In one of my S&OP pulse check surveys, I asked participants the following question;
‘Do you believe there is a difference between S&OP and IBP?’
Most (48%) of the 120 survey participants believe there is a difference. 20% answered ‘don’t know’ and the remaining 32% believed there is no difference.
The answers made me realize I actually don’t know any widely acknowledged definition for IBP. And I have been reading, researching, writing and practicing IBP for many years. As far as I know there is no agreed standard definition. I think we need one. Why bother, besides solving my own existential problem?
Because when there is no agreed definition or standard, there are no clear rules. Without rules anything goes. Anything can be called IBP. Any software vendor can call their solution IBP. Or any consultancy can knock on your door with an IBP maturity model. Any scholar can tell you he is teaching you IBP. I see this happening all around me.
This is not a great way to build a foundation, or govern, educate and make progress with an important principle like Integrated Business Planning. Personally, I regard IBP as mature S&OP, so yes I do think IBP is different. I also prefer the IBP abbreviation as it is a more inclusive definition. It doesn’t just mention sales and operations and leaves planning open for the whole enterprise. But defining IBP as mature or advanced S&OP is not enough to be clear about what IBP is.
Shortcomings in existing IBP definitions
There are many different IBP definitions, one of them being ‘advanced S&OP’. At Wikipedia we can find this first definition: ‘Integrated Business Planning is a planning process that integrates across two or more functions in a business or government entity referred to as an enterprise to maximize financial value.’ This definition calls out IBP as a planning process with the goal of maximizing financial value in an enterprise.
A second definition comes from an Oliver Wight website: ‘Integrated Business Planning (IBP) is the business planning process for the post-recession era, extending the principles of S&OP throughout the supply chain, product and customer portfolios, customer demand and strategic planning, to deliver one seamless management process.’
Although Oliver Wight has done a lot to explain and market IBP to the masses, I do have some problems with this definition.
- It calls out a timeline, the post-recession era, which I believe is confusing (which recession, in what country and when?) and unnecessary.
- It shows a bias towards supply chain and S&OP terminology, from which I believe IBP has to unshackle, as you can read in the Rise and Fall of S&OP.
- It tells us that it is a process only and calls out some steps in that process.
- It tells us the end goal is one seamless management process, so the process itself.
A third definition is ‘Integrated business planning (IBP) is a strategy for connecting the planning functions of each department in an organization to align operations and strategy with the organization’s financial performance.’ This definition works well, doesn’t focus on process, explains the cross functional nature and links strategy and financial performance. It correctly calls out the need for alignment, however it doesn’t tell us what we do with the outcome of our aligned plans.
The focus on process in the first two definitions shows a lack of system thinking, as we all know IBP is more than just a process. Furthermore the goal of IBP can’t be the process itself, it should have a business objective, like maximizing financial value in the first definition. IBP needs to be holistic, calling it a process only undermines a holistic approach.
Integrated Business Planning as a system
As I wrote in this blog, IBP requires system thinking. System thinking was defined by Senge, Lannon-Kim in 1991 as; ‘System thinking is a discipline for seeing wholes, recognising patterns and interrelationships and learning how to understand those interrelationships in more effective, efficient ways’. In this context, IBP can be described as a ‘planning system’, however, using the word ‘system’ in an IBP definition, might get confused with IT-systems.
We can also think of IBP as a planning philosophy, which requires indeed a process, but a whole bunch of other things to make it work seamless. In the Oxford dictionary a definition of philosophy is; ‘a theory or attitude that acts as a guiding principle for behaviour’. I prefer to regard IBP as a planning philosophy, with system thinking as the theory or attitude that acts as the guiding principle. Almost everything in the business needs to be connected to make a feasible and accurate periodic projection of the budget or the strategic intent.
Integrated Business Planning objectives
We might forget it in our busy day to day lives, but the ultimate goal of any business is to achieve its purpose and envisioned future. A strategy is a set of decisions, priorities and long term plans to achieve its envisioned future. The budget is the first year of the strategy. The supply chain is just one of an enterprise its functions we need to execute a strategy. There are many other functions, so there is no need to call out the supply chain in an IBP definition.
If we want to support a company’s vision through planning, any definition needs to be in the context to achieve the envisioned future, strategy and budget goals of an enterprise. IBP provides us a forward view to tell us if we’re likely to achieve the budget, strategy and envisioned future. These are ultimate goals for IBP and hence are included in my definition.
IBP Validity and Reliability
Just any guess of the future isn’t good enough. Before any educated guess or plan for the future is presented we need to make sure there have been some checks and balances to make sure it has some validity. If we project stock, working capital or an EBIT number, we need to have a degree of confidence that this is really what we’re looking at.
Once we have validity and we agree and are aligned on what we’re looking at, we need reliability of any projection we make. We like to see the projected stock, working capital or EBIT number within an acceptable range.
Validity and reliability both need logic in analysis and interpretation of data and agreement on the assumptions we use and is one of the hardest elements to get right in IBP. For an EBIT projection, every P&L line needs to have some validity and reliability. For a strategy projection, we need to have reliability of the status, progress and forward view of strategic initiatives.
We need to have validity and reliability about our expected budget and strategy performance, or the whole purpose of IBP falls apart.
A new IBP definition
In IBP the periodic review is often monthly, but financial and strategy literature often suggest quarterly periods to review a rolling forecast and strategy progress. Hence we don’t like to call out a specific time period. Executives are the main responsible for vision, strategy, budget and decision making like resource re-allocation and need to be called out. We also like to create some form of alignment during an IBP cycle on the information presented to executives. Following these explanations, here is my working definition of IBP.
Integrated Business Planning (IBP): A holistic planning philosophy, where all organizational functions participate in providing executives periodically with valid and reliable information, in order to decide how to align the enterprise around executing the plans to achieve budget, strategic intent and the envisioned future.
We then can only hope that, armed with this information, the executives make good decisions and set the right priorities to lead to company to its envisioned future. Will this definition be the final acknowledged one? No way, but I hope it will bring us a step closer to define and agree what IBP is in a few sentences.
I encourage you to comment on this ‘open source’ definition. It has already been updated many timest based on some of the feedback in the comment section.