The Integrated Reconciliation Review

The Integrated Reconciliation Review – Deploying Strategy With Integrated Business Planning
Number 5 of 7 in the Oliver Wight Strategy Deployment white paper series
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In case you missed it – read the other papers in the series:

White Paper #1: Connecting Strategy to Execution – Deploying Strategy With IBP
White Paper #2: The Portfolio Review – Deploying Strategy With IBP
White Paper #3: The Demand Review – Deploying Strategy With IBP
White Paper #4: The Supply Review – Deploying Strategy With IBP

Introduction

This series of white papers looks at how to integrate the business strategy with operations in an organization through the Integrated Business Planning (IBP) process. A mature IBP process can operationalize and deliver individual business unit and functional strategies and plans in line with the overall corporate objective (see figure 1).

The first paper in this series, ”Connecting Strategy to Execution,” introduced this concept using an analogy of portfolio investment for retirement planning. The three subsequent papers focused on the responsibilities of the first three steps in the Integrated Business Planning process – The Portfolio Review, The Demand Review, and The Supply Review – in delivering a return on investment in line with business goals.

Through their respective IBP Reviews, the portfolio and demand teams are responsible for considering the market, which products should be introduced or retired, their impact on demand, and how to meet customer expectations and improve performance. The supply team, meanwhile, evaluates what it will take to meet the request for product from the portfolio and demand teams in terms of manufacturing, labor, distribution, and logistics, as well as the cost and service implications. They will decide if the supply plan can meet the demand plan within the confines of the supply chain strategy and available resources and provide alternatives if not. Across all these reviews, assumptions, risks, and opportunities (AROs) are documented and managed.

This paper considers the role of the fourth step in the IBP process, the Integrated Reconciliation Review (IRR). In the IRR, the unresolved issues from the previous three steps are filtered and, where they cannot be addressed, prepared for escalation to the MBR. The IRR is also where the comprehensive operational plan is financialized and compared to appropriate commitments, e.g., annual operating plans or strategic plans, to identify gaps. Identified gaps and recommended actions to close them are also escalated for decision by the executives in the MBR.

Reconciliation throughout the IBP cycle

It is essential to understand that reconciliation should happen continuously throughout the monthly cycle, so problems can be resolved as close to the issue as possible. For urgent issues within their delegations of authority, the IBP review leaders should immediately resolve issues that cross between reviews or functional boundaries before the scheduled IRR. A successful Integrated Business Planning process utilizes the robust cross-functional network of IBP review leaders to communicate and, where possible, resolve issues as they arise at any time during the IBP cycle.

For example, suppose the Supply Review Leader learns of an impending disruption in a manufacturing plant and informs the Demand Review Leader and others immediately. In that case, they may be able to manage demand to mitigate the impact and meet their commitments per the strategy. If the issue is raised, with sufficient time, the IRR may be the right place for the conversation. Still, the IBP team should always be looking to address issues at the appropriate level and within their decision rights to avoid escalating unnecessary issues to the MBR. Any decisions made in or between the review steps should be managed within the IBP process and communicated appropriately to the IRR/MBR reviews.

The purpose of the Integrated Reconciliation Review is to establish the agenda and content for the final stage of the IBP process – The Management Business Review (more about this in the sixth white paper).

In the Integrated Reconciliation Review, a group of cross-functional leaders come together to review:

A. The financialized operational plans;

B. Any material changes in assumptions, risks, and opportunities from the previous cycle – including input from other reviews, decisions made, and company-wide projects;

C. Any gaps between the IBP plan and the Annual Operating Plan and strategy, as well as recommendations to close those gaps.

An effective IRR provides an efficient prioritization and filtering process focusing on gaps to the plan and strategy. When done right, it prevents the executive team in the MBR from suffering detail dysfunction. Only the relevant and essential information is passed on to the leadership team in the MBR, helping it to focus on making the decisions required for delivering the plan and long-term strategic objectives.

Who is involved?

The Integrated Reconciliation Review includes representatives from Finance, the Portfolio, Demand and Supply Reviews, along with other key stakeholders, as needed.

There are several options when choosing the IRR leader. Perhaps most commonly, the IBP process leader, as the facilitator of the MBR, runs the IRR because they are acutely aware of what the MBR owner is looking for, and familiar with the content presented in the MBR. In another case, a finance manager who reports to the CFO brings financial understanding and an arm’s length perspective and makes a good choice to lead the IRR. There is no right answer regarding who should lead the IRR. What is clear is that this person should be capable of interacting with all levels and functions across the organization, seeing the ”big picture” and driving consensus across the team.

A critical step in the process

We have seen organizations that are inclined to skip the Integrated Reconciliation Review. Some say that because the Management Business Review includes the owners of the Portfolio, Demand, and Supply Reviews, the IRR, which includes the leaders of those same reviews, is unnecessary. Other multinational companies have separate IBP cycles for different regions or platforms that must be consolidated to segment and group levels. In an already busy monthly cycle, this consolidation requires time, so eliminating the integrated reconciliation step may be considered to “speed things along.”

Understandably, companies are looking for ways to streamline the process, but dropping the IRR is a grave mistake. At Oliver Wight, we believe the Integrated Reconciliation Review is a critical step in the IBP cycle.

Efficiency in the MBR

The Integrated Reconciliation Review ensures a smooth-running Management Business Review. We find that when the IRR process is poorly executed, or skipped entirely, executives are likely to spend time in the MBR tracking down and discussing the reasons for performance gaps instead of making decisions on recommendations to close those gaps. The leadership team will likely become increasingly frustrated, needing a clearer business view. Rather than focusing on strategic long-term issues, it will be drawn into the weeds unnecessarily.

As an example, one client we worked with initially saw its MBR meetings turn into hunting expeditions to close performance gaps. Over time, as the Integrated Reconciliation Review Leader and the team became better acquainted with the key business drivers and where they should be focusing, this started to improve. A key indicator of this improvement was when a multi-million-dollar gap in the EAME demand plan was identified in the IRR. The demand leader, in real time, accessed the Demand Review output summary and pulled the commentary explaining the gap, a delayed contract with a national health service in the region. This context was used to explain the gap to leadership in the MBR and the appropriate team was tasked with developing a response plan in time for the next cycle’s MBR.

Value for IBP leaders

Additionally, the Integrated Reconciliation Review is of great value to IBP process leaders. This step is their first opportunity to get a comprehensive overview of the business, incorporating strategy, portfolio, demand and supply, and the financials. It is a chance for them to ensure the health of the IBP process, adherence collectively and comprehensively to its principles, and that the correct information reaches senior decision-makers.

An often-overlooked benefit of the IRR is that it provides a fantastic opportunity to develop future executives. The IRR team has a line of sight to key business drivers and strategies and is tasked with bringing proposed solutions to ensure the business delivers its goals to the leadership team. It empowers them to take ownership of their process and make decisions at their level. They learn what is important to the executives and how they make decisions, which enables them to better filter the relevant information to be passed up to the MBR. This is all great training for a future executive role in the business.

Preparation for the MBR

One of the frustrations IBP review leaders often voice with the Integrated Reconciliation Review is that they have a compressed time frame at the end of the month to gather all the information and organize it in time to present it to the executives in the MBR.

However, there is no need to wait for all the reviews to be finished before beginning to collect inputs for the IRR. In fact, the best practice is to start as soon as the information from each review meeting is available – e.g., the PR summary should be ready early in the month. This is achieved by creating a simple preparation process with deliverables and timing, what is needed from whom and by when, and sharing it with those who need to supply the data. A monthly cadence can then be established with standard inputs, placing accountability for its submission on the relevant members of the IRR team.

It is generally true that the time between the IRR and MBR is limited, and a pre-read should be distributed 48 hours before the MBR. Establishing an efficient and proactive preparation process is essential. Another best practice is to come into the IRR with a draft MBR deck for the team of IBP review leaders to filter and finalize.

What happens when the IRR is ineffective?

A poorly conducted IRR, or no IRR at all, can cause big problems. The MBR agenda may be inconsistent with the executive team’s expectations, and the story may not hold together if there are gaps in data or a lack of accountability for the plan. Missed strategic milestones and red metrics may also go unexplained and unaddressed.

In one such case, it took the CEO only minutes into the MBR to ask, ”Why are we even meeting?” The plan numbers were inconsistent between Demand, Supply, and Finance, there was a lack of accountability for relevant parts of the plan, leading to infighting and finger-pointing, and many of the actions that were due had not been completed.

None of this became clear until the MBR, whereas it should have all been caught in the IRR. Although the issues may not have been fixed within the 48-hour turnaround before the MBR, if the IRR had been effective, the executive team could have been aligned and initiated actions to improve. Instead, the CEO took over the MBR meeting, started writing columns of numbers on the whiteboard (generating yet another inconsistent view), and handed out actions to be completed by the next review.

Fortunately for that company, the unpleasant MBR was a wake-up call. During the next IRR, the CFO was in attendance, and Finance made sure there was one set of numbers that had been agreed upon by the appropriate stakeholders. The demand basis and format that worked well for one region was adopted by another and used to show its forward plan. Actions had been completed, or at least plans to complete them were presented.

Appropriate subject matter experts were prepped and invited to the MBR. Following the IRR, the team members (IBP process leaders) updated MBR team members (IBP process owners) to avoid surprises in the MBR. In this way, the process got back on the right track, and the executives had a clearer view of their business, were aligned and accountable for their plans, and had a much more credible basis for making decisions.

Getting to this level of competency takes time. When implementing IBP, it is common to establish a glide path, i.e., a multi-month plan describing how the process will improve and mature over time. The process will not be mature after just a cycle or two, so it is helpful to set milestones for progression. It helps to set expectations with leadership (don’t expect perfection immediately) and gives the IBP team members attainable levels of process improvement with a means to measure progress. One company’s practice was maintaining an overall list of improvements that needed to be addressed, with an action item of prioritizing the top three each month. This ultimately created a greater focus and success rate and accelerated the process improvement rate.

Key elements of the Integrated Reconciliation Review

Financialized operational plans

As the consolidation and financialization stage of the IBP process, the Integrated Reconciliation Review is the first point of the cycle where the process leaders have sight of the financials across the entire business. With an extended horizon, this forward view includes the impact of potential strategic changes, e.g. new products, markets, or capital investments.

One of the Demand Review outputs is an unconstrained demand plan, which outlines what the business can sell given its products, sales team, the market, and customer demand, without considering any supply constraints to delivering it. The unconstrained demand plan provides an overview of the available opportunity. The supply team takes this unconstrained view and looks at what is feasible, then constrains the demand plan to what can be delivered and the reasons why, e.g., staff levels, equipment, time, etc. The resulting constrained plan is financialized to create the plan of record over the 24-to-36-month planning horizon.

Since we are on the topic of financial plans, this is a good point for a brief aside. While the financials of what can actually be supplied (and therefore sold) is the basis for the financial projection, it is also important to financialize the sales that could be achieved according to the unconstrained demand plan, without consideration of the supply constraints. This allows us to value the gap between constrained and unconstrained demand and ensure the business does not lose sight of the potential demand opportunities. If the unconstrained demand plan rolls up to $120m and our financial projection is $100m, there is a $20m opportunity. This should drive conversations with leadership about how to capture this incremental demand.

Input from other IBP reviews

As well as plan financials, the Integrated Reconciliation Review also includes a discussion of updates to the assumptions, risks, and opportunities (AROs), detailed in the output summaries from the Portfolio, Demand, and Supply Reviews. IBP review leaders should consider changes to these AROs and raise to the MBR only those that are material and relevant to the executive conversation. Reviewing the appropriate AROs gives leadership a feel for the soundness or riskiness of the plan as well as a view of how the organization is thinking about capturing specific upsides and mitigating specific downsides.

Significant external trends and competitive actions, often arising from the Portfolio Management Review, are also vetted in the IRR for presentation in the MBR to ensure executives have a robust conversation about the external landscape and consider its implications for the business and its strategy.

Performance gaps and decision-making

Creating a streamlined agenda and content for the MBR requires discussion and decisions around performance gaps. In a business operating an effective IBP process, IBP review leaders should be empowered to make decisions, either at the Integrated Reconciliation Review or, even better, before the IRR by communicating with the leaders of other reviews (ongoing reconciliation). This ensures only necessary issues that require a decision by the leadership team are presented at the MBR.

A key part of the IRR is reviewing the latest financial projections as compared to the Annual Operating Plan or budget and considering what actions can be taken to close any gaps. Figure 8 provides a graphical representation of gaps to plan, with a bridge showing which areas have underperformed to create the gap, as well as areas or opportunities where actions could be taken to close the gap and to what extent. The bricks in such a bridge diagram are often aligned with the primary assumptions or drivers of the plan, e.g., innovation, price, competition, and the risks and opportunities around them. This method provides a means to keep everyone aligned on what underpins the plan and where actions will be taken. The team should spend their time solving the gap, not debating its exact size. Beyond looking at what has gone wrong to cause the gaps, this is also the time to look at what has gone well, as this can also inform suggested gap-closing opportunities.

Identifying gaps is not limited to comparisons with the annual budget but also includes testing progress against longer-term strategic objectives. For one company, their near-term commercial performance was meeting the annual financial plan, because of strong margins; however, their long-term goal of selling-out the volume from soon-to-be upgraded processing facilities, which allowed access to much higher margins, was well behind plan. While gaps to strategic goals may seem less urgent, it is essential that these are identified and course corrections are made to get the business back on track.

Scenario Planning

Along with changes, gaps, and an external view, the IRR must escalate necessary decisions to the MBR, and scenario planning is an important source of those recommendations. One CEO summed it up by saying, “I don’t want to have any knowable surprises in the MBR.” There are unknowable surprises, e.g., a tornado hitting a manufacturing site; however, there are some events that can be anticipated. IBP, specifically the IRR, provides an excellent forum for scenario planning these knowable surprises for potential timing, impacts, and responses. The IRR provides the cross-functional perspective and extended horizon which allows the organization time to respond to change rather than reacting to it, when enabled by integrated scenario planning. The output of this scenario planning is a decision template (figure 9), which should be reviewed and finalized in the IRR and presented in the MBR. It is a concise one-page document detailing the key information the leadership team needs to make the required decision. It answers the fundamental questions: What is the issue? What is the background information surrounding the issue? What different options have been explored to resolve the issue? What are the critical deadlines? Which option does the team believe is best, and what is the financial impact of doing this?

The decision template helps the leadership team understand mid-level management’s thinking and discussion before the MBR in a streamlined, standardized format. With process discipline, the MBR members will get used to this standard template, to quickly extract what is needed to make a well-informed decision.

Company-wide projects

The IRR also provides an opportunity to raise issues that may impact business strategy, which would not necessarily be raised in the previous IBP review meetings, because they span across the company. For example, a major ERP implementation is not specifically a supply, demand, or portfolio issue. The IRR provides a place to discuss this type of initiative and its impact on the different functions and the business as a whole.

Alignment with strategy

Strategic milestones

The Integrated Reconciliation Review is also a natural point during the IBP cycle to test the alignment of the IBP plan with the strategy. It is an opportunity to not only review the delivery of strategic milestones but also to verify that once the milestones are hit, they are having the desired effect and moving the organization closer to its long-term goals. While the business strategy should be durable (i.e., not changed every month or quarter), it should be consistently tested against information from different business areas to ensure validity, and revised as needed.

Leadership should be asking questions, such as:

Is the product portfolio evolving in line with corporate objectives?
Are demand resources focused on the markets, regions, channels, and customers identified as strategically important?
Are capital investments developing capacity to support future product and geographic aspirations?
Is an external perspective being brought into the MBR to test strategic assumptions – market trends, regulatory changes, competitive actions?

Connecting execution with strategy

A key goal of Integrated Business Planning is to align the business strategy with execution. The business strategy details the organization’s direction in the long term, i.e., over the next three to ten years. This informs the priorities and initiatives to be carried out over the mid-term, i.e., one to three years, and from those, short-term business goals are defined for each function, department, and team.

Note in figure 10, that the cascade of strategic direction down to execution is not a one-way process. The feedback loop between short-term execution and back up to the overall business strategy is critical. There is no point in having a fantastic strategy if, when it filters down to the day-to-day activities of the business, it does not work in practice.

In every review in the IBP cycle, plans should be tested against and aligned with the overall business strategy. This is another reason why everyone in the business should have a line of sight between their role and the strategy, at least at their functional level. A well-defined and clearly communicated strategy alleviates leadership from having to get involved in every decision. The IRR provides a last chance to ensure the alignment between execution and strategy has been considered in each conversation before reaching the MBR.

Summary

The Integrated Reconciliation Review is where the outputs from the IBP process reviews, financials, and other relevant information are brought together to be reviewed, filtered, and refined before being packaged for elevation to the Management Business Review. The IRR is critical to ensure the MBR fulfills its purpose as a meeting in which the executive team can make the required decisions effectively and efficiently, supporting a focus on a minimum 24-month horizon and the long-term business strategy.

In a mature IBP process, participants in the IRR should be aware of the key strategic drivers of the business, the important internal developments, and external trends. Armed with this information and consistent feedback from those in the MBR meeting, the IRR Leader should anticipate and answer the leadership team’s questions “before they are even asked.”

Simply put, the IRR is the working session that prevents the MBR from becoming a working session. Only when the IRR has done the work to thoroughly set the table will the MBR be an efficient and effective executive decision-making session.