The theme of my presentation at past spring’s Host Analytics World was that EPM is needed in fair, foul, or uncertain weather. While EPM is used differently in fair and foul weather scenarios, it is a critical navigational instrument to help pilot the business.
For example, in tougher times:
- You’re constantly re-forecasting
- You’re doing expense reduction modeling
- You might do a zero-based budget (particularly popular among recently PE-acquired firms)
- You’re likely to try and reduce capex (unless you see a quick rebound)
- You’re probably making P&L, budget, and spend authority more centralized in order to keep tighter reins on the company.
In better times:
- You model and compare new growth opportunities
- You often build trended budgets more than bottom-up budgets
- You adopt rolling forecasts
- You increase capital investment and build for the future
- You do more strategic initiatives planning
- You decentralize P&L responsibility
These (and others) are all capabilities of a complete EPM suite. The point is that you use that suite differently depending on the state of the business and the economy.
Well, now with the surprise election of our 45th President, Donald Trump, we can be certain of one thing: uncertain times.
- Will massive investments in infrastructure (including but not limited to, The Wall) happen and what effect will that have on economic growth and interest rates?
- Will Trump deliver the promise 4% GDP growth that he’s promised or will the economy grow slower?
- Will promised deregulation happen and if so will it accelerate economic growth? What effects will deregulation have on key industries like financial services, energy, and raw materials?
- What, as a result of this and foreign policies, will be the price of a barrel of oil in one year? What effect will that have on key industries such as transportation?
- Will Trump spark a trade war, increasing the price imports and reducing the purchasing power of low and middle-income consumers? What effect might a trade war have on GDP growth?
- What impact will all this have on financial markets and the cost and availability of capital?
I don’t pretend to know the answers to these questions. I do know, however, that there is uncertainty about all of these questions– and dozens of others — that will directly impact businesses in their performance and planning.
If you cannot predict the future, you should at least be able to respond to it in agile way.
If your company takes 6 months to make a budget that gets changed once a year, you will be very exposed to surprise changes. If you run on rolling forecasts, you will be far more agile. If you have good EPM tools you will able to automate tasks like reporting, consolidation, and forecasting in order to free up time for the now much more important tasks of scenario planning and modeling.
Again, if you can’t know whether oil will be $40, $50, or $70 — you can at least have modeling out all three scenarios in advance so you can react quickly when it moves.
I’ve always been a big believer in planning and EPM. And, in this uncertain environment, companies need EPM now more than ever.