Of Actual Currencies and Plan Rates

Yesterday I voiced some frustration at the infinity of questions that can be asked of a Market Intelligence professional, and suggested one way to filter out the questions that should be discarded: "Will you take the same decision whatever the answer?". I gave the example of asking for charts to be done in both Actual Dollars and Plan Dollars, and suggested these requests create extra work for no discernible additional value.

Today I'll try to attack the question of when to use Actual Dollars and when to use Plan Dollars.

For at least the past four years, the exchange rate between the pound and the plan dollar has been £1 = $1.55. This isn't an exchange rate that anyone outside IBM would recognise, but a constant currency rate used inside an international company has two immense advantages:

• Plan rates are better for sales target-setting. Sales representatives (SRs) and their managers shouldn't have to worry about fluctuating exchange rates when deciding how they are going to achieve their annual targets, because exchange rates are beyond their control. Customers in the UK pay IBM for its products in pounds, not dollars. So if SRs targets are set in dollars, it is far better if they are in plan dollars, not actual dollars.


• Plan rates enable fairer year-on-year comparisons. If you want to measure success from one year to the next, then it's far better to measure sales growth of a sales representative, division or subsidiary in constant currency than at actual currency exchange rates. The reason is the same: exchange rate movements are beyond their control, so they should be punished or rewarded for these movements.

There is little point in requiring people to carry two parallel sets of figures around in their heads—both plan dollar targets and actual dollar targets—so in order to calculate their market share, they will want to see the market size calculated in plan dollars.

However, the rest of the world operates in actual dollars:

• American IT companies publish their results in actual dollars.
  
• The values of publicly announced contracts are stated in actual dollars / euros / pounds.
  
• IDC, Gartner, Ovum publish their estimates of competitor revenues in each IT market in actual dollars.
  
• If you state plan dollar numbers to anyone outside of IBM, they won't recognise any of them.

A company which translated all of this data back into their own internal constant currency could justifiably be described as too inward-looking. Every time that you saw an externally produced estimate of the size of an IT market, you would have to translate it into plan dollars in order to check whether it looked reasonable.

So at some point, it's best to talk in actual dollars, to avoid becoming too unworldly. Our principle tends to be as follows:

• Market size charts tend to be given at Plan Rate.
  
• Charts of competitor revenues are given at Actual Dollar Rates.

There is, as you might expect, a conflict when we try to apply competitor revenues to a particular market.

And I haven't even tried to address the topic of the best measure to use when there is high price inflation...