Among the different subjects touched upon in our upcoming Business Finance interview with Patricia Cochran, CFO of Vision Service Plan, we thought Patricia’s comments surrounding budgeting and forecasting may hold special interest to finance professionals at large. Here’s a short excerpt:

Steve Player: Tell me a little bit about what VSP does, for those of our readers who may not know which eye care plan they’re actually using.

Patricia Cochran: VSP stands for Vision Service Plan. We provide eye care as an employee benefit. We’ve been in business a long time — since 1955. We are the largest provider of this service, covering over 55 million people throughout the United States, which means that about one out of every six people has our vision coverage.

We primarily sell it through employers as well as associations. We also have an individual plan so people can buy it directly. We provide eye exams, eyeglasses, and contact lenses if patients need vision correction.

SP: My introduction to VSP was through the company’s activity-based management program. What were you aiming to achieve when you set up activity-based costing, and what role does it play today?

Cochran: In my earlier years working here, I kept hearing from my colleagues in management, “If only we understood our costs!” They wanted to know what it cost to do a particular piece of work, and they couldn’t decipher it through the traditional accounting that we were doing for them. I thought there had to be a way to get that understanding to them. When I first started the activity-based cost program, I thought, “This is something that they will understand, versus natural classification of expense or department reports.”

At this point the management teams in our organization know so much about their costs — they can’t escape! Before it was a mystery; now it’s no longer a mystery. They understand how much it takes to do the work they’re doing, and whether it’s creating value.

Activity-based costing has been very helpful for us. We’ve dropped some products that really weren’t profitable. As much as we wanted to hang on to them, the facts were the facts, and so we dropped them. It’s definitely been a value-add.

SP: Have you made any major changes in planning and budgeting, or do you have a fairly traditional budget?

Cochran: I’d say we’re still doing traditional budgeting. One thing I’ll add, though, is that the budget isn’t static, because we can adapt to various business changes.

We do the budget in a condensed timeframe; we give people about six weeks.

SP: So you’re not a six-months-process type of organization …

Cochran: No, we get that thing done! And then, on an ongoing basis every month, our business leadership team — the four company presidents, the CEO, the CFO, and the VP of HR — gets together, and if there are any changes that need to be made, we talk about those as a group. Do we need to increase an activity? Do we need to make a strategic investment in a business or a product line? The budget isn’t set in stone, and it does evolve during the year, but there are some pretty substantial discussions among the top leadership team before any changes are made.

SP: How far out do you forecast?

Cochran: We do a pretty good job of forecasting for the next two years. We try to do some forecasts out five years, but I’d say those are pretty big guesses.

SP: How does VSP deal with the kind of volatility we’ve seen since the back half of 2008? I assume some of your customers have been laying people off, so they have fewer employees for their health programs to cover. How does that impact you?

Cochran: We’ve been impacted from two standpoints. One, as you mentioned, is that unemployment is not our friend. The second thing is that when people are nervous about losing their jobs, they use their benefits at an extraordinary level. They’re thinking, “I’d better use it today, because who knows whether I’ll have it tomorrow.” So we’ve seen a real spike in utilization. In all the time I’ve been here, I’ve never seen a utilization pattern like this last year.

Our seven-executive budget oversight committee is where we think this through. Obviously, we want to safeguard our employee base; our talent pool is our future. With that as an underlying premise, we looked at our discretionary spending areas — some of which are nice to have, some of which are part of our culture here — and we thought about them in tiers: If we need to start paring back because of shrinking enrollment, what’s our first tier? What are our second and third tiers? So we’re ready to execute if we have to.

Look for our extended interview with VSP’s Patricia Cochran later this month on BusinessFinancemag.com. ###