Need to Change
The energy act of 2005 paved the way for utilities to invest more capital into their existing infrastructure to bring it up to the par in order to meet their customer expectations. Across the nation, utilities have been investing in upgrading their transmission and distribution infrastructure, spending more on reliability-centered programs and grid infrastructure. Due to regulatory guidelines in certain states, utilities are also increasingly looking to meet the guidelines of an efficient energy portfolio by collaborating and in some case investing in alternative energy providers.
On the operations aspect of the enterprise, utilities are becoming increasingly aware of risks associated with delivery and performing effective planning in terms of costs and resources to handle disruptions like infrastructure failures, outages and storm related disruptions. They are also increasingly spending resources on their customer outreach programs.
Increased Demands and the Need for Greater Transparency
With increased demands for more capital investment and a need for more budget dollars to meet effective asset maintenance strategies by the business units, the budget offices of todays utilities are being forced to transform to meet these new challenges and opportunities. The simple mechanism of re-evaluating prior year budgets by an escalation rate for labor, nonlabor and shared services is proving to be less than efficient.
With a portfolio of increased budget dollars rises the need to effectively manage and control the distribution of these dollars and maintain adequate transparency of the budget office.
According to the 2007 PWC (PriceWaterhouseCoopers LLP) Budgeting and Forecasting Study:
- 56 percent of budgeting and forecasting effort is spent on low value activities, including data collection and consolidation, reviews, approvals and report preparation.
- 70 percent of respondents are dependent on spreadsheets for all or a portion of their financial planning activities.
- Management and employee dissatisfaction with the current planning process is high due to the increased level of granularity and lack of alignment with business strategy.
Best Practices and Principles
What are the principles and leading practices of establishing a world class budget office? How can the corporate budget office be efficiently brought into the transformations arena? In this article, I will examine some of these issues and address pathways to mitigate risks.
It is very clear from some of the results of the survey that there are efficiencies to be gained from budget and planning transformation activities. Transformations can be large-scale or piecemeal types as long as appropriate milestones and clearly associated measures have been identified and measured to show the value realization.
Pathway to Effective Transformation
Any significant transformation exercise at the budget office cannot be viewed holistically without the impacts of three core areas along the four key budgeting dimensions.
The transformation exercise is often focused on all the three key dimensions: people, process and technology. Often, an effort to quickly fix one of these dimensions without assessing the impacts on the other two has only lead to disappointing results. A few years ago, during one of my consulting engagements, I noted that a particular variance report had been in use for the last ten years. The report did not make much sense given the prevailing circumstances. The software vendor hired for implementing the best-of-breed solution had very meticulously redesigned the report in a fancy format within the new system. Upon further investigation, I found that a disgruntled manager had created the report request a while back as he was not happy with the analyst. He made the analyst in charge of producing this monthly variance report do it one of his primary responsibilities. Ten years elapsed, and the manager had retired. The analyst moved to a new area of responsibility, but the report didnt stop breathing. No one questioned the value of the report. What started out as a informal punitive exercise became a key performance indicator (KPI).
Im sure upon closer examination of your repository of legacy reports, you will find many such organic reports that have lived and breathed for years without getting noticed.
This brings me to the most important dimension of the transformation. Its definitely the People aspect. How much budget slack is built into your annual budget process by your business units? Before escalating the labor, nonlabor and other cost drivers, have your budget managers reviewed to see which activities require funding for the current budget year? Have they prioritized the limited budget among the conflicting resources effectively? Has the corporate strategy been clearly communicated to the business unit stakeholders? The central budget office is best served in its operations, if it has developed a clear communication plan for its budget. A budget that is well aligned with the corporate strategy and goals is easier to work with; accountability built into the budget and each stakeholders input to the budget process and its relation to the overall strategy can be easily understood. This is also an integral part of the budget communication package.
Choosing to use one particular software over the other is not a very good option to help optimize the budget process. This will by no means be effective in reducing the budget cycle nor will it be able to reduce the budget slack. A clear and consistent process model needs to be developed for the budget transformation process.
Three Key Ingredients of the Process Model
The process model should very clearly identify the key components of the annual budget process and their associated relationships. Workshops should be conducted to properly identify the key processes and subprocess. For each subprocess of the budget model, the core activities should be clearly identified. For each activity in the sub-process:
- Detail steps should be identified.
- The roles associated with the activities needs to be documented, for example, the budget administrator role or the budget analyzer role or the budget planner role. Defining and identifying roles up front will help measure the potential change impacts.
- For each of the activities identified during workshops, the as-is practice and the to-be state needs to be documented. Interviewing the users from the identified roles will help the process consultant understand the key gaps in the existing process.
- For each of the activities, measures, metrics and their alignment with KPIs and other corporate metrics will need to be clearly identified and defined.
- A proposed transformation package will need to be produced, clearly stating the needed efficiencies and the proposed solutions to help gain these efficiencies.
- The transformation package will need to be presented to the project steering committee. Appropriate approval procedures will need to be established during this time period.
- Use of a business process improvement (BPI) model or a conjunction of Six Sigma with IDEF toolsets will go a long way to help assist in this exercise.
Once the transformation package has been approved by the steering committee and other significant stakeholders, only then should the technology facet come into play. Currently, the market has multiple software vendors in the area of business performance management (BPM). The choice of one over the other is dependent on many factors and will be discussed in another article. At the minimum, the selection process for the vendor and the software package should clearly address the expected transformation efficiencies in each of the given areas.
Key Activities and their Impacts
Is the software package capable of providing a unified communication platform to the budget process participants? Is there a central repository of all cost drivers with consistent enterprise wide definition? Does the software package provide a detail status of the progress of the budgeting exercise during the time the budget process is being developed? For example, cost drivers such as number of meter sets or number of planned pole inspections and overhead conversions with a sample unit estimated cost stored in the central repository will be helpful.
How does the software implementation help assist in the collection of the budget data from the various business units? Do the business units prepare data external to the budget system and then upload it into the system or does the software provide a unified platform for developing the budget as well as collecting the budget? Are there predictive exception handling features that help in the collection process? If the training and development (T&D) submitted budget is higher than the agreed upon targets, does the software provide an alert to both corporate and the business unit in concern?
Does the budgeting software provide automatic consolidation of the budget data? Can the budget data be consolidated against multiple dimensions to answer such questions such as, What is the total PUC spending versus FERC spending projections? What is the total amount of money being spent on environmental initiatives? Being able to consolidate against multiple dimensions should be an important feature of the product.
Upon implementing the software, the focus of the budgeting activities should shift in creating analysis and value from the budget data. The significant time spent in collecting and consolidating the budget should be a thing of the past.
Is the software able to provide multiple views of variance reports? How is the security handled for the access of the variance reports? Can I leverage the budget information automatically to help create production plans or detailed maintenance cost plans for the various work centers and functional locations? Does the budget data automatically provide its input into the corporate dashboard?
The pathway to effective transformation in the budget and planning areas of the utility operations should clearly focus on all the three ingredients, i.e., people, process and technology. Technology presents the improvement opportunities; people make them real. The organizational culture and structure needs to support them to make this happen.
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