More and more, organizations are asking their managers to engage in detailed forecasting of the investment programs they are in charge of. Is this just another administrative exercise that comes in the the way of timely delivery and execution? Let’s take a closer look at some of the effects and benefits of this process.
Planning season at many firms is like the holiday shopping season. People are frantic to identify their list of initiatives and submit them. It’s like a Christmas list of activities: each initiative scrambling for its place to belong in the book of work for the coming year.
Many projects will be forced to fall by the wayside or be sacrificed so that others can move on. It’s a march towards that elusive balance where initially the bottom-up demand of work exceeds the top-down appetite to spend, but like the arrival of Christmas day itself, eventually the two will meet in a forced engagement, but not without several phases of attrition. As in nature, only the strong survive.
Each program idea should be rationalized with a Business Case: are we looking to achieve productivity savings, create competitive advantage in a particular space, or perhaps simply respond a new regulatory requirement? How long will it take and how much will it cost to achieve these benefits? What are the risks? What are the key milestones? Using a standardized process and ideally a standardized central tool – for managers to submit business cases allows:
– to see cost vs. benefits of a program clearly articulated according to agreed criteria;
– to review different programs against the same set of metrics. This facilitates prioritisation when drawing down against a fixed budget;
– to maintain a “book of work” that can be prioritised as budget becomes available.
Once a business case it’s approved, it’s time to get going! However, it’s not enough to simply deliver the product: have the anticipated benefits been delivered against the planned costs? The best way to know is to measure actual spend from month to month and adjust anticipated spend as the project progresses.
There are some obvious ways a project can stray from costs as in the case of late delivery, where expensive resources are kept on for an extended length of time. But what are the implications of perhaps bringing headcount on board later than originally planned or making hardware purchases later than expected? Let’s examine these scenarios in the two examples to follow.
1. The Headcount example: “Don’t leave your loved ones disappointed on Christmas Day: spend the money and bring home the goods!”
The case of headcount joining later than anticipated is somewhat obvious: if I expect 5 headcount from Jan to June and 10 headcount for the rest of the year, what is the impact of hiring in October for the case where a headcount costs $5,000/month?
So…my original plan was to spend $25,000/month for the first 6 months of the year and $50,000/month for the second 6 months of the year. This would result in a total spend of $450,000. The 3 month delay (July thru September), means my actual spend would be $375,000.
While one might think that the implications of a $75,000 under-run is not so severe, it represents a 17% variance to the year’s plan. In today’s cost-constrained environment, had we been able to anticipate that $75,000 under run through appropriate forecasting, the savings could perhaps have been applied to another lower priority initiative previously on hold. After all, that budget is approved and allocated for in the balance sheet process of the firm. Also consider the effect of the under-run in the current year will probably translate into over-spend in the next year, thereby adding a financial burden to subsequent years financial plan prior to even beginning the next planning cycle.
2. The Depreciating Asset example: “Spending next year’s Christmas funds on this year’s toys”
Let’s now take the hardware example. Most firms today apply depreciation models to their planned hardware spend. Consider a $360,000 planned cash outlay in January on a server farm and required storage. Taken on a 36 month depreciation schedule the balance sheet impact of this spend in year 1 is $120,000 or $10,000/month. If I defer this spend for 6 months, even though I am taking the cash outlay in the same planning year the balance sheet impact is $60,000 in year 1 as opposed to the $120,000 planned. The problem here again is that year will now be a year 4 impact of $60,000 – see the table below:
| Total Cash Outlay | Year 1 Bal Sheet Imp | Year 2 Bal Sheet Imp | Year 3 Bal Sheet Imp | Year 4 Bal Sheet Imp |
| $360,000 taken in Jan | $120,000 | $120,000 | $120,000 | 0 |
| $360,000 taken in Jul | $60,000 | $120,000 | $120,000 | $60,000 |
The impact to the project costs is not insignificant and must be accounted for, to make optimum use of the dollars approved in the planning process.
These simple examples aim to illustrate the value of the forecasting discipline. If at department level this is good housekeeping, a firm-wide approach means a much higher level of control and cumulative $ benefits. A central governance function that uses standard processes and tools can contribute to delivering real results, not just administrative pain!
Understand these principles of forecasting to be a better program manager across all the dimensions of delivery including Time, Scope and of course Budget and avoid a lump of coal in your stocking on Christmas day.