Best Practices for Upgrading Planning, Budgeting & Forecasting Capabilities

Editor's note: This is the second of two articles on planning, budgeting, & forecasting, with this one focusing on what the technology strategy should be. Read the business case for upgrading these capabilities here

The latest economic downturn exposed long-standing gaps in the planning, budgeting and forecasting (PB&F) practices of some insurance carriers. To some extent, these processes had been afterthoughts within the finance function of insurance companies for a long time. Yet, regulatory oversight, the globalization of markets and increasing operational complexity are placing a new spotlight on PB&F capabilities.

To realize full value from investments in PB&F, insurers should recognize that a methodical, holistic approach is required. The temptation to leap right to technology implementation as a panacea for all that is wrong with the PB&F function must be resisted. Critical process, organizational factors and underlying data issues must also be addressed for PB&F transformation to be truly successful.

Successful change programs and transformation initiatives start with a clear and methodical approach and thorough planning, with project execution guided by several leading practices:

Steer clear of panacea thinking. With enticing benefits, there is some risk that insurers will view implementation of a planning tool as a one-stop cure-all for their PB&F ills. While the business case may appear very compelling, it is critical that PB&F leaders carefully evaluate all of the components to the PB&F process to clearly see the value of a PB&F tool.
Establish governance and framework. The PB&F process should start with a well-defined plan, linked to the organization’s overall vision and strategy. This strategic plan should drive the budget process on an annual basis. Historically, many insurance companies manage PB&F completely within finance, only obtaining input from the business when needed. If each division has a different way of building their plan and budget, they will not be comparable or understood across the organization. Plans and budgets should have broad input from across the organization in order to increase buy-in and acceptance at all levels.
Look outside. Often insurance companies overlook the importance of external information in relation to planning processes. Top PB&F performers utilize external market-based data to assist in the generation of targets for the budget. Additionally, objective third-party information should be used to develop external assumptions, cost allocations and drivers. Benchmarking data may also be useful.
Reconfigure the organization. When it comes to optimizing the organization for PB&F, the goal should be to ensure the right type of work is being managed in the right locations at the right time with the right resources. Appropriate spans of control should also be in place to ensure that information is consolidated from the best sources and sufficient coordination of budgeting processes occurs. Clear lines of accountability for certain types of data or decision-making should be established.
Don’t forget the culture or the people. Beyond optimizing the organizational chart, insurers reworking their PB&F approach should embrace change management practices, because it is likely that organizational walls will be broken down and more information shared. Leadership should start at the top, with senior-level sponsors spelling out the case for change — why it is necessary and how the company will benefit. If PB&F is to be a cross-functional pursuit, appropriate representatives should be identified from across the business (and corporate functions) and their roles clarified.
Implement rolling-forecast capability. It is important for insurers to view planning as a continuous, iterative process to guide business decision-making, not as a once-a-year administrative exercise. Once a fundamental PB&F capability is put into place, implementation of rolling forecasts should be considered in order to improve the quality and accuracy of the PB&F function.

Bottom-line value After years of lagging positions in terms of process automation and technology adoption, the insurance industry has made major strides forward in the last several years. In finance and accounting, the combination of enterprise technology and off-shoring has led to impressive gains in overall efficiency and significant reductions in overhead.

Insurers can capture a great deal of the potential value just by coming up to par with their counterparts in other subsectors of financial services in these fundamental functions. More importantly, mastering the process, organizational and technology components of PB&F can lay the groundwork for long-term leadership in finance and provide valuable insights to drive positive economic results.