Has the volatile and unpredictable nature of the business environment outdated traditional budgeting methods?
Absolutely, however, the extent of the impact can vary across industries and companies. To exploit opportunities, or to protect business from risk, flexibility needs to be incorporated into the planning processes. The rate of change is only getting faster, and competition is fierce. Those who respond correctly first, can yield great returns.
The increased volatility seen in the business environment has significantly impacted our performance at Starbucks, and our ability to accurately forecast. Acts of terrorism, currency fluctuations, adverse weather, declining footfall on the high streets and malls are all examples of external events that limit the effectiveness of traditional budgeting, as they outdate any key drivers or assumptions used. The danger here is resources are allocated sub-optimally, or even dangerously – and newly created opportunities may not be taken advantage of. Additionally, we’ve found that creating annual operating plans 13 months in advance, which are tied to employee compensation, could also incentivise incorrect behaviour – as there will be those who significantly exceed budgets, or fall well short, due to assumption changes.
How did Starbucks respond to this challenge?
Although the traditional planning process is still very much part of the business routine at Starbucks, we have shifted thinking around resource allocations, particularly longer-term capital projects, requiring re-evaluation of assumptions and driving the need for business cases before approval – just because the activity is in the budget, does not mean it is able to be spent. Additionally, we reallocated resources away from the planning process, investing in finance business partner roles. Much of the forecast is centralized now, with the debate shifting from the numbers, to the drivers of the numbers. The business partners focus ensuring performance is maximized, and that risks/opportunities are flagged up and dealt with timely. We are looking to implement a cloud-based forecast tool, migrating from excel, which will also drive efficiencies (in terms of resource and time) and create much more robustness to the plan. As a smaller region of a large global organization, the hurdles to implement any new software, do take time.
How has a rolling forecast process benefited Starbucks?
We are still very much in our infancy with regards to implementing a true rolling forecast- we do have bespoke processes in place, as longer-term investments (new stores) and supply chain need to make decisions beyond the current AOP timelines and need to reflect latest assumptions.
How important has business partnering been in delivering this new approach?
Business partnering is critical to the finance team at Starbucks, and one of the biggest changes implemented in the EMEA FP&A structure. Initially, the business was unsure of the role and the value it can bring, however now it is viewed as a critical addition to the business – even recognised as employee of the quarter. Much of the benefit of the finance business partner is seeing the increased commercialism in decision making – instead of being a team that historically would be seen as a barrier, we are seen as supportive and helping solve for the solution. As the assumptions used to create the plan change, we now have resources to help the business swivel to take advantage. The control shifts from the plan to the business partner, whose benefits are measurable in the P&L, with a step change in performance. With the introduction of the business partner roles, not only do we get a much clear understanding of performance risks and opportunities, but also get much better decision making by the business. They will undoubtedly be a crucial component of the FP&A team going forward.
Paul Harris is commercial finance director at Starbucks EMEA responsible for planning, forecasting and investment appraisals for the region. He was previously EMEA finance director for Apple and before that a commercial finance business partner at Nike.
Hear from Paul Harris about how you how you can save time, drive value, and increase efficiency with effective business partnering, driver-based forecasts and implementing a rolling forecast process at CFO Agenda at Twickenham Stadium on 9 May:
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