integrated business planning maturity model

Integrated Business Planning - IBP Maturity

Published by Jan Veerman , last updated on May 13, 2024

This is blog 8 in a series of 9 on the topic Integrated Business Planning (IBP). In these blogs we will detail our IBP Framework, the importance of a proper IBP implementation and the benefits it can bring organisations. Topic of this blog: IBP Maturity .

IBP maturity comes in five stages:

• Collaborative

Each level is a next step upwards to full maturity. We did not invent this maturity model, organisations as Gartner and McKinsey have paved the way for us. The way we use it for our customers is to create a starting point, to take stock of the current level. Where is your organisation situated right now? And which leve do you want to achieve?

Level of Maturity

Looking at the picture, it seems we will define one level for all processes within an organisation. That we will define an overall picture of maturity. But we see different processes can have different levels of maturity in an organisation. So instead of one overall measure, we define the maturity level for different processes:

• People: culture & behaviour, people
• Process: deliverables. process, horizon, planning
• Tools: technology
• Analytics: measures & CSF’s, performance

Each process can have a different level of maturity and for each process a different target level of maturity can be established.

Taking Inventory

To achieve the target level of maturity, you need to know the current level. So we always start with an analysis of the current level across the different processes. We have tools that support in establishing a view of the current levels (workshops, interviews, questionnaires, etc.). Once the outcomes are available, we will present this in an overview that is understandable for the organisation. We see that this overview of the current level of maturity triggers discussion. People expect to see higher levels of maturity (in most cases) and is always a great starting point for the next step, the target level of maturity.

Target level of Maturity

For the target level, we always try to keep the expectations realistic. Most organisations want to achieve the highest level of maturity (Integrated), for all processes. But in most cases that comes with an effort that might be too much. For some processes, this highest level might be achievable and should be set as the target goal. For other processes, the level Collaborative is already a huge step forward and the target to achieve.

Once the current and the target levels across the different processes are known, we can start to define the actions needed over time to achieve the target levels. For one process it might be achievable within a few months, for others it might take years. Especially if you want to increase more than one level of maturity.

The actions can be planned and measured. Besides the planning to keep track of progress, also measures should be put in place to ensure the expected quality is achieved.

Improvements

During the implementation of the required actions, the organisation should see the improvements in day to day activities. Departments start to collaborate more, the forecast accuracy starts to improve, the number of daily operational issues slowly starts to decline, customer satisfaction starts to increase, revenue increases as well as margin.

The IBP maturity improvement is a timely and tedious road to travel, but the benefits that lay at the horizon are huge. Besides the increased maturity of your own organisation, we do see a spin off to your supplying organisations as well. If they see the benefit of the road you are travelling, they might be interested to improve as well. As several organisations start to improve, the full supply chain will benefit.

IBP maturity is not established overnight. It takes effort and might take several years to reach the target levels. But each increase of maturity brings benefit for your organisation. The target level of maturity can be set different at different levels across the mentioned processes within your organisation, depending on the ambition of the organisation as well as the level of maturity of your supply chain in general. But the benefits will be huge. IBP maturity plays an important role in the success of Integrated Business Planning. Without the proper maturity level, too many errors are made, misalignments across departments and a lower forecast accuracy (to name a few).

The next blog will be the last one in this series of nine: IBP Roadmap – closure . In this last blog we will look at at the previous eight blogs, add our recommendations and come to a final conclusion.

IBP Collaborative

Integrated Planning and Performance Management Maturity Model

The term fully integrated is one that is often used by solution providers.  But how can you assess their claims when there is no universal definition of what this term means? This article provides a starting point to address this dilemma.

What’s the difference between Integrated Business Planning, Integrated Financial Planning, Integrated Performance Management and other integration-related management terms?  In fact, what comprises a fully integrated process?  These are questions for which there are no universally accepted answers.  Provided below are articles and videos that answer these questions.  They describe a maturity model that brings together strategic, financial and operational views of planning and performance management (P&PM) processes.  By exploring them, you’ll learn the following:

• Specific capabilities that comprise mature P&PM processes
• How these capabilities enable global manufacturers to manage complexity
• How these capabilities address strategic, financial and operational challenges
• How this maturity model differs from those used by technology analysts

Provided below are links to the articles that address P&PM maturity:

• Strategic IBP: Driving Profitable Growth in Complex Global Organizations Click Here
• Why Finance Should Own Integrated Business Planning Click Here

Provided below are links to YouTube videos that address P&PM maturity along with:

• Executive Overview : This 6 minute video provides executives (of global manufacturers) with a high level overview of differences between strategic and tactical IBP (Integrated Business Planning) that will help them to make key choices about their IBP strategy. Click Here
• Maturity Details : This 1 hour video provides a detailed understanding of differences between immature and mature forms of Integrated Business Planning. In so doing, it introduces the terms Strategic and Tactical IBP, the latter being the most common form of used by global manufacturers and provided by solution providers. Click Here

I welcome comments and opportunities to discuss these points of view. To this end, please feel free to  connect with me  and join the  IBP Collaborative LinkedIn group , a key focus of which is on planning and performance management innovations and interconnected (strategic, financial and operational) issues in companies that manufacture and distribute goods. Also, check out our  YouTube Channel  for further details about the perspectives contained in this and other LinkedIn posts.

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By  Niels Van Hove , Supply Chain consultant, Mental Toughness coach and S&OP/IBP expert at  Truebridgese

As S&OP found its origin in the supply chain, IBP is often biased with supply chain terminology and reasoning. It can be argued that current IBP development is still driven by a supply chain bias. With this lack of diverse thinking, IBP innovation runs the risk of being not truly ‘integrated’.

Contrary to most current defined maturity phases of IBP, one can find on the internet, we also can define IBP maturity phases from a more strategic angle.

Many experts agree that IBP has a monthly check and balance with the budget and the strategic intentions of a business. Therefore, a well-executed IBP cycle will provide monthly visibility and measures progress against business objectives and strategy in the long-term horizon. Furthermore, we can say that a business strategy and the required strategic resources and capabilities have the goal to get a company closer to its vision.

According to Collins and Porras, a company vision exists from its core values, core purpose, a BHAG (big, hairy, audacious goal) and a vivid description.

• The core purpose is the reason for being; it captures the soul of the organization. Where you can fulfill a strategy, you can’t fulfill a purpose.
• Core values define what the company stands for. A company will stick to them, even if it became a competitive disadvantage in certain situations.

Well defined, integrated and truly lived, purpose and values will drive companywide behavior. Imbedded company behaviors will drive a sustainable company culture, which will last over time.

A well-defined achievable BHAG with a vivid description provides employees with an envisioned future they can identify with and which creates an emotional attachment, which makes them go the extra mile. As CEO Bob McDonald says on the emotional component and innovation at P&G; ‘People will innovate for financial gain or for competitive advantage, but this can be self-limiting, there is a need for an emotional component as well – a source of inspiration that motivates people‘.

If a company wants to track its budget and strategy and we use this vision framework and IBP as the planning process to support the business, IBP can be defined with the following maturity phases:

1. Integrated planning:

In this phase, companies start to focus on integrated planning between previously siloed functional areas. Some functions are more advanced than others. A company might have focused on the state of the art finance processes and systems, but doesn’t reap the full benefits of that due to lack of integration of other functional areas into the finance process. Some integration exists, but not across all functional area’s and there is not enough integration with finance to make a monthly financial prediction on EBIT level in the long term horizon. S&OP as most define it will be in this phase.

2. Dynamic budget planning:

In this phase, enough functional areas plan in an integrated way for the process to provide their input to the P&L to create a fully-loaded forward projected P&L. Finance understands the ‘volume’ input and the other functional areas understand the financial ‘value’ planning. This will provide the company visibility on how it is tracking versus the budget or annual operating plan on a monthly basis on EBIT level.

Why EBIT level? Because I heard too many times in a boardroom the argument, when only gross profit was on the table; ‘we can’t decide on this because we don’t have EBIT a number’ . We can also expect these companies to deliver monthly balance sheet and cash flow prediction. For these companies, there is no separate budgeting or forecasting cycle. Every month can be the budgeting cycle. Dynamic indicates that opportunity and risk scenarios across all functional areas are integrated into the financial projection.

3. Dynamic strategy and capability planning:

In this phase, the company has defined its strategic goals, measurements, and targets and is capable of checking and communicating monthly if they are on track to meet the strategy in the horizon beyond the budget. The strategic intent, which can be defined on lower levels like product segment, country or business unit level, will also guide in decision making for decisions on the budget horizon.

The company has also defined its core strategic capabilities to meet its strategy. There are many strategic capabilities possible.  Ideally, a company shouldn’t have more than a handful as if it will define more it will erode the focus on these capabilities. Some examples are:

• Risk management: for companies that have extended and complex networks that are sensitive and dependent on changes in global and geopolitical events. For example companies with global supply chains, but also the Finance industry.
• Innovation: for companies that in a highly competitive market can outpace their competitors based on innovation and new product development. Often seen in the technology industry and CPG
• Commodity trading: for companies that are highly influenced by commodity cycles as the commodities can be more than 80% of the COGS of their core products. For example, food & beverage companies that have crops and livestock as core raw material.
• Demand is driven supply chain: for companies that can get the competitive advantage from driving their business from the front end of the supply chain. For example food, beverage and consumer package industry. Often in retail and consumer environment, which are promotional driven and where POS information is available,
• Knowledge management: for companies that are highly dependent on knowledge workers and the exchange of knowledge between people and business units. Companies that have IP to integrate, sell and protect. For example Consultancies and software industry.
• Supply exploration: for companies that have to spend high amounts of capital to find new or increase the supply of their core product. For example the oil and mining industry.
• Collaboration:  Collaborative IBP can be a separate phase for companies that see the strategic advantage in collaborating with their suppliers and customer in the longer horizon and therefore want to integrate their business plans. For companies that have the power in the supply chain through size or uniqueness of offering this will most likely not be a strategic focus.

The list can go on and on with Technology, Sustainability etc. Once a company has defined its strategic capabilities and has defined goals, measurements and targets for these capabilities, it needs plans to implement or improve these strategic capabilities. An update on status, progress, risks and mitigations for those plans will be part of the IBP cycle in this phase. Dynamic indicates that sensitivity analysis around the plans to reach the goals of the strategic capability is part of the update.

4. Integrated vision & purpose:

In this phase, companies have a well-defined purpose, values and an achievable BHAG with a vivid description that people can identify with and which create an emotional attachment. The company aims to integrate this with the IBP cycle.  A company can decide not to pursue strategic opportunities because doing so would compromise their core purpose or values.

A large multi-billion dollar beverage company, for example, decided not to enter the very lucrative market of premium RTD’s (Ready to Drink) alcoholic beverages because the alcohol content was too high. Although the opportunity was achievable and margins were very interesting, the alcohol content would not be in line with their core purpose of ‘bringing more sociability and wellbeing to our world’ . The purpose guided decision making in the strategic horizon.

The company values and the emotional attachment will be tracked in the monthly IBP process and have actions, goals, and measurement. Executives follow progress to understand if employees believe and identify with the companies values, BHAG, and purpose and show emotional attachment. This can be done by 360 degrees feedback, engagement surveys or roundtable discussion between executives and employees. Executives also have to lead by example in behaviour and actions. Their own behaviour will have goals and measurements and progress is tracked,

For all phases, communication is important , although it can be argued that it’s most important when developing an emotional connection. An IBP document on the key decision, outcomes, progress and wins in the IBP cycle can be communicated to a well-defined stakeholder group in the company. This will both give the stakeholders an understanding of business performance, priorities, improvement opportunities and successes, as well as keep the engagement with the company vision, purpose, and the IBP process.

Executives have to realize and appreciate that this communication document is the results of all the hard work from middle and lower management to gather all required IBP information for the executives to make decisions in the IBP meeting. This communication makes sure the IBP meeting is not seen as a ‘black hole’ which only sucks up information and doesn’t provide feedback.

Once a company masters these four phases, it tracks and plans on a monthly basis the budget, the strategic intent and strategic capabilities, the company values, and purpose and the emotional attachment of the employees. If a company then links these plans with shorter-term control plans and execution, we might call it real Integrated Business Planning.

Would these four phases be IBP innovation?

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The Ultimate Guide To Integrated Business Planning

Are you looking for a way to streamline your business planning process? Integrated Business Planning (IBP) is the perfect solution. It’s an approach that combines all aspects of business planning into one comprehensive strategy, allowing you to make decisions quickly and accurately. This guide will help you understand how IBP works and how it can benefit your organization.

With IBP, you can save time by having all of your data in one place, making it easier to identify trends and opportunities as they arise. You’ll also be able to make more informed decisions based on real-time data analysis instead of relying on outdated information or guesswork.

What Is Integrated Business Planning?

Integrated business planning (IBP) is a powerful process that could become central to how a company runs its business. It is one generation beyond traditional sales and operations planning (S&OP) and combines financial and operational data from across the organization to create an aligned, cross-functional plan for the future. IBP enables businesses to make decisions based on key assumptions that are documented and updated regularly, helping them to achieve corporate goals.

IBP solutions help align financial and operations plans, giving companies greater planning accuracy and operational performance. This process also incorporates forecasting and demand response , demand-driven supply management, inventory optimization, production scheduling, transportation optimization, and more. With business planning processes in place, companies can make better decisions faster by leveraging real-time data from across their organization.

What Is the Difference Between Sales & Operations Planning and IBP?

Sales And Operations Planning (S&OP) and Integrated Business Planning (IBP) are two different integrated processes used to manage the supply chain. S&OP is a cross-functional process that focuses on aligning demand forecasts and supply in volumes in a tactical range, while IBP has a broader scope that looks at aligning all aspects of the business to ensure better decision-making.

Sales and operations planning processes typically have medium-term planning horizons that rarely extend beyond 18 months, while IBP naturally has a longer time scale. Additionally, IBP starts at the executive level, and each month or planning cycle culminates in a performance review against plans.

Both S&OP and IBP are important for managing the supply chain and ensuring successful operations. However, it’s important to understand their differences to choose which process best meets your needs.

What is an example of an integrated business model?

An example of an integrated business model is a supply chain management system. This type of system links different parts of the organization, from the production and inventory to customer service and sales. It leverages data to streamline operations, improve efficiency, and reduce costs. By integrating processes across departments, businesses can gain greater visibility into their operations and make better decisions faster than ever before.

Benefits Of Integrated Business Planning

The main benefit of implementing IBP is increased revenue, followed by forecast accuracy and improved Perfect Order Delivery. Other benefits include creating transparency between strategic goals and financial and operational activities, unlocking P&L performance through coordinating strategies and tactics across traditional business functions, creating more collaborative decision-making, providing higher agility in responding quickly to the business environment and market volatility, and generating insights on developments in the market.

IBP is important because functional and technical silos across organizations can result in flawed decision-making. Transitioning to IBP can help companies enhance their performance by improving their ability to respond quickly to changes in the market.

Challenges Of Integrated Business Planning

Integrated Business Planning (IBP) is a powerful process that can revolutionize how companies run their business. However, it is not without its challenges. IBP requires an organization with the right technology, processes, and people to succeed.

One of the biggest challenges of IBP is getting all departments within an organization on board with the process. It requires buy-in from all levels of the organization, including executives, operations, and finance teams. Without this unified approach and skilled and experienced employees, getting everyone working together towards a common goal can be difficult.

Another challenge of IBP is data integration. In order for IBP to be successful, data must be collected from multiple sources and integrated into one system. This can be difficult due to different systems used by different departments or even different countries within an organization. It also requires a high level of accuracy and consistency in order for the results to be meaningful and actionable.

Finally, IBP requires constant monitoring and adjustment as market conditions change over time. Companies must stay up-to-date on changes in demand, supply chain disruptions, and other factors that could affect their plans. Without regular monitoring and adjustments, companies risk making decisions based on outdated information, which could lead to costly mistakes down the line.

Why Is Integrated Business Planning Important?

Integrated Business Planning (IBP) is an important process for businesses to align their goals with their financial, supply chain, product development, marketing, and other operations. It helps companies to create a unified plan that can be used to make better decisions and reach corporate objectives.

IBP is a powerful tool that allows businesses to consider all the different elements of their operations when making decisions. This means they can make more informed choices about allocating resources, developing products and services, and managing their finances. By taking into account all these factors, IBP enables companies to make better decisions and more informed strategic plans that will lead them toward success in the long run.

Another benefit of an Integrated Business Planning process is that it helps businesses become more agile and responsive to changes in the market. With IBP in place, companies are able to quickly adjust their plans based on new information or changing customer needs. This allows them to stay ahead of the competition and remain competitive in an ever-changing business landscape.

Overall, Integrated Business Planning is essential for businesses looking to stay ahead of the competition and reach their goals. By considering all aspects of operations when making decisions, IBP provides companies with a unified plan that can help them succeed in the long run.

Elements Of Integrated Business Planning

The three main parts of integrated business planning are categorized as “Plan,” which involves creating a strategy, “Execute,” which involves carrying out the plan; and “Monitor and Adjust,” which involves reviewing and making changes as needed.

The Plan element involves the initial step of creating a strategy. This includes identifying key goals, objectives, and expectations around the company’s products and services to understand better how those should be used in an overall strategy. Additionally, it includes developing plans for specific initiatives that will help advance those goals.

The Execute element is about carrying out those plans. This includes everything from setting timelines, allocating resources, and developing procedures to ensure the plan is implemented properly.

Finally, the Monitor and Adjust element involves reviewing progress on the strategy and business performance and making any necessary changes or adjustments. This could include changing timelines for certain initiatives, modifying business processes, or introducing new initiatives to stay ahead of competitors. This element is important to ensure the plan remains up-to-date and relevant in an ever-changing business environment.

The Integrated Business Planning Process

To be successful, integrated business planning needs to occur on a regular basis, usually every month or every quarter. This strategic planning process should be undertaken to align the different parts of the business and create a unified plan that everyone can work towards.

1. Product Management

A cross-functional team meets monthly to review the status of all product-related projects. This includes managing the entire product portfolio, identifying any new risks or opportunities, prioritizing high-value products, and aligning them with business goals. The ultimate aim is to ensure that raw materials and manufacturing floor capacity are available as needed. Whenever necessary, product managers update and publish a master plan that outlines the required resources for delivering the changes.

2. Demand Planning

Demand planning is a team effort that involves members from sales, marketing, and finance. Its goal is to meet customer demand and reduce excess inventory while avoiding supply chain operations issues. Improving profitability, customer satisfaction, and efficiency are all benefits of demand planning. The team works to create a demand plan that accurately estimates future demand, tailored to the right markets and methods. KPIs such as sales forecast accuracy, inventory turns, fill rates, and order fulfillment lead times are used to measure success.

3. Supply Chain Planning

Supply chain professionals aim to find a cost-effective way to meet expected demand efficiently. To achieve this goal, having visibility into complex supply chains is crucial. One way to accomplish this is through a formal supply chain optimization project, which helps identify and fix potential weaknesses, such as low inventory levels or order fulfillment challenges. The ultimate goal of supply chain management is to reduce the cost of goods sold (COGS) .

Supply chain leaders should deeply understand the production process from raw materials to finished goods. By understanding upstream and downstream processes, supply chain professionals can better anticipate customer needs, uncover new opportunities for cost savings, and mitigate risks. Additionally, they should build relationships with key suppliers and develop strategies to ensure a consistent flow of materials.

4. Financial Planning

Financial planning involves setting short-term and long-term goals for a company that are achievable through the best use of resources. This includes understanding financial trends, managing budgets, monitoring cash flow , financial forecasting, and making decisions about investments.

Financial planning gives organizations an understanding of their current economic environment and helps them create plans to achieve their objectives. It also helps to reduce risk and maximize profits. Ultimately, financial planning is essential for success in any organization.

Integrated planning can be challenging for organizations used to a traditional budgeting process. However, companies can improve their overall financial performance and better meet customer needs by taking a more strategic approach. This requires data-driven insights to inform decisions and the ability to quickly shift resources in response to changing market conditions. The finance team’s influence is driven by their ability to analyze and recommend quickly.

5. Customer And Channel Plan Development

Customer and channel planning are integral components of a successful business. These plans involve researching customer needs, segmenting target audiences and creating strategies to reach them. Additionally, customer and channel plans help determine the most effective marketing tactics for each target audience with the goal of increasing sales and brand loyalty.

This includes selecting the best delivery channels (offline or online) that suit certain markets and target audiences and considering customer preferences when designing products or services. Through customer and channel planning, organizations can create a more successful marketing strategy and reach their desired goals.

4. The Integration Team

The integration team, which is usually composed of individuals from the finance organization, combines the initial product, demand, and supply plans into a single strategic plan that covers a 24- or 36-month period. As necessary updates are made, significant changes are identified by the teams. Decisions that require higher-level approval are prepared for executive review.

The integration team also leads scenario planning . This process involves considering different potential business plan outcomes and helping identify risks. The teams then help develop strategies to mitigate risk, thereby ensuring the success of the overall planning process.

5. The Executive Team 

The executive leadership team addresses disagreements and shares the revised plan with the entire organization. This management team is responsible for making final decisions on the plan and ensuring it reflects the organization’s objectives. Additionally, they review progress made against the plan and make adjustments as needed.

The executive team also considers external factors such as market conditions, customer expectations, competitive environment, and other factors to ensure the organization is on track to reach its desired goals.

6. Supporting Software

Many organizations use software to support their IBP process. This software may include budgeting and forecasting tools , customer relationship management (CRM) systems, financial analysis programs , and inventory tracking applications. Such software assists in streamlining the process of gathering data from multiple sources and increasing overall efficiency within the organization. It can also assist with scenario planning.

7. KPI Assessment

At regular intervals, organizations assess the performance of their plans using key performance indicators (KPIs). These KPIs provide a snapshot of progress and help determine whether or not the plan is on track to achieve its desired outcomes. By evaluating KPIs on an ongoing basis, organizations can identify areas that need improvement and adjust their plans accordingly.

Software To Support IBP

Software solutions are available to support Integrated Business Planning processes. These enterprise performance management solutions provide a comprehensive view of the entire business, allowing you to analyze financial data in real-time data analysis from multiple sources. This helps organizations make informed decisions based on accurate information and forecasts. Additionally, software solutions can automate many of the manual processes associated with IBP, such as data collection and analysis, which helps streamline operations and reduce costs.

Organizations looking to transition to Integrated Business Planning should consider investing in cloud based technology and software solutions supporting their IBP initiatives. Many software solutions can support financial forecasting processes with new tools like predictive analytics ,and feed right into your financial plan.

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FP&A Leader | Digital Finance Advocate | Small Business Founder

Mike Dion brings a wealth of knowledge in business finance to his writing, drawing on his background as a Senior FP&A Leader. Over more than a decade of finance experience, Mike has added tens of millions of dollars to businesses from the Fortune 100 to startups and from Entertainment to Telecom. Mike received his Bachelor of Science in Finance and a Master of International Business from the University of Florida, laying a solid foundation for his career in finance and accounting. His work, featured in leading finance publications such as Seeking Alpha, serves as a resource for industry professionals seeking to navigate the complexities of corporate finance, small business finance, and finance software with ease.

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Sales & Operational Planning (S&OP) Versus Integrated Business Planning (IBP)

S&OP process has been around for a long time . Many corporations have tried the S&OP journey with mixed success. The process has evolved over the years. Even though the concept behind this process is simple, many corporations have struggled to adopt it. Gartner has proposed an S&OP maturity model based on its research.

Figure: The Five-Stage S&OP Maturity Model

To be successful in S&OP, businesses need to start with People, Process, and Technology – in that order. However, for all three to work in some form of coordination, there needs to be orchestration, organizational pull, and leadership. This is where the sustainability of the process breaks down.

According to industry surveys, the best scenario achieved by the S&OP process is to do supply/demand balance with a heavy Supply Chain/Operations focus. It is generally led by mid-level managers in supply chain or operations organization. It generally does not consider or align with business or marketing or finance strategy. Even though, in and of itself, supply/demand balancing is a valuable exercise with its inherent benefit, it generally does not address the business strategy, e.g., maximize profit margin or lower operating cost. Even though the terms may sound like two sides of a coin, the supply chain response could be quite different.

To take the business performance to the next higher level, thought leaders in this space have proposed the adoption of Integrated Business Planning (IBP). A comprehensive definition of IBP has been provided by Colleen Crum from Oliver Wight, a leading consulting firm in Integrated Business Planning:

A process led by senior management that evaluates and revises time-phased projections for demand, supply, new product development, strategic projects, and the resulting financial plans . This is done on a monthly basis , on a planned 24-month rolling horizon. It is a decision-making process that realigns the tactical plans for all business functions in all geographies to support the company’s business goals and targets. A primary objective of S&OP/IBP is to reach consensus on a single operating plan , to which executives of the management team hold themselves accountable  and allocates the critical resources of people, equipment, inventory, materials, time, and money to most effectively satisfy customers in a profitable way .

Here are the key characteristics of IBP, which differentiates IBP from S&OP:

• Senior executive management ownership and leadership
• Integration of strategic plans, initiatives, and activities
• Integration of product and portfolio review
• Integration of financial planning
• Improved simulation, modeling, scenario planning, and analysis
• Gap identification and gap closure analysis
• Easy, effective translation of aggregate plans to detail plans, up and down the data hierarchy
• Improved trust across a cross-functional team

The key difference between S&OP and IBP is that IBP starts at the executive level. Each month or planning cycle, the IBP process culminates in a Management Business Review in which the executive team reviews the latest projections, potential gaps in achieving business and strategic objectives, gap closing options as well as resource projections to execute the plan. With strong leadership by the executive team, over time, the business begins to think in terms of the overall health and welfare of the company, rather than optimizing a function at the expense of the overall company benefits. These are the key differences between the S&OP and the IBP. Companies that achieve the greatest benefits from IBP use the process as a collaborative, cross-functional management process led by the executive team for running the business – which is the essence of IBP.

Is the Journey Worth the Trouble?

Here is a sampling of the range of improvements achieved by 40 Oliver Wight clients who embarked on the IBP journey:

What if a company can improve its performance by the above amounts? What would be the impact on financial performance and/or customer satisfaction?

A study by Aberdeen Research sheds some light on the answers to previous questions. The following data are the results documented by companies using Integrated Business Planning, categorized by best in class, industry average, and industry laggards.

Even though the implementation of IBP takes greater effort than S&OP, the journey is well worth it based on the financial gains presented above. In today’s fast-changing world, the IBP process brings the necessary nimbleness to the organization to cope with and address business challenges.

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Integrated Business Planning (Advanced Sales & Operations Planning)

Disconnected plans and strategies breed sub-optimal performance in companies.   

For more than 30 years, business leaders have used Integrated Business Planning to connect strategy to portfolio, demand, supply, and resulting financial plans.   

The result: Improved business and financial performance. The foresight to adapt to changing business conditions. Leadership and management teams operating with unity.  

Discover how mature your Integrated Business Planning Process is with our online self-assessment tool.

What is Integrated Business Planning  

Integrated Business Planning is a decision-making process to align strategy, portfolio, demand, supply, and resulting financials through a focused and exception-driven monthly re-planning process.   

The result is a single operating plan, over a 24+-month rolling horizon, which senior executives hold themselves and their teams accountable for achieving.    

Done well, it is the formal way that the business is  managed,  and strategy is connected to execution. Integrated Business Planning eBrochure

How We Help    

Prior to joining Oliver Wight, our  team of experts  led IBP implementations where they were employed. They know what it takes to  develop an effective IBP process .  They also know how to utilize IBP to drive business and financial results.   

We offer the following  IBP  services:  

• Advising, coaching, and mentoring on how to utilize the process to drive results  
• Education and workshops to further understanding of best practices  and how to design the process
• Diagnostic and progress assessments to identify needed areas of improvement . These assessments  address  executive decision-making,  people skills and behaviors, process, and  information that supports IBP.

Value of  Integrated Business Planning

IBP connects company functions and executive teams so that they are operating to one aligned plan. That means the business  plans  and strategies are executed with  no surprises at year-end.  

With a ligned innovation, demand, and supply plans ,  companies grow sales revenue  while at the same time  lowering operating costs . Companies realize more opportunity in the marketplace and an increase in market share by streamlining these plans. The supply organization better anticipates capacity needs, which  improves its ability to fulfill orders on time.   

M ore credible information  is  given   to  the  Board and The Street.  That builds   trust  that the leadership team   will  deliver on their promises and goals.  

What Clients Say    

“Because of the way the process allows us to look ahead and be proactive, we can also see billions of dollars of opportunity cost savings way into the future. Our ROI will be measured in billions of dollars every year for the next decade.”   Jim Dwyer, U.S. Army Materiel Command –  US Army Materiel Command  success story    

“The IBP Management Business Review is one of the most valued activities for me. In ninety minutes, each month, we gain insights on the business challenges. We get visibility of gaps and how to close them. It helps inform me of the risks and opportunities in the business. It’s how we make sure we’re being responsive to customers and driving growth in revenue and profits.”  Tom Pigott, Chief Financial Officer, Marzetti and Lancaster Colony Corporation –   Marzetti  success story  

Insights on  Integrated Business Planning  

Integrated Business Planning – eBrochure

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• How do you plan for something that you can’t predict? Lessons from Coronavirus  
• Should you throw  out  your Integrated Business Planning process in the current environment of uncertainty?  
• Integrated Business Planning Is Key to Making Annual Planning a ‘Significant Non-Event’  
• Hello Finance – Are You Engaged?  
• Hey CFOs – Are You Seeing the Right Stuff?  
• Getting Executives Out of the Weeds to Focus on the Business  
• Three Powerful Traits of Large, Successful, Consumer Goods Companies  
• The Three Key Challenges That Middle-Market Businesses are Facing  
• How To Leverage Millennial Traits Through IBP  

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What Is Integrated Business Planning (IBP)?

The term today is highly debated between two groups of practitioners: one defines it as the planning process that includes demand review, supply review, product management review, management business review, financial reconciliation, and business strategy. Some view IBP as a broader version of S&OP, which also emphasizes the role of strategic planning. It continues to evolve.

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Fp&a—a double-duty mandate for the cfo necessitates mature capabilities.

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As financial planning & analysis (FP&A) becomes more integrated into different business functions, and thus becomes a core responsibility for the leaders of those functions, CFOs can expect their own historical and traditional roles, and workloads, in FP&A to keep evolving and expanding.

FP&A—A double-duty mandate for the CFO necessitates mature capabilities

Enhancing FP&A has always been a top-of-mind issue for most CFOs. Thus, it is no surprise that most finance leaders and professionals rate financial planning and profitability analysis and reporting as a priority for the coming year, according to the results of my firm’s latest global survey of finance leaders.

But a double-duty mandate on the CFO has resulted from the extension of FP&A responsibilities to leaders throughout the enterprise, placing additional demands on finance leaders. Boards and C-suites are demanding more predictive data-driven analytics not only from product and service lines, but also from supply chain leaders, chief human resources officers, chief marketing officers, chief revenue officers, heads of ESG and sustainability initiatives, and other organizational leaders.

This FP&A expansion stems from an increasing need to drive value, optimize costs and enhance agility enterprisewide amid a dynamic business climate being influenced by continuing inflationary trends (which may be showing signs of abating), geopolitical conflicts, trade wars, supply disruptions and workforce challenges, among many factors.

This shift places new requirements on CFOs and their finance groups (without removing any old requirements—once again, the finance group takes on more). Finance leaders must work with their counterparts throughout the organization to help ensure the relevance, accuracy and security of the data used in their respective planning activities and analyses. In many cases, finance may need to supply relevant data to different groups. In addition, as new analytics related to sustainability reporting, supply chain risks, supplier performance, demand fluctuations, skills inventories and forecasts, and labor cost projections emerge and mature, finance groups will want to integrate those analyses and key performance indicators (KPIs) into their own financial analyses, forecasts and projections.

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Given the high stakes underscoring these activities, finance leaders will benefit from an exercise to assess the maturity of their current FP&A capabilities. Below we discuss how.

Assess and Evolve

Subpar planning and analysis capabilities can trigger too many gut calls—impulsive decisions, such as discontinuing new product development with intention to stabilize short-term profitability—that often create larger, longer-term challenges (such as reduced focus on innovation and lack of resilience and agility). To evaluate their FP&A efficacy, CFOs should benchmark their current practices against industry best practices to assess where their function stands on the FP&A maturity continuum.

To illustrate, the following breakdown of basic, defined and optimal FP&A practices is culled from a more comprehensive maturity matrix:

• Basic: At the early maturity stage, FP&A processes are supported primarily by spreadsheets (versus more advanced business information tools), static presentations, manual data entry, basic financial reporting and comparatively weak process governance (e.g., lack of clear policies, existence of ad hoc validation routines and too much reliance on intuition). The process is heavily dependent on people; however, there is little to no collaboration with business partners.
• Defined: In this mid-level phase, dedicated planning and consolidation tools facilitate financial planning processes, although finance groups still rely heavily on spreadsheets for analyses and reporting. On the analytics front, finance groups typically conduct driver-based profit-and-loss modeling, diagnostic analytics and enhanced financial reporting. Standard global data models are also present, as are formal governance policies, processes and reporting activities, resulting in decision-making that is more data-driven. The finance team routinely collaborates with business partners across the organization, incorporating other known factors into analyses and forecast models.
• Optimized: A fully optimized, holistic FP&A function is built for speed and employs integrated and flexible self-service tools (and advanced technologies ) that facilitate real-time collaboration and digital on-demand planning, integrated driver-based machine learning models, predictive and prescriptive analytics, and self-service reporting across mobile platforms. Effective governance and controls are fully integrated into established standards and processes, a clear linkage to strategy exists, and there is a commitment to continuous improvement.

The optimized state for FP&A advances the organization’s progress toward a more holistic planning capability (sometimes referred to as business planning and analysis, or BP&A) that combines activities from across the organization to focus on the most critical business drivers that must be addressed to execute the organization’s strategy successfully—a capability that reaches beyond finance to include other business functions that have a stake in the corporate-wide planning process.

The point at which FP&A activities are positioned on the above simplified continuum is a key determinant of the extent of opportunities for improvement.

Planning and Analysis—and Expertise

We find that most non-finance business groups reside on the “basic” end of the FP&A maturity spectrum. A fair number of finance groups are at this stage, as well. For the CFO, elevating the maturity of FP&A capabilities—and assisting their supply chain, HR, ESG, marketing and other peers in getting started on building and advancing their planning and analysis capabilities—begins with evaluating and, as needed, improving the quality of three enabling components:

• Data: What data do we need to provide insights about our current and future performance to the C-suite and other business partners? Do we have access to the skills and processes required to analyze this data in a meaningful manner?
• Tools: How reliant are we on spreadsheets in our planning, reporting and analysis activities?
• Governance: What data governance controls are in place to provide guardrails around our data collection, analysis and reporting activities? Are we aware of the risks associated with our use of unstructured data sourced from multiple systems (both inside and outside the organization)?

For example, collaborations with chief procurement officers might espouse a total cost of ownership (TCO) perspective on sourcing investments and the development of new supplier selection and management strategies. Finance leaders can also help supply chain partners develop KPIs that more effectively measure and monitor quality, reliability, risk management capabilities and capacity for innovation .

As is the case with supply chain operations as well as other business units, sustainability teams need finance’s assistance in accessing and analyzing relevant, high-quality data in accordance with organizational data governance standards—and, in many cases, new disclosure rules in place in different parts of the world where the organization operates.

As sustainability reporting groups race to comply with a wide spectrum of global disclosure requirements and deal with market demands for data from non-regulatory stakeholders, they can look for opportunities to leverage this work—which involves a combination of internal controls, data management, risk management and regulatory reporting—to improve sustainability planning and analysis. In addition to taking charge of ESG data management and reporting , CFOs can assist these teams with developing sustainability metrics that monitor ESG performance and help spot potential operational improvements (e.g., reducing total production costs).

Helping business counterparts strengthen the relevance, accuracy and security of the data used in their planning and analyses plays to the finance group’s partnerial mission. While it may require more work on the front-end of the FP&A process, keep in mind that finance leaders are inevitably called on to perform even more work—primarily of the troubleshooting and investigative variety—on the back end if other business leaders over-rely on intuition when planning and forecasting. A healthier approach is for CFOs to help their business partners, as well as their own finance function, nurture their FP&A capabilities to increase the relevance and accuracy of the FP&A outputs with effective governance and controls.

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Transitioning from Sales and Operations Planning to Integrated Business Planning

Over many years, the business management process of choice for many organisations has been Sales and Operations Planning (S&OP). S&OP was originated by Oliver Wight in the early 1980s and although the world has since adopted the language of S&OP, it has not always adopted the fundamental practices which have made it successful.

Practitioners of S&OP continue to find that the quantity, quality, and sustainability of business performance improvements depend on how the process is used. Those organisations which use S&OP as the primary process to manage the business get the most significant and wide-ranging results. For many organisations though, possibly even the majority, their S&OP process has not progressed as the business has matured and markets changed. As a result they have not experienced the true benefits it can bring.

Integrated Business Planning (IBP) is most simply described as advanced, or next generation, Sales and Operations Planning and represents the evolution of S&OP from its production planning roots into the fully integrated management and supply chain collaboration process it is today.

Global recession, political uncertainties, and the coronavirus pandemic have each put planning processes to the test. The arrival of the economic crisis, for example, was so swift, no organisation could sidestep it. However, those which operated integrated processes fared much better during the downturn than those that didn’t. They were able to continue to drive improvement throughout the difficult times and were then ready to meet demand as it returned.

So what are the differences between S&OP and IBP and how are those organisations which have made the transition benefiting?

The evolution of S&OP

To understand the benefits of IBP over S&OP it is helpful to understand the history of its evolution, as shown in Figure 1.

Although S&OP first started to emerge as a concept in the 1970s, the acronym did not enter the lexicon of business planning until the 1980s. This reflected the first real development of the process – gaining the previously non-existent co-ordination between the commercial and supply sides of the business.

Throughout the 1980s further evolution saw the balancing of supply and demand and a focus on inventory control, but it was not until the late 1980s that the crucial development came with the introduction of financial integration to the S&OP process. This is one of the critical success factors of effective S&OP and a key aspect of the evolutionary development towards IBP.

Oliver Wight added product and portfolio management integration to S&OP in the late 1990s and many business leaders describe this as one of the highest value changes they have adopted in the business planning process. Product management is a key aspect of many businesses – for some organisations annual product churn is 80% or more. With conventional S&OP, however, product management is not integrated into the process. This leaves a substantial aspect of the business as a discrete part of planning, often viewed as a separate ‘creative’ process and the domain of R&D or the marketing department.

By the turn of the Millennium, scenario planning had become popular with businesses. This represented a significant progression from simple supply and demand planning, looking instead at the impact of proposed changes on the wider business and making comparisons against strategy. What would happen, for example, if a price change was introduced, not just in terms of profitability but on different demand scenarios and so on?

The most recent development is increased collaboration at the front and back ends of the supply chain – consumers, customers, and customers’ customers, as well as suppliers – and its integration into the process. Part of the challenge with critical suppliers and customers is developing relationships based on trust, and trust can only be generated when people deliver to expectations and to promise. This is dependent on greater reliability in the numbers and IBP does this very effectively.

Over time, the focus of attention on S&OP has been shifting toward a better understanding of the external environment as well as ensuring alignment and synchronisation among the internal functions of the company, which was S&OP’s original objective. The shift toward strategic management is a key driver in the transition to Integrated Business Planning (IBP).

So at what point did S&OP become IBP? It is important to understand that the new name was not introduced to herald the invention of a new process, but to reflect the substantial changes in an existing one. Oliver Wight and its clients started to use the phraseology in the late 1990s. Up to then, organisations were operating what they still called S&OP, but it had become a restrictive nomenclature; to many, S&OP still meant getting sales and operations together to do some planning, even though the potential of the process had already developed way beyond that. In short, S&OP no longer accurately described what the process was capable of.

Consequently, S&OP was failing to even get the attention of the executive, never mind their ownership. Whilst S&OP does not resonate with business leaders, IBP does. This is because it addresses concerns within their worry circles such as integrating and organising people within their businesses. Naturally, most businesses have a disorganised element to them; the objective is to get everybody driving in the right direction and operating to the same plan as quickly as possible (Figure 2). The purpose of an effective S&OP process has always been to achieve alignment, but whereas S&OP was just about aligning sales/commercial with supply, IBP aligns sales, marketing, R&D, operations, logistics, finance, HR; even IT. Whilst it takes time for an organisation to mature into a full IBP process, it’s important to emphasise that you don’t begin with 1970s S&OP and progress to IBP; you start with the ‘latest version’.

As consumer behaviours change within an ever-evolving digital landscape, business planning processes are also developing to aid organisations under pressure to deliver on price, choice, and convenience. Enterprise Business Planning, or EBP, develops the principles of Integrated Business Planning to provide a 21st century solution for creating a competitive advantage. EBP is not a single solution but a set of super solutions for businesses operating IBP at the highest level of technology. It incorporates digital planning capability, linking the global strategy and execution across multiple time horizons.

What are the key factors to consider in establishing a successful IBP process?

1: ownership.

Ultimately, everybody in the organisation needs to be committed to IBP (Figure 3), but that commitment begins at the top. It is critical the business leader not only supports the IBP process, but takes ownership of it and leads it. If IBP is to be the process that runs the entire business, by definition, the business leader must be committed to it; if you fail to gain executive backing for your IBP process, the process is destined to fail. Nevertheless, the evidence suggests that many organisations do not grasp this fundamental principle: a survey conducted by Ventana Research shows that 70% to 80% of organisations which operate an S&OP process do not do so at the executive level; and Oliver Wight’s own poll shows that in half of some of the world’s best known organisations, the business leader does not lead the business management process. It’s not about getting the business leader to sign up to a process, it’s about the leader saying, ‘this is my process, who’s going to sign up to it?’ This isn’t playing with words. It’s transferring from the ‘dollar and cents’ page to the hearts and minds of the executives – they should be saying ‘this is what we use to run the business; to grow the business; to add value to the business’.

2: Business horizon

Another fundamental of IBP is the horizon (Figure 5). Many organisations still don’t look beyond the next three to four months, or at best the end of the financial year. Successful IBP requires the business to look out over 24 months; indeed most organisations look out over 36 months or more, but 24 months is the minimum requirement. It’s critical too that it’s a rolling horizon and the forward view is continually updated with no stop/start or annual budgeting process, which the rolling forecast renders redundant. Organisations with a greater level of maturity in their IBP process use it to compare performance against strategy – the 36 month rolling plan – and are able to ask themselves whether they are headed in the right strategic direction; are the things they’re doing going to help them deliver against their strategy?

The business horizon

• Identify significant problems and opportunities
• Time to determine the most effective response
• More effective annual planning

Important too is focus – it’s no good having a long-term horizon whilst still focusing on the short-term. Similarly, although we can, and should, learn from the past, that is only a small percentage of the IBP process. As a rule of thumb, at least 70% of time in planning review meetings should be spent looking beyond the next quarter, but our research shows that still only half of organisations do this.

The purpose of the IBP process is not to manage the short term but to focus beyond that (Figure 6); to look at the things which are heading towards the business from further out. IBP demands the business articulates where it wants to be – not just this financial year but the next few years too – and to see the financial gaps between the bottom-up ‘latest plan’ and the top-down business plan that has been financially committed to. It is still all too common for companies not to know what they are trying to achieve until just a few weeks before the financial year begins; this makes it very difficult to succeed. People are striving to deliver something but don’t know what is expected. There is an obvious relationship between the focus of the planning process and ownership of the process – if the focus is on the short term, the executive will not be interested in the process, and if the executive is not involved, the focus can only be on the short-term because those who are involved can only make short-term decisions.

Of course the long-term focus of IBP does beg the question, what about the short-term? And it’s a particularly pertinent question given continued economic and market volatility.

There is, and always will be, a need for different planning horizons (short, medium, and long-term) to be used at different levels within an organisation. Of course short-term planning and re-planning is an essential component of operational execution; without excellence in these areas organisations will fail to deliver the optimum results, both in regard to customer service and cost. But that is not the purpose of IBP. We call the short-term weekly governance process Integrated Tactical Planning (ITP). This process defines a way of executing the IBP plan whilst managing and communicating the changes that inevitably happen. The outcome is more time for senior managers to spend on strategy and the longer-term horizon.

ITP runs in parallel with IBP, feeding the individual process reviews. Companies who mistakenly use the monthly IBP process to synchronise the short-term are losing out on two fronts: it is impossible to resynchronise the short-term quickly enough, and they are missing the opportunity to use the process to regularly synchronise the medium to long term.

The role of IBP is to align all the individual functions of the business (marketing, operations, R&D etc.) to the direction in which the company is heading; the plans it has to get there; and the things it is doing based on ‘current reality’.

4: Managing behaviours

As we’ve already discussed, the first challenge in implementing an IBP process – or transitioning from S&OP to IBP – is for the leadership team to take ownership of the process and commit to a new style of running the business. Then comes the sizeable challenge of overcoming the traditional thinking of operating in functional silos, and to integrate all key areas of the business. Critically, IBP aligns behaviours. One of the most common behaviours in organisations is under-promising and over-delivering because people know that will get them a better bonus or a pat on the back from the CEO. Where people are pressurised into this particular behaviour, they are encouraged to commit to things they don’t believe in. Those behaviours have to change, and the only people that can drive that change are the members of the executive team. Without change, people will start second guessing, and that leads to the creation of multiple sets of numbers, which means by the time you get to the short-term, it’s impossible to determine what is going to happen. The truth is that short-term volatility is often a result of people not paying attention to what is really going to happen or being in denial because they don’t have a definitive set of numbers to work to. It isn’t uncommon for the executive team to dismiss the bottom up numbers from their people, because they refuse to believe the truth of the fact that the plan isn’t going to be delivered; by over-writing the bottom-up plan they create the short-term volatility themselves. What is important for the leadership team to realise is that IBP is not a process for gamesmanship. Sandbagging or overly-optimistic projections are inappropriate and harmful to business performance. IBP is about communicating and discussing reality ‘as we know it’. With IBP, management is expected to either execute the consensus plan or communicate that the plan cannot be met. The principle of ‘bad news early is better than bad news late’ applies.

Keys to success

As the chart in Figure 7 shows, effective IBP requires the interaction of people and behaviours with processes and tools. We need these tools for IBP and there are a number of good IT tools on the market, which are very effective at supporting people in an IBP environment, not just for basic planning but their capability to financialise plans. But the hardest thing to achieve is behaviour change and if you don’t tackle it you will fail. Behaviour change comes from involving the right people at the right time in the right process, which is designed to achieve the right things.

The importance of product & portfolio management

As discussed previously, product and portfolio management are key components in the development of S&OP into IBP. In the product management review, the focus is on product planning: analysing the product lifecycle; understanding where products are in that lifecycle; and optimising the portfolio to determine which products should be introduced or phased out. The review should analyse the product funnel in terms of the health of the pipeline – split by innovation or renovation, depending on the type of industry you’re in – plus how well projects are being managed. Its purpose is not to analyse individual projects but to understand how the business is performing against the overall pipeline; how to manage the pipeline and project status; and how to prioritise.

The key output of the product management review is an updated product plan: changes within the pipeline and portfolio need to be communicated to the rest of the business – what are the new opportunities and vulnerabilities for the demand plan; what are the key changes in supply requirements; and is alignment to the business and product strategy assured? The product management review provides an understanding of what this means in terms of the financial projections; what revenue is coming from ‘new’; how healthy is the pipeline and portfolio; and what should be rationalised in the product tail? The outcome of the review is therefore a clear understanding of the current product and portfolio management plan within the company. Most importantly, there is now clear visibility of the activities being undertaken within this core process of the organisation and the impact of these on the business plan and strategy.

The Oliver Wight Integrated Business Planning model

Figure 8 is the process model used to depict the IBP review cycle. There are five steps in the monthly process. These are not a series of discovery meetings but a continuous process of orchestrating those who are business-accountable to review, present, and communicate progress and change. The reviews must be action-oriented, and they demand rigorous preparation to identify issues and scenarios for consideration in advance of the meeting. Then decisions can be made, and revised plans agreed, before they are made visible across the entire integrated process. The meetings are diarised from the outset and those involved have to prioritise the dates – nothing should be more important; after all, this is the management process running the entire business. The cycle begins every month with a product/ activity/ portfolio management review (depending on the nature of your business). Moving then, to the demand review (revenue and volumes). Next to supply, which needs to respond to the demand plan – in effect, a formal request from sales and marketing to the supply chain to make the relevant materials and capacity available, at the time they anticipate the customer will require them. At this point demand is understood and product management has been reviewed, so the key goal for supply is to deliver at the right cost. The fourth step is the integrated reconciliation process, which focuses on the gap between current performance, and the strategy and business plan; its purpose is to make sure good decisions are made at the fifth and final step, the management business review, which is the domain of the leadership team. In matrix organisations, there could be multiple IBP processes which run concurrently (never sequentially) up through the organisation.

Integrated reconciliation

This is where S&OP truly transcends into an integrated planning process. It is fundamental to IBP that appropriate decisions are always made at the lowest possible level. Gaps and their implications should be identified and understood at the product, demand and supply reviews, so the leaders of those reviews can make decisions and put forward recommendations to bridge those gaps. Thus, the business is continually optimised and re-optimised. This comes together at the integrated reconciliation review, so decisions and recommendations can be made to shape the agenda for the management business review. Another key requirement of integrated reconciliation is to understand the status of strategic activities and other programmes that do not naturally fall out of the product, demand, and supply reviews but which have a significant impact on the business (an ERP system upgrade for example); to know where they are, if they are on budget, and whether there is enough resource to manage them.

The role of finance

It is typical of conventional S&OP processes that finance is not at the table, and that financial plans and S&OP are not fully integrated. Whilst with S&OP, operational plans will come from the demand, supply, and product steps, there is often a parallel but separate financial planning process which results in multiple sets of numbers, lack of trust, sandbagging, and bias. Research from Ventana shows that only 52% of organisations have any sort of meaningful integration of plans, whilst our own study reveals that just 16% have fully integrated plans, whilst 42% have integration with financials.

With IBP, finance must have a role throughout the entire process. Within the reviews, as well as supporting processes, finance has to ensure everybody understands the financial implications of the bottom-up plans and the overall health of the business: in the demand review what is going to be sold to customers in terms of revenue and margin; for supply, what is the cost of fulfilling demand? And in the management review step, finance must be able to make a full assessment of business health over the rolling 36 month horizon – and identify gaps compared to the financial plan, the business plan, and the strategy. This assessment should include P&L projections, revenue margin, the cost implications of plans, cash flow, and income. An important side issue is that, when there is credibility in demand, supply, price, and cost data, finance is free to do value-added financial analysis instead of just forecasting.

Information and documentation

The importance of documentation, information, and written plans is ever increasing, and this is an essential deliverable from the IBP process. Deciding which information is critical to IBP should again start at the top. The key is for the executive to understand which information they need in order to make real decisions that help influence the future performance of the business. Real understanding of markets, customers, internal capabilities, as well as strengths and weaknesses is vital to allow the formulation of a quantitative and qualitative plan with a clear understanding of the impact they will have, so the management team is in a position to truly optimise the business.

How is the success of IBP measured?

Ultimately a successful IBP process will bring a substantial return to the bottom line, but success is also measured through the execution of the business plan in a cohesive and efficient manner, right across the organisation – so the predicted results for the business can be achieved. IBP allows the leadership team to get a realistic view of where the business is planning to be, and make real decisions ‘now’ to influence that position. This enables top line growth as well as cost efficiency through early action in preventing loss of business and exploiting new opportunities. Many executives speak of control of the business; understanding the business; visibility of expected business outcomes; and business growth. Also, once the business is under control, IBP becomes the perfect foundation for the deployment of continuous improvement activities, so the executive can focus on eliminating waste too.

What IBP delivers for Oliver Wight clients

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A data leader’s operating guide to scaling gen AI

After almost two years of infatuation with generative AI (gen AI), companies are moving past the honeymoon phase 1 “ Moving past gen AI’s honeymoon phase: Seven hard truths for CIOs to get from pilot to scale ,” McKinsey, May 13, 2024. to embrace the work that matters most: creating value from this tantalizing technology. Expectations are high. A recent McKinsey Global Survey  found that 65 percent of companies across sizes, geographies, and industries now use gen AI regularly, twice as many as last year. 2 “ The state of AI in early 2024: Gen AI adoption spikes and starts to generate value ,” McKinsey, May 30, 2024. Investment in gen AI continues to rise amid the belief that early gains seen by high performers are a harbinger of cost decreases and profits to come. But most companies have not yet seen significant impact from gen AI.

About the authors

This article is a collaborative effort by Alex Singla , Asin Tavakoli , Holger Harreis , Kayvaun Rowshankish , and Klemens Hjartar , with Gaspard Fouilland and Olivier Fournier, representing views from McKinsey Technology and QuantumBlack, AI by McKinsey.

To keep up with the competitive pace of innovation, data executives at most organizations have drafted gen AI strategies. Not all companies have moved past the pilot stage, but most have made steps to integrate AI into their tech stacks at some level. Yet a technical integration model  is only part of what is necessary to generate lasting value from gen AI. Companies must also create gen AI operating models to ensure their technology implementations deliver measurable business results.

An operating model is a familiar structure in most large organizations. A company’s operating model is a plan that outlines how people, processes, and technology will be deployed to provide value to customers and stakeholders. It can encompass financial structures, partnerships, and product road maps to meet the company’s long-term goals. When applied specifically to gen AI, an operating model includes every decision—from staffing and organizational structures to technology development and compliance—that guides how gen AI is used and measured throughout a company.

A well-defined gen AI operating model can help leaders successfully and securely scale gen AI across their organizations. Data is the backbone of a successful gen AI deployment, so chief data officers (CDOs) often lead the charge to create these models—bringing technology, people, and processes together to transform gen AI’s potential into real impact. Yet when creating gen AI operating models, data leaders commonly fall into two traps:

• Tech for tech: This approach involves allocating significant resources toward gen AI without a clear business purpose, leading to solutions disconnected from real-world impact. This can result in overspending on gen AI tools that are rarely used in daily workflows and create little business value.
• Trial and error: This approach entails experimenting with disparate gen AI projects, but not doing so in a coordinated manner. This presents a particular risk in sectors such as technology, retail, and banking, where gen AI has the potential to quickly increase productivity. Companies in industries where gen AI may take longer to have a significant effect on productivity, such as agriculture and manufacturing, could potentially afford to wait to deploy the technology.

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Many business leaders feel a sense of urgency to deploy gen AI. This creates an opportunity for data executives to get approval for gen AI operating models that put data at the center of the organization.

When CDOs and their executive supporters are ready to define a gen AI operating model, what are the first steps to get started? And what measures should companies take to ensure these operating models meet risk, governance, security, and compliance measures? We present a practical guide data leaders can use to create a gen AI operating model, including how to structure talent teams, organize data assets, and determine whether a centralized or domain-centric development is the best approach.

Design a gen AI operating model around components

Gen AI innovation is moving at an exceedingly fast pace, so it makes sense to design an operating model that leverages components. With this approach, a company creates a plan for adding new gen AI components to the enterprise architecture at regular intervals, and in ways that are aligned with business goals. The operating model enables changes to gen AI components without having to overhaul the tech stack.

On one hand, adding gen AI functionality to mature elements that require fewer regular updates, such as cloud hosting and data chunking, warrants a higher level of investment and implementation complexity. On the other hand, fast-moving elements with shorter life cycles, such as agents and large language model (LLM) hosting, should be quick to implement and easy to change.

In this area, organizations can be flexible, first implementing the minimum necessary components for critical gen AI use cases, and then adding and removing components as needs evolve. For instance, a leading European bank implemented 14 key gen AI components across its enterprise architecture. This approach allowed the bank to implement 80 percent of its core gen AI use cases in just three months (Exhibit 1). By identifying the gen AI components with the largest potential impact early on, the bank focused its developer resources to produce gen AI features aligned with clear mid- to long-term goals. However, while a component-based approach to gen AI deployment is a crucial success factor for scaling gen AI, only 31 percent of gen AI high-performers and 11 percent of other companies have adopted this model. 3 “ The state of AI in early 2024: Gen AI adoption spikes and starts to generate value ,” McKinsey, May 30, 2024.

To succeed with a component-based gen AI development model, companies can create a task force to review, update, and evolve the road map. The task force also assigns execution plans, ensuring IT, data, AI, and business teams have appropriate responsibilities for specific rollouts. This requires clear communication between a variety of stakeholders, including AI engineers, software developers, data scientists, product managers, and enterprise architects, as well as regular reporting to business leads. Coordination is essential to ensure that component rollouts are systematized and aligned with organizational goals instead of presented in a series of disjointed pilots.

Choose an extended or distinct gen AI team

When building a gen AI operating model, defining a core team is crucial. There are two main options: extend an existing data or IT team by equipping them with new gen AI skills or build a distinct and separate gen AI team. The latter can be accomplished by selecting people from an existing data or IT team or by hiring new talent. Each has its own advantages and constraints.

Making an existing data team responsible for gen AI may seem to be the easier option, though the pendulum could shift as gen AI matures. For instance, a leading logistics organization extended its IT organization, which included data teams, to launch several gen AI initiatives. The company wrapped gen AI into its data and analytics road map, encouraging existing teams to upskill in gen AI capabilities. While the company succeeded in deploying a gen AI pilot, it was limited in scope. And future rollouts were slower than expected because gen AI products were integrated into the company’s overall technology platform, requiring time and resources to ensure compliance with existing systems.

Decoupling the gen AI team from the IT or data organization has different advantages. This approach allows an organization to build a new highly skilled gen AI team from scratch. With a solid foundation in data and AI architectures, the new team can quickly iterate on gen AI components outside of the larger IT function.

About QuantumBlack, AI by McKinsey

QuantumBlack, McKinsey’s AI arm, helps companies transform using the power of technology, technical expertise, and industry experts. With thousands of practitioners at QuantumBlack (data engineers, data scientists, product managers, designers, and software engineers) and McKinsey (industry and domain experts), we are working to solve the world’s most important AI challenges. QuantumBlack Labs is our center of technology development and client innovation, which has been driving cutting-edge advancements and developments in AI through locations across the globe.

Several leading European banks have launched such gen AI task forces, with the idea they could potentially expand into full-fledged centers of excellence (CoE). In highly regulated industries such as healthcare and financial services, creating new, centralized gen AI teams also appears to be the best practice. Using this approach, these companies launched several gen AI projects within weeks instead of months.

Either model can be successful, but both have pitfalls companies should be careful to avoid. If the gen AI team is decoupled from IT, its road map should still be aligned with the broader IT organization to avoid duplicating efforts or building disconnected gen AI components in multiple places. The capability map and ownership of each component should be clearly defined and shared across the organization. For example, the gen AI task force could oversee prompt engineering and guardrails, LLM operations and orchestration, and model improvement—but not data ingestion, management, and storage.

However, if the gen AI team expands as an offshoot of existing IT and data functions, the team will need to successfully manage two starkly different technology life cycles. Specific gen AI components, such as LLM hosting and model hubs, will need to be developed and put into production more rapidly than traditional IT and data components, such as hosting and containers.

Whether a company chooses an extended or distinct gen AI team, it is important for a central IT team to define a common underlying technology infrastructure that ties all gen AI tools together. Avoiding this step could lead to compliance issues or technical debt —the extra work required to fix buggy products that were initially built for speed rather than quality.

Prioritize data management in strategic business domains

As every data leader knows, effective data management is a pivotal factor in implementing gen AI. Without a functional data organization, gen AI applications will not be able to retrieve and process the right information they need. Yet most enterprises report significant hurdles in data utilization, including issues with model reusability, accessibility, scalability, and quality. That is why a data management and governance strategy should be part of any operating model for gen AI. Governance includes managing document sourcing, preparation, curation, and tagging, as well as ensuring data quality and compliance, for both structured and unstructured data.

Managing vast amounts of unstructured data, which comprise more than 80 percent of companies’ overall data, may seem like a daunting task. 4 Tam Harbert, “Tapping the power of unstructured data,” MIT Sloan School of Management, February 1, 2021. Indeed, 60 percent of gen AI high performers and 80 percent of other companies struggle to define a comprehensive strategy for organizing their unstructured data. 5 “ The state of AI in early 2024: Gen AI adoption spikes and starts to generate value ,” McKinsey, May 30, 2024. To address this challenge, organizations can prioritize specific domains and subdomains of unstructured data based on business priorities. For example, one company may prioritize a data domain that groups all gen AI products under development into one business unit, whereas another may prioritize a domain that groups all data related to a specific function, such as finance or HR. The ideal domains and subdomains should be small enough to be actionable while being sufficiently large enough to provide a significant, measurable outcome.

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Since handling unstructured data can be unfamiliar to many data teams, the process should be launched by experts in a centralized manner. These experts are typically data engineers trained to handle unstructured data, as well as natural-language-processing engineers, grouped into a CoE. They establish and implement processes for managing unstructured data so it is accessible to gen AI systems. They ensure policies in the company’s gen AI operating model provide a view on when and where data is consumed. They also ensure consistent standards for data quality, risk management, and compliance.

However, once the CoE provides a deployment road map, domain experts with business oversight should take over the data management process. They are better equipped to extract knowledge from specific records in their field than data professionals alone. As business units begin to provide more higher-quality data for a wider variety of use cases, the centralized data teams tend to become overwhelmed by the demand and lack the expertise to check the quality, veracity, and tagging of domain-specific documents.

Plan for a decentralized approach to gen AI development

As domain teams become more adept at managing data, companies may choose to progressively increase these teams’ ownership of gen AI development—moving from a centralized model to a federated one and finally to a decentralized one (Exhibit 2). Forward-thinking data executives may want to ensure their gen AI operating road maps include future scenarios of decentralized development. There are three approaches to consider.

Centralized gen AI

Some companies choose to centralize gen AI into their own domains. This allows organizations to build capabilities quickly and control costs. A leading global telco used this model, making gen AI a node to its business units, operating under the leadership of a chief data and AI officer. The company was able to quickly set up a knowledgeable gen AI team by pulling existing employees into a central unit. This approach kept development costs low and reduced the risk of multiple teams creating similar projects.

Federated gen AI

As companies build gen AI expertise, they often choose a federated model, in which business units are not only responsible for consuming data related to their domains but also take over data processing and repositories. This model allows domains to integrate gen AI more deeply into their daily workflows for stronger business outcomes.

A major North American investment bank chose the federated model to develop new gen AI use cases within a business unit. The gen AI use cases were so successful that the company later provided funding to scale similar gen AI tools across the organization. This lighthouse project model, in which an innovative project is developed within a business unit and then extended throughout the organization, can be a successful way to boost gen AI deployment without project duplication.

Decentralized gen AI

Some innovative organizations push decentralization even further, transferring all gen AI capabilities to domains. In this model, each domain creates its own gen AI team composed of business, data, and technical experts aligned on a common goal to develop relevant gen AI applications. A decentralized model of gen AI development allows domains to create gen AI agents tailored specifically to their needs, which they can then offer to other domains. For example, a marketing domain that creates agents for social media content creation and post management could then see those agents adopted by many other domains, such as business development, sales, and customer success. With this approach, it is important for a centralized IT team to retain visibility into the tools being developed to avoid blind spots and ensure no two teams develop similar gen AI tools.

Unify federated teams through common infrastructure

While business units know which everyday problems they need to solve with gen AI and are thus well placed to build specific use cases within their own domains, this decentralized development process should never compromise the company’s overall security or resiliency. Instead, companies should ensure IT teams build and manage an underlying common infrastructure on top of which all gen AI tools are developed and deployed. The IT team should also be responsible for building repeatable platforms that can be used by all the business units, such as a prompt library, a repository for Python code, standard agents, and systemized cloud storage. This type of centralized IT management empowers business units to create new gen AI tools, while ensuring all use cases they develop adhere to a highly secure and unified technology framework.

Emphasize risk and compliance governance

Gen AI comes with heightened risks, including potential hallucinations, misinformation, and data leaks. That is why every gen AI operating model should include explicit stipulations for risk and compliance governance . Companies can start by delineating the levels of risk they are willing to tolerate with gen AI and which areas of the business require more safeguards. This initial risk assessment evaluates the diverse ways a gen AI application could affect the company, customers, and partners. When this risk assessment is complete, companies can create a governance and monitoring plan, which should also define any new quantitative and qualitative tests that need to be conducted. By mitigating risks, companies can move forward with gen AI rollouts instead of taking a wait-and-see approach that could hamper competitiveness.

In practical terms, creating a gen AI risk plan involves a six-step process that data leaders must continually monitor and update as new potential risks arise and when new tools are deployed.

• Identify new risks: Ask developers and technology users to identify potential AI-specific threats to add to the company’s overall risk plan.
• Classify gen AI tools: Encourage data teams to collaborate with the risk function to apply oversight to the most critical gen AI tools first.
• Deploy a tiered approach: Adjust the depth and frequency of derisking methods for each gen AI tool based on continual risk assessments.
• Make risk tracking habitual: Begin oversight at the development stage, continuing to measure risks throughout implementation and production.
• Equip risk teams for success: Establish a CoE with developers and risk leaders to ensure the risk team keeps pace with evolving gen AI trends.
• Get everyone on board: Ensure end users, developers, managers, and leaders all understand the company’s policies for safe gen AI use.

By following the above guidelines, data leaders can establish a risk structure that balances oversight with the ability to support rapid decision making and agile gen AI deployments. A strong AI governance plan also helps companies keep pace with constantly shifting AI regulations. For example, the EU Artificial Intelligence Act emphasizes the need for transparency, requiring organizations to notify users about AI risks, ensure model output quality, and conduct regular compliance assessments. Legislation in many countries requires companies to meet privacy standards that can affect how gen AI tools are permitted to consume data. Any gen AI governance model must be flexible enough to take relevant regulations and updates into account.

As gen AI moves from experimentation to implementation, companies must create both operating and technical models  to successfully guide deployments across their organizations. Data sits at the center of these models. Companies must organize all their data so gen AI applications can securely access it at scale. From an operational standpoint, data leaders should coordinate gen AI rollouts as genuine digital transformations, applying best practices to ensure clear governance, objectives and key results, and progress monitoring.

With such a coordinated plan, companies can quickly launch gen AI use cases from a centralized CoE. They can also prepare themselves for a longer-term evolution to a decentralized development approach supported by common technology infrastructure, which can power the agile gen AI deployments companies need to compete in today’s fast-paced AI economy.

Alex Singla is a senior partner in McKinsey’s Chicago office; Asin Tavakoli is a partner in the Düsseldorf office, where Holger Harreis is a senior partner; Kayvaun Rowshankish is a senior partner in the New York office; Klemens Hjartar is a senior partner in the Copenhagen office; and Gaspard Fouilland and Olivier Fournier are consultants in the Paris office.

The authors wish to thank Jean-Baptiste Dubois, Jon Boorstein, and Pedro J. Silva for their contributions to this article.

This article was edited by Kristi Essick, an executive editor in the Bay Area office.

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