From annual budget to rolling forecast - Karine Cochet

COPYRIGHT © 2011 ALCATEL-LUCENT. ALL RIGHTS RESERVED.
ALCATEL-LUCENT — CONFIDENTIAL — SOLELY FOR AUTHORIZED PERSONS HAVING A NEED TO KNOW — PROPRIETARY — USE PURSUANT TO COMPANY INSTRUCTION
Karine Cochet, FP&A leader, APAC
APRIL 19th, 2013
From Annual Budget to Rolling Forecasts

Agenda
Alcatel-Lucent:
Overview and challenges
Former Budget Process – Assessment
Budget Process as it should be
Exploring Budget Process Enhancements
2
Exploring Budget Process Enhancements
Driver-Based Forecast
Rolling Forecast
Alcatel-Lucent:
Enhanced Budget Process: where are we?

Alcatel Lucent – WHO WE ARE?
1000+
CUSTOMERS
(NETWORK OPERATOR)
1M+
NETWORKS
500K+
CUSTOMERS
(ENTERPRISE)
My
computer
My
storage
My
communications
150+
COUNTRIES
3
~72,000
employees
2012
revenues
€14.4b
2012
R&D/Sales
16.1%
Intelligent
Network
My
media
My
gaming
2012
Adjusted
operating
margin
−1.8%

Alcatel Lucent – WHAT WE DO?
PRODUCTS
Innovation
R&D
SERVICES
System specific
DELIVER
products
INSTALL
INTEGRATE
TEST
4
MANUFACTURE
SOLUTIONS
Architecture
Design
Customized
products
accessories
tools
TEST
MAINTAIN
OPERATE

Alcatel Lucent and the Planning process
ANNUAL
COMMITMENT
TOWARDS OUR
CREDITORS
GUIDANCE TO
MARKET
COMMITMENT
TOWARDS OUR
SHAREHOLDERS The Annual Budget
is a mandatory
5
ANNUAL
BUDGET
COMMITMENT
TOWARDS
OUR
EMPLOYEES
COMMITMENT
TOWARDS
OUR
CUSTOMERS
is a mandatory
exercise

• Time Consuming, not enough time left for analysis
• Manual and labor intensive process: hundred of spreadsheets, difficult to
update, subject to errors, heavy to consolidate, costly process
• Too many details, a lot of wasted energy and a false sense of security
• Tied to a rigid calendar, creating an inappropriate annual mindset and
current year focus while business is an ongoing operation
Former Budgeting Process - Assessment
6
When finally completed, it is already out-dated
• Lack of ownership of operational managers, they see no benefit and
follow the process against their will
• Finance does much of the work, no buy in from the business
• Process is way too linear, lacking dynamic interaction between Strategy /
Operations / Business, and opening the door to budget gaming / target
negotiation

In a world of increasing competition and changing economic
environment, companies need a better way to predict the future, more
agile, more flexible, more focused, more reliable
Planning process should raise questions and provide answers that are
core to the business
What planning process should we use?
7
• What drives performance in our market? In our operations?
• What is our strategy?
• How much investment should we dedicate to new initiatives?
• What are the key performance indicators that would best measure
progress towards strategic goals?

1. Align with the Business Priorities:
• Start with the strategic plan
• Engage at the executive level
• Measure what is critical to the strategy
• Validate goals against key metrics/market data
• Clearly communicate the metrics
2. Increase collaboration among functions: involve all department
How should the planning process work?
8
2. Increase collaboration among functions: involve all department
managers and get more accurate forecast (engaging those closest to the
information)
3. Be timely: get information in the hands of business owners quickly and
regularly
4. Adapt, be flexible: revisit as often as necessary, run multiple scenarios,
be ready for the unexpected

Benefits of a driver based forecast:
• Increased accuracy
• Reduced cycle time
• Limited interpretation
• Improved collaboration (same language as the business owners)
• Aligned with the business strategy
Implement driver based forecasting
9
• Aligned with the business strategy
Key prerequisites:
• Identify and manage the true business drivers
• Focus on activities - not financials
• Include key non-financial drivers

Driver based forecasting - examples
# of Cards
# of Active
Cards
Monthly
Billing
Annualized
Revenues
Demographic
Market
penetration
Promotions
Substitutes
Average Spending
Income
Credit limits
Seasonality
Credit Card business:
10
Installed
Product
Base # of calls
per type of
request
Hours
required
Person
Hours
requiredNew
Product
Sold
Type of call:
warranty, technical
support, training..
Average call length
depending on type
Service Level
Agreements
Peak Volume Call
Customer hotline business:

• Balance Detail with Value
• Target Accounts that have material impact and high variability
• Combine Statistical and Judgmental methods:
Build a Financial Model (1/2)
Pros Cons
Statistical
>Visualize patterns found
in historical data and build
predictive models
• Objective
• Uses drivers
• Models multiple
relationships
• Complex to build and to
maintain
• Assumes information can be
quantified
11
• Regularly re-examine models by examining forecast accuracy
predictive models
(regression, time series…)
relationships quantified
• Assumes that some past
patterns will continue in future
Judgmental
> Use judgment to choose
variables, build structural
equations, and adjust the
model predictions
• Easy to set up
• Handles novel
situations (official
announcement,
“street” talk…)
• Open to bias
• Drivers not proven

• Run “what if” scenarios
• The whole point is not necessarily to predict nearly 100% accuracy
but to call to action with informed decisions
• Resources for capital projects and operational expenses can then be
reallocated and new performance targets set
• Shift from Linear Process to a Continuous Cycle
Build a Financial Model (2/2)
12
• Shift from Linear Process to a Continuous Cycle
Monitor,
Report
and
Analyze
Review
and Set
Strategy
Planning Input
and
Collaboration
Allocate
resources and
Execute

• A rolling forecast is a process in which key business drivers are
forecasted on a continual basis, not associated with a specific
financial year
• Expands forecast horizon beyond current fiscal year
• Scenario based: uses various assumptions to anticipate bottom line
impact
Moving to a rolling forecast
13
• Predictive: recommendation is to have at least quarterly reviews of
the process and run scenarios, use the added information to reduce,
but not to replace annual budget process

• Fine-tuning the models can be challenging:
The difficulty is to re-inject Actuals and understand variances to
adjust Forecasting… without getting lost in a rear-view mirror
Driver-Based Rolling Forecast – Challenges
(1/2)
14
• Information System may be a hurdle:
Having the right tools, end to end, avoiding heavy manual data
collection and scenario handling

• Change management is required:
Limit “budget gaming”, target negotiation mindset and adjusted
projections to fill the gaps.
Promote collaboration, knowledge sharing and transparency on
assumptions & dependencies
Driver-Based Rolling Forecast – Challenges
(2/2)
15
assumptions & dependencies
Embed forward-looking attitudes into the culture, create a
consistent focus on the business issues, rely consistently on
forecast intelligence to make managerial decisions
This requires strong Buy-In from management and discipline
from everyone

Nowadays, corporate culture tends to focus on quarterly performance
It is essential to incorporate long term implications, foster innovation and
growth
Incorporate a 3-5 year outlook in the planning process:
• Better focus on market conditions and strategy
Long Term versus Short Term?
16
• Better focus on market conditions and strategy
• Give business owners an opportunity to project themselves into the
long-term future
• Build a consensus around corporate strategy and execution
• Build foundation for future planning

What is the situation in Alcatel Lucent?
Emerging
• No formal
planning process
• No planning tools
• Inadequate
Developing
• Inconsistent
process
• Basic tools (e.g.
Excel)
• Ad hoc
spreadsheets
Defined
• More standard
processes
• Some integration
across Business
Units
• Reliance on ERP
system as
planning tool
Advanced
• Enterprise-wide
processes
• Use of web-
enabled budget
tool
• Rolling forecast
and other
advanced
processes
Leading
• Planning process
fully integrated
with strategy
• Real-time
forecasting and
performance
monitoring
• Compensation
linked to results
17
communication
• Purely financial
plan
spreadsheets
• Highly manual
process
planning tool
• Little analytic
Harmonizing system >> One ERP
Introducing one common forecasting tool
Introducing Rolling Forecast
Some model based scenarios, but still very manual
Still too detailed bottom-up approach
Sometimes lacking discipline in data collection
Not yet real time nor integrated with strategy
Current processes
and philosophy
must evolve

ADDRESSABLE
PIPELINE
ORDERS
FORECAST
SALES
FORECAST
ORDERS
FORECAST
MARGINS
FORECAST
ORDERS
FORECAST
HEADCOUNTS
/FIXED COSTS
FORECAST
CASH
FORECAST
INVENTORY
FORECAST
A strong process but too manual
18
By product, segment,
customer:
• Market share
• Trends
• Reputation,
investor perception
Addressability still
rather empiric
Systematic
customer:
• Delay from
Qualification to
Contract
• Win/Loss ratio
• Probability to win
Long run forecast thru models but empiric, not formal, lacking methodology
Short-run forecast is 100% manual and detailed by opportunity
Systematic
customer:
• Backlog/book ship
conversion ratio
• Typical project
schedule - Revenue
recognition rules in
line w/ T&C
• Adjusting lead time
to Demand Plan
customer:
• For recurrent business:
historical trends adjusted
with expected Cost
Improvement / Price
Erosion / Specific
Provisions linked to T&C
• For key deals: detailed
P&L analysis
Systematic
Still too empiric,
methodology not
formal enough
Systematic
Handled centrally

Conclusion for Alcatel Lucent
• Monthly Forecast Process is clearly embedded in the culture but
remains too manual and cumbersome
• Improved agility with a strong methodology, practice alignment,
converting understanding & assumptions into rules, and
regularly challenging some long time habits
19
Still some changes to implement before having a real
Driver-Based Rolling Forecast tied to our Strategy…
And now: tell me about the situation in your company??

From annual budget to rolling forecast - Karine Cochet

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