Planning to outperform markets and competitors: the new dynamic management tools for CFOs. Growth Management and Commercial Intelligence

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1 Planning to outperform markets and competitors: the new dynamic management tools for CFOs Growth Management and Commercial Intelligence

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3 Executive summary The planning and forecasting model used by most businesses no longer works in today s tough business environment and unstable markets. Traditional business planning fails to account for why 90-95% of business activity results in lead attrition or sales churn. To survive, companies must outperform their markets and competitors. This means adding value to customers beyond their expectations which requires evidence-based and provable commercial intelligence from across every commercial activity (not just sales). The main drivers and limiters that impact sales outcomes today are rarely relationship driven. Companies must control the real commercial drivers and limiters (internal and external) that are impacting their future success. The G-index is designed to give companies a real idea of their growth potential and the future impact of past sales effort at all times. EXECUTIVE SUMMARY 1

4 Introduction Business planning and forecasting is an inexact science for most businesses, even for those deploying the dynamic management principles of Beyond Budgeting, where continual analysis and forecasting replace fixed budget periods. Setting accurate targets based on past and present commercial performance, rather than on hope is critically important for companies with ambitions to outperform their markets and competitors. This paper outlines the key issues of managing growth and sales trajectory in an economically unstable and competitive market, and explores practical ways to achieve accurate and dynamic forecasting. Our business environment is tougher today than it has ever been. Over the last two decades we have witnessed the longest ever period of continuous economic growth, the emergence of new markets, removal of trade boundaries and the globalisation of economies. Increased competition and the advent of the internet have provided customers with greater choice and better information on which to base buying decisions, as well as a voice with which to influence markets. 2 INTRODUCTION

5 Forecasts should not be predictions or statements of aspiration. Today we are also facing the worst recession for 80 years. Many markets have ceased to grow and have become unstable. These are long term changes which are forcing companies to make critical choices they must adapt or face the very real possibility of dying. But that s not how a business works. The new breed of CFO requires data on future outcomes continuously on demand and taken from every commercial function in the business from product development to lifecycle, attrition and churn; customer demand to sales in order to: Unsurprisingly CFOs now spend more time managing the future than dwelling on the past. Forecasts should not be predictions or statements of aspiration. They are tools to inform decision making to help shape future outcomes. Maintaining spread sheets and databases of customers and prospects may be the best system that many businesses have, but it s not enough in today s environment. CFOs need both a new set of tools and a very different work methodology if their businesses are to outperform markets and competitors. Their analytics and business intelligence have to be evidencebased and provable in order to give confidence to stakeholders. The information businesses use is often created in technology silos: CRM, SFA, BI, PLM etc., which is disconnected from other commercial and financial functions in the organisation. Manage future growth strategies Set and achieve ambitious targets Accurately plot sales trajectory Measure business drivers and limiters Measure customer value adding Track competition and competitiveness Support management collaboration on a common sales strategy Out-perform markets and competitors. INTRODUCTION 3

6 Rolling Forecasts Businesses that have adopted the Beyond Budgeting principles of leadership and management [1] have quickly realised the benefits of making planning a continuous and inclusive process (rather than a top-down annual event) and dynamically coordinating the interactions of frontline managers to collaborate in the pursuit of one common business strategy. Rolling forecasts, based on the 3-step Forecasting Methodology, developed by Foresite SPA, keep managers informed and aids improved decision making that can impact future outcomes. Step 2: Sales Trajectory - combines the FØ forecast and active sales pipeline. Pipeline is high-risk at every level. At the business level risk is categorised by its principle drivers: 3-step Forecasting Methodology Step 1: FØ Forecast - Knowing exactly where the business is today seems an obvious prerequisite, yet it is surprising how few businesses have this information at their fingertips. The FØ forecast comprises active sales, order bank and backorders. It is based entirely on fact and should be 90% accurate. It represents the forecast sales outcomes if the company does nothing else. Long lead conversion times High obsolescence rates High failure rate of new products Short product life cycles e.g. fashion led Poor customer loyalty Strong Competition At every stage of the commercial sales cycle, risks arise that impact the likelihood of conversion. While traditional forecasting can never be completely accurate, trajectory tracking can be very reliable. For this reason provable pipeline forecasting demands zero subjectivity. A Hybrid methodology that combines the best of 4 ROLLING FORECASTS

7 predictive and roll-up forecasting whilst avoiding the shortcomings of both is achieved by following four golden rules: Step 3: Correction Forecasting accuracy is less to do with accurate predictions than with taking continuous corrective action to the impact of drivers and limiters on sales trajectory. 1 Remove Subjectivity - Replace probability of success in the forecast roll-up calculation with planned ultimate conversion rate according for the commercial value step that the lead has reached. Always looking over the horizon and closing the gap between sales trajectory and target restores the heading towards target. 2 Remove Delinquency - Avoid creating false optimism about future outcomes by applying decay rules to lead values according to their degree of delinquency. 3 Remove Speculation - Filter the sales tail according to risk appetite i.e. below what conversion rate would a lead be considered too speculative to include in a forecast for planning purposes? 4 Sensitise forecasts using the actual conversion rates of value steps measured by the system. ROLLING FORECASTS 5

8 Continuous Improvement Identifying the causes and measuring the impact of drivers and limiters enables businesses to not only take remedial action to correct sales trajectory, but also to make continuous business improvements. i. Performance of Lead Generation Sources tells us what to expect from future sales initiatives and supports planning on a scenario basis ii. Lead Attrition measures the impact on trajectory and the causes of lost opportunities Competitive advantage Customer fulfilment iii. Process Performance has a causal correlation with lead attrition and identifies the commercial function which failed thereby causing attrition. By making this event a data collection opportunity extends the richness of this constant source of business intelligence that identifies and measures: Causal analysis Impact and trends Process performance 6 CONTINUOUS IMPROVEMENT

9 Competitor activity iv. Sales Churn similarly measures the impact on trajectory and the causes of lost sales. Furthermore it measures the business ability to replenish churn from the existing sales pipeline and conversion performance. This in turn highlights the need for future lead generation activity. However, the same data as we captured for lead attrition has very different connotations at the churn event: Product lifecycles and obsolescence rates Churn replenishment capability Causal analysis Impact and trends Service levels The Datum Points for Business Drivers and Limiters PSBR INTEREST RATES CONTINUOUS IMPROVEMENT 7

10 Measuring Added Customer Value Understanding and measuring customer delight is a very complex science and a standardised approach that is suitable for practical business applications has yet to be agreed. According to research undertaken by Fred Reichheld (Harvard) [2], tracking the quality of client relationships needs to be so simple that people can understand it easily. The results should be relevant to the business and enable managers to focus on the real sources of long term growth. Most businesses convert less than 10% of the leads passing through their prospect pipeline. This means that circa 90% of all prospects are lost through attrition (an event that happens maybe 20 times more frequently than winning a sale). Attrition information is a hugely rich and valuable source of data about customer reactions to your sales proposition that can be continuously measured. Its advantages over market and customer surveys are compelling: Respondents are 100% qualified leads i.e. looking to buy what you sell Respondents are identified individuals Provides a continuous source of feedback The impact of their response can be measured and analysed by any static data variables held against the prospect lead 8 MEASURING ADDED CUSTOMER VALUE

11 Buying decisions are based on good information and meeting customers demands. Continuously knowing the market s reaction to your business is a truly powerful concept and the companies that have adopted this approach have been surprised at the breadth of issues it has highlighted and the impact they have on their business. Significantly we have noticed that seldom is customer relationship ranked as a material issue, at least within B2B and manufacturing businesses. This is a real sign of the times, indicating that market power has indeed shifted to the customer and that buying decisions are based on good information and meeting customers demands. Even more significant has been that the issues highlighted have not only been solvable by management teams, but because their impact was quantified, expenditure and investment decisions were easy to agree. This was the case for a UK flavour and perfumery manufacturer for whom roughly 50% of its sales were from a library of standard products. These would be sold on a sample approval basis; that is to say, customers would request a sample and a price and if both were found to be satisfactory an order would be placed. A thousand requests were received each month but the conversion rate to sales was extremely low. It transpired that the top reasons for this were late or no sample delivery and poor follow-up. An investigation quickly determined that the sample department was only capable of making 500 samples per month. The solution was so simple - employing a few extra people in the department plugged an opportunity leak that was costing the company millions of dollars every year. Setting Ambitious Targets Under the continuous planning process, relative targets should be set that motivate managers to strive for continuous improvements and these should be reviewed regularly. They should be sufficiently ambitious to keep the business challenged without being so unrealistic that they are dismissed as unachievable. Now comes the question - what is an ambitious target and how can it be continuously updated? We have seen that forecasting sales trajectory provides a pragmatic view of where we are and the direction we are heading whilst at the same time accounting for the causes of sales gap. As we can measure the cause and impact of drivers and limiters, we can manage them. This presents the opportunity for scenario targeting tools that allow managers to explore the impact of continuous improvement initiatives on sales trajectory. MEASURING ADDED CUSTOMER VALUE 9

12 G-Index The CFO of a major food group in Virginia, USA saw how this methodology supported decision making in the group s recent $2.5 billion European investment, however the investors wanted to cut straight to the chase. How are their future returns on investment developing in a single figure metric? Today! Growth, or G-Index was the result. An instant metric that compares the known facts about performance and sales in the 365 days prior to today with the trajectory for the next 365 days after taking into account the impact of new sales, lead attrition and sales churn. Source: Foresite SPA 10 G-INDEX

13 G-Index is perhaps the ultimate sales performance metric for ambitious and growing businesses. So if investors are looking for growth of 20% in the coming year they would expect that the business should have achieved a G-Index of at least 120, otherwise it has not yet achieved the ability to deliver the target result. And so the resultant index is actually more than a growth index it is a measure of how well the business is managed. And by drilling down it is possible to evaluate the relative contribution of every sales input to the overall G-Index thereby building a valuable connection between the various elements of commercial activity and the business strategy. This metric can be used to: G-Index is perhaps the ultimate sales performance metric for ambitious and growing businesses because it tests their ability to achieve targets from their current trajectory. This is especially important for businesses with long lead conversion times where the impact of commercial activity has to be visible even before it converts into billable sales. Target sales teams Measure the impact of sales effort Benchmark business units Measure the relative contribution of sales inputs (drill-down) Evaluate business worth G-INDEX 11

14 Way We Work Philosophy Way We Work is a radical new approach which recognises that effective managers work in a free and sometimes unstructured way it s what allows them to be innovative, creative, agile, and responsive to the needs of their peers, the business and (most importantly) their customers. Software should never dictate how managers should do their job, but should adapt to the way they work. The underlying principle should be never to impose a prescriptive methodology onto managers other than is absolutely essential for the collection of the data required by the database and algorithm engines. Brian Hawkes is the founder of Foresite SPA, a growth management and trajectory forecasting Software Company. He has been a finance director for aggressive growth organisations for more than 20 years, and is a member of the CFO Panel for the International Private Equity firm 3i. In 2005 he founded Foresite SPA to develop radically new tools to enable CFOs to de-risk business processes, manage growth and create accurate, dynamic forecasts. [1] Hope, J.D., Bunce, P.G. and Röösli, F. (2011) The Leader s Dilemma: How to build an empowered and adaptive organization without losing control. San Francisco: Jossy-Bass [2] Reichheld, F. (2006) The Ultimate Question: Driving Good Profits and True Growth. Boston: Harvard Business School Press, 2006 For more information on growth management and dynamic forecasting, see 12 WAY WE WORK PHILOSOPHY

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