Shared complexity is about the only similarity between the forecasting models of the eight independent businesses that make up Hunt Consolidated, Inc. (HCI) — the diversified holding company with subsidiaries that engage in oil and gas exploration and production, real estate development, power, ranching, agriculture, and private equity investments. Hunt Oil Company (HOC), for example, operates a capital expense-based business with multiple simultaneous projects spanning several years in shale formations around the world. Identifying revenue streams and tracking performance on a project-by-project basis can be as challenging as tapping into a new oil reserve. The business model of Hunt Realty Investments (HRI) may be just as complex, but its forecasting models might instead rely on cash flow analysis or waterfall structure calculations, models that would be of little use to another HCI business.
Because of these variations, budgeting and forecasting had always been viewed as the responsibility of the independent business units, with minimal centralized planning functions or processes that rolled up to HCI. Often, deep industry knowledge and expertise were counted on as the most important tools for creating annual forecast models. And as an 80-year-old business and one of the largest independent oil and gas companies in the world, HOC clearly had in-house expertise, but these experts didn’t necessarily always see a need for change.
A New Look at Planning
Change, though, was on the horizon. John Gooch is HCI’s Business Warehouse Manager, reporting to the office of the CFO and supporting the reporting needs of all the independent business units. He describes the planning operations at HOC prior to an organizational overhaul that started about three years ago. “We were aware that our planning tools needed to be updated and were focused on data capture more than anything else,” he says. “There wasn’t a formalized group tasked with capital planning for the business as a whole.”
The catalyst for change at HOC — which would then lead to the other business units — began with the hiring of a new planning director with business intelligence (BI) expertise who knew the value of centralized planning based on a robust BI strategy. Full-scale change wouldn’t happen overnight, though. Without a strong base of well-defined budgeting and forecasting processes, it was understood that a technology solution would have to follow a process reengineering.
According to Gooch, this meant forming a dedicated capital planning and forecasting team at HOC and supporting this team by changing reporting requirements from its existing SAP Business Warehouse (SAP BW) system. With more insight into capital expense transactions out of SAP ERP, the team could start to think about long-term forecasting in the context of defined processes to drive actuals rather than disparate month-by-month well-educated guesswork.
“It required system-level changes, and this provided the impetus for us to look at supporting the rest of the organization with a renewed focus on planning,” says Gooch. “With a strategy first, we could then manage to do that with a solution.”
Steering Toward an Enterprise-Wide Planning Tool
Coinciding with this change at HOC was a new directive from the parent company that required strategic plans from the business units rather than standard annual budgets or monthly forecast cycles. So when a steering committee was formed with senior executives from each of the businesses to explore a solution, it swiftly ruled out a quick-fix approach in favor of an enterprise-wide tool that would deliver newfound visibility into planning operations as a whole and, whenever possible, avoid disruption to the models favored by the independent business units.
With an infrastructure that included integrating SAP ERP and an aging SAP BW system with a non-SAP database, the organization decided on a phased implementation of SAP Business Planning and Consolidation, version for SAP NetWeaver, starting with a rollout at HOC first before deploying the solution to the other business units. The timing — early 2012 — coincided with SAP Business Planning and Consolidation 10.0 becoming generally available on SAP BW 7.3, with support for running the system on SAP HANA beginning a few months later.
This coincidence led to one of the biggest decision points: With a need to upgrade its business warehouse to support SAP Business Planning and Consolidation 10.0, HCI had to figure out if it made more sense to upgrade the business warehouse while maintaining its existing database infrastructure, or start fresh and take the opportunity to become an early adopter of SAP HANA. The business chose SAP HANA.
“When we looked at the cost of SAP HANA against ending existing maintenance costs, it was comparable, and then we factored in that SAP HANA would position us well for what the future holds with in-memory technology,” says Gooch. “We decided to stand up a new environment, partly because it involved moving to a new database, but also because a lot of what we built into our aging BW system was antiquated, and this gave us the opportunity to re-architect from the ground up.”
It would also save HCI from having to wait to complete the upgrade before beginning its SAP Business Planning and Consolidation implementation, and the goal was to have the solution in place for HOC in time to produce its 2013 annual plan. However, with the intention of implementing the solution for each business, HOC couldn’t just configure the new system for the stand-alone business without factoring in the requirements of the other business units.
This complication is where input from the steering committee proved valuable, and helped allay concerns that SAP Business Planning and Consolidation was intended strictly for the oil business. “It was important to have buy-in from the various business units beyond what was now being required of them by HCI for submitting strategic plans,” says Gooch. “When we started, the business units were telling us that their models were just too complex. There was a lot of discussion about their pain points and what they needed, and we provided assurances that SAP Business Planning and Consolidation would help.”
With HRI, for example, Gooch essentially guaranteed that SAP Business Planning and Consolidation could be configured so that a back-end investment team could pull data in the model it needed to satisfy its reporting requirements, and continue to rely on familiar spreadsheets for the cash flow analysis and reports that drove daily business and helped determine whether or not to invest in new properties or adjust cash distribution from existing investments. The financial planning team could access a far more granular view of long-term forecasting with a more integrated solution; better generate summarized financials of investments with standard profit and loss statements, balance sheets, and cash flow statements; and not have to worry about linked spreadsheets and emails.
“The interplay between the two groups would no longer consist of walking down the hall and putting a stack of paper on someone’s desk,” says Gooch. “Instead, the business will perform its work like it’s used to, and the data will go to SAP Business Planning and Consolidation, which will have its own model for working out financial statement plans.”
Architecting the system this way, with standard rulesets across the business units, would make it easier for everything to roll up to the HCI finance department. Gooch’s team did most of its data modeling in-house, converting BI reporting objects to staging that would enable a straightforward and consistent data pull for SAP Business Planning and Consolidation users across various business units.
“Our strength was more in following a structured approach and similar types of rulesets: That’s not to say there’s a right way or a wrong way, but that’s what meshed with the skills we brought to the table considering the amount and different types of data involved,” Gooch says.
To design the landscape this way, the project team incorporated as many similarities as it could into a harmonizing layer. While planning models might differ considerably between business units, they share basic entries within the general ledger view, such as cost center, account, month, time, etc. A sub-layer would contain the models proprietary for a specific business unit, so HOC would have its own dimensions making it identifiable as such and specific to the way HOC does operational planning. This data would roll up into the harmonizing layers, which then makes it easier to consolidate every plan into a singular finance plan for the organization at the top.
About midway through the project, the team converted its consolidations model into the solution, which became the source of actuals and pushed the data into the various finance models in the harmonizing layer.
“Because we had multiple independent business units, we wanted to balance between providing a planning environment that met a business unit’s specific needs, as simply as possible, while also providing a consistent layer that allowed plans to be integrated and consolidated together,” Gooch says.
HCI married its considerable BW experience with implementation partner itelligence, primarily for the organization’s strong background as system integrators for SAP Business Planning and Consolidation implementations. “itelligence had the industry knowledge as well as the planning and consolidation focus,” Gooch says. “The SAP Business Planning and Consolidation 10.0 application was new to everyone, and there were, of course, some challenges with that, but their design consultants had the deep implementation experience that really paid off in spades.” (For more information about itelligence, refer to the sidebar at the end of the article.)
From Bottom-Up to Top-Down
Because the initial phase of the project focused on HOC, it was the first business unit to understand how drastically planning changed. Prior to the implementation, HOC employed a bottom-up approach for many areas, including operational expenditure (OPEX) planning, where a district superintendent would look at a report from a cost center showing a year’s worth of actuals, which would, for the most part, be the fixed operating expense for the next fiscal year.
With SAP Business Planning and Consolidation, HCI focused on making this a rate-driven variable model. With HOC, for example, operating expenses might go up if three new drilling rigs were about to become operational, and the organization wanted these types of variables reflected in its forecasting.
“Today, we’re not making OPEX projections based at the individual cost center level,” Gooch says. “Bottom-up planning was a lengthy process and it didn’t take into account the complexities of a changing business. Now, HOC’s central planning group can have some input from the district level and can use those assumptions in various scenarios in different ways, so it’s a top-down and rate-driven system.”
“Previously, we couldn’t provide true driver-based planning, and it was a challenge just to create one version of a plan. Now, businesses are modeling all types of scenarios, even within a single forecast cycle, and because they now own it, they have a much clearer understanding of how the data is behaving in the model and how to change it to create another scenario.”
— John Gooch, Business Warehouse Manager, HCI
Exploring Opportunities with SAP HANA
With reengineered planning, Gooch’s team was called on for support far less than it had been when each business unit had its own planning methods, which meant tasking the BW team with running a host of different queries, an offshoot of the patchwork organizational approach. Gooch’s team is in an ideal position to judge the effectiveness of the tool, which includes vastly improved what-if modeling and self-service opportunities that Gooch says are some of the main advantages.
“Previously, we couldn’t provide true driver-based planning, and it was a challenge just to create one version of a plan. Now, businesses are modeling all types of scenarios, even within a single forecast cycle, and because they now own it, they have a much clearer understanding of how the data is behaving in the model and how to change it to create another scenario,” Gooch says. With SAP HANA as the underlying platform on which SAP Business Planning and Consolidation and SAP BW run, queries that had taken hours to render were suddenly taking seconds.
“It’s everything it promised,” Gooch says. “On the output side, we can run a wide-open query on a hundred million record objects and get results back in two seconds. So now you can start to think about different ways to approach a solution. It’s not just SAP HANA for SAP HANA’s sake, meaning it’s not just speed, but more about the options that it creates in addition to the performance.”
As far as the overall project is concerned — which is ongoing as business units continue to be onboarded — expanding options through process reengineering and technology encapsulates HCI’s planning reinvention.
Says Gooch, “We’re now where the rubber meets the road when you actually build on it, which I think is true of any type of design like this. But we’ve kept true to the spirit of what we wanted to do, and providing this new environment, where a business owns a lot more of its planning — it’s working well for the businesses that want to get a lot out of it.”