Ep. 131: Marco Otti - Budgeting Revisited

Contact Marco Otti:
https://www.linkedin.com/in/marco-otti/


Budgeting Revisited:
https://sfmagazine.com/post-entry/may-2021-budgeting-revisited/


FULL EPISODE TRANSCRIPTMitch:
(00:00)
 Welcome back to Count Me In, IMA's podcast about all things
affecting the accounting and finance world. I'm your host Mitch
Roshong and this is episode 131 of our series. For today's
conversation my co-host Adam spoke with Marco Otti about possible
solutions in different approaches to budgeting. Marco is a group
controller who acts as a finance business partner to support the
decision-making of Autoneum, the global market leader in
acoustics and thermal management. In their conversation, Marco
discusses some of the common issues with traditional budgeting
and explains why CFOs need to rethink how they plan and execute
their budgets. Keep listening as we head over to their
conversation now.


Adam: (00:50)
So let's start by talking about some of the issues with
traditional and better budgeting. Why change?


Marco: (00:56)
Yes, why is innovation in budgeting needed, right? I mean, as a
group controller, I contribute to our company's annual budgeting,
monthly forecasting and three-year financial planning process,
and I often ask myself, how can we as management accountants do a
better job at budgeting, right? Kind of process be simpler or
different. I'm sure most listeners have been involved with the
budgeting process in one way or another. Maybe ask yourself as
well, what do you consider the most significant barrier to
improving or changing your budgeting process? There can be many
barriers of course, for example, organizational attitudes towards
budgeting, time, cost, inflexible IT systems, or the process
being controlled by another group/department, or maybe you think
there are no barriers at all, then that's great. One thing to
remember is that traditional budgeting is still used in the
maturity of companies. At the same time, many of these
organizations identify agility as their strategy, which is quite
surprising because traditional budgeting is too rigid to support
agility well. And if you read Kaplan and Norton, they say that
the ineffectiveness of many budgets also comes from the fact that
almost 60% of organizations don't link budgets to their strategy
and only 25% of managers have incentives linked to the company's
strategy. Most of us are aware of the limitations of traditional
budgeting. So it can be a very time-consuming exercise with
limited value, as assumptions are quickly outdated. Also
decisions are often made too early and other to senior level. And
based on my own experience, having been involved in a budgeting
process, the issue with traditional budgeting is really the
amount of work compared to the benefit. I mean, having annual and
detailed discussions with cost centers can be quite
time-consuming and usually the complaints come from us, the
finance function, finance organization who manage and execute
this process. So depending on how lean and improved your process
is, it can be an efficient exercise as well. With better
budgeting you can substantially reduce the planning effort, for
example, with less meetings, less reporting requirements, more
top-down guidance, shorten the process to maybe one or two months
every year. However, process improvements are still a
continuation of the traditional budgeting approach and does not
bring fundamental changes of instruments.


Adam: (03:30)
So then what are the essential functions of budgets and what are
they used for?


Marco: (03:34)
That's a good question because, the functions and what budgets
are used for, are quite relevant and important, like translating
your company strategy into targets, which refers again to the
strategy execution, Kaplan and Norton are talking about. Budgets
are, if you will, the tactical implementation of the strategy,
they are about resource allocation, which again, starts with
developing and validating the company strategy. Therefore, I
would say you cannot just remove the budget with its functions
and manage your costs and business because planning is still
important to coordinate activities, in your own organization. As
an example, let me share some of the different functions the
budget has at my company, Autoneum. We use the budget for setting
absolute targets for the year and to support the performance
management throughout the year, for example, every month. So the
budget really serves as a reference point for performance and
based on many assumptions, it gives a prediction of the next year
and how we plan to control costs. Also it is used for resource
allocation and managing continuous improvement initiatives. In
any organization, traditional and better budgeting is really a
mix and let's say a compromise of some of these and other
functions.


Adam: (04:57)
Okay, then, so in the context of traditional budgeting and VUCA
environments, how did your company respond to the crisis last
year?


Marco: (05:04)
Yes, I mentioned agility before, of course, in a VUCA
environment, like in 2020 with the COVID-19 pandemic, traditional
budgets were not very useful to compare performance against
because they were basically irrelevant by the end of the first
quarter. So how did we respond? On the top line we planned for
different scenarios and updated them weekly. In terms of costs,
we used the most recent rolling forecasts, which are updated
monthly. And in discussions with the business unit locally agreed
on how to best cut costs. In some cases we instructed some
top-down adjustments, based on the revenue levels. So for a time
really stopped focusing on a budget, right, and shifted the
attention to the monthly forecast and came up with intermediate
targets based on the circumstances. This is also something to
think about when you put yourself in the shoes of the decision
makers. What did you or your company do to respond and manage
costs during the pandemic? Did you empower your local teams
because they know best how to manage costs. Or on the other hand,
did you centralize decisions as much as possible because in a
crisis there is a need for strong leadership, right? Actually, I
mean, this spectrum of self-control versus command and control is
relevant when thinking about new budgeting approaches. You can
manage costs with detailed annual cost budgets or increase
autonomy and flexibility by using absolute or relative KPIs, or
even no targets at all. Of course, this then needs strong company
values and a clear direction.


Adam: (06:45)
What are the possible solutions for more business agility and
changing to different budgeting approaches like beyond budgeting?


Marco: (06:52)
Actually this question, was the reason why the president of the
IMA Switzerland chapter, Hessel Brouwer and myself, reached out
to CFOs and academics in Switzerland to learn from their
experiences of moving to more modern and agile budgeting
techniques and then also publish an article in strategic finance.
One of the main ideas of the beyond budgeting theory is to
separate the budget functions as outlined before. The key budget
functions, are target setting, forecasting, and resource
allocation. So instead of having one compromised number for all
these functions, you would in a first step separate targets from
forecasts and from resource allocation. With that, you would have
three different numbers serving different purposes. A key tool is
forecasting or rolling forecast, which supports the ongoing
planning and forecasts are used for the purpose of better
decision-making and not as a target or application for resources.
Forecast should reflect the best estimates with as little details
as possible and be again, decoupled from targe...