Planning & Budgets

Planning & Budgets IS 207 • Acknowledgements --Several of the slides in this presentation have been "borrowed" from a variety of sources: • Gary Dessler, Management (2nd ed.) • Peter Lyman • Tom Lucke

First: An Introduction to Planning • Planning • Is part of the "Strategic Management Process" • Should be tied to the mission and goals of the organization • Aligns the organization's internal capabilities and the external demands of its environment (market, regulation, etc.)

Step 1 Step 2 Step 3 Step 4 Define the Business and Set a Mission Statement Set Strategic Goals Formulate a Strategy Implement the Strategy Step 5 Evaluate and Correct as Needed The Strategic Management Process

Three types of strategies Strategic Planning Corporate Functional Competitive

Our approach • IT and strategic management issues • Business models • (shorthand for "what you have if you don't have a business plan") • Budgets • Accounting as a planning and management tool (if time permits)

A. IT and strategic management “We still lack a well-defined model or theory for the kind of organization now emerging. So managers are confused over the enormous task of restructuring operations for a new era.” Halal Therefore, managers must balance between today’s operations and strategic planning for the future.

Venkatraman on information management • Management is evolving from a command paradigm to the communications paradigm; from hierarchy to flatter organizations, with more local team autonomy; management by coordination is replacing command and control • Information management has rationalized the organization, but real time network communication is changing it fundamentally --from hierarchy to enterprise (networks of self managed enterprises that operate like an internal market system). Budgeting is the language & medium of coordination.

B. Business models (in six "easy" steps) 1. The value proposition 2. Technological innovation 3. The competitive environment & differentiation 4. The revenue model 5. Source of investment 6. The competent team

1. The value proposition How (exactly) does IT innovation add value? • To whom does it add value? Think in terms of value chain. • Who is the customer? Think about internal and external markets

Value Chain • - a linked set of value creating activities • from raw material to end use product Customer Procurement R&D Manufacturing Marketing Distribution Service Value chain Customer Basis Source: Marius Leibold, Gibert J. B. Probst & Michael Gibbert For additional information, see the complete lecture at: http://www.sims.berkeley.edu/~bigyale/koethen/km/english/chains.htm

Branding & differentiation... The brand: Why will the customer adopt your solution / return? • Are online transactions more cost effective and/or economies of scale or scope and/or larger revenue? Differentiation: How will this business stand out? What will make it one of the best in this market?

2. Technological innovation • Means/ends. Is the technology about reducing costs or increasing revenue? Or developing competency? Or competitive factors? Or quality of service? Or what? • How can the costs & benefits be measured? When? (covered last week) • Why is this innovation likely to succeed?

3. The environmental scan • What is the competition doing? Are online extensions of brick & mortar business stronger (Amazon vs. Barnes & Noble)? Or, are they less able to innovate? • Might competing value chains emerge? (Is our business model sustainable?) • What do we have to do to learn about/ develop competencies in future innovations?

4. The revenue model How does your innovation control costs and/or create economies of scale and/or scope and/or produce revenue compared to traditional models? What are the costs of building, implementing, sustaining the new technology?

5. Investment source IT projects are investments. Understand the business model, culture and decision making process of your organization to figure out the politics of IT investment. (a) internal reallocation (b) loans (what cost of funds?) (c) venture capital

6. The team: attracting and retaining talent • How do you find people who can function in an environment of continuous change? • How do you recruit & retain them? • Note: The team is often the key to finding investors, since every other aspect of the business plan continuously changes.

Who makes the decisions?(The transition between the team & the role of budgets) Does the organization have a strategic decision making process? • If so, how does it work? • If not, how do IT projects get authorized and implemented? • What and who determines the success of an IT project? Note: Institutional history and culture are as important as org charts (“informal organization”).

C. Budgets: Allocation and/or Reallocation • Operating budgets are cut to create one-time or recurring funding for investment • Innovation in one place creates reduction of resources (people, projects, money, attention) in others. This may become a diffusion of innovation problem.

What are the organizational functions of budgets? • Budgets as a planning process • Budgets as a priority setting process • Budgets as a resource allocation process • Budgets as a responsibility allocating process • Budgets as an evaluation process

Uses of Budgets • Budgets can be useful • To provide overview • To help allocate resources • To determine leverage points • In financial control

Budgets have a political side • Budgets are political documents and are often part of political processes—internal & external • Especially in choice of aggregation • In focus—changes versus totals • Accept the status quo vs. • Zero-based budgets • Functional vs. Divisional

Role of Costs (again) • Budgeting often involves (arbitrary) allocations of joint costs • Frequently through the use of "overhead rates" • Budgeting  Costing  Pricing • (Remember the telephone leased line example) • UCB per-line telephone and per-node data charges

Budgets reflect industry type 1. Governmental agencies & non-profits 2. For-profits 3. Startups

Agency & non-profit budgets • The Civil Service Model: most of the resources are committed to staff, therefore the budget issues tend to concern priorities for one-time money (grants, gifts, capital spending). • Budget cycle once a year • Causes difficulties for strategic (multi-year) planning • Digression: Why treat the Navy differently from the Army? (Art. I, Sec. 8) • Implementation decentralized to "professionals”

For-profit enterprises • Two flavors of money: revenue and investment. • Budgets do not allocate "money," but allocate revenue projections. • Quarterly review of revenue vs. projections, continuous evaluation and problem solving. • Performance against the budget determines rewards.

A startup model • Funding from VC in a series of “rounds of funding” -- each with defined, measurable goals -- through an evolutionary path. • Friends & family • Angel • First round, second round • buyout or IPO • CEO goal: “drive valuation”

“Flavors of money” • Source and restrictions • One time and recurring

Technology budgeting 1. Startup: Defining the product Differentiating brand 2. For-profit: Controlling/reducing costs Analysis of what’s going on New products 3. Agency & n-p: Improving service Controlling/reducing costs w/o reducing staff

Planning horizon: motivation • Startup: differentiating brand creating market • For-profit: controlling costs and maximizing profit for shareholders • Agency & n-p: Quality of service, as defined by professionals, not customers

Incentives 1. Startup: Valuation of options 2. For-profit: Bonus Raises Promotion 3. Agency & n-p: Professional ethics, job security

D. The Role of Accounting • Provide useful information to • Owners • Managers • Potential investors • Regulators

What would be in the introductory parts of a financial management course • Background/Objectives • Key Financial Accounting Concepts • The Financial Statements • Interpretation and Analysis

What Are We Talking About? • What do accountants do? How do they do it? Who cares about what they do and how it’s done? • Financial Accounting • Preparation of financial statements • Audit • Control • Managerial (or Cost) Accounting • Budgets and variances • Analysis for management decisions • Cost and profitability assessment

What Would We Cover? • The objective is not to turn you into accountants . . . Just to give you the basic concepts and let you see how to apply them in your work • Typical Questions: • How profitable is XYZ? • What is the value of GGG’s embedded network, on a per access line basis? • Is is reasonable to expect 30% EBITDA in the LD industry? • Are small business customers profitable for a LEC?

Objectives of Financial Reporting • . . . to help present and potential investors and creditors and other users in assessing the amount, timing, and uncertainty of future cash flows. (FASB Statement of Financial Accounting Concepts No. 1) • . . . to present a true and fair view of the company’s results and financial position (Accounting Act, Finland—post 1993) Note the crucial distinction between GAAP and "Pro Forma" statements – procedures and assumptions do matter.

Planning & Budgets