LRP v/s AOP

In the customer conversations I have, very few FP&A teams spend time on LRP processes. While its equally important, it appears that the intensity and effort behind the same is probably less than that invested in the AOP. How are they different, where do they intersect, whom do they serve?

The Long-Range Plan (LRP) and the Annual Operating Plan (AOP) are both crucial elements of strategic planning in organizations, but they serve different purposes and cover different time horizons.

As the names signify, the AOP is the pan for the current year capturing the revenue and expense plan by products, segments, departments, and finally resulting in the overall P&L that the organization is expected to achieve in the given FY.

The Long-Range Plan is a strategic plan that typically covers a period of three to five years or even longer. It focuses on the long-term vision, goals, and strategies of the organization. Key Characteristics:

1. Time Horizon: Covers a longer time frame, usually 3-5 years, but can extend up to 10 years or more. This will vary by industry also. E.g. agriculture product (seeds) related companies, pharmaceuticals/ drug manufacturers, defence goods manufacturers, naturally will tend to have a larger horizon coz their product development lifecycles are that long. Whereas automotive, or FMCG segments will have a shorter outlook.

2. Focus: Emphasizes long-term goals, vision, and strategic initiatives. Addresses major investments (setting up new development centers or manufacturing plants), market expansions (expanding into new countries), new product developments, and significant organizational changes (acquisitions and divestments).

3. Planning Process: Involves high-level strategy formulation and alignment with the organization’s vision and mission. Often includes market analysis, economic trends, competitive analysis, and impact of technology advancements.

4. Level of Details: Less detailed and more strategic than the annual plan, allowing for adjustments as long-term goals and external conditions evolve. But again, depends on the segment/industry.

5. Output: Results in a strategic roadmap that guides decision-making and resource allocation over an extended period. May also connect with multiple AOPs relative to the impact of the initiatives identified in the LRP.

6. Audience: Primarily aimed at senior management and the board of directors. But with contributions from relevant stakeholders.

How do FP&A solutions support LRP planning

The fundamental capabilities of a FP&A solution used for AOP still apply for LRP e.g. multi-dimensional modelling, data analysis, data integration, collaboration, etc. The following capabilities of the FP&A solutions will come in very handy: ?

>Monitoring strategic initiatives and special projects: As strategic projects involve higher expenditure over a longer period of time, monitoring them is equally crucial. FP&A solutions enable organizations to define such projects, allocate resources, capture actuals, and identify progress or delays. ?

>Scenario comparison: This is probably the second-best capability which comes in handy during the LRP process i.e. the ability to develop and compare multiple business scenarios and visualize its impact on the income statement. Each of the initiatives can be tied back to the P&L across multiple years and re-adjusted to reflect the variations. E.g. how much will we spend in setting up a new plant over the next 2 years and in which month of year-3 can we expect it to add to the revenue plan.

>Linking AOP with LRP: As the above example illustrates the LRP has an impact on the AOP for costs and revenue over multiple years. This can have a significant bearing on the years where the key milestones in the LRP are expected to be accomplishes e.g. general availability of the new products to be sold in the market or the impact of new product development on year-2 AOP. Using FP&A tools both the plans can be intricately linked and monitored for the respective initiatives and the years.

>Forecasting: As with most plans, LRP is a forward-looking statement. FP&A tools come pre-packages with multiple forecasting algorithms which can help organizations fine-tune their business projections. These could be in the form of revenue, headcount, demand, or costs.

>Data Security: As LRP contains highly competitive and sensitive information. Plus, LRP plan is made for a longer period of time and thus it's fair to expect people movement over years. Executing these plans on spreadsheets is fraught with multiple risks viz. data sharing/leakage, wrong access, no auditability and person dependency. Introduction of a system adds stringent security, auditability, access control and eliminates people dependency.

LRP is used for guiding overall direction, setting ambitious goals, and ensuring that the organization remains focused on its long-term vision despite short-term fluctuations. FP&A solutions can significantly help organizations better align LRP with AOP, while improving decision making leading to more accurate business forecasts, and optimum utilization of resources.