LEADING PRACTICE TRENDS FOR BUDGETING, FORECASTING AND COSTING ANALYTICS. RSM Webcast March 30, 2017

Transcription

1 LEADING PRACTICE TRENDS FOR BUDGETING, FORECASTING AND COSTING ANALYTICS RSM Webcast March 30, 2017

2 Contents Introduction Current state of budgeting, forecasting and costing analytics Traditional overview and approach Leading practices overview 4 steps to rolling forecasts 5 steps to zero-based budgeting Costing analytics Questions 1

3 Introduction Greg Maddux Partner, Regional Management Consulting Leader Greg works closely with key management to develop and implement tactics for improving process efficiency, operational performance and profitability results for organizations. He has worked with mid-sized to Fortune 50 businesses in a variety of industries including healthcare, insurance, manufacturing, higher education and other sectors. He specializes in finance transformation, M&A integration, and shared service design and implementation to create higher performing organizations. Greg s background includes more than 25 years experience in providing consulting services, as well as experience with a Big Four firm and in the insurance industry. 2

4 Introduction Steve Mermelstein Director, Management Consulting Steve Steve is a Director in Management Consulting with specialization in costing, margin management and operational improvement within health care and other not-for-profit and for profit organizations. Steve has nearly 20 years experience helping create higher performing organizations and advising clients during his career at RSM, IBM and in private industry. Steve also has had extensive training and deployment of Lean Six Sigma. 3

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6 CURRENT STATE OF BUDGETING, FORECASTING AND COSTING ANALYTICS 5

7 Current State of Budgeting, Forecasting and Costing Analytics 75% Effort is wasted rekeying and manually rolling up data 64% Annual plans are out of date by the time they are put into effect 90% Spreadsheets contain data and formula errors Source: Statistical research performed by Adaptive Insights.

8 Current State of Finance Business Goals Strategies Agility New: Historical Responsibilities: Insight and Action Reporting Control Cash Management Efficiency Data Gathering Risk Management Finance Finance functional roles are much more strategic and much less transactional than historically.

9 Current State of Financial Planning and Analysis Financial staff are buried and consumed with doing basic financial duties, severely limiting available time for FP&A An immediate and recurring ROI is available for those FP&A departments that can have their staff focus on value-add activities and not basic duties. Source: Statistical research performed by APQC

10 What Research Groups are Saying For every $1 invested in business analytics, organizations realized an average return in excess of $10 Nucleus Research Analytics drive 30% or more better improvement or better decisions Aberdeen Group Companies in the top third of their industry averaged 6% higher profitability than their competitors due to data driven decision making -Harvard Business Review Optimized sales plans increase sales attainment 17% -Aberdeen Group 9

11 TRADITIONAL OVERVIEW AND APPROACH 10

12 Core Approaches to Traditional Budgeting Management style: Executive control Best equipped to translate objectives into operational goals and initiatives Underlying assumption can be that managers and employees do not have skill sets, motivation or honesty to act in a way that supports company objectives Authority: Centralized Objectives, plans and initiatives are handed down through multiple levels of the organization (can lead to micro-management) Structure consumes enormous amounts of dollars, resources and time to support it Layers of management structure insulate executives from fast-paced market developments, resulting in missed opportunities Performance measurement: Fixed targets Targets set by executive management Best way to predict and manage to desired results Constantly changing market conditions can result in significant plan-to-actual variances Focus on short-term results can set the stage for questionable management and accounting practices 11

13 What s wrong with traditional budgeting processes? Single budget cycle with infrequent reforecasting 64% of annual targets are obsolete in 4-6 months Long budget cycles Multiple iterations shifts focus away from other operational and strategic activities Budgeting participants procrastinate and are reluctant to participate Drives greater separation between high-level strategy and operational budgets Offline spreadsheets & lack of standardized budgeting templates Spend it or lose it behaviors Limits the effectiveness of the financial planning function Stale budget data reduces the ability to effectively support financial analysis, close and reporting activities 12

14 Trends away from traditional budgeting Some companies have eliminated the annual budget cycles and replace them with continuous cycles (American Express) Southwest Airlines uses a rolling quarterly forecast for budget/plan Selected health care systems are moving towards rolling forecasts and department level performance measurement driven targets Many organizations are implementing technology solutions that allow for timely, efficient updates to forecasts and scenario planning 13

15 BUDGETING, FORECASTING AND COSTING ANALYTICS LEADING PRACTICES 14

16 RSM s Financial Planning Maturity Continuum Basic Developing Leading No formal planning Formal but disconnected planning Integrated planning Strategic Planning Subjective decision making Limited data used in decision making Objective data-driven decision making Financial and operational resources matched to capital required to execute strategic initiatives Budgeting and Forecasting Annual budget preparation Budget and forecast preparation Moderate understanding of key drivers Rolling forecasts implemented Thorough understanding of key drivers with a focus on forecast accuracy and predictability Management Reporting and Analysis Reports indicate if highlevel targets were met Reporting is a manual process Standard, recurring management reports with detailed analysis Ability to drill-down and around on results, as needed Reporting drives re-forecasting decisions Real-time results Dashboards/scorecards with KPIs (visualization) Planning Accuracy Material variances in planned to actual performance explained Reasonably accurate planning Predictability in planning, resulting in increased target accuracy Risk Management Limited understanding of key business risks Identification of select upside and downside risks Identification of key upside and downside risks with pro-active planning based on likelihood and impact of events Organization Structure Decentralized business planning functions Score keeper role Centralized business planning Limited strategic influence Centralized function providing decision support Tightly integrated and aligned with other business units Technology Disparate systems and no one single data truth Integrated and automated technology (i.e. CPM, BI) Full utilization of CPM/BI software Common information platform On-demand, self-service culture

17 Budgeting & planning leading practices framework Frequency Process Management Level of Detail Budgeting & Planning Leading Practices Leverage Technology Driver Based Budgeting Participation & Collaboration 16

18 Frequency Increasing the frequency of budgeting cycles will drive greater alignment between organizational strategy and operations Must achieve a balance between the level of effort required to perform budgeting and forecasting activities and value derived from those activities Frequency will be driven by a variety of factors including: Market & industry volatility Resource availability Budgeting & forecasting process and scope Technology 17

19 Frequency: Rolling forecasts Rolling forecasts acknowledge that a company functions as an ongoing operation by: Reducing or eliminating the traditional approach of the previous period plus an uplift This approach forces individuals undertaking the forecast to update their business projections each month and embed the activity in monthly procedures Helping to eliminate the annual year mind-set and focus on ongoing operating results Acknowledge that the business functions as an ongoing operation and needs to be managed accordingly Providing a continual business outlook at all times Gain a forward-looking plan that allows management to take remedial action on unexpected changes Reducing or potentially eliminating the annual budgeting process At the normal budget time, management will already have a very good idea of what the following financial year will look like from their latest rolling forecast 18

20 Define correct level of detail Create an efficient system that provides access to the right information when it s needed Only produce the appropriate amount of detail needed to make smart business decisions By linking detail to operational responsibility, accuracy increases as managers forecast or budget items that they manage and discuss on a day-to-day basis A few key details can help predict shifts in the company s overall financial trajectory Allows focus on key performance metric targets by department or service line rather than tedious line item budget analysis for every department, every month 19

21 Driver-based planning Enables the underlying business model to be captured within a standardized and structured capacity Release business users from building and maintaining individual, usually spreadsheet-based, forecast and budget models Allow common parameters to be incorporated within the models eliminating the need for end users to forecast items for which they are not responsible Ensure transparency and provide modeling capabilities to operational managers Provide management with the confidence that forecasts and budgets are derived from one common modeling methodology and set of algorithms 20

22 Participation and collaboration To gain a greater understanding of the planning and budgeting processes, involve resources across all levels of the organization Leaders provide the direction, managers provide the details, and budgeters gather the information An appropriate blend of top-down target setting and bottoms-up analysis requires collaboration Forecasting and budgeting capability can be placed in the hands of the business (e.g. at a division/ department level) Those who can produce the best forecast of business activities are those who undertake and are responsible for those activities Collaborative process offers greater accountability and better execution of corporate strategy 21

23 Leverage technology Excel spreadsheets no longer stand-up to the challenges of today s fast paced and complex businesses Rethink your current technology by implementing a cloud or on-premises solution Research and invest in a solution that not only meets your specific business requirements but also: Automates the budgeting and planning process Provides intelligence and analytical capabilities for drill down into costs and margins at a detailed level Delivers a unified solution package for budgeting, forecasting, consolidations, and reporting activities Enables business agility and scalability Enables driver-based scenario planning 22

24 Corporate Performance Management (CPM) capabilities CPM Core Capability Benefits 23 Budgeting Personnel Planning Revenue Planning Forecasting Consolidations Reporting Analysis Dashboards/Scorecards Sales Performance Management Visible & interactive supporting details Integrated Top-down & Bottom-up budgeting Protected, flexible budget scenarios Formula control and accuracy Detailed employee compensation planning Department managers become accountable Measure different revenue streams Evaluate revenue assumptions Accurately manage revenue budgets Routine and scheduled re-forecasts One step forecast adjustments User-defined driver-based forecasting Consistent completion of data Enhanced validation & approval Repeatable, reoccurring consolidation Get the Story Behind the Numbers One System, Multiple Report Types Move Beyond Pre-defined, Locked Down General Ledger Reports Automatic variance breakdown Graphical trend analysis Complete data cross-examination Transform your data into meaningful visuals Align your business to key goals Integrate with Microsoft Office Accurate and obtainable sales plan Enhanced visibility across the organization Transparency into final sales results Visually appealing budget status updates Automatic budget to actual comparison Unlimited workforce scenario planning Effectively manage turnover/promotion/ movement Flexible payroll reporting Continuously forecast revenue Consistently analyze & report revenue Continuous rolling and what-if scenarios Leverage department assumptions Full financial cycle forecasting All-inclusive currency translation Multiple consolidation levels supported Adaptability when changes are needed Cross Functional Reporting Requirements Met Secure Enterprise Wide Report Distribution End-user driven discovery Multi-level enquiry Safe, encouraged data exploration Provide visibility into corporate status Robust sales estimates Sales plan integration Better buy-in reported

25 Gartner Magic Quadrant CPM

26 Practical steps for improving budgeting/forecasting Stop limbo dance between executives and operating management Become analysts and communicators not just accountants- know what the numbers mean Dig into the true cost of services to understand margins and profitability at a service line level Shift to scenario planning that includes multiple scenarios for on-going operations, as well as strategic opportunity assessment Make budget participation across the organization not central to just the budgeting department Change the finance conversation From mind numbing tables of numbers to visual trends over multiple periods From point in time focus to looking at key drivers / root issues of performance Move away from a one point in time budget process (Annual Process) to a continuous process Eliminate unevenness of cycles by transforming to a continuous process Constantly evaluate the alignment of budgeting processes and the strategy of the organization Constantly measure whether drivers are accurate 25

27 Benefits of adopting these best practices Automation and reduction in errors Increased ownership and accountability for financial targets More agility to refresh financial and operational targets based on changes in the business More focus on risk mitigation actions vs. variance explanations Increased satisfaction from upper management with positive financial outcomes Detailed, advanced analysis in a user friendly manner 26

28 Beyond Budgeting Best Practice Planning Techniques Best Practice Technique Integrated Planning Rolling Forecasts Zero-based Budgeting Bottoms up and Middle-out Budgeting Resource Planning via Profitability Analytics Driver Based Benchmarking and Target Setting Predictive Analytics 27 Scenario Planning and Sensitivity Analysis Description Integrated planning brings strategy, finance and operations to the table all at once for collaborative planning that aligns enterprise wide actions for better execution on strategic objectives. Rolling forecasts are re-forecasts on a monthly or quarterly basis that require less time than an annual forecast and allow the organization to pro-actively plan and react to changes in market conditions This is a proven strategy to improve profitability. This technique requires each costcenter/department to build their budget from scratch based on key operating volumes and drivers which in turn promotes accountability. Top down budgeting often hinders morale and accountability. A bottoms up or middleout approach allows budget owners to own their numbers which in turn promotes better accountability and results. Spend that next dollar on the most valuable products/services based on data-driven, objective decision making via profitability analytics Model your projected performance using the key drivers that largely determine your results and depict the levers to be pushed and pulled in times of changing market conditions Compare performance in your KPIs to industry best practice and using a triangulated approach to set performance targets (this extends enterprise wide) Use external data and/or statistics to predict future performance which in turn yields better performance results. Pro-actively mitigate risk by planning for a change in market conditions

29 Leading Practices Explored Today Rolling forecasts Zero-based budgeting Costing analytics 28

30 4 STEPS TO ROLLING FORECASTS 29 Insights adapted from Adaptive Insights ebook

31 Rolling Forecasts Value Why Use Rolling Forecasts? More agility to respond to changes in mix, volumes and other factors Timely access to relevant forward-looking information for decision-making More action-oriented than explanation-oriented Help senior executives manage areas of performance risk and expectations Shorten planning cycles and spend more time looking forward

32 Rolling Forecasts Value Timely action to improve the bottom line. In a study by the Aberdeen Group, organizations that performed rolling forecasts saw a 10% revenue growth over the past 24 months in comparison to a 7% growth for organizations that did not. Aberdeen Group

33 4 Steps to Rolling Forecasts Step 1 Use a dedicated application for rolling forecasts don t try to perform them with spreadsheets Step 2 Utilize drivers, not details Step 3 Conduct multiple what-if scenarios Step 4 Choose the right forecasting horizon

34 Step 1 Use a Dedicated Application Spreadsheets are great tools but. While nearly 80% of organizations still use spreadsheets for budgeting, forecasting and analysis attempting to manage rolling forecasts for complex organizations with numerous assumptions and multiple scenarios in Excel is difficult at best. Not only are multiple scenarios for rolling forecasts difficult to update and manage with spreadsheets, they re also prone to errors in formulas, broken links and have a general lack of controls.

35 Step 2 Use Drivers, Not Details Focus On Significant Business Drivers Focus your rolling forecasts on significant business drivers such as volumes, mix, cost efficiency metrics, quality measures, patient satisfaction, and working capital. Leading budgeting and forecasting tools enable you to build your forecast based on the specific drivers for each service area and department. Moving from a detailed line item, static budget approach to an on-going performance metric/business driver approach requires strong support across the leadership team to effectively deploy.

36 Step 3 What-if Scenarios Respond Quickly to Scenario Changes Being able to do advance what-if scenario planning and forecasting helps leadership be prepared for unexpected changes and build contingency plans. Scenario planning enables management to more quickly understand and take timely action for changing conditions.

37 Step 4 Forecasting Horizon Key Considerations There is no set guideline for the time interval for rolling forecasts. It all depends on your organization s specific business needs, and how long it takes to make decisions about operations, capacity and spending. Here are some questions to ask to determine your forecast horizon: 1. What is the speed of change for my organization and its external forces? 2. What seasonality and cadence for renewed contracts must be considered? 3. How intensive are my capital requirements and related lead times? 4. What is the likely pace / lead times for planned strategic initiatives? 5. How frequently are opportunistic strategic initiatives moved on? 6. What is the cadence of regulatory reporting, surveys, etc.?

38 5 STEPS TO ZERO- BASED BUDGETING 37 Insights adapted from Adaptive Insights ebook

39 Zero-Based Budgeting Overview Zero-based budgeting ( ZBB ) was first introduced in 1970 in Harvard Business Review ZBB is a repeatable process to: Review every dollar in the annual budget Manage monthly financial performance Build a culture of cost management ZBB looks for the most efficient return on spending. It aims to eliminate unproductive costs, often as much as 10-25% of SG&A in the first six months of deployment 1 ZBB is a popular technique deployed frequently by organizations experiencing changing business conditions

40 5 Steps to Zero-Based Budgeting 1 - Map out service lines and budget ownership 2 - Create alignment between your strategic plan and ZBB 3 - Bring a balance of top down and bottom up analysis 4 - Align culture and incentives 5 - Support ZBB with a dedicated CPM tool

41 Step 1 - Map out your Service Lines and Ownership Keep your model simple and focus on key service line ownership. Don t over complicate the review and approval of the zero-based budgets.

42 Step 2 Create Alignment between your Strategic Plan and ZBB Vision Strategic Plan Detailed Strategic Initiatives w/ Critical Success Factors High-level KPIs with Targets Budget Preparation The strategic plan should set forth the vision, strategic initiatives and targets for the upcoming year(s). All levels of the organization should be kept abreast of the plan in order to prepare a thoughtful zero-based budget. The budget preparers and reviewers will need to be privy to the strategic plan information in order to align their budget build-ups with the plan and supported by the plan. We call it integrated strategic and financial planning.

43 Step 3 Bring a balance of top down & bottom up analysis Top Down Targets by Department / Service Line Strategic Zerobased Budgeting Bottom Up analysis of cost components and drivers of cost Strategic alignment External benchmarks Internal trends and benchmarks Service line trajectory (expand, maintain, reduce or eliminate) Key metrics by service line to measure service, quality & efficiency Fixed vs. variable costs Rationalize all cost categories and components based on value delivered Analysis of key cost drivers & changes Quick wins and initiatives to achieve targets

44 Step 4 Align Culture and Incentives Creating a zero based budgeting culture doesn t happen over night. Education of the strategic plan and associated key performance measures by service line is key to setting the stage. Managers need to have key performance measures with targets included in their annual goal setting and linked to incentives.

45 Step 5 Support ZBB with a Dedicated CPM Tool Utilize proven corporate performance management (CPM) tools to build up the budget, capture key cost components, cost drivers and associated key performance measures. Having a standard platform is critical for providing access across multiple departments, driver-based costing assumptions, and the ability to easily aggregate and update the zero-based budget.

46 COSTING ANALYTICS 45

47 However beautiful the strategy, you should occasionally look at the results. Winston Churchill 46

48 Changing Market Conditions Reimbursement is evolving towards value-based payment models that reward high quality and lower cost with shared savings With heightened customer focus on their health care costs, price transparency is becoming increasingly important In a value-based market, understanding costs at a service and procedure level is critical for enhancing efficiency and improving patient outcomes Having an accurate view of margin at a procedure level is critical for the future 47 By 2020, over 50% of health care payments will be tied to outcome- and value-based contracts between providers and payers. - Gartner, 2016

49 Current State of Costing in Health Care Costs for the same procedures may vary widely by physician and location yet not be detected At times, a lack of confidence in the accuracy of cost information across the organization delays decision making Methods for developing standard costs are often inconsistent across multiple sites and departments Standard costs are infrequently updated A culture and cadence for frequent review of procedure level margin results is often lacking Commonly used Excel and ad hoc databases have limitations for providing an efficient means to monitor and update costs, provide drill down and reporting capabilities New capabilities are needed to have accurate visibility into service/procedure level cost information core systems used by health care providers currently don t specialize in these capabilities 48

50 Cost Breakdown at the Procedure Level Median Variable Cost per Procedure $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Physician Comparison: Total Knee Replacement Laboratory LOS Imaging Therapeutic Services OR Time Cardiovascular Supplies Pharmacy Blood $0 Dr. A Dr. B Dr. C Dr. D 49 Source: Strata Decisions

51 Methods for Developing Costing Standards Easier but inaccurate: Ratio of Cost to Charge (RCC) assumes reimbursement directly correlates to resource consumption. Most accurate but difficult to explain/maintain: Activity-based Costing assigns costs based on activities and drivers specific to each procedure or service, with detailed data requirements for each. Commonly deployed: The Relative Value Units (RVUs) approach utilizes relative weights at a procedure level to accumulate costs based on relative differences in consumption of resources across services. While RVUs originated with Medicare, other refined RVU data sources exist. Increasingly deployed: A Hybrid RVU method utilizes a standard RVU approach while refining RVUs for selected high $, high volume procedures based on site specific factors and acuity considerations, while also assigning actual costs where possible. 50

52 Costing Framework Develop Costing Model and Platform Stratify Procedures based on Volume and $ Engage Key Stakeholders Continuous Cost Improvement Pilot Costing Model for Selected Procedures Deploy Reporting and Accountability Cadence Analyze Data and Identify Opportunities Revise and Fully Implement Solutions Patient Outcomes Conduct Ongoing Costing Monitoring & Maintenance 51

53 Example Encounter Costing Flow Costs: Map logical cost pools from the GL Activity Drivers: Charge Master Volume and other Drivers Costed Encounter: General Ledger Patient Care Labor Med Supplies Implant Devices Pharmacy Chargemaster CPT Codes, etc. CPT Codes (with RVUs developed & surrogates) Apply Costs based on RVU volumes at Encounter level (with attributes) Assign Direct Charges Patient Encounter Patient Care Labor Med Supplies Implant Devices Pharmacy Analyze and Report by Various Attributes: - Patient - Physician - Location - Payer - Department - Service Line - Other Desired Categories Facility & Indirect Costs Other Drivers Facility & Indirect Costs 52

54 How to Begin: Developing a Cost Model Selection Select a costing system based on current and future requirements Identify and select a population of higher volume and higher $ procedures Take a pilot approach, breaking the effort into phases to gain momentum Define Inputs Map general ledger costs into appropriate level of cost pools Determine RVUs (standard RVU sources and/or tailored RVUs) Identify other selected drivers for indirect sources (keep it relatively simple) Define other attributes and data requirements for reporting and analytics Engage Department Leaders and Selected Physicians 53 Gain their agreement on costing assumptions specific to their area

55 How to Begin: Developing a Cost Model (continued) Design and Build Create the working model with the collected inputs Identify any gaps and develop methods and supporting assumptions to fill them Develop Reporting Views for Analysis Create reporting views illustrating cost per procedure by site, by physician and other dimensions Analyze results with Department leaders/physicians Refine and develop on-going cadence Measure Outcomes in parallel Refine and Implement Next Phases 54

56 Using Analytics to Drive Cost Efficiency Proven Costing solutions enable slicing and dicing of data for thoughtful analytics that may produce improvement opportunities Key attributes/dimensions include analyzing: Payer Location Physician Service Line Department Major Disease Categories (MDC s), Diagnoses Related Groups (DRG s), and ICD procedure and diagnosis codes 55

57 Governance and Sustainability Driving a culture of transparency and accountability requires: Establish executive-level and service line cost/margin management teams Service line teams should be comprised of Cost Accounting and Service line/department leaders and selected physicians Develop cadence for monthly meetings and accountabilities for cost and margin reporting analysis sessions Tie to patient outcomes, balancing cost and quality Quarterly review of Service Line/Department and Service Line progress readout session with Executives Align with performance evaluation and compensation Provide sufficient training on methods and outcomes 56

58 Success Factors in Costing Initiatives Avoid overly detailed, complex costing frameworks Avoid overly simplistic costing spreads not tied to key activities/drivers Ensure buy-in and management use from executives and clinical stakeholders Take balanced approach: Patient satisfaction and quality measurements must be used in conjunction with cost metrics Leverage technology that can provide the necessary detailed costing assignments, reporting and analysis, and is easy to maintain Standardize service line and other definitions in every reporting system to avoid confusion and ensuring assumptions and drivers are more accurate and meaningful Empower leaders at multiple levels to become subject matter experts, becoming resources to others in the organization 57

59 Costing Case Study Large health system with more than 20 hospitals and 500 clinics Existing cost reporting structures and methods weren t enabling actionable improvement Implemented hybrid costing model to better compare service lines, identifying contribution margins Activity driven enabled identification of specific areas to improve by procedure Results: Identified $42M of service line cost savings $5M realized of supplies savings Significantly improved access to data 58 Adapted from HealthCatalyst

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62 Contact Information Greg Maddux Partner, Regional Management Consulting Leader Steve Mermelstein Director, Management Consulting Steve

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