For progressive and competitive organizations of all sizes, accessing smarter, leaner and faster information to drive a successful business strategy can only be achieved with real-time insights into their customer’s needs and buying behaviours.
Identifying and building ‘products of the future’, before you customers even realise the need, can mean the difference between long-term success and overnight failure – Nokia and RIM (Blackberry) are two examples of market leading companies who failed to prepare for the onset of handheld computing, Apple took the reverse approach, the rest is history.
Advances in predictive and analytical software are facilitating a huge competitive advantage for many companies who recognise the value of using big data to look into the future using ‘precognitive’ technology. But, for many organizations, FP&A analytical transformation remains out of reach for reasons including a lack of preparedness and a business culture that’s become risk adverse from the failure of historic technology investments to deliver the transparency needed to drive a successful strategy.
The World Trade Centre, Amsterdam and Cercle de Lorraine Club van Lotharingen, Brussels welcomed some of the brightest minds in Financial Planning & Analysis (FP&A) to discuss that very topic at both cities’ second FP&A Board roundtables, organized by Larysa Melnychuk (MD of the FP&A Trends Group).
Agenda for the evening:
FP&A Analytical Transformation – what does it mean for organizations and are we ready for big data analytics in finance?
Both sessions welcomed Thomas Lundell, Director of FP&A & Business Control (EMEA) at NetApp, creators of innovative storage and data management. Thomas presented NetApp case study "FP&A Transformation: Becoming Agile, Adaptable and Predictive" which detailed his personal and corporate business journey in transforming FP&A through technology investment.
I asked Thomas what he believes to be the major advantage Analytical Transformation can provide for an organization and how do senior FP&A professionals best relay that advantage when trying to secure investment buy-in from organizational heads. Thomas says:
“There are two main advantages to undertaking an Analytical Transformation for FP&A, both of which certainly will secure investment buy-in from leadership.
First, it improves the speed and quality of decision-making. Business is increasingly dynamic and fast moving. Business executives need to make large-scale, complex decisions within reduced time frames. Going through an analytical transformation will enable FP&A to provide both predictive and prescriptive analytics that will enable executives to make better and quicker business decisions.
Second, it enables FP&A to create an integrated business plan that links up all the functions within the organization and that can capture market opportunity in an efficiently coordinated way. By going through an Analytical Transformation, FP&A can move from doing traditional budgeting and forecasting, to creating integrated business plans that link investment allocation with business unit strategy.“
Discussions broached the matter of how analytical technology can tick the wish lists of many Senior FP&A professionals including:
Both groups addressed the readiness of many organizations in embracing the value-add of analytics transformation and the challenges, which continue to obstruct its advancement even within some of the largest, most successful businesses in the world.
Regulatory changes such as the arrival of the International Financial Reporting Standards (IFRS) 9, who’s enforcement has been delayed until 1 January 2018, may also be fostering a reluctance to prepare, even if just as a resistance to the core principles of the new standard.
Access to quality data and the flexibility to make decisions quickly by utilizing that data to predict the future, remains the FP&A holy grail of business strategy.
“Advanced analytics is the extensive use of data, statistical and quantitative analysis, explanatory and predictive models and fact-based management to drive decisions and actions” Thomas H. Davenport (Professor of IT & Management, Harvard)
But analytics tools are only useful if you know where your data is coming from and there is a solid confidence in its integrity. Asking sometimes uncomfortable questions should be a prelude to any investment decision, learning from past mistakes can be illuminating.
How companies chose to use the outputs of analytical technology was another strong discussion point. Process and systems can predict an outcome but the million-dollar question is Why? By understanding why data is showing a particular trend, companies can focus on what the customer wants in the future and how best to deliver the solutions, which provide an organizational competitive edge.
Treating data as a strategic resource is vital for success, how ownership of that data is structured is no less important. Imagining a different world and reorganized business model, which can better meet the demands of a digital age, may for some organizations, prove a prerequisite to the transformation journey for FP&A.
“Part of making good decisions in business is recognizing the poor decisions you’ve made and why they were poor” Warren Buffett
All business partners should have a natural vested interest in their businesses data resources through both individual inputs and strategic output but who should be the custodian of that data? General consensus leans towards those who can apply science to the data. FP&A offers the process, financial acumen, a grounded approach to forecasting and the hard and soft skills required to maximize benefit from a ‘closed loop’ position which benefits the business at large.
Skill gaps twinned with a sometimes mañana approach to the professional development needed to attract and retain the best and brightest FP&A talent continue to hamper advanced thinking. Empowering finance professionals to think outside the box and paint a picture of tomorrow fuels the dynamism, creative thinking and collaboration required to achieve and maintain a competitive advantage.
Creating a common language and understanding through education and training is a great place to start and a critical accompaniment to change management, allowing staff to grow and develop within their new roles and business structures. After all, human collateral will remain our most valuable asset until and if, we achieve singularity!
But given the obvious advantage advanced analytics can bring to a business, I asked Amrish Shah (Snr Finance & Operations Director PvH NL & MEA at PvH Europe BV) what he feels is the main obstacle to investment in analytics technology that senior FP&A professionals are experiencing within their organizations and how do they work to overcome these obstacles:
"……….Tackling the obstacles of organization readiness and risk adverseness to technology investment, both these challenges require a far greater investment in people. With the right experience, mindset and attitude (one of learning and experimentation) both internally and externally and ensuring that information management is seen as a strategic resource that has to be planned for and tackled as such, professional development needs to be on the rolling agenda of every management team and Board".
There is no dispute analytics technology improves the speed and quality of an organization’s decision-making.
Transformational business journeys including the move to advanced analytics are evolving projects that don’t and shouldn’t have a final end point. They need to be agile and operate around new drivers for the future - one size does not fit all. It’s a very personal journey, unique to individual businesses.
FP&A is leading the charge but they should avoid any attempt to make the journey alone. The relationship between senior finance professionals, CTO’s and CIO’S must be at the heart of this process to ensure a holistic view of the business, its needs and and the task at hand. Choosing to ignore or simply delay embracing the value-add analytics technology can bring to your business and its position within the competitor landscape is a no brainer. We simply can’t ignore the march of progress.
Many thanks to sponsors and partners of the FP&A Board events: The Association for Financial Professionals (AFP), provider of international FP&A Certification and finance training. Page Group, global recruitment firm and Tagetik, leading FP&A Technology company.
Copyright © 2017 Association for Financial Professionals, Inc.
Heuristics are rules of thumb. Psychologist Gerd Gigerenzer believes heuristics are a necessary part of an individual’s decision-making process. Heuristics can be used in FP&A as a way to make decisions about how organizations earn revenues and incur expenses.
Here is a heuristic that I use to make decisions about how organizations earn revenues:
Revenues are more than products delivered or services provided; revenues are about the qualities of the products delivered or services provided. Accessibility, courtesy, and durability are a few examples of the qualities within products or services. As individuals, we purchase food from specific supermarkets and internet services from specific service providers. Our reasons are based in large part on the qualities of the supermarkets and service providers we choose. Individuals who are FP&A practitioners should consider this fact when conducting their work. Revenues represent a validation of what people see in the product/service offerings of companies. What people see is the accessibility, courtesy, and durability of products or services.
Here is a heuristic that I use to make decisions about how organizations incur expenses:
Organizations that sell products incur an expense called Cost of Goods Sold. This expense represents the cost of the product sold. Organizations that sell products or services incur selling expenses. These expenses represent the cost of selling products or services. Organizations that sell products or services incur administrative expenses. These expenses represent the cost of supporting organizations. Thinking and learning about how these expenses are incurred provide insight into an organization’s effort to deliver products or provide services.
Applying the expense heuristic can focus on what people within organizations can control, i.e. their activities. Perhaps people responsible for the cost of goods sold need to choose other vendors for materials or merchandise, improve the use of labour and overhead, or re-negotiate costs with existing vendors. Perhaps people responsible for selling expenses need to change communication methods like using social media instead of radio/TV ads. Perhaps people responsible for administrative expenses need to change how they train employees, prepare financial statements or purchase office supplies. Changes in activities can lead organizations closer to establishing a clear relationship between why customers buy their products/services and how activities fulfil these reasons.
FP&A can be a very detailed process. These details may hinder not only the quality but also the timeliness of information provided. Perhaps using heuristics in FP&A can lead practitioners down a road to improving their work.
By Christian FOURNIER, Author (Globalisation - adapter l'organisation de son entreprise face à la mondialisation...)
Tools and processes used by finance and FP&A (commercial management, billing, accounting, operational statistics, competitive intelligence, planning, budget, forecast, variance analysis, reporting) needs to be customized in order to achieve both efficiency and relevance. There is nothing like on the shelf tools. Company’s industries, size, profile and positioning, geographic reach, product reach, etc. … constitute “forces” that needs to be understood in order to build a relevant and efficient set of tools.
There are debates about the relevance of (some of) these tools. Such as, is so call “traditional” budget or variance analysis still relevant? or beyond budget supporters or what granularity for chart of accounts, etc... These are based on (supposed) opinion that CFO’s and/or managers are not satisfied with the results of their own processes or tools.
In fact, such opinions are generally developing from
Prior reinventing the wheel, I would strongly suggest to thoroughly analyze these three “causes” and to take necessary actions.
First, look at the two last areas then concentrate on the process built and organization. Obviously, there are interacting but it is still important and more easy to analyze them separately.
1 - A wide range of potential issues can be originated from culture:
From a finance perspective,
From a management perspective,
These cultural issues impact the image of the finance outputs and needs to be assessed and considered as such.
2 - The ways objectives, bonuses and evaluations are articulated have also a major impact on the perceptions of the finance output. Obviously, managers (and employees) like and want to be considered as successful and to receive the financial and other elements of recognition that goes with it. As such the tools used for definitions and measurement, are subject to a lot of pressure, in particular when the environment is difficult or aggressive and when results are not in line with expectations. Questions about validity of the objectives definition or on the way performance is measured will for sure be raised and may be valid. This is a complex issue and I am afraid that no simple and single response exists.
I would still advocate the fact that plan, budget and forecast shall be set as per the best understanding on the business conditions and environment and shall not be polluted by “aggressive” or “defensive” individuals objectives and targets settings. This suppose a certain level of disconnect between the two set of tools.
3 - The relevance and effectiveness of the finance processes is definitely a finance responsibility but involve inputs from all parties. Over the statutory and tax obligations, finance processes must be design in order to give company management the best chances to take necessary decisions in a timely manner. This brings us to the first “dimension” that needs to be looked at: the time dimension.
The competitive or market intelligence is the next dimension to be analyzed i.e. the markets with its different components:
The external and internal resources are the next dimension to be analyzed with its different components:
The “statutory time” tends to naturally drive the finances processes. Accounting would be the prime example and it may be satisfactory for certain business or industries. The calendar month/quarter/year will drive the different finance activities (commercial and operational statistics, accounting, planning, budget and forecast, reporting…).
Still, some industries or business type require a different way to “respire” and then it is essential to take this in consideration in the design of the overall process. Some industries have a material seasonality, some have a very short order to revenue time (immediate to few days) where for others it is month(s) potentially year(s). This needs to be correctly assessed and integrated in the whole time table i.e. from order reporting to forecasting and reporting both in terms of timing/delay and in terms of periodicity.
A further aspect of timing to be integrated into the processes is the “time… to”. Time from proposal to order, time from order to revenue, time from contract to orders, time from launch to delivery, just in time ... depending on industry and company there are always a certain number of key “time to” which needs to be managed and which are critical for the accuracy of the forecasting exercises and in the explanation of the variances. Their identification, measurement and proper application are in most case vital to the quality of the overall process.
In certain business you may want to report and analyze revenues on a daily basis considering weekends and public holidays (distribution, restaurants…). At opposite in others, the contract or order to revenue cycle is such that even monthly reporting and analysis is too short to properly integrate any meaningful changes in trends. A material change or delay may impacts your revenues and revenue forecast. Optimistic or aggressing views may very well impacts the quality of your forecast.
The market dimension and its components are keys that need to be properly integrated within the design of the overall finance processed (end to end).
Those data dimensions will obviously combine on a dynamic way. This shall permit to capture and measure accurately (in the most extended configuration) (i) who sell what to whom in which currency per country destination at order processing level (ii) the revenue generation and associated Cost of sales in the same data configuration (billing/accounting) (iii) in order to compare to past periods and to budget and/or reforecast made along the same lines. This end to end chain is essential.
Effectiveness and relevance will get reduced each time the chain is ”broken” (or oversimplified). One “traditional” place is when information existing at order and billing level are “aggregated” at accounting level whereas budget/reforecast would be supposedly prepared based on business drivers that “miss” some of the dimension. Example with currency, if the pricing and billing currency information is lost when converted to statutory currency in accounting and if budget/reforecast is build using the latest revenue trend from accounting, any chance to accurately and efficiently understand, report and forecast incidences of currency fluctuation is lost. Similar issues can be met if the customer (or customer profiles) is lost along the process or if the product granularity is oversimplified.
Whereas finance may consolidate all information, sales and marketing shall be key contributors. Company objectives/targets (budget/reforecast) shall be logical with the market trends, correspond to a clear set of strategical and tactical options/hypothesis and performance shall be “benchmarked” to these options/hypothesis. Most of these options/hypothesis represent real decisions rather than simple “forecast”. Over the quality of the process, this is the quality of these decisions that is key to the final result. It means a necessary and material involvement of the management structure all along the process. Those decisions must be captured / embedded in the final output. They shall be tested with reality at end. If in any forecast there is a part of mechanical data gathering, there is also a fair amount of managerial pro-forma decisions and it should definitively avoid all form of wishful thinking.
Without those elements the relevance and effectiveness of the planning, budget and forecast processes thus reporting are questionable as well as individual objectives setting and evaluations. This is the main source of the uneasiness with those processes.
The challenge in there is in two folds:
In each category, the degree of importance may largely vary from strategic to common/easily exchangeable. This may be linked to the importance in terms of costs, to the scarcity or uniqueness of such resources or any other industry specific reason. The whole process shall then attach more attention to those resources than to the more common one. Data structure decisions are not just technical decisions, they are key fundamental decisions impacting business.
Whereas in the “theory country” evolution of costs shall reflex in the prices of product sold, in the “reality country” it is far to be so simple and automatic. Something very similar and parallel to revenue must then be design and implemented for the goods / suppliers / geography combination (at least for all strategic ones). Purchasing shall be a key contributor in-there.
The combination of revenue and cost of sales processes shall permit to understand and forecast margin on cost of sales evolution. In most business, the revenue, cost of sales and margin constitute the major business challenge and thus the area where effort in analysis and forecast shall be concentrated.
The other costs and investments will be captured, analyzed and forecasted following the company organization structure using enough granularities to have a detail breakdown covering every process of the company and matching it to the management structure. Certain non-strategic functions can be profitably outsourced to more specialized firms.
Again depending on industries and company those can represent quite a different challenge. Over the traditional analysis of the costs and investments it represents, it’s their productivity and utilization rate that must be measured, analyzed and forecasted.
Depending on business type, the weight of staff and associated costs can largely vary in percentage of revenue or even of the margin on Cost of sale. Services industries would concentrate large percentages in staff costs whereas manufacturing or extraction industries will concentrate a far lower percentage.
The head count by ranks and the statutory costs by function are largely insufficient. It shall be complemented by a true qualitative analysis in particular for the key competencies. Associated costs such as training, recruitment, redundancy,… shall also be substantiated over and above the “traditional” statistical trend.
A company cannot survive without proper financing. It supposes a dedicated / structured follow up and forecasting (that is a subject in itself).
Finally, keep an eye on your communication. Efficiently gathering and analyzing data, furthermore producing relevant synthesis represents probably 90% of finance work. Still, what may make the difference is the last 10% i.e. the way those are communicated internally and externally.
By Tijana Balotic Truong, Performance Management Professional
Becoming a business partner is usually a choice. There are several areas to consider when preparing for your new way of working:
Everything starts with you, and the understanding of what you want and why. Then follows how.
What is the purpose of you becoming the business partner, why do you want that to happen?
What do you expect from the role?
How realistic are those expectations?
How else could you achieve the same purpose/goal and meet your expectations if not by becoming the business partner?
What are your motivators?
How does your role of the business partner fit into the existing organizational culture?
What will be the implications (both positive and negative) of you becoming the business partner for you, your family, team, company?
Where do you see the biggest challenges?
What are the tools that you need in order to overcome them?
What kind of support do you need?
What do you require from your (future) partners in order for your role to add the most value to the organization?
How is best to obtain the necessary tools and support?
It is crucial to understand your own primary drivers and assess whether business partnering is the way forward for you.
If you decide to work towards becoming a business partner, it would be helpful to anticipate the main changes which will occur once your journey starts. Planning how to address these changes will be very important.
At the same time, it is necessary to accept that you will not have all the answers and that some of your views will change as the learning evolves. Staying open, connected to the reality and flexible will enable you to timely adjust.
Focus on the big picture will keep your priorities straight.
Although this assessment is about you, it does not mean that you should do it alone – feedback from the others will help you get the additional perspective. It is people who know you well, those in your organization and in your network you can trust, people who have been/are going through the similar process who can give you the relevant inputs. The more realistic picture you have, the clearer your next steps would be.
Adequate support at home would make it easier for you to focus on what needs to be done at work. Open conversations about the following topics will help you prepare:
Talking in advance about how the life outside of the office will change once the workload increases would make you and everyone impacted more ready. Going through the agenda of an ordinary day under the new circumstances would help arrive at a realistic plan of who can do what and where the bottlenecks are. If, for example, it turns necessary to hire someone to help with children/household/pets etc., it is better to start the search early.
For you to succeed as a business partner, it is critical to have your team on board. Discuss with your team members what becoming a business partner would mean for them, benefits that it would bring, challenges they would they face, what expectations and concerns they might have and how to manage those.
Your team members should conduct the assessment similar to the one you have done for yourself. If the expectations and the motivation are aligned, it would provide a solid ground.
After identifying the challenges, next step would be to design a plan to overcome them.
Prioritization is important in this process to define the optimal path. Ensuring some quick wins will help motivate and encourage the team.
The discussion will also contribute to the assessment if you already have the right people or you need the team to change/increase. In order for you to succeed, it is essential to have a strong team who shares the same vision and values.
The model of working should be designed in a way that helps everyone, instead of loading your department with the additional projects to work on. That is why it is important for everyone to understands and agree that you and your team will provide the support where relevant and that you will get the adequate support from the rest of the company.
However, is the company ready for this? How has the organization considered people in finance so far? It would be your role to demonstrate the importance and the benefits of bringing finance to the table while protecting your team.
Remember that this would be a long process and your role will evolve. Requirements from your partners are not always going to be obvious, sometimes your biggest contribution would be to identify the areas for the others to focus on. And there would be cases when it would be necessary for you not to get involved.
Being a business partner will increase your scope and you will be more dependent on others. Learning to delegate, choosing the battles to fight for, saying no without compromising the relationship, continuing to expand your knowledge, surrounding yourself with the right people and supporting them would be the keys to success.
Planning will help you get prepared, although it would not provide all the answers. Situations will evolve over time and you will be adapting together with the rest of the company.
It might also happen that you come to the realization that the overall price for you to pay to become a business partner is going to be too high. There is nothing wrong with that. Actually, the earlier you understand that, the better you can prepare for the alternatives.
Becoming the business partner is only the beginning; the main challenge would be to remain a relevant party at the table. The journey would be dynamic and you will learn a lot. Enjoy!
The dusk of Management Taylorism is the dawn for the strategic CxO. Constant cooperation, communication and deep business process knowledge are the answer to digitalization, data lakes and disruptive threats. The opportunity for Finance is to extend resource allocation and financial planning towards becoming the trusted strategic advisor beyond the mere financials. How can FP&A support this achievement?
BY TAKING THE CFO BACK TO SCHOOL!
Mintzberg, Ahlstrand and Lampel go on a strategy safari and present the historic schools of strategy. Each school has a distinctive focus and their combination put the corporate strategy beast to live. There are there main classes that shape the decision-making of future profitability:
The Prescriptive Schools of Strategy
1. The Design School
2. The Planning School
3. The Analytical Positioning School
Designing a conceptual framework for strategy formulation, developing an organizational planning process and enhancing it with an analytical positioning in the marketplace dominated the literature from the 60s to the 80s. Financial Planning & Analysis is by its very name a kid of these decades. A visual sneak into the "Technology of the 80s" makes it obvious why FP&A can't stop there. Yet, these schools are the compulsory exercise for the CFO with the following six schools to be considered the free skate event.
Challenge the CxO league in all strategic schools!
The Descriptive Schools of Strategy
4. The Entrepreneurial School
5. The Cognitive School
6. The Learning School
7. The Power School
8. The Cultural School
9. The Environmental School
Moving from the foundation schools about strategy to the field exercise, entrepreneurs envision products and put them to live. This strain is a prerequisite to formulating a strategy to be a cognitive process deriving from individual brain activity and psychology. The Cognitive School is small yet powerful with Daniel Kahnemann and Edgar Schein contributing as psychologists to the strategist's mind. Btw, Eric Kandel, like Kahnemann also a Nobel laureate, wrote a tremendous book on the brain, perception and learning.
"Culture determines and limits strategy!" Edgar Schein, MIT (pdf Review here)
Taking a perspective beyond the individual are the latter four schools. Learning is equal to an emerging strategy as the complexity of the world is neither grasped in a moment nor steady enough for a once for all determination of the business future. The schools set a strong argument for a frequent planning and forecasting process facilitated by FP&A.
The Power School implies strategy as a result of negotiation and compromise. In this fpa-trends article, I laid out the negative effects of a group decision: the compromise tends to be loaded with risk. This being the most cooperative and communicative school, the CFO is well advised to cross borders into knowledge about the process of political decision-making (the german standard at google books). This holds true, esp. as the traditional, military styled organization makes room for more cooperative and communicative forms. The democratic design of special forces worldwide proofs, that the military again leads the way.
While the schools from 1 to 8 take an active stance, the Environmental School is a reactive school with a strategy derived from external forces. The CFO can manifest it in comparative KPIs and benchmarks. Being blind on this side, strategic actions will flow around Finance.
Look at the competition and express their performance to underline the strategic ambitions of the company!
Combinative and transformative:
10. The Configuration School
combines any selection of the empirical and theoretical findings clustered in the schools above. Here, why can't Finance hold the grail to a strategically shaped future with a
as laid out by the International FP&A Board? There may be a few personal related ones which bring us back to the beginning: back to School, learning never ends!
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