Tomorrow’s annual operating plan

It’s essential to the successful achievement of short-term strategic, operational, and financial goals and is imperative when allocating resources in order to maximize ROI.  

The current process for developing an AOP is time-consuming and ineffective in aligning operational plans with budgetary constraints. An inordinate number of valuable analyst hours goes into creation of templates for distribution across the business, offline work in every department to eventually populate the distributed spreadsheets, and finally, collection and error checking as the templates are aggregated for the holistic picture. 

However, times are changing, silos are being broken down, and more collaboration and visibility are being demanded across functions and from stakeholders. This is a major opportunity for transformational finance leaders to take the AOP into a new era, one focused on realistic guardrails, open communication, and alignment across all levels of the business.  

The AOP status quo 

The old way of creating an AOP includes finance teams within business units and/or departments developing operational plans and budgets in a silo not aligned to the strategic plan. These teams review current-year progress on operational and financial objectives, departmental operational goals for the following year, past performance, and costs to develop an AOP. Unfortunately, these activities are often performed in a manual, spreadsheet-reliant environment and limited to passing information and communicating through email, both vulnerable to human error and rapid outdating.  

While this takes place, higher-up in the organization, corporate finance and strategy teams are developing alternate operating and financial targets without consulting the individual business units and often using the same manual spreadsheet- and email-driven environment. For instance, a unit may develop a revenue plan based on demand forecasts, product development, marketing support, and sales resources, or they may have a customer metric to improve the net promoter score. Corporate teams may have a different revenue target from that agreed upon in the financial plan based on their own understanding of the capabilities of the organization. This siloed approach and exchange of information leads to misaligned and ineffective AOPs. 

This siloed system sets up the entire organization for a lower probability of achieving its plans.  No collaboration between levels means no visibility into the context of how each team developed the targets. There isn’t a shared understanding or insight into the business unit’s past performance or future needs. This kind of individual effort leads to Financial Planning and Analysis (FP&A) teams spending the vast majority of their time aggregating and reconciling data rather than analyzing the data. With a bevy of spreadsheets and emails to consolidate, who has time to truly analyze the data provided? These hours spent reconciling replace the ability to validate and present the data. Because there is less context than is necessary, the data often doesn’t tell a cohesive story and FP&A needs to return to the drawing board to align the organization around budgetary constraints.  

This misspent effort has consequences for every level. The individual contributor is shackled by a budget passed down without insight into organizational capabilities. They need to spend time reconfiguring their AOP and performance goals to match the number provided, which is often an exercise in sacrifice and compromise. 

Although using the AOP status quo can, by definition, provide an operating plan for the year, without a more collaborative and intelligent way of building an AOP, the business is limited by this labor-intensive and opaque approach. 

Creating the AOP of tomorrow 

Transformational finance leaders are charging into the future with more cohesive, effective AOPs. Here’s how they’re changing the AOP status quo by using Extended Planning and Analysis (xP&A), or a connected approach to planning. 

Aligning on course and trajectory

First, all teams need to agree on the course and trajectory of the business. Businesses increasingly maintain an evergreen plan or focus on a monthly view. This better ensures alignment on the path of the business and what is required to keep it on track with near-term course corrections.  

Alignment typically comes from the C-suite, which sets an expectation with the business stakeholders on how they expect the business to track, communicated as target ranges or glidepaths for key metrics. This allows the AOP process to focus strategically on what needs to change to realize the growth, margin, cash generation, and CSR objectives of the business, in addition to influencing the reforecasting process throughout the year

Value levers

The Finance team exposes the levers of value creation in the key objectives listed above: For example, the volume, price, and mix impacts in revenue, or the activities, volumes, headcount, labor rate inflation, outsourcing, and mix components of functional costs. This allows the conversation to move from “rolling up” AOP based on disconnected assumptions to “what needs to be true” to satisfy the business demand. Conversely, it can also inform how to adjust what to expect the business to support.  

Growth mindset

How to close the gap or maximize the performance of the business facilitates leadership conversations focused on problem-solving what needs to be true to achieve AOP effectiveness. Exercising a growth mindset prioritizes sending capital into the areas creating the greatest value or quickly baselines what is achievable while also driving alignment. 

Collaboration 

By leveraging Connected Planning, leaders can analyze scenarios and flow of the effects of different courses of action across the entire value chain, regardless of what function or which stakeholder owns the information and decisions. They can assess the likely impacts where the assumptions are transparent, and the model is understood and trusted. If the outcome is unsatisfactory, either the assumptions need to change or the expected outcome needs to be reset. All are aligned and have visibility across the process for true collaboration. 

Additionally, there is no time lost to building plans not aligned to targets. The drivers and shape of the plan are agreed upon up front and the impact of those decisions are clear to all stakeholders. The detailed build ups ensure managers execute in accordance with the plan.  

 The drivers are captured directly into the model by the planner, providing instant feedback for whether they meet all of the relevant value levers distilled to their level. The value levers act as a control mechanism during the business cycle to test and learn whether the business is executing in accordance with the plan. 

Timelines 

Finance no longer wastes time aggregating piecemeal information. Timelines are dramatically reduced due to automation and flow-through from the evergreen plan, removal of double data handling, and the agile and strategic approach to building the shape of the plan up front. 

Outcomes of the AOP of the future

The value in transforming the AOP process is manifold, and far outweighs the pain of making a change for the team. These major improvements not only create less burden, but improve overall business outcomes. When you break away from the AOP status quo, expect to: 

• Create conversations and enable collaboration. No longer reliant on context-free spreadsheets, conversations become easier. For example, a leader can hand a budget to an individual contributor and a conversation about how it will be used can happen, thanks to the visibility of a connected platform. It’s no longer a strict assignment of money, leaving individuals feeling as though they have no choice but to say “I can’t make this budget” without being able to easily point to the data to support their claim. Leadership and lower level contributors can collaborate creatively to meet budget without major sacrifice. For instance, the ability to go back and forth to come up with solutions to meet budget is a lot better than assigning budget and leaving the individual to make do with what they’re given.
   
• Enjoy more visibility. Leadership gains the ability to see all levels of data and make better determinations. If leaders want to achieve a certain goal and look at the data available from across the business, and they see only a modified or entirely different goal is possible, they’re providing more fodder for those collaborative and strategic conversations.
   
• Reduce manual labor. Use time more strategically with a faster, clearer look into the entire business’s performance using Anaplan. There are no more endless hours spent aggregating information from various spreadsheets or digging through emails to find the necessary data. With a modern approach to the AOP, that time can be used to analyze data and make better, more informed decisions.
   
• Gain trust. Enabling collaboration and conversation while enhancing visibility and strategic decision-making create a perfect storm for positive outcomes. The added cohesion across levels of the business affords more opportunities for accountability and trust. Leaders need to listen to the individual contributors’ rationale for line items before handing down arbitrary budgets to better ensure the budget is met – and not with sacrifice or erosion of business performance. 

Conclusion 

Transformational finance leaders have the ability to completely change the AOP. Moving away from a siloed, top-down approach, they can enable collaboration, visibility, and trust between levels of the business for greater accuracy and better, more measurable performance on an ongoing basis. Aligning strategic, financial, and operational planning creates an environment of shared ownership of organizational targets and business performance. This is made possible via Connected Planning, or xP&A, with all levels and business units reporting data into the same system to unlock potential, uncover hidden risks, and become more agile and resilient over the course of the year.