On 12th October 2017, 22 senior finance practitioners from such companies as Ericsson, IDG (International Data Group), Lagardére Sports, MSD, Nutricia, Philips, Pirelli, Regus, Salesforce, Telia, Tieto, etc., gathered in Stockholm to interactively discuss why Driver-Based Planning matters for modern FP&A. The discussion was thought-provoking and interesting: many finance practitioners considering fully driver-based planning model, however, just a few organizations have them.
The demand for Financial Planning & Analytics (FP&A) thought leadership and best practice establishment is very high. In response to many requests from the UK professional community, the London FP&A Circle was established in July 2016.
This is a vendor-agnostic educational and networking forum for passionate finance practitioners. It is a platform for the International FP&A Board to share its practical insights on the latest trends and developments in financial planning and analytics with the FP&A community of London city. So far the Board discussions were held in 15 cities, 11 countries on 4 continents.
At the beginning of the new year, join our next meeting in central London to learn Latest Trends in Modern FP&A.
Latest Trends in Modern FP&A
Thursday, 25 January 2018
6-30 pm – 7-00 pm Registrations, networking, light food and refreshments
7-00 pm – 8-30 pm Latest Trends in Modern FP&A. Presentations and interactive discussion
8-30 pm – 9-30 pm Networking
- A new era for FP&A.
- Latest trends in analytics, planning, modelling and systems.
- FP&A Maturity Models by the International FP&A Board (Analytics, Rolling Forecast, Business Partnering).
- Conclusions and recommendations.
Michael Page, 1st Floor, Victoria House, Southampton Row, London, WC1B 4JB
Participation in the FP&A Circle events is complimentary and by invitation only, with 40-50 attendees per meeting. The forum is vendor agnostic and exclusive to the finance practitioners. We will not be able to confirm places for vendors, consultants and unemployed.
If any work disciplines can offer us a window to the future, Financial Planning and Analytics (FP&A) is certainly one of them. In an environment where your speed to move can make the ultimate difference to your company, it’s no accident that financial forecasting is now at the cutting edge of change in today’s business world. And indeed, future business success may lie with those who embrace these changes sooner rather than later.
Faced with a post-Millennium atmosphere of uncertainty and rapid change, accurate forecasting – and the ability to reforecast at pace – has gained huge currency for business leaders. Add to this the influence of automation tools on traditional accountancy roles, plus the growing need for top-line expertise in reading and disseminating our vast quantities of data, and you have a sector at the centre of the action when it comes to change. Michael Page recently sat down with one of FP&A’s thought leaders to plot five factors driving change in today.
- Speed and Simplification
Larysa Melnychuk, CEO and founder of the International FP&A Board, spends much of her time these days in discussion with the world’s leading CFOs about the changing world of financial analytics, financial planning and analysis.
She notes that in an environment of unprecedented “black swans” and “perfect storms” in our global financial market, business leaders are now more aware than ever of the need to move fast: “Situations that we never expected would happen, have happened in real life. Obviously in the business environment, this is one of the biggest reasons why financial analytics has changed,” she notes.
Combine this pressure-cooker environment with the arrival of newer and cheaper Cloud-based systems that are easily managed within a finance department, and you have an environment ripe for change. “In this dynamic business environment, it’s not possible to use the old, very detailed and static methods we used,” notes Melnychuk, who is based in the United Kingdom. As a result, the landscape for financial analytics is now more forward-looking and speed conscious than ever.
- Find Your Key Drivers
In an increasingly complex environment, the ultimate goal is to understand in the simplest way, how a business makes its money. “We’re talking about simplification beyond the incredible level of detail that we had before,” notes Melnychuk. “It’s all based on key business drivers that are very important to identify – it’s about the 20% of drivers that explain 80% of the results.”
She notes that while many managers claim to know these key drivers, the reality of our big data world is that some drivers become less sensitive over time, while others prove less reliable. The ideal key drivers process should be part of a company’s business intelligence project, she notes. “It should be automated: and the drivers should be checked often, through analytical automation.” Likewise, it is also important to pay attention to both internal and external drivers, she notes.
Yet are many companies in the world currently doing this? “I would say not many,” she notes. “Definitely leading companies have started – and this is on the agenda of many companies.”
- Tough Roles to Fill
Increasingly, she says modern FP&A teams require three distinct roles (as per Mark Gandy’s model). The first is the Architect who builds the driver-based model. Next comes the Analyst, who can track its progress. And ideally, a third role, that of a business-partner, or Communicator. “It’s difficult to find these three people in one role,” Melnychuk notes from her own experience as an FP&A director. “Analysts and Architects can be introverts, and not so comfortable going to the business to communicate it. I’ve seen this a lot.”
As such, it tends to be a tough job to fulfil: “Around 70% of UK CFOs, and 80% of US CFOs, say that FP&A roles are the most difficult to fill.” While in traditional accountancy, being qualified and examining past financial history was once sufficient, this is no longer the case. “In FP&A it’s different. We’re seeing the emergence of big data, from which you have to analyse these key drivers.”
- Rapid Reforecasting
In an environment of sudden and intense market change, being able to identify and simplify your business drivers can provide an invaluable chance to move fast against competitors. “It’s dependent on the visibility of their data, and the ability to drill down and make decisions very quickly,” Melnychuk notes.
She takes the example of a sudden market interruption, a so-called black swan event. “With traditional planning models and traditional hires, you needed four-to-seven months to reforecast. But with this new generation of systems, models and people, you can probably do this in a couple of hours – almost in real-time.” One New York based banking group she spoke with, had reforecasting down to a fine art. “At the moment, it’s less than 36 minutes, while previously it used to be more than three weeks. This is an indication of how the world’s changed,” she notes.
“And why? It’s because traditional line-by-line forecasts were replaced by driver-based planning model that is implemented through system. Just 36 minutes and it’s done – and the quality of this forecast is quite good as well. So this is a good example of how much this can achieve.”
- Future role replacements
Larysa Melnychuk anticipates a realignment ahead in terms of job roles within finance departments, as some traditional roles become replaced by new ones. “Fewer traditional accountants will be needed, and more combinational skills, especially with this data management, analytical and business-partnering will be needed,” she predicts. “I can see a time when data scientists work together with FP&A. And it is already happening in some leading analytical organisations”
Leading companies already enlist data scientists to identify, for instance, the one driver responsible for 60% of their forecasting. Melnychuk notes that effective driver-based planning can save teams a lot of time and effort: “You don’t need a lot of data, or to spend a lot of time. But to identify those key drivers really can help you to very quickly and very effectively build your plans and different scenarios for the future.”
“There will be this new work for analytical people, because they will start from different levels of analytics, and they will go forward. So it’s very motivational for good analytical talent to be at such organisations.”
The interview was first published on the Michael Page Asia-Pacific websites.
In this interview, Larysa Melnychuk, Managing Director at FP&A Trends Group and the Founder of the International FP&A Board, shares her thoughts on Beyond Budgeting Philosophy and reveals insights that were generated by the London FP&A Board during debate on the subject.
Are we ready to change the traditional budgeting culture?
In a previous blog post I mentioned that people who are highly sensitive to the lack of flexibility of traditional budgeting often see rolling forecasts as the answer. If we update our view of the future more frequently and don’t confine it to the financial year it is obvious that this will be more useful than traditional annual budgets based on the financial year.
So, you might think, forecasts are like budgets but done more frequently – right?
Forecasts and budgets are fundamentally different animals, and a failure to recognise this is the cause of many of the problems people have in implementing forecasting processes that deliver value.
The best way to think about forecasts is that they are future actuals. Whereas actuals inform you about what has happened given what you did in the past, forecasts are an attempt to work out what will happen in the future given what you have done and what you plan to do.
You can’t change what you did in the past but you can change your plans…and this is the reason why you produce forecasts. They enable you to determine if and how you need to change your plans to achieve the outcome you want.
To achieve this a forecast needs to be an honest reflection of your expectations. What it can’t be is a way of setting goals or budgets, because these reflect your aspirations. If you try to use forecasts in this way there are only three possible outcomes:
- You will get bad forecasts
- You will get bad targets or budgets
- You will get bad targets and bad forecasts
Indeed, forecasts on have value if you can change your plans in order to achieve the outcome that you want. And since this might mean reallocating resources, forecasts are in opposition to traditional fixed budgeting rather than a handy uncontroversial add on to the process.
And that’s not the only reason why forecasting and budgeting make uncomfortable bed fellows.
Traditionally variance analysis is used to manage performance back to budget and in this world a negative deviation from budget is bad. In a world of forecasting, however, gaps are good, because it is the existence of gaps that tell you that you need to do something different.
Let me illustrate this with a simple example.
Imagine that you are in a sailing boat. You know where you want to go and before you set out you made a plan of how you are going to get there based upon certain assumptions about the wind, tides and so on.
But very often when you are sailing – just like in the world of business – the assumptions that you originally made were wrong because you had no experience of the waters that you were sailing into. Or perhaps conditions changed after you set out. In these circumstances, in order to get where you want to go you have to plot a new course, the first step of which will involve working out where you will end up if you carry on doing what you planned to do.
This forecast may well tell you that you are going to end up hitting some rocks or in some other bad place. This is useful knowledge. This is why you forecast. Your forecast is telling you that you need to do something different.
At this point the appropriate response of the captain to the navigator should be ‘thank you for telling me. What do I need to do differently?’
In business however, because people have been trained to think that differences are bad, forecasts that show adverse outcomes are often greeted with words like ‘this is unacceptable’ or ‘you must try harder’. And worse, when forecasts change to reflect changing circumstances, we often hear ‘last month you said x but know you say y. Do you know what you are doing?’
If this is what happens people pretty soon learn that although you say you want a forecast what you really are asking for is reconfirmation of the budgeted numbers. And if this happens, whatever it says at the top of the piece of paper on which it is written, it is NOT a forecast at all, and everyone has wasted their time. Worse it might have engendered a false sense of security and you may be about to stray into dangerous waters without knowing it.
So forecasting – done well – is much more than a minor modification to traditional processes performed to provide flexibility that the annual process doesn’t possess. It is truly subversive because it demands a change in many other processes and more importantly the mindset that underpins the traditional model of performance management.
Getting the mindset right is probably the most important and difficult challenge that has to be addresses when introducing forecasting into an organisation, but it is not the only one.
Over the next three blogs I will tackle some of the other, more technical issues.