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Closed Loop

Contents 1 Table Of Contents 1.1 Executive Summary 1.2 Foreword 1.3 A Word from the Publisher 1.4 Figures and Tables 2 Part 1: The Activity-Based Planning And Budgeting Closed-Loop Model 2.1 Chapter 1. A New Approach 2.1.1 1.1 The Organizational Value of Budgeting and the Budget Process 2.1.2 1.2 The Challenges Facing Traditional Budgeting Practices 2.1.2.1 1.2.1 Issues with Preparing the Budget 2.1.2.2 1.2.2 Issues of Effectiveness and Efficiency 2.1.2.3 1.2.3 Issues with People 2.1.3 1.3 The CAM-I ABPB Closed-Loop Model 2.1.4 1.4 The Challenges Overcome and Not Overcome with the Closed-Loop Model 2.1.5 1.5 The Necessary Knowledge Base 2.1.6 1.6 An Overview 2.2 Chapter 2. Details of the ABPB Closed-Loop Model 2.2.1 2.1 An Overview 2.2.2 2.2 Stage 1: Achieving Operational Balance 2.2.2.1 2.2.1 Step 1: Set Quantitative Demands 2.2.2.2 2.2.2 Step 2: Determine Resource Requirements 2.2.2.3 2.2.3 Step 3: Balance Resource Requirements with Resource Supply 2.2.3 2.3 Stage 2: Achieving Financial Balance 2.2.3.1 2.3.1 Step 4: Determine Resource Costs and Derive Financial Results 2.2.3.2 2.3.2 Step 5: Add Non-Activity-Based Costs to Obtain Total Financial Results 2.2.3.3 2.3.3 Step 6: Balance Financial Results with Financial Targets 2.2.3.4 2.3.4 Step 7: Create a Formal Budget 2.2.4 2.4 An Additional Consideration: Excess Capacity 2.2.5 Chapter 3. An Application of the Closed-Loop Model 2.2.6 3.1 Summary 2.2.7 3.2 Base Period, Operational and Financial Balance 2.2.7.1 3.2.1 Operational Balance 2.2.7.2 3.2.2 Financial Balance 2.2.8 3.3 Next Period, Operational and Financial Balance, Scenario 1 2.2.9 3.4 Next Period, Operational and Financial Balance, Scenario 2 2.2.10 3.5 Multiple Activities for Multiple Products and Services 2.2.11 3.6 The Hazard of Extrapolating Activity Costs 2.2.12 Chapter 4. Adapting the Closed-Loop Model to Additional Settings 2.2.13 4.1 Government Cost-Recovery Agencies 2.2.14 4.2 Government Program Agencies 2.2.15 4.3 Shared Services Settings 3 PART 2: IMPLEMENTING THE ACTIVITY-BASED PLANNING AND BUDGETING PROCESS 3.1 Chapter 5. An Overview of Part 2 3.2 Chapter 6. Initiating and Planning an ABPB Project 3.3 6.1 Initiating an ABPB Project 3.3.1 6.1.1 Step 1: Understand the Strategy to Support the Goals of the Organization 3.3.2 6.1.2 Step 2: Identify the Time and Resources Required for the Effort 3.3.3 6.1.3 Step 3: Draft a Communication Plan 3.3.4 6.1.4 Step 4: Develop a Project Charter 3.3.5 6.1.5 Step 5: Enlist a Project Champion for the Effort 3.4 6.2 Planning an ABPB Project 3.4.1 6.2.1 Step 6: Select an Appropriate Project Pilot Site 3.4.2 6.2.2 Step 7: Develop the Project Plan, Listing all Associated Milestones 3.4.3 6.2.3 Step 8: Quantify Risks and Develop Risk Mitigation Plans 3.4.4 6.2.4 Step 9: Identify the Required Data sources 3.4.5 6.2.5 Step 10: Develop a Project Evaluation Plan 3.5 Chapter 7. Developing the Initial Closed-Loop Model 3.5.1 7.1 Designating the Organization’s Planning Period 3.5.2 7.2 Understanding the Building Blocks of the Closed-Loop Model 3.5.2.1 7.2.1 Demands for Products and Services 3.5.2.1.1 7.2.1.1 Demand Volumes 3.5.2.1.2 7.2.1.2 Forecasting Demand 3.5.2.2 7.2.2 Activities Consumed by Demand 3.5.2.3 7.2.3 Resources Consumed by Activities 3.5.2.4 7.2.4 Differentiating Between Activities and Services 3.5.3 7.3 Modeling at the Right Level of Detail 3.5.4 7.4 Connecting the Building Blocks - Consumption Rates, Drivers, and Metrics 3.5.4.1 7.4.1 Determining Activity Drivers, Resource Drivers, and Consumption Rates 3.5.4.2 7.4.2 Determining Consumption Measures 3.5.5 7.5 Estimating Consumption Rates and Drivers 3.5.5.1 7.5.1 Collecting Historical Data and Performing Regression Analysis 3.5.5.2 7.5.2 Finding Relationships using Analogous Data 3.5.5.3 7.5.3 Using Expert Knowledge 3.5.5.4 7.5.4 Combining Methods 3.5.6 7.6 Defining Resource Capacities 3.5.6.1 7.6.1 Understanding Fixed and Variable Resources 3.5.6.2 7.6.2 Understanding the Costs and Implications of Unused Capacity 3.5.7 7.7 Identifying Internal Increases to Demand 3.5.8 7.8 Summary 3.6 Chapter 8. Using the Closed-Loop Model to Manage the Business 3.6.1 8.1 Lever 1 - Demand Quantities 3.6.2 8.2 Lever 2 - Consumption Rates 3.6.3 8.3 Lever 3 - Resource Capacity 3.6.4 8.4 Lever 4 - Resource Unit Costs 3.6.5 8.4 Lever 5 - Product and/or Service Pricing 3.6.6 8.6 Management Responsibility and Viewpoints 3.7 Chapter 9. The ABPB Process: Sustaining the Closed-Loop Model 3.7.1 9.1 The Supporting Elements of the ABPB Process 3.7.1.1 9.1.1 Review the Business Strategy 3.7.1.2 9.1.2 Update the Responsibilities and the Performance Measurement System 3.7.1.3 9.1.3 Update the Demand Forecast 3.7.1.4 9.1.4 Update the Activity and Resource Relationships 3.7.1.5 9.1.5 Run the Closed-Loop Model 3.7.1.6 9.1.6 Integrate the Results into the Formal Budget 3.7.1.7 9.1.7 Execute the Plans and Assess Results 3.7.2 9.2 Change Management 3.7.2.1 9.2.1 Transitioning from Project Management to Managing the ABPB Process 3.7.2.1.1 9.2.1.1 Forming the ABPB Process Team 3.7.2.1.2 9.2.1.2 Documenting the ABPB Process 3.7.2.1.3 9.2.1.3 Providing Effective Training 3.7.2.2 9.2.2 Developing a Process that is not Intrusive 3.7.2.3 9.2.3 Managing Applicable Knowledge 3.7.2.4 9.2.4 Maintaining the Visibility of the ABPB Process 3.8 Chapter 10. A Deeper Examination of the Building Blocks 3.8.1 10.1 Defining and Forecasting Demand 3.8.1.1 10.1.1 Determining the Volume of Demand 3.8.1.2 10.1.2 Applying and Using Revenue Forecasts 3.8.1.3 10.1.3 The Role of Volume and Revenue Forecasting Tools and Techniques 3.8.1.4 10.1.4 Transfer Prices 3.8.2 10.2 Measuring Consumption Rates 3.8.2.1 10.2.1 Estimating Fixed Consumption Rates 3.8.2.2 10.2.2 Managing Variability in Consumption Rates 3.8.3 10.3 Understanding Complex Activity Interactions 3.8.3.1 10.3.1 Successfully Cascading Demands and Activities 3.8.4 10.4 Understanding the Relationship Between the Closed-Loop Model’s Financial Results and Cash Flows 3.9 Chapter 11. The Architecture of an ABPB System 3.9.1 11.1 Data Sources 3.9.1.1 11.1.1 Existing Enterprise and/or Legacy Systems 3.9.1.2 11.1.2 Activity-Based Costing Models 3.9.1.3 11.1.3 Interviews 3.9.1.4 11.1.4 Surveys 3.9.1.5 11.1.5 Sampling 3.9.1.6 11.1.6 Time Studies 3.9.1.7 11.1.7 The Optimal Level of Detail 3.9.2 11.2 The Activity-Based Data Store 3.9.3 11.3 Reporting and Analysis 3.9.4 11.4 The ABPB Data Management System 4 PART 3: DERIVING VALUE FROM THE ACTIVITY-BASED PLANNING AND BUDGETING PROCESS 4.1 Chapter 12. Integrating the ABPB Process with the Traditional Budgeting Process 4.1.1 12.1 An Overview of Part 3 4.1.2 12.2 Traditional Budgeting Processes 4.1.3 12.3 The Necessity of Co-existence 4.1.4 12.4 Transition and Expansion 4.1.5 12.5 The Final, Formal Budget 4.1.6 12.6 Cash Flow 4.1.7 12.7 Summary 4.2 Chapter 13. Linking the ABPB Process with other Strategic Management Initiatives 4.2.1 13.1 Balanced Scorecard 4.2.2 13.2 Performance Measurement and Benchmarking 4.2.3 13.3 Asset and Capacity Management 4.2.4 13.4 Continuous Process Improvement (including Six Sigma) 4.2.5 13.5 Risk Management 4.2.6 13.6 Reward for Performance 4.3 Chapter 14. Summary and Conclusions 4.3.1 14.1 Benefits of the Activity-based Planning and Budgeting Process 4.3.2 14.1.1 Benefits to the Planning and Budgeting Process 4.3.3 14.1.2 Benefits to Other Management Processes 4.3.3.1 14.2 Our Underlying Philosophy and the Path Forward 4.3.4 Appendicies 4.3.4.1 Appendix A. A Glossary of Terms 4.3.4.2 Appendix B. Bibliography 4.3.4.3 Appendix C. Index

Table Of Contents

Executive Summary

Foreword

A Word from the Publisher

Figures and Tables

Part 1: The Activity-Based Planning And Budgeting Closed-Loop Model

Chapter 1. A New Approach

1.1 The Organizational Value of Budgeting and the Budget Process

1.2 The Challenges Facing Traditional Budgeting Practices

1.2.1 Issues with Preparing the Budget

1.2.2 Issues of Effectiveness and Efficiency

1.2.3 Issues with People

1.3 The CAM-I ABPB Closed-Loop Model

1.4 The Challenges Overcome and Not Overcome with the Closed-Loop Model

1.5 The Necessary Knowledge Base

1.6 An Overview

Chapter 2. Details of the ABPB Closed-Loop Model

2.1 An Overview

2.2 Stage 1: Achieving Operational Balance

2.2.1 Step 1: Set Quantitative Demands

2.2.2 Step 2: Determine Resource Requirements

2.2.3 Step 3: Balance Resource Requirements with Resource Supply

2.3 Stage 2: Achieving Financial Balance

2.3.1 Step 4: Determine Resource Costs and Derive Financial Results

2.3.2 Step 5: Add Non-Activity-Based Costs to Obtain Total Financial Results

2.3.3 Step 6: Balance Financial Results with Financial Targets

2.3.4 Step 7: Create a Formal Budget

2.4 An Additional Consideration: Excess Capacity

Chapter 3. An Application of the Closed-Loop Model

3.1 Summary

3.2 Base Period, Operational and Financial Balance

3.2.1 Operational Balance

3.2.2 Financial Balance

3.3 Next Period, Operational and Financial Balance, Scenario 1

3.4 Next Period, Operational and Financial Balance, Scenario 2

3.5 Multiple Activities for Multiple Products and Services

3.6 The Hazard of Extrapolating Activity Costs

Chapter 4. Adapting the Closed-Loop Model to Additional Settings

4.1 Government Cost-Recovery Agencies

4.2 Government Program Agencies

4.3 Shared Services Settings

PART 2: IMPLEMENTING THE ACTIVITY-BASED PLANNING AND BUDGETING PROCESS

Chapter 5. An Overview of Part 2

Chapter 6. Initiating and Planning an ABPB Project

6.1 Initiating an ABPB Project

6.1.1 Step 1: Understand the Strategy to Support the Goals of the Organization

6.1.2 Step 2: Identify the Time and Resources Required for the Effort

6.1.3 Step 3: Draft a Communication Plan

6.1.4 Step 4: Develop a Project Charter

6.1.5 Step 5: Enlist a Project Champion for the Effort

6.2 Planning an ABPB Project

6.2.1 Step 6: Select an Appropriate Project Pilot Site

6.2.2 Step 7: Develop the Project Plan, Listing all Associated Milestones

6.2.3 Step 8: Quantify Risks and Develop Risk Mitigation Plans

6.2.4 Step 9: Identify the Required Data sources

6.2.5 Step 10: Develop a Project Evaluation Plan

Chapter 7. Developing the Initial Closed-Loop Model

7.1 Designating the Organization’s Planning Period

7.2 Understanding the Building Blocks of the Closed-Loop Model

7.2.1 Demands for Products and Services

7.2.1.1 Demand Volumes

7.2.1.2 Forecasting Demand

7.2.2 Activities Consumed by Demand

7.2.3 Resources Consumed by Activities

7.2.4 Differentiating Between Activities and Services

7.3 Modeling at the Right Level of Detail

7.4 Connecting the Building Blocks - Consumption Rates, Drivers, and Metrics

7.4.1 Determining Activity Drivers, Resource Drivers, and Consumption Rates

7.4.2 Determining Consumption Measures

7.5 Estimating Consumption Rates and Drivers

7.5.1 Collecting Historical Data and Performing Regression Analysis

7.5.2 Finding Relationships using Analogous Data

7.5.3 Using Expert Knowledge

7.5.4 Combining Methods

7.6 Defining Resource Capacities

7.6.1 Understanding Fixed and Variable Resources

7.6.2 Understanding the Costs and Implications of Unused Capacity

7.7 Identifying Internal Increases to Demand

7.8 Summary

Chapter 8. Using the Closed-Loop Model to Manage the Business

8.1 Lever 1 - Demand Quantities

8.2 Lever 2 - Consumption Rates

8.3 Lever 3 - Resource Capacity

8.4 Lever 4 - Resource Unit Costs

8.4 Lever 5 - Product and/or Service Pricing

8.6 Management Responsibility and Viewpoints

Chapter 9. The ABPB Process: Sustaining the Closed-Loop Model

9.1 The Supporting Elements of the ABPB Process

9.1.1 Review the Business Strategy

9.1.2 Update the Responsibilities and the Performance Measurement System

9.1.3 Update the Demand Forecast

9.1.4 Update the Activity and Resource Relationships

9.1.5 Run the Closed-Loop Model

9.1.6 Integrate the Results into the Formal Budget

9.1.7 Execute the Plans and Assess Results

9.2 Change Management

9.2.1 Transitioning from Project Management to Managing the ABPB Process

9.2.1.1 Forming the ABPB Process Team

9.2.1.2 Documenting the ABPB Process

9.2.1.3 Providing Effective Training

9.2.2 Developing a Process that is not Intrusive

9.2.3 Managing Applicable Knowledge

9.2.4 Maintaining the Visibility of the ABPB Process

Chapter 10. A Deeper Examination of the Building Blocks

10.1 Defining and Forecasting Demand

10.1.1 Determining the Volume of Demand

10.1.2 Applying and Using Revenue Forecasts

10.1.3 The Role of Volume and Revenue Forecasting Tools and Techniques

10.1.4 Transfer Prices

10.2 Measuring Consumption Rates

10.2.1 Estimating Fixed Consumption Rates

10.2.2 Managing Variability in Consumption Rates

10.3 Understanding Complex Activity Interactions

10.3.1 Successfully Cascading Demands and Activities

10.4 Understanding the Relationship Between the Closed-Loop Model’s Financial Results and Cash Flows

Chapter 11. The Architecture of an ABPB System

11.1 Data Sources

11.1.1 Existing Enterprise and/or Legacy Systems

11.1.2 Activity-Based Costing Models

11.1.3 Interviews

11.1.4 Surveys

11.1.5 Sampling

11.1.6 Time Studies

11.1.7 The Optimal Level of Detail

11.2 The Activity-Based Data Store

11.3 Reporting and Analysis

11.4 The ABPB Data Management System

PART 3: DERIVING VALUE FROM THE ACTIVITY-BASED PLANNING AND BUDGETING PROCESS

Chapter 12. Integrating the ABPB Process with the Traditional Budgeting Process

12.1 An Overview of Part 3

12.2 Traditional Budgeting Processes

12.3 The Necessity of Co-existence

12.4 Transition and Expansion

12.5 The Final, Formal Budget

12.6 Cash Flow

12.7 Summary

Chapter 13. Linking the ABPB Process with other Strategic Management Initiatives

13.1 Balanced Scorecard

13.2 Performance Measurement and Benchmarking

13.3 Asset and Capacity Management

13.4 Continuous Process Improvement (including Six Sigma)

13.5 Risk Management

13.6 Reward for Performance

Chapter 14. Summary and Conclusions

14.1 Benefits of the Activity-based Planning and Budgeting Process

14.1.1 Benefits to the Planning and Budgeting Process

14.1.2 Benefits to Other Management Processes

14.2 Our Underlying Philosophy and the Path Forward

Appendicies

Appendix A. A Glossary of Terms

Appendix B. Bibliography

Appendix C. Index

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