Digitized Corporate Planning: How to avoid bad investments
Digitization is becoming increasingly important for corporate planning. But what exactly does "digitization" of corporate planning mean and what should companies consider before investing in new (digital) technology?
By Wolf-Gerrit Benkendorff
In a study by the Institute for Financial Services Zug on digital change in controlling from 2016, 73% of the companies with a turnover of more than 50 million CHF assessed their degree of digitization in controlling as mediocre and better. This optimistic self-assessment surprised me. I see a possible explanation in the fact that digitization is often reduced to the implementation of new, digital technologies.
With the help of a framework I present how complex the digitization of corporate planning is and what must be considered when redesigning it. This avoids bad investments and increases the probability of a successful transformation. The framework distinguishes four sub-areas:
- Change drivers that trigger a redesign of corporate planning.
- Enablers in the form of new (digital) technologies that support or enable a redesign from a technical point of view.
- Foundations for efficient planning processes.
- Digitized corporate planning in the narrower sense.
The pressure to change existing corporate planning arises externally and internally.
- Externally: With the ongoing digital transformation of the economy and society, the complexity of the business environment is growing. Uncertainty is rising, planning cycles are shortening, and corrective measures are increasing.
- Internally: The digitalization of products, services, processes and even business models increase the complexity within a company. The fast and unbureaucratic (re)allocation of resources will become a success factor.
Each company can derive from the change drivers which procedural and methodological adjustments are to be made to the existing corporate planning activities. Only then should a decision regarding the use of new (digital) technologies be taken.
Enablers are technical developments that can also be used for corporate planning. The following classification is based on the requirements of digitized corporate planning.
- Big Data: Big data refers to data stocks that are too large for conventional data processing systems and therefore require new processing technologies.
- Data science: The term data science covers all methods (predictive analytics, machine learning, AI, etc.) that are used to make new discoveries in data sets or to increase the quality of regularly performed forecasts.
- Big Calculations: With increasing computer performance, ever larger and more complex problems can be solved with high quality based on an increasing amount of data. This is often done in real-time (using in-memory technology), which enables seamless integration into the operational planning process.
Enablers can have a positive effect on the efficiency and effectiveness of corporate planning. For example, the creation of forecasts can be automated, and their quality increased at the same time. But caution is required here: A quality improvement of forecasts is only possible if the underlying data meets very specific requirements!
Foundations are the central prerequisites without which digitized corporate planning can neither be established nor operated economically.
- Steering concept and driver models: The steering concept describes the integrated financial steering along the entire value chain, from the value drivers to the top financial key performance indicators. Driver models represent an appropriately simplified model of reality that enables the steering concept to be incorporated in the controlling processes.
- Database and IT planning system: The real-time availability of structured and increasingly unstructured data (such as text files, presentations, videos, audio data) is becoming increasingly important for digital corporate planning. At the same time, a standardized, automated and integrated IT planning system is required to meet increased procedural and methodological requirements.
- Know-how and culture: Those responsible for planning should be able to assess which adjustments to the existing corporate planning will be necessary because of the digital transformation and where additional value will be generated through digital technologies. Cultural change is also necessary. For example, certain decisions can be better made by automated data analysis than by gut feeling.
In recent years, many companies have already laid these foundations in order to increase the efficiency of their corporate planning. Nevertheless, it is worth assessing the current situation, which should also include the data flows of the operative (ERP) systems.
Digitized corporate planning
Digitized corporate planning in the narrower sense encompasses the processes and methods that are subject to the greatest pressure for change through digital transformation.
In the past, strategic planning often meant defining the best possible strategy for a (possible) future. Modern planning approaches, such as scenario-based strategic planning, explicitly take the uncertainty of the future into account. The result is a robust core strategy that is valid for several scenarios and can be supplemented with scenario-specific options depending on future developments.
Rolling planning forms the core of digitized corporate planning. The internal control system must respond to increased complexity with greater flexibility and shorter response times. It is not the financial year, but the business requirements that define the rhythm in which the rolling process is run through. This rhythm differs from company to company and even from process to process, e.g. sales planning and investment planning.
To ensure that rolling planning can be executed at the necessary pace, a high degree of automation is necessary without compromising quality. This requires foundations such as driver models, powerful databases and professional IT systems, supplemented by the deliberate use of data science and big calculations.
A cultural challenge arises from the increasing uncertainty of the business environment. It is becoming more difficult to set financial targets that have the right level of ambition over a period of one or more years. Digital business planning therefore requires changes in target setting, performance evaluation and incentives (bandwidths, relative targets, profit sharing, etc.).
Scenarios, simulations and optimizations
The growing uncertainty requires the increased use of scenarios, simulations and optimizations. For example, Big Calculations can be used as part of rolling planning to calculate complex scenarios in real time. While a scenario represents exactly one possible future (the probability of occurrence of the scenario is unknown), simulations allow predictions about the probability of a loss or the expected profit. While simulation methods represent an established method in scientific or technical areas, their use in everyday business management has not yet been widely accepted.
Risk is the possibility of deviating from planned targets due to "accidental" disruptions resulting from an uncertainly foreseeable future. If risks increase because of the digital transformation, this has consequences for corporate planning: Traditionally single-value planning, i.e. the plan represents exactly one future scenario, cannot reflect the increase in corporate risk. This requires the use of multi-value planning based on simulations. In that way, planning and risk analysis can be linked. Growing risk is represented as a larger variance around a planned value.
Transformation of corporate planning
The presented framework can be used to derive starting points for a redesign of corporate planning. To reduce the risk of making bad investments in digital technologies, it is useful to answer the following questions in advance:
- Change drivers: To what extent is the company affected by the digital transformation?
- Digitalized corporate planning: Which existing methods and processes of corporate planning need to be adapted? For which tasks should new methods and processes be developed?
- Foundations: To what extent do the foundations for a digitized corporate planning already exist? Where are additional investments necessary?
- Enabler: Where is it reasonable to use new technologies? What are the prerequisites?
- Change: Is the impact of digitized corporate planning on the existing financial management and control system known? Is there enough support in the company for a redesign?