Product Lifecycle Management (PLM) is a critical component for the success of any company developing goods or services. The process by which a company creates new products and services determines speed to market and thus becomes a driver for growth as well as keeping the company’s offerings relevant to consumers and ensuring that these products reach the markets synchronizing timing with demand. The integral PLM process can drive success for companies in any industry, including consumer goods, technology or software.
Along with a strong PLM, robust financial planning processes embedded in the PLM allow companies to establish realistic goals and, more importantly, enable the companies to correct course when results inevitably diverge from those planned goals. The financial planning and analysis function plays an integral role in a corporation’s annual goal setting, the development of near term strategic plans, and tracking key performance indicators (KPIs) such as sales, product cost, capital and operational expenditures.
Thus, financial planning teams are uniquely positioned to be the catalyst in achieving results of the PLM process.
I will share some of the best practices I employed in my professional experience that can help your firm manage product lifecycles.
Financial results will inevitably have variances to the budgets and forecasts, no matter how robust or comprehensive the modeling was when those were developed. Variances are unavoidable, outside economic factors are hard to predict, markets will change unexpectedly, and consumer behavior may shift at a moment’s notice. Furthermore, those factors are independent of the internal estimates and projections, which may be challenging to predict accurately with new offerings or in undefined segments.
The key to financial planning leadership is providing insights for the company to adjust accordingly, and to do so promptly. Financial planning sets the parameters to measure, quantifies the goals and tracks them continuously so the company can be ready to correct course quickly when needed.
Financial Planning’s Role in Each Product Lifecycle Management Phase
Product managers, designers, marketers and sales teams are the industry experts driving the majority of innovation and thus become the de-facto owners of PLM.
Financial planning and analysis should not be a supporting function in PLM – but instead a leader that focuses all team members towards profitable and successful growth. PLM is a set of processes and methods that provide standardization and rules, ensuring the involvement of all operational functions involved, their people’s resources, and their skills. It is important to note that standardization of processes allows the staff to avoid overlooking aspects of the product development process and ensure the involvement of all parties.
When properly implemented, standardization sets the stage for flexibility throughout development and will encourage innovation, rather than create bureaucracy and establish rigid rules.
PLM creates the framework for the various phases for any product or service’s life, and financial planning plays a crucial role in each one of these stages:
Stage 1: Development
This stage is the idea phase, where business plans are built alongside the research, design and proofing of concepts. By design, not all products or service offerings survive the development phase. This stage serves a vital filtering function, where only the best and most business-viable ideas are selected and then sourcing or manufacturing plans established.
Building a strong business case encompasses aspects beyond only estimating expenses such as research and development, sales projections, the bill-of-materials (BOM), capital investments, tooling or even sales projections. Quantifying these components often is the responsibility of the business owners described above.
A successful partnership with the financial planning function can lead to more accurate estimates as historical data is leveraged more effectively.
Financial planning teams often have more significant insights into the trend of actual results, individual cost and actual expenditures.
While these are critical components that must be carefully considered, perhaps the most overlooked aspect is not the original estimate, but their equivalent elements in later phases. Strong financial planning considers expenses required to not only successfully go to market but to continue supporting product refreshes during later stages, such as timing cost savings and efficiencies correctly, considering future required investments for “refreshes” or product variants.
Financial planning during development is critical beyond building the business case for the product’s life. Investment parameters must be set for essential functions such as research and development along with key performance indicators. As previously mentioned, not all products should move past this phase, and proper financial planning helps determine when it is time to consider investments as sunk costs and “cut the cord.”
Stage 2: Growth
This stage starts at the product or service’s introduction, through launch and early releases. The growth phase can be the most exciting time in product development, as it may confirm all of the expectations and hopes the company projected have come to fruition. On the flip side, it can also be a challenging time if those do not materialize, and adjustments are required. When strong financial planning is followed in the development phase, the proper parameters are established to evaluate the growth accordingly. These parameters then determine which of the scenarios above applies. Sales growth can be exciting when experienced in isolation, but financial planning is paramount in quantifying the acceptable level of sales growth.
In some cases, companies may fool themselves with high growth rates without taking into account external or even internal benchmarks. In emerging industries and markets, exponential growth may be the norm, and double-digit growth may be a sign of failure. In more mature conditions, even single-digit sales growth may define success. For this reason, it is essential to measure growth not only against the business plan but to the competition as well.
Financial planning’s leadership is essential throughout the growth phase in ensuring that the innovation pipeline is adequately funded.
Even though a product may still be experiencing growth, the most successful companies avoid complacency and plan future offerings ahead of the market telling them when they are needed. After all, the maturity phase may always be just around the corner, and it is the responsibility of financial planning to prepare the company for its future stages. At this point, while tempting to reap profits, financial planning must ensure research and development budgets and continuous improvement projects such as cost savings are maintained.
Stage 3: Maturity
Once the product or service successfully competes in the marketplace, consumer demand will shift, and competitors will develop their own rival offerings. At this point, growth rates will inevitably slow down as the product enters the maturity stage.
The first vital role of financial planning during the maturity phase is determining whether the product has indeed entered this phase and to determine whether the decline in growth rates is driven by external factors, such as an economic downturn or seasonal business fluctuations. The continuous tracking of sales compared to expectations and competitors becomes critical at this point. How are sales performing relative to budget and forecast? What is the market share trend over short and long term periods? These fundamental questions may signal whether a product has hit maturity, and the size of these changes become the indicators to whether a refresh is in order or a replacement is merited.
By definition, once maturity hits, the product has been in the market for some time. Driving to identify cost savings and efficiencies becomes a critical role of financial planning teams. In many cases, cost-savings plans are promised by sourcing and manufacturing teams, without proper tracking by the accounting teams that have access to the actual costs. Defining accountability of cost savings is a crucial responsibility of financial planning, helping maintain profitability as prices fall due to the maturity phase.
Proper financial planning will also ensure the product’s life beyond growth and maturity has been defined. As the product reaches maturity, how did the business plan outline the life cycle? Will the product become a perennial offering, and financially be a “cash cow” for the firm? Is maturity expected to last a significant time, or as is the case in many technology segments, does the market call for a quick phase-out and replacement strategy?
Stage 4: Decline, or Phase-Out
As previously discussed, an adequately defined product lifecycle will determine the speed at which the product will be phased out or replaced. The role of financial planning during this stage is to quantify the financial impact at the End-of-Life. What plans are in place to deplete inventory before becoming obsolete? What is the level of discounts required to stimulate such depletion? And how much obsolete inventory may need to be written off? Financial planning can provide the proper coordination between operations and accounting to establish reserves, and thus avoid surprising management with unplanned “bad news.”
In some cases, limited product offerings are provided after the phase-out period. For example, automotive parts are commonly past a vehicle’s end-of-life, and software packages will have technical support years after their replacement has hit the market. In such cases, it is critical to budget for long-life products and services to avoid alienating past customers that may become repeat buyers. Financial planning can facilitate making these a profitable venture.
PLM & Financial Planning: The Wrap-Up
As this article highlights, robust financial planning can drive the PLM process and the continued vitality of the company. In summary:
- Set realistic goals and parameters that signal potential red flags.
- Leverage actuals and historical trends when tracking performance.
- Provide leadership when business conditions change adjustments are required.
- Ensure budgets cover ongoing funding for later phases past development.
- Communicate between operations and accounting teams to set proper reserves and avoid surprises.
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About the Author
Raul has over 20 years of experience in corporate finance across several industries, including consumer goods, e-commerce and automotive. His core competencies include operational leadership, budgeting and forecasting, and partnering cross functionally to provide insights and drive results in both public and private companies. Raul has worked in a diverse set of areas within finance, such as manufacturing and operations, product development, sales and marketing, due diligence analysis and transaction advisory. Prior to joining 8020 Consulting, he served as the Senior Director of Finance at Newegg, an e-commerce company, and served as Senior Manager at Mattel in the International Division and the Operations Division. He holds a B.S. in Economics from the Wharton School, University of Pennsylvania.
Categorized in: Financial Planning & Analysis