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The Advantages of a Driver-Based Rolling Forecast

  • By Nilly Essaides
  • Published: 9/4/2015
mazeWhen implementing a new rolling forecasting process, companies are advised to take things in stages and make sure the new approach does not generate extra work.

“The last thing you want to do is increase the burden on the folks doing the forecast,” said Sholape Kolawole, EPM transformation associate principal of The Hackett Group. To this end, it’s useful for companies to employ a driver-based rolling forecast. The idea is to really figure out what moves the needle, then make sure that there’s a connection between that and the forecast. That’s what financial services company Euroclear has attempted to put in place.

Identifying the right drivers

Euroclear is a platform that settles different transactions. It’s a very risk averse and stable business. In 2012, the management committee wanted to look beyond the current fiscal year, and so the company’s financial planning and analysis (FP&A) function began running a rolling 18-month forecast. “The forecast is refreshed three times a year,” said Jose Gozzi, manager of FP&A. “The third forecast also covers the budget for the next fiscal year. The forecast includes the lines of the P&L that cover revenue for the group, as well as all different costs; administrative and direct.”

The forecast also covers the various business entities (12 legal entities). Additionally, there are three different internal departments that contribute: the client facing group (operations); the IT group (because of its importance, IT does zero-based forecasting bottoms-up three times per year); and the support divisions, which include finance, marketing and HR. For the first forecast, all the divisions do a classic bottoms-up forecast, as well as the budget.

“In terms of revenue drivers, the company looks at markers like the number of transactions, market outlook, and type of transactions,” Gozzi explained. “On the cost side, headcount is one of the most important drivers—60 percent of the cost is headcount driven. We have a payroll model to collect data and model it. Different parameters are based on inflation, etc. for each country in which we operate, driven by regulatory constraints and the level of competition.”

For IT, the key drivers are the projects Euroclear embarks on and its contracts with the European entities for application development. “These mandates are based on assumptions and guidelines. We estimate the rate: that’s another important driver,” Gozzi said.

In regard to infrastructure, the rolling forecast is basically the capital base and depreciation. “We have a lot of maintenance costs for our infrastructure,” said Gozzi. “We make assumptions about the cost of support using contacts. It’s very directly driven by outstanding support contracts.”

When implementing the new forecasting approach, Euroclear didn’t encounter any substantive obstacles, according to Gozzi. It was mostly a question of the maturity of each division. IT was already very mature and had the processes in place. Others, like operations, needed to formalize their approach a little more regarding what is likely to happen next year. “Once they understood why we do it, they gained the skills,” Gozzi said.

Added Gozzi: “The forecast is our GPS; it provides direction of where we’re going. What’s important is to see increase in new business, and to understand how that will affect cost and keep in line with revenue, anticipate that in advance and mitigate that increase to achieve greater profits. Without the farther outlook, it’s difficult to take action and drive the business.”

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