from DSSResources.com


                          DSS News
                     D. J. Power, Editor
               June 23, 2002 -- Vol. 3, No. 13
         A Bi-Weekly Publication of DSSResources.COM

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Featured:

* DSS Wisdom
* Ask Dan! - What is active enterprise financial planning?
* What's New at DSSResources.COM
* DSS News Releases

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DSS Wisdom

According to Alvin Brown in a 1957 pamphlet prepared by the Society for 
Advancement of Management, "...an industrial enterprise exists for the 
sole purpose of earning money for its owners. All of its actions, 
therefore, and all of the decisions that prompt those actions, are 
directed toward earning money. All decisions are financial decisions. 

"All decisions are financial, either because they directly affect the 
expenditure of money, or because they indirectly affect expenditures by 
consuming or disposing of effort, facilities, or material, all of which 
cost money. ... All decisions are financial because you cannot conceive 
of one that does not affect, in one way or another, and in some degree, 
the earnings of the enterprise." (p. 101)

from Brown, A., "All Decisions are Financial," in Shull, F., Jr., 
Selected Readings in Management, Homewood, IL: Richard D. Irwin, Inc., 
1958, pp. 100-102.
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Ask Dan!
by Daniel J. Power

What is active enterprise financial planning? 

Active enterprise financial planning is a collaborative, participative, 
real-time, web-based approach for budgeting, performance management and 
financial planning. It is the latest buzzword and "must have" 
application. Why the sudden interest in improving budgeting and 
forecasting? Duh! Bad results! The weak economy since April 2001 has 
decreased financial performance "visibility" in many companies. In these 
companies, the profit forecasts have been very inaccurate. The resulting 
embarassment (or anticipation of such embarassment) for the company's 
CEOs and CFOs from revising forecasts downward has sent many of them 
scrambling for new forecasting and decision support capabilities. 
Managers want better performance "visibility going forward". Some 
software vendors argue active financial planning supported by web-based 
software is the answer to poor performance management and budgeting 
woes. This Ask Dan! briefly examines decision support for budgeting and 
financial planning.

According to a survey of 165 European Chief Financial Officers (CFOs) at 
the PwC Consulting (http://www.pwcconsulting.com/) website, the "role of 
the CFO is evolving from merely transactional activities to encompass 
decision support." The survey from May 2001 indicated a greater interest 
among CFOs in decision-support activities such as performance 
management, budgeting, reporting, profit and cost management and 
shareholder value analysis. CFOs in large companies in the U.S. and 
Europe may be a little bit ahead of the curve, but the new attention to 
financial decision support seems widespread.

Let's review the basics (cf., Stedry, 1967). A budget proposes 
expenditures for specific items and specific purposes for a future time 
period. Also, a budget is a set of goals with "price tags attached". 
Budgeting is a goal setting process in which managers need to actively 
and meaningfully participate. Managers who will be expected to meet a 
part of the overall budget should participate in establishing that part 
of the budget. The amounts in the budget need to be challenging and the 
targets must be accepted and perceived as attainable by those charged 
with acheiving them. Budget processes do not always improve financial 
performance because of estimating and behavioral problems like 
overestimating needed expenditures and then spending that amount whether 
needed or not and underestimating receipts and then not working very 
hard to exceed the estimate. From an "accounting perspective" budgets 
are tracked against actual receipts and expenditures so that "corrective 
action" can be taken. A good tracking system should provide managers 
timely reporting of where the budget is NOT being met. Creating and 
tracking a budget can be supported by a computerized system and in large 
companies computerized support is probably necessary.  Budgeting can be 
time-consuming and tracking expenditures against a budget can be 
tedious, delayed and difficult.

Today web technologies are enabling companies to redesign and improve 
their budget development and performance management processes. So what 
works? Budgeting has been a popular topic in recent months at 
darwinmag.com and I have tried to follow the arguments and discussion 
related to the latest buzzword -- "active financial planning". The 
website is an extension of Darwin Magazine (which I don't receive). In a 
series of articles at darwinmag.com, Alice Dragoon (May 2002) has 
discussed budgeting and active financial planning.  Her series started 
out with some Excel bashing, discussed some process issues, and then she 
summarized some vendor success stories. She quotes Steve McMinn, a 
partner at Accenture, as claiming the recent lack of financial foresight 
has occurred because most companies’ financial planning processes are 
mired in "Excel hell".

Ms. Dragoon cites the following "facts" from her interviews and from 
principals at consulting firm Answerthink:

-- "some 80 percent of global companies use Excel almost exclusively as 
a planning tool"

-- "finance folks spend weeks attempting to consolidate hundreds of 
spreadsheets with inconsistent data definitions, altered formulas and 
extra rows added by creative managers"

-- "the typical billion-dollar company’s finance staff alone spends some 
35,000 hours a year supporting the planning, forecasting and reporting 
process"

The above statements definitely identify some problems. So what is the 
solution? Should companies stop using Excel for budgeting and move 
exclusively to what AMR Research (www.amrresearch.com) calls "active 
enterprise financial planning" tools? Yes and No. CFOs definitely need 
to investigate purchasing web-based budgeting and financial planning 
software.  Also, Excel definitely is a poor tool for data collection and 
data aggregation.  Web-based software can help to speed up budget data 
collection, management and monitoring, but Excel can be used to build 
powerful planning, budget analysis and decision support tools.

Excel "hell" occurs when managers use Excel for data collection tasks it 
was never intended to perform. An Excel budget tool can help unit 
managers develop a budget using "what if?" capabilities and then the 
proposed budget can be submitted using a web form. Budget tracking can 
also occur using a web-based application. Senior managers may also want 
to use Excel to analyze budget data from multiple business units. Budget 
data can and should be centralized on a company intranet and everyone 
involved in the process should use the same data definitions.

The days of consolidating budgets from Excel spreadsheets completed by 
managers of business units that are sent by "snail" mail or emailed to 
headquarters should be over. Companies do NOT need to use an Excel 
application for data collection and aggregation. Managers can focus on 
using Excel applications for data analysis and decision support (when 
Excel is the best development tool). New web-based tools can fit into 
and support a more sophisticated budgeting and financial planning 
process.

So who are some of the budget decision support vendors to check out? 
What vendors should be investigated? First, Comshare (www.comshare.com) 
has always been a favorite of mine. Dragoon doesn't mention Comshare, 
but she does mention three excellent vendors, Adaytum, Hyperion, and 
OutlookSoft. The OutlookSoft product may be particularly interesting for 
Excel users because marketing materials claim it "leverages the power of 
Microsoft Excel". Another new vendor in this product space is Elevon, 
Inc. (www.elevon.cc). Elevon received the Best Product Launch award at 
the recent Budget Masters Conference (see 06/03/2002 Elevon press 
release). These five vendors provide a starting point for finding new tools. 
I've visited their websites and read the promotional materials, but I 
have not used their products.

What can we conclude? Active financial planning is possible and using 
web-based support is better than manual, bureaucratic planning 
processes, but it doesn't solve all problems. For example, technology 
company Cisco has been identified for a few years as a leader in using 
the web for financial consolidation and planning, but even Cisco CEO 
John Chambers has been troubled recently by poor financial performance 
forecasts.  The vendor success stories indicate web-based budgeting 
decision support tools can be useful, but short-run forecasting is and 
will remain difficult in turbulent environmental conditions. All we can 
do is reduce the budget process cycle time -- we can get the financial 
performance news faster; we can take corrective action sooner. Also, 
despite the inappropriate use of Excel for gathering budget data in some 
companies, a spreadsheet-based DSS can be part of a redesigned active 
financial planning process.

Finally, in a classic paper, Andrew Stedry (1967) wrote "The success of 
a budgetary control system then may be measured in terms of its ability 
to induce the formulation of plans which contribute to organizational 
goals, at lower levels in the hierarchy (p. 415)." Improving the overall 
control system and budget process is the key; web-based budget decision 
support is intended to faciliate and support the overall budgeting and 
performance management process.

References

Dragoon, A. "Escaping Excel Hell", May 2002,
http://www.darwinmag.com/read/0502/budget_content.html

Dragoon, A. "Putting Active Financial Planning to Work", May 2002,
http://www.darwinmag.com/read/0502/budget3.html

Kirk, E. "Elevon receives prestigious award for Elevon Active Financial 
Planning", Elevon Press Release June 3, 2002.

PwC Consulting, "Evolving Role of CFOs in Belgium, France and 
Luxembourg", CFOSurvey2001, May 2001, 
http://www.pwcconsulting.com/us/pwccons.nsf/viewwebpages/CFOSurvey2001

Stedry, A. "Budgetary Control: A Behavioral Approach", in Alexis, M. and 
C. Z. Wilson, Organizational Decision Making, Englewood Cliffs, N.J.: 
Prentice-Hall, Inc., 1967.

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What's New at DSSResources.COM

06/17/2002 Posted case by Microsoft Staff, "Pennzoil-Quaker State Select 
SQL Server 2000 Analysis Services for Comprehensive Business 
Intelligence Solution", Microsoft, Inc., January 2002, URL 
DSSResources.COM/cases/.

06/15/2002 Posted version 4.2 of the DSS Web Tour.

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DSS News - June 9, 2002 to June 21, 2002

Complete news releases can be found at DSSResources.COM.

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06/13/2002 Pacific Edge Software ships Project Office connector for 
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06/12/2002 Toyota Financial Services analyzes business performance with 
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06/11/2002 Intergraph and Keigan Systems team to produce GeoMedia Grid. 

06/10/2002 Informatica unveils vision and products for the real-time 
enterprise.

06/10/2002 Sagent added data access components from Datadirect 
Technologies to its BI Platform.

06/10/2002 eOptimize announces pilot agreement with UNC's Kenan-Flagler 
Business School.

06/10/2002 Information Analysis wins major Air Force modernization 
contract.

06/10/2002 EDS selects HNC Software's payment optimizer for fraud and 
abuse detection in Kansas and Oklahoma state Medicaid programs. 

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