Budgeting as a tool for enforcing strategic alignment of an organization(part I)CONFIDENTIALBudgeting as a tool for enforcing strategic alignment of an organizationMichael Hasler(ZRH)Bernd Heinemann (MUN)Martin Huber (CG)Lukas Junker (FT)Manfred Stuettgen(ZRH)GregorTheisen(FT)A ;How-to; guide for setting up performance-oriented planning processes in complex organizationsSeptember 2002This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Companyduring an oral presentation; it is not a complete record of the discussion.0HOW TO USE THIS DOCUMENT. will find useful NE-material for budgeting studiesMGMs.?;Budgeting -a high impact engagement; (pp. 5-11)MGMs. will find support in structuring a budgeting engagement and in identifying key workstreams?;Iterative planning process starting with budgeting; (pp. 13-16; EMs.32,48)?;Key success factors; and ;Lessons learned; (pp. 30; 46; 53; 55). can use the document as hands-on toolbox?;Build-up of basics for Budgeting;: Development of reporting guidelines and templates, standard communication format, and data management solution (pp. 16-30)Associates.?;Synchronization of budgeting and target setting;: Preparing KPI-driven model for setting targets and scenario analysis (pp. 32-46)?;Budget reviews;: Preparing review meetings -assessment/ challenge of budgets (pp. 48-53)1020920_AVG182_PD High-End-v1SUMMARY (1/2)Budgeting -a high-impact engagement topic?According to common beliefs, a budgeting engagement offers only limited potential to create client impact; budgeting is a simple process without top management relevance, best left to accountants?However, there are two worldsThe ideal text book world, where the common beliefs are indeed true, and best practices call for a sequential process beginning with strategic planningThe real world, characterized by complex organizations in transformation, where a parallel iterative planning process is needed?In the real world, budgeting can be an attractive engagement topic and a good basis for follow-up engagementsBudgeting generates deep business insight and can act as springboard for strategic discussionsBudgeting turns out to be directly relevant for top management defining its targets for the upcoming yearsIterative planning process starting with budgeting?The iterative planning process outlined in this PD responds to three important real-world challengesAn underdeveloped planning and control functionAn organization in transformation (leading to a disconnect between budgets and strategy)A complex multilevel organization?The iterative planning process has three main stepsBuild-up of basics for budgeting: Creating the operational prerequisites Synchronization of budgeting and target setting: Reconciling thefinancial targets set by the group holding with budgets prepared bottom up by the BUs(dual starting points) in multiple loopsBudget reviews: Finalizing an integrated budget and strategy through review meetings2020920_AVG182_PD High-End-v1SUMMARY (2/2)Build-up of basics for budgeting?Creating the indispensable prerequisites for a sound budgeting process involves several activities, e.g.,Development of uniform management reporting standards (codified in comprehensive budgeting guidelines and standardized reporting templates)Development of a standard communication format (to be used for discussing and comparing BU budgets)Development of a data management solution (used for storing and aggregating budget data)?In all these activities, the state of development of the client's finance function needs to be explicitly taken into accountSynchronization of budgeting and target setting?Budgets and strategy have to be integrated on all organization levelsThe financial group target has to be translated into a corresponding strategic positioning of the divisionThe division in turn, has to set targets for its BUs in a strategically sensible wayBUs and Business Lines have to cooperate in elaborating their budgets?Synchronization can be supported by a comprehensive Excel model that uses a KPI-logic to set targets and to ;reverse-engineer; a potential strategic positioning from scenario analysis of feasible KPI combinationsBudget reviews?Top management reviews budget and strategy of reporting units inhybrid review meetings combining discussion of financials with review of strategic positioning?In order to use review meetings as a key tool for influencing the strategic direction of BUs, they have to be carefully prepared (e.g., internal/external benchmarking)3020920_AVG182_PD High-End-v1CONTENTS?Budgeting a high-impact engagement?Iterative planning process starting with budgetingBuild-up of basics for budgetingSynchronization of budgeting and target settingBudget revi