A definition of quality is “a distinctive characteristic possessed by someone.” The work of FP&A practitioners focuses on thinking and learning about how financial activities – earning revenues, incurring costs, generating cash flows – affect organizations. The thinking and learning about this relationship require a mindset that creates results.
The mindset of FP&A practitioners comes from the qualities that individuals have. From my education and experience, FP&A practitioners should have a quality that establishes a foundation for doing their work. The quality that establishes the foundation for FP&A practitioners doing their work is curiosity.
A definition of curiosity is “the strong desire to know or learn something.” The strong desire to know something is a fundamental quality of a person who practices financial planning. The strong desire to learn something is a fundamental quality of a person who practices financial analysis.
Financial planning is thinking about how organizations will earn revenues, incur expenses, and generate cash flows. In order to stimulate thinking about revenues, expenses, and cash flow, an FP&A practitioner should know the purpose of the organization. Knowing the organization’s purpose establishes a foundation for preparing a financial plan. Building on the foundation is where an FP&A practitioner’s curiosity becomes evident. The evidence is provided through questions asked.
Financial analysis is learning about how organizations earn revenues, incur expenses, and generate cash flows. Learning about how organizations earn revenues, incur expenses, and generate cash flows is an excellent opportunity for FP&A practitioners to apply their curiosity. They can ask questions about issues like transactions recorded, relationships with stakeholders, and changes to strategic plans. They also can walk through facilities like stores to observe layouts as well as customer and employee behaviour. The limit to learning through financial analysis is the number of questions to ask.
A curious FP&A practitioner can help an organization, however, being curious is only a basic quality. An FP&A practitioner needs a quality that can keep the practitioner relevant in the value-added process. The quality that keeps an FP&A practitioner relevant is a commitment to continuous improvement.
A definition of continuous improvement is “an on-going effort to improve processes.” Financial planning and financial analysis are processes. Like any process, financial planning and financial analysis are not perfect. An FP&A practitioner needs to accept this fact because failure to do so results in failure to provide value. In order to provide value, an FP&A practitioner should strive to improve one’s work.
Improving one’s work in financial planning can come from education. Education in psychology can help FP&A practitioners manage biases when preparing budgets and forecasts. Education in mathematics can help FP&A practitioners formulate revenue, expense, and cash flow projections. Education in technology can help FP&A practitioners prepare and communicate financial plans. These examples have provided guidance for me and that is due to experience. Other FP&A practitioners may have faced experiences that lead them to improvement through other paths. That is fine as long as FP&A practitioners realize that value-added financial planning is an on-going effort to improve processes.
Improving one’s work in financial analysis, like financial planning, can come from education. My education in accounting plus my interests in psychology, mathematics, and technology provide a foundation for improving my analytical processes. I also find my desire to learn as a basis for my continuous improvement initiatives. Having a desire to learn leads me to consider different perspectives when performing financial analysis. Having different perspectives allows me to see activities within organizations in ways not easily seen within financial statements. Financial analysis is learning about how organizations function. Learning is not static, it is dynamic so an on-going effort to improve processes is most appropriate for financial analysis.
People who are or wish to be FP&A practitioners can describe their capabilities through their resumes. Resumes are not enough. FP&A practitioners need distinct characteristics that allow them to not only do what is expected but also go beyond expectations.
Remember…having an FP&A career starts with having FP&A qualities.
According to Wikipedia, prescriptive analysis is – after descriptive and predictive analysis -the third and final stage of business analytics. Gartner plots prescriptive analysis as the final and most difficult stage of data analytics. This article will draw an analogy with the mapping and car industry to suggest that prescriptive analysis as an opportunity to support Integrated Business Planning (IBP) and business optimization, is not a final stage, but just at the beginning of a new planning era.
Where descriptive analysis answers the question; ‘what happened and why’, predictive analysis answers the question; ‘what will happen’, prescriptive analysis will also suggest actions that benefit from the predictions and show the implication of each option. Or, as Anne Robinson, a past president of INFORMS, a society for analytics and operations research professionals tells us; “Prescriptive tells you the best way to get to where you want to be”.
Companies like River Logic, model financial and operational business constraints and use prescriptive analysis to optimize a business objective. The business objective can be to maximize an asset, maximize throughput or minimize capital use and cost. Or all of the above at once. In combination with Integrated Business Planning to provide visibility and manage change in model assumptions and constraints, this creates a powerful and holistic scenario and decision making capability for executives.
Integrated Business Planning is like a GPS for a business
Robinson’s definition sounds pretty much like using a GPS system in your car. It will tell you the best way to get where you want to be. Integrated Business Planning is like a GPS for a business. IBP done well will provide a company with a valid and reliable periodic rolling forecast and strategy status. This in turn provides executives visibility on gaps versus budget and strategic intent, so they can steer the company to ‘where they want it to be’.
If we take this analogy a little bit further, Integrated Business Planning and prescriptive analysis can learn from GPS and the evolution of the underlying map technology. Only 15 years ago we still used paper maps in our car. The first commercial GPS systems were launched in the 80’s. TomTom, a Dutch mapmaker and traffic company launched their first portable GPS system in 2002. In December 2015, TomTom launched the world’s first commercially available near real-time updated map. Let’s have a look how they got there and what is next. Let’s open our minds and have a look at trends in the mapping, traffic and the car industry and see what prescriptive analysis and IBP can learn from it.
Map making and maintaining used to be an expensive exercise, where you needed to drive lots of cars around every street over and over again. TomTom made deals with tech giants like Apple and Uber to provide automated data input to their maps. Millions of IPhone users and Uber drivers continuously send information to the TomTom database, which is used for mapping, traffic and route analysis to update a standard maps almost real time.
We can easily imagine a prescriptive analytics phase where the optimization model is automatically updated with macro assumptions and constraints like GDP, consumer spend, oil prices and total market capacity. Dynamic micro assumptions like capacity, downtime, material availability can come directly from intelligent machines. This creates dynamic constraints in the optimization model.
Advanced Driver Assistant Systems (ADAS) are already capable to warn drivers for upcoming traffic jams and many middle class cars already operate with automatic break control in city traffic. Some cars like the Mercedes E-class, can take this further and automatically take over the steering wheel when a driver loses control of the car.
With dynamic data input in the optimization model, prescriptive analysis can create alerts and intervene before a certain threshold of a critical resource or constraint is reached. An asset can be almost at capacity or underused, cash can dry up, or throughput can reach unsustainable limits.
TomTom has presented a 3D map of Germany and Michigan, in support of the German and US car industry. It has 3D maps in Silicon Valley in support of US tech companies and is partnering with Bosch - a world leading German electronics provider to the car industry - to make rapid progress to 3D map other parts of the world. 3D maps provide a 360 view of the road so a car knows where important landmarks, every lane, traffic sign, building or traffic light is and includes road geometry like curves and slopes. 3D maps are required for highly automated driving (HAD) and in combination with sensors on the car for autonomous driving (AD).
Optimizing our own business with prescriptive analysis is like a 2D map. Now add to that the impact competitors, suppliers and customers have on your business within your industry. Now imagine the impact of other industries, countries, the weather and geopolitics. In our connected, interdependent global world, similar to a 3D map, we will require multidimensional network prescription and optimizing.
Cars like the Mercedes e-class and Tesla S model already can change lanes autonomous and park the car without the driver being in the car. Audi will launch a HAD version of its flagship A8 in 2017. Elon Musk recently told analyst that Tesla is two years away from self-driving cars. Google has accumulated a millions kilometres of autonomous driving. McKinsey recently predicted that 15 percent of new cars sold in 2030, could be fully autonomous. Soon humans don’t have to touch a steering wheel.
We already know based on research that humans better not touch a short term forecast as we are riddled with bias and emotions. We already let demand sensing take over short term forecasting and replenishment decisions. It is not hard to imagine prescriptive algorithms take over tactical and strategic decisions in a distant future. This will create prescriptive execution.
In some existing self-driving cars, the driver has to touch the steering wheel every now and then to let the car know he is still there and awake. In the future this will not be needed anymore. Cars are idle for over 90%. All this wasted capacity will once be used by intelligent systems. Every car will be connected. In cities, less people will own cars. Public ride shares and taxi bots will rule the cities and take you where you need, drop you off and go to their next ride. This requires artificial intelligence (AI) and deep machine learning.
Google’s AI team has beaten a top human player in the game of Go, a 2,500-year-old game that is exponentially more complex than chess. IBM’s self-learning machine Watson, capable of beating world chess masters and the average joe at jeopardy, is available commercially for any business. It might be a small step for an AI algorithm to not only prescribe the best solution and take the decision to implement it, but also prescribe changes to the optimization algorithm afterwards to incorporate learnings and newly detected circumstances. The prescriptive algorithm will become self-learning and self-sustaining.
Only 15 years ago we were using a paper map to find our way around in our car. Due to a common vision for the holy grail in the car industry – the autonomous car - map makers, tech companies, the car industry and suppliers to the car industry all joined forces. There is also urgency due to healthy competition, as the car industry itself feels threatened by the tech giants’ entry into their industry. Due to this collaboration, competition and urgency, commercially available self-driving cars will become a reality in the next five years. Who would have imagined that 15 years ago?
Prescriptive analysis and execution might just be the holy grail of integrated business planning and business optimization. Maybe the biggest learning from the mapping and car industry is what can be achieved if powerful coalitions are made to chase a holy grail.
To produce a rolling forecast and strategy status update, an IBP process periodically needs to review its plans and resources and update its underlying assumptions and business constraints. An IBP process can provide these same inputs periodically as boundaries in to a prescriptive algorithm and in return get suggested decisions for an optimized rolling forecast.
My on-line research indicates that over the last three years collaborative planning with customer and suppliers have increased, but most businesses still use IBP within the boundaries of their own company walls. And although more than half of my survey participants indicate they integrate financial planning & budgeting as a key task in their IBP process, it is likely that this is supported by slightly dis joined predictive analysis. Therefore, most companies will operate in the bottom left corner of below figure.
In terms of understanding constraints, risks and opportunities, the future of IBP will be to plan across the whole value chain, rather than within the company walls. A final step in IBP scope will be to understand and incorporate constraints from interdependent value chains, commodities and countries to create a global view.
Progress from predictive to prescriptive analysis creates the opportunity for a business to develop a periodic optimized plan within its IBP scope. Once resources and constraint data can be dynamically input in a prescriptive algorithm, near real-time optimized plans with global constraints can be achieved. At that point, IBP can still govern the choices of data input and decisions the prescriptive algorithm makes.
This will end, when artificial intelligent and self-learning systems tune the optimization algorithm and govern and change the constraints and assumptions it uses automatically. Similar to the driver in a highly autonomous driving car, who has to touch the steering wheel to let the software know he is still awake, executives might have to let the AI algorithm know they’re watching the integrated business planning decisions and numbers it produces.
We have a long way to go before we’re at that stage, but if we use our imagination, we can see how prescriptive analysis is only the start of a new IBP era.
The application of design thinking involves the creation of solutions in the meeting of an objective. Unlike a purely analytical approach, it begins with the solution and utilizes resources from across the enterprise to bring about its creation. The purely analytical approach breaks down the problem into its subsequent parts in order to rebuild it anew. Design thinking is solution focused while the analytical method is preoccupied with the problem.
The truly effective finance business partner must utilise both mind-sets. They start by framing the problem but also visualising possible solutions. They strive to break down the issues into manageable concerns, to understand the constraints, possible barriers and bottlenecks. They brainstorm the benefits of various ideal solutions, branch out across functional silos and test their early ideas to gain rapid feedback from concerned stakeholders.
A suite of tools which can empower the finance business partner to adopt this type of concurrent thinking is mapping techniques.
Mapping can be used as a tool to facilitate analysis and synthesis. They can be used to understand the varying levels within a hierarchy, the possible consequences of key strategic decisions and the sequential steps in a complex process. They can be solution and objective led, leading from the final output to reveal a series of interconnected relationships. They can be problem led in which each is listed and connected via a series of steps used to reveal how each could be solved or overcome.
Finance business partners have been using mapping techniques unaware that they are inherently a design-led process. Practitioners are creating possible outcomes when they use these techniques. They can be used to build and test a vast array of possible solutions in a rapid and simple manner enabling the finance business partner to visualise solutions at a vastly more rapid rate and allowing them test and reject more options and therefore iterate rapidly to a better solution.
This is design thinking.
The following are examples of mapping techniques which enable the finance business partner to occupy the creative and analytical thinking domains in their search for the best solutions.
Value mapping is used to visualise how organisational resources can be utilised to create value. They are used to understand how value is created, captured and transferred into the organisation.
They are a simple alteration of Porter’s value chain in that it recognises that value creation is neither linear nor restricted to a single path but can be cyclical and involve reciprocal relationships.
Where the focus is internal the user starts with existing resources. The map flows outwards identify at each stage how existing resources can be utilised to maximise value creation, capture and transfer.
How can existing resources be more effectively utilised to identify products or services which the customer values most highly?
Identify and target those customers whose needs the organisation can best meet.
How can existing resources be used to more effectively and efficiently to build value into those products which customers most desire?
Build products or services in the most economic manner which meets the needs, satisfies the desires or removes the most acute pains of the most profitable and able customers.
How can existing resources be more efficiently utilised to ensure the greatest level of value is transferred into the organisation and realised as retained profit?
Deliver the product or service in the most cost-efficient way at the lowest cost without any loss of effectiveness.
Process maps are an established tool in business and change management. Business process re-engineering requires the creation of the as-is state where the current process with all its imperfections and quirks is fully mapped out. They enable practitioners to identify existing bottlenecks and process inefficiencies such as redundant feedback loops and duplication. This approach is highly analytical.
Through the mapping tools described above the finance business partner will gain a detailed and thorough understanding of the levers of value creation and the internal processes involved in the capture and transfer of that value into the organisation. However, the constraints and inefficiencies of the current design will also become clearly visible enabling the finance business partner to visualise the current strengths, weaknesses, along with the possible opportunities and threats acting on their organisations. This will enable them to build a detailed SWOT analysis.
Benefit maps can be used to visualise the impact of potential change and are an established part of change management. They are used to understand the possible benefits and dis-benefit of a proposed solution. They begin with the objectives and work backwards to map the high-level benefits that would arise when those objectives are realised. This continues to a point where the intermediate benefits can be realised by an immediate action or output. This technique allows the user to rapidly audit any given solution by focusing on the impact of any given change. It focuses on the end user and places their needs at the forefront of the thinking process.
The mapping tools above focus on creating and understand the current, as-is design by providing an analytical view of existing resources and the internal processes. The creation of the strategy and benefits map involves building into it outputs of change. In order to realise any strategic advantage from change an organisation must alter how it creates value, how this value is then captured and then transferred into the organisation and realised as retained earnings. This will involve the creation of to-be value and process maps which reflect the end game of change and which will enable the realisation of the strategy map.
It is in the creation and design of the to-be maps that design thinking is utilised. However, before the to-be state can be realised either in physical reality or in the various maps the finance business partner must gain a thorough understanding of the needs of the stakeholders affected by the change, their concerns over how any change will impact them and how the change will affect or alter their role within the organisation. In short, the to-be maps must be designed to meet the needs of the organisation as well as the full range of stakeholders and not simply a revamped and tidied up version of the old. There must be an appreciation of the need to iterate towards the final solution with the desire to engage affected stakeholders throughout the design, build and implementation of the new maps.
How an organisation creates, captures and transfers value does not remain static. It depends on people for continuous maintenance. By engaging stakeholders early during the design phase and rapidly iterating through design and testing, mapping tools can be used to ensure that such on-going maintenance is minimal.
The use of mapping tools and the creation of to-be states can be used to anticipate change, enable more effective contingency planning and therefore reduce the risk of uncertainty. In an environment of extreme uncertainty, it is vital that organisation do not become paralysed by it but embrace the need to remain agile to change, action focused and future led. Success in this environment favours those that are able to create their own futures via a creative and design led approach but which is grounded in sound financial and business sense.
By James Myers, Global Finance Executive and Finance Transformation Consultant
Companies reducing the size of their Financial Planning & Analysis (FP&A) finance teams are cutting valuable resources in the misbelief that is not a priority. That’s untrue. So what’s the role of FP&A in today’s company anyway?
Our worlds are moving at hyper speed, so to be successful we need to focus on our core mission. In FP&A this mission is to help organizations accumulate new knowledge faster than their competition.
“In the information-age the organization that can most effectively accumulate new knowledge and leverage that insight to make better decisions wins.” Barry O’Reilly
FP&A is the winning strategic player for fast moving companies. In reality, this mission has become obscured, so first, you must take time for reflection and then re-evaluate your direction. More than surviving the downturn, it is time for action. FP&A can lead when you focus on:
The winning FP&A Value Cycle© is a framework to create huge value within your organization. Your FP&A team are the intersection of 3 key elements: Strategy, Business and Data. They create momentum between each intersection, driving the cycle forward.
To win in today’s economy, a company must learn and take action faster than their competitors! FP&A is truly a forward-looking part of the organization. Together, we will drive the cycle.
“A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component” Richard P. Rumelt (Good Strategy Bad Strategy: The Difference and Why It Matters)
FP&A is a consulting support function to the organization’s business leaders. Being a business partner and building a plan is not new; being a leader is. The first step in planning is to start with strategy and translate it into actions vs. sending out a slew of excel spreadsheets! Being able to translate the vision of the company’s direction with FP&A is often difficult, but rewarding. Not building a plan that is aligned to it will be disastrous. Think of the strategy as a beacon and the plan is the instructions on how to get there. For FP&A having a deep understanding of the strategy and vision and translating that into a plan that is aligned to all the aspirations of the company is critical.
Deep understanding of the business problem is time well invested – i.e. what is the problem, who has this problem and the value that will be gained from solving it (this last one is often left off). The VALUE is the key to getting the resolution!
Once the strategy has been translated into clear instructions, it’s time to get to work solving some of the known unknows – the things we know we don’t know. Techniques like design thinking, customer discovery interviews and 5 Whys, are all great tools to gain deeper understanding of organizational problems and their associated value. This will be seen as proactive by leadership and embraced as a solution. Unfortunately, what I often see is teams creating endless reams of data and dashboards with no real understanding of the business problem they are trying to solve or the value they are generating from this insight.
EXAMPLE: Target, a US retailer. In early 2012 their strategy was to provide long-term value to guests. This strategy was translated into goals and targets and through that process, the business asked the question, who are Target’s loyalist long term guests. Through analytics, it was found that parents to be were the most loyal long-term guests.
Notice the direction of the data – we started with the strategy and moved into business questions, not from the data. Often when people have too much data, they start from the data to figure out the answer and generate reams of reports that solve no problems.
Target has reams of data on their customers, and it turns out, through predictive analytics they can predict with 80% certainty what trimester you are in. Armed with this information it becomes very easy to target certain customers with coupons, and they were able to grow from $44 billion in 2002 to $67 billion in 2010 3.
Armed with the new insights we have an opportunity to influence and drive the winning strategy. Generating insight that drives the business is great, however to make a longer-term impact we need to complete the cycle. These insights must be fed into the strategy - this is the most critical part. Once the insights are generated, the only way to incorporate that knowledge back into the cycle is to influence the strategy that in turn influences the plan and in turn influences the insight. For Target we can see how the strategy evolved over time as they realized the power of driving customer insight and in 2015, their strategy evolved to: Target will create a more guest-centric experience. For a company to grow smarter, FP&A must become more forward looking.
In order to survive and thrive, FP&A must begin to leverage the FP&A Value Cycle© for continued growth!
James Myers is the founder and CEO of FP&A Strategy Consulting, helping to accelerate finance transformation resulting in smarter organizations that focus their talent on issues that matter.
James is a thought leader in FP&A and has presented at many Finance summits. He has also held various finance and operations leadership roles in multinationals such as Dell and Nokia and has clients such as Hewlett Packard Enterprise. James holds advanced degrees in finance and accounting and is a qualified Chartered Accountant. In his spare time he is, also a Co-Program lead for the Silicon Valley Startup Leadership Program and runs the Silicon Valley Power BI User Group.
As promised in the previous article, let us go deeper into the relationship between FP&A and Data management (DM) and see how Data management enriches your FP&A role and successes. Using the FP&A Analytics Maturity Model, that was developed by London FP&A Board, you have definitely checked , which state of the FP&A maturity corresponds to your company and which goals are to be reached in the nearest future.
Let’s now to check:
Before we continue with a definition of Data management, let me ask you three questions:
If all answers are ‘YES’, then it means that you already deal with Data management on daily basis and there is a reason for you to continue reading the article.
As discussed in the article (1), you as FP&A professional deal with a company value. Data is also a company asset and to be treated and to be managed as assets.
What are the main elements of Data management which might be of your interest and require your attention?
These are not all established Data management elements, but if you are in control of these five elements for your data, you safeguard an outstanding quality of your FP&A work results.
In order to define the maturity, you need to know, which deliverables of each DM areas are to be measured.
So, let’s make a short list of the main deliverables.
The main deliverables can be briefly described as the follows:
Data governance is measured by presence of a Governance Policy, roles, and/or procedures that describe who is responsible for what in regard to solving data-related issues among different departments;
Data architecture is measured by:
Data quality practices include:
DWH/BI is measured by the availability of tooling for report generating and for the dissemination of reports.
Data security can be assessed by the presence of policies and procedures, data classifications, monitoring and issue resolution mechanisms.
Let’s now to combine these areas with FP&A maturity model (see the picture below).
Thanks in advance if you let us know, at which stage of the Maturity level you will put your company.
Copyright, ©2018 fpa-trends.com. All rights reserved.