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Implementing a Performance Based Budgeting System
ProfitStars
•Leading provider of best-of-breed productsg p p
•Jack Henry & Associates (Nasdaq: JKHY)
•M r th n 11 000 t m r n ti n id•More than 11,000 customers nationwide
•Solutions are core platform-independent
•Customers consist of the largest megabanks and brokerage companies to start-up community banks and credit unions
Focused Diversification Acquisition Strategy
Non-Core
Core
Non Core
Customer
The ProfitStars Solution Suite
• PROFITstar – ALM & Budgeting• Margin Maximizer – Product PricingRevenue & • Margin Maximizer – Product Pricing• PROFITability – Organization and Product Profitability• RPM - Relationship Profitability Manager• Enterprise Payments & RemitPlus – RDC & Remit
Revenue & Growth
Solutions
• Synapsys – Customer Relationship Mgmt• TeleWeb & TeleBank – Internet Banking & IVR
• ATM Manager Pro – ATM ManagementCost Control • Synergy – Document Imaging• ImageCenter & Genesys– Check Imaging • Enterprise Image Conversion Solutions
Risk
Solutions
• Biodentify – Biometric Security• Centurion – Business Continuity Consulting• Matrix & Gladiator – Networks & Network Security
Risk Mitigation Solutions
Performance Suite
Optimizer
Monitor Analyze Plan Execute
RPM
Customer
PROFITability
Org/Prod PROFITstarMargin
Maximizer SynapsysCustomer
Profitabilityg/
Profitability ALM/Budgeting Loan/Deposit Pricing
CRM/MCIF
Objectivesj
• Examine why budgets fail
• Define Performance Based BudgetingDefine Performance Based Budgeting
• Questions
Why Budgets Fail
There are 4 basic steps to budgeting:1. Gather input2. Make projections3. Present reports4 Fil i il b d i4. File it away until next budgeting season
Why Budgets Fail
Management Support (or lack of)Management Support (or lack of)“The budget is the bane of corporate America” –Jack Welsh, General Electric
“The budget is a tool of repression” Bob Lutz Chrysler–Bob Lutz, Chrysler
“Budgeting is right up there with root canal”g g g p–Peter Krebser, Pfizer Inc
Why Budgets Fail
• “Too complex”
• “Takes too long”
• “Too inflexible”
• “Not motivational”
-- Financial Managers
“Budgeting, so it seems, is nothing but an unproductive exercise that steals time from your real job.”
HBR Article
Why Budgets Fail
Why do budgets fail?Why do budgets fail?1. It’s out of sync with the strategic plan
2. It doesn’t motivate the right behaviors
3. It rapidly becomes obsoletep y
4. It takes too long to produce
Why Budgets Fail
1 It’s out of sync with the strategic plan1. It s out of sync with the strategic plan“It’s a strategic goal for us but it’s not in the budget.”
• The budget emphasizes financial performance versusThe budget emphasizes financial performance versus strategy
• The focus is tactical rather than strategic performance drivers
• Emphasis on “making budget” prevents managers from executing strategyexecuting strategy
Why Budgets Fail
121416
Budget Barrier•Incremental thinking
68
1012 •Incremental thinking
•Ceiling on growth•Floor on cost reductions
246
0Year 1 Year 2 Year 3 Year 4 Year 5
Budget ActualStrategic Goals Linear (Actual)
Why Budgets Fail
60+% of strategy never gets implemented60+% of strategy never gets implemented60+% of strategy never gets implemented60+% of strategy never gets implemented
•95% of the typical workforce doesn’t understand the strategy
•60% of organizations do not link the budget to the strategy
•70% do not link management incentives to the strategy
•85% of executive teams spend less than one hour per month discussing strategydiscussing strategy
Why Budgets Fail
2. It doesn’t motivate the right gbehaviors
• Budgeting GamesBudgeting Games
• “I’ve got to spend it or I’ll lose it”
• “It’s not my budget”
• “I don’t have control over that [expense]”
• No Buy-In!
• Expense manipulation
• Compartmentalization
B d d i i d• Bad decisions are made
Why Budgets Fail
3 It rapidly becomes obsolete
• Fails to respond to environmental h
3. It rapidly becomes obsolete
changes
• Outdated within months of completion
Why Budgets Fail
Year March June Dec
Prime rate change from previous August ( l i i d)
2000 9% 19% 19%
2001 -11% -26% -47%
2002 30% 30% 37% (planning period)2002 -30% -30% -37%
2003 -11% -11% -16%
2004 0% 0% 25%
2005 29% 41% 65%
2006 20% 28% 32%
2007 0% 0% -9%2007 0% 0% -9%
2008 -27% -39% ‐52%
2009 ‐35% ‐35% ‐35%
2010 0%
Why Budgets Fail
4 It takes toooo long4. It takes toooo long• Senior managers spend 10-20% of their time on
budgetingbudgeting
• Finance departments spend as much as 50% of their time on it!their time on it!
• Business Finance survey – “Two to Four months to complete the budget”to complete the budget
Performance Based Budgeting
• Why do we budget?
• Performance Based Budgeting• Coordinate financial plans with strategies
• Get alignment and eliminate the budget barrier
• Communicate financial expectations• Get buy-in from operational managers
• Track goal achievement• More than once per year
• Reward performance
Performance Based Budgeting
Coordinate financial plans with strategiesCoordinate financial plans with strategies
• Part of the master picture for the organizationorganization
• Align individual units to the strategic plan
• Emphasis should be on key perforamnceindicators (KPI’s) and the efficient allocation of resources
Performance Based Budgeting
Strategy Coordination
Objective Measure Target InitiativeFinancial
To succeed financially,how should we appear to
our owners?
To achieve our vision,how should we appear
to our customers?
MissionVisionV l
Objective Measure Target InitiativeInternal Business Process
Objective Measure Target InitiativeCustomer
ValuesStrategy
Objective Measure Target InitiativeLearning & Growth
What areas need tolearn and grow for usto achieve our vision?
To satisfy ourcustomers, at whatbusiness processes
must we excel?
Performance Based Budgeting
PerspectiveF1 I i h
Strategic Objectives Strategic MeasuresN t i ( l )
Targets
Corporate Scorecard
Financial Perspective
F1 Increase earnings per shareF2 Add and retain high value
customersF3 Increase revenue per customerF4 Reduce cost per customer
Customer Perspective
• Net income (vs. plan)• Revenue mix (by target
segment)• Revenue per customer• Cost per customer
C1 Become a trusted financial advisorC2 Provide superior service
• Customer satisfaction (survey)• Share of wallet
+$100M30%(A) 70%(B)
$300$75
90%50%
Customer Management
nter
nal
spec
tive
Product InnovationOperations
C2 Provide superior service • Target customer retention
I1 Understand customer segmentsI2 Shift to appropriate channelI3 Cross-sell the product line
• Share of segment• Channel mix change• Cross-sell ratio
I4 Develop new products • Revenue from new products (%)I5 Minimize problems • Service error rate
90%
30%40%2.5
50%0 %In
Pers
Human Capital
ng &
w
th ctiv
e
Operations Management
Information Capital
I5 Minimize problemsI6 Provide rapid response
Service error rate• Request fulfillment time
L1 Insure readiness of strategic jobs • Strategic job readiness
L2 Insure availability of strategic info • Information portfolio readiness• Customer survey
Responsible Citizen I7 Build diversity reflecting community • Diversity mix versus community
0.%< 24hrs
1.0
100%
100%100%
www.bscol.com
Lear
nin
Gro
wPe
rspe
c
Organization CapitalL3 Create a customer-focused cultureL4 Build cadre of leadersL5 Align the organizationL6 Best practice sharing
Customer survey• 360° Survey (leadership model)• Strategic awareness survey• Personal goals aligned to BSC
(%)• KMS utilization/currency
100%70%90%100%100%
Performance Based BudgetingIntegrate the Budget into the Strategic Plan
Performance Based Budgeting
2 Communicate financial expectations2. Communicate financial expectations
• Use participatory budgeting
F ll bl i /• Focus on controllable income/expense
• Provide regular, consistent variance reporting (to budget and strategies)
• Hold them accountable
Performance Based Budgeting
Imposed budgets Top Mgtg
Middle Mgt
ParticipatoryOperational Mgt Participatorybudgets
Operational Mgt
Performance Based Budgeting
Ad antages of imposed b dgets:Advantages of imposed budgets: • Increase probability that organization’s strategic plans will be
incorporated in planned activitiesincorporated in planned activities• Enhance coordination among divisional plans and objectives• Reduce the time frame for the budgeting processReduce the time frame for the budgeting process
Performance Based Budgeting
Risks of imposed budgets:
• May result in dissatisfaction, defensiveness, and low morale among individuals who must work under the budgetR d h f li f k• Reduce the feeling of teamwork
• May limit the acceptance of the stated goals and objectives• Limit the communication process among employees and management• May create a view of the budget as a punitive device• May stifle the initiative of lower-level managers
Performance Based Budgeting
Advantages of participatory budgets: • Provide information from persons most familiar with the needs and
constraints of organizational units• Integrate knowledge that is diffused among various levels of
management• Lead to better morale and higher motivation• Provide a means to develop fiscal responsibility and budgetary skills p p y g y
of employees • Develop a high degree of acceptance of and commitment to
organizational goals and objectives by operating management g g j y p g g
Performance Based Budgeting
Advantages of participatory budgets: g p p y g
• Are generally more realistic• Allow organizational units to coordinate with one another• Allow organizational units to coordinate with one another• Allow subordinate managers to develop operational plans that conform to
organizational goals and objectivesI l d ifi i• Include specific resource requirements
• Blend overview of top management with operating details
• Provide a social contract that expresses expectations of top management and subordinates
Performance Based Budgeting
Risks of participatory budgets: • Requires more time
M i d l k i h b d• May cause managers to introduce slack into the budget• May support “empire building” by subordinates• May start the process earlier in the year when there is more uncertainty about
the future year
Performance Based Budgeting
Education:•Strategies•Budgeting Process
Variance Reporting:•Scorecard •Budgeting Process
•Variance Analysis•Budget
Buy-In
Budgeting:•Proper Toolsp•Immediate Feedback
Performance Based Budgeting
Performance Based Budgeting
Performance Based Budgeting
Performance Based Budgeting
Performance Based Budgeting
3. Track Goal Achievement• Get the right tools – no spreadsheets• Rolling forecasts
• Multiple year forecasting (3-5 yrs min)• Monthly import from your core system• Top level versus sub level (branch, dept) forecasting• Subtotal budgeting• Subtotal budgeting• Formula driven account forecasting• Product rate ties to driver rates• Automated budget assumption documentationAutomated budget assumption documentation• Multiple what-if capabilities
• Rate forecasting
Performance Based Budgeting
4 Reward performance4. Reward performance• Focus on progress toward strategic
objectives• Secondary emphasis on annual budgetsSecondary emphasis on annual budgets
• Use non-financial performance drivers
Performance Based Budgeting
Performance goals Performance Measures Targets
Staff ScorecardPerformance goals
Financial Perspective
Performance Measures
Customer Perspective
• Revenue• Expense• Margin
• Customer satisfaction (survey)
Targets
$6 million$1.7 million$4.3 million
90%Customer Perspective
Customer Management
erna
lpe
ctiv
e
Product Innovation
• Customer satisfaction (survey)
• Share of segment• Channel mix change• Cross-sell ratio• N/A
90%
30%40%2.5N/A
Inte
Pers
p
Human Capital
g &
h iv
e
Operations Management
Information Capital
• Service error rate• Request fulfillment time
• Strategic job readiness
• Information portfolio readiness
Responsible Citizen • Diversity mix versus community
0.%< 24hrs
1.0
100%
100%
Lear
ning
Gro
wth
Pers
pect
i Information Capital
Organization Capital
Information portfolio readiness• Customer survey• 360° Survey (leadership model)• Strategic awareness survey• Employee goals aligned to BSC
(%)• KMS utilization/currency
100%100%70%90%100%100%
www.bscol.com
Performance Based Budgeting
1 Ti d i l1. Tied to strategic goals
2. Gets buy-in from operational y pmanagers
3 More than a once per year exercise3. More than a once per year exercise
4. Ties incentives to performance
Performance Based Budgeting
Budget Failures Performance Based Budgeting
Out of synch with the strategic plan •Focus on key performance drivers•Implement strategy mapping and strategic scorecards
Doesn’t motivate the right behaviors •Consider participatory b dgetsDoesn t motivate the right behaviors •Consider participatory budgets•Provide regular feedback on performance•Tie incentives to scorecard measures –not just the budget
Rapidly becomes obsolete •Get the right tools in place•Utilize rolling forecasts
Takes too long to produce •Get the right tools in place•Keep communication lines open•Provide continuing education
Questions
2110 Papillion Parkway #1102110 Papillion Parkway #110Omaha, Ne 68164
Phone: 800.356.9099Fax: 402.431.8822
Performance Enhancement Solutions:Martin Webster
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