite SPA are available through Cloud applications to instil leading practices swiftly and inexpensively into any organisation without requiring capital expenditure or impacting existing IT infrastructures.

Rolling Forecasts:

Traditionally budgets are set annually and updated with periodic forecasts (maybe every quarter). However operations and customers never work in this way, being instead a continuous process. Rolling forecasts promote a culture of value creation and measurement that enables value-oriented metrics to guide decisions and actions that lead to high performance. The projections that they produce are up to the minute, accurate and enable us to identify the gaps between projections and target/budget.

Sales forecasts should not be merely predictions or aspirations, but accurate reflections of the real sales opportunities that the business plans to deliver. They are a dynamic assemblage of existing sales contracts, sales order bank and sales pipeline which are constantly changing in value and timing.

Driver-based rolling forecasts rely on three cornerstones – a forecasting database, a dependable data capture mechanism and a non-subjective projection methodology. A key objective is to provide visibility over the gap between projected sales and the sales target/budget. This identifies the management task ahead and is constantly changing with every new lead, win, churn, attrition and timing change.

1. Forecasting Database – Employing one real-time forecasting database removes many of the traditional forecasting problems associated with accountability, timing and version control. Forecasts are permanently updated and always available on demand for any planning horizon and tailorable for any business purpose e.g. production/capacity planning, line loading etc. Multi-dimensional data views, consolidations, translations, analyses and what-if capabilities can instantly provide new perspectives on forecast potential.

1. Data Capture – The best business projections are produced by those who undertake and are responsible for the value step functions along the sales value chain. Frontline and operations managers need access to input, analyse and extract data from one integrated opportunity management system which forms the ideal front-end tool for data capture into the forecasting database. This avoids the problems and errors associated with manipulating spread-sheets and provides the framework for the integration of personal information and email management as well as document sharing and data exchange to other business applications e.g. ERP.

   In order to be effective, data capture tools must work with your managers, and not be invasive or prescriptive. They should be intuitive, practical and familiar. Cloud/SaaS applications are a great way to connect people and data across large distances and dispersed organisations. Mobility solutions such as Smartphone access improve performance and further extend the reach that field force have to their opportunity management and critical customer data whilst easing their life/work overlap.

1. Predictive Forecasting Methodologies –Predictive algorithms fall into four broad categories:

• Extrapolation – trending and charting are useful for volume repeat businesses e.g. retail. If applied inappropriately however, it can be dangerous to assume that trends will continue into the future.
• Binary Method – For every potential sale there are only 2 possible outcomes; either the sale is won or it is lost. Therefore based on the attainment of certain pre-defined milestones the sales lead will be either 100% or 0% included in the forecast. This method is suitable for small samples of lead potentials e.g. major capital projects.
• Roll-up Method – Multiplies the potential prospect value with its probability of success. This method is good for large lead samples, but its main drawback is that probability is subjective; you’ll get as many opinions as people you ask. So who is right?
• Sales Value Chain – This hybrid methodology developed by Foresite SPA combines features from both the Binary and Roll-up methods whilst avoiding the shortcomings of both. It is designed to interface with performance management tools, and therefore more accurately reflects the true operations of the business. It is the first essential for an integrated business forecasting and performance management system and creates the information platform for closing sales gaps.

Sales Value Chain:

The sales value chain forms the spine of the value creation model. Landmark value steps are the vertebrae from which ultimate conversion rates are set i.e. the % rate at which leads that have experienced this landmark convert into a sale, either at this landmark or at a subsequent one. As sales leads progress along the value chain, many are lost through performance and competition, but the ultimate conversion rate of each value step dramatically increases i.e. a higher proportion of leads convert at the final product trial step than do at the tender step.

This approach immediately solves a further 5 forecasting issues:

1. 1.    Removes all subjectivity associated with using probabilities in the roll-up method.
2. 2.    Actual ultimate conversion rates can be measured in the database and applied to sensitivity checks on forecasts and to provide performance variance analyses.
3. 3.    Forecasts can be filtered by conversion rate to remove sales tails and become more binary (according to the risk appetite of the business).
4. 4.    Decay rules can be applied to discount delinquent leads according to pre-defined milestone rules. This reduces the impact of leads that are less likely or unlikely to result in a sale, and which can make forecasts over-optimistic.
5. 5.    Value steps are the points from which we can measure lead attrition and capture data pertaining to lead attrition causes and competitors. The same can be achieved for sales churn providing invaluable performance data on the 90% of a business’s activity that is usually omitted from the financial or management reporting.

Performance Management:

Predictive forecasting is as much about having the performance metrics needed to close the gaps between forecast and planned sales, as it is about having the accurate predictions with which to identify them.

In our value-centred culture the foremost consideration must be the achievement of the current business plan; be it this month or this year’s target/budget. We always need to know exactly where we are in relation to the sales target, the predicted pipeline delivery within the planning horizon and the drivers and limiters that are affecting it.

Sales Gap

The rolling forecast and real-time forecasting database facilitate the accurate assessment of sales bridge and sales gap. Foresite call this their “3 Step Driver-based Methodology”:

STEP 1

The FØ Sales Bridge recognises the legacy benefit/deficit brought forward to the current planning horizon in respect to:

-       On-going sales/contracts

-       New business wins

-       Order bank

-       Sales churn impact

-       Lead attrition impact

These are all ‘known’ within the forecasting database but in normal planning systems are often difficult to extract.

STEP 2

Predictive Forecasts apply the Sales Value Chain method (described above) to the sales pipeline converting within the planning horizon. The combination of steps 1 and 2 enables the identification of the Gap between planned and predicted sales.

STEP 3

Gap Closure requires analytical visibility of performance and the impact of inputs, drivers, limiters and competitors on the business.

-       Pipeline opportunities

-       Churn replenishment capability

-       Process performance analytics

-       Relative value of sales inputs and sources

-       Impact and causes of drivers and limiters

-       Reasons and impact of competition

G-Index is the ultimate business performance metric providing stakeholders with a true indication of the growth potential ‘in-hand’. Derived from all of the above pipeline and performance data, it is a single-figure metric for the business that can be used to;

-       Target business units and sales teams

-       Benchmark business units

-       Understand the relative value of sales inputs

-       Evaluate business worth

About Foresite SPA

Foresite SPA is the leading driver-based forecasting and performance management SaaS offering the complete management toolkit for anticipating and closing sales performance gaps without imposing prescriptive methodologies or invading management time.

Developed in the tough world of aggressive growth and performance turnaround, Foresite SPA is designed to be robust and reliable across large and diverse organisations where forecasts must not only be accurate, but management must have the tools to ensure that they are delivered.

The benefits of the subscription model are now well-known. Foresite avoids the need for costly and complex BI or CPM systems and so delivers an impressive ROI proposition. This also means that it is adopted quickly and easily, and can be delivering results in a matter of weeks not years.

Brian Hawkes FCMA is a member of 3i’s CFO panel and founder/CEO of Fortek Ltd, a company that works with the boards of high impact investor focussed organisations worldwide, specialising in performance turnaround and rapid growth. Fortek developed Foresite SPA (Sales Performance Applications) as a SaaS in response to its clients’ needs for forecasting certainty and control over the generation of shareholder value. The driver –based forecasting and performance management solution has been adding value and certainty to international groups across Europe, Scandinavia and the United States of America since 2004, and today is the leading SPA provider.

© Foresite SPA 2011