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8 Ways FP&A Can Combat Competitive Threats

  • By Nilly Essaides
  • Published: 6/6/2016
As financial planning and analysis (FP&A) becomes the analytics hub of the organization, it must be able to help senior leaders anticipate how competitive disruption may affect financial results and prepare an action plan. The following are eight ways FP&A can do that.

Break the silos. Finance’s first job is to help companies spot competitive threats. And that boils down to breaking internal barriers. “Many organizations still work in silos while leveraging models and processes that are difficult to manage and ill-suited to meet various organizational changes,” said Peter Won, manager in The Hackett Group’s EPM Transformation Practice. “These silos cause various inefficiencies across teams thereby significantly influencing their ability to manage their business—not to mention their ability to handle change.” Successful organizations promote cross-functional teams that work effectively together.  

Leverage big data. According to David Axson managing director at Accenture Strategy, CFO and Enterprise Value, the ability to come up with multi-point forecasts and run various scenario analyses has a lot to do with having more information at the ready. “In large part, that’s because FP&A now has much richer data, both financial and operational, to tell a richer story to help make better decisions.” It’s also true that 80 percent of that data may be noise. Therefore, FP&A needs to work out what the right data set is for any given analysis.

Redefine the hiring pattern. It’s true that the proliferation and accessibility of big data means finance can leverage these sources to gain better insight to better understand the competitive landscape. But it can’t take advantage of this without having the right talent, according to Won. In his experience, companies need people who could leverage the dominant technology for analysis.

Get comfortable with discomfort. “Most finance executives are not comfortable with ambiguity or the chance of being wrong,” Won said. “You can be precise looking backwards, but you have to accept that scenarios are not going to be always right. But they give you a frame of reference. The key thing is to make sure that the analysis answers a business question.”

Get specific. The nature of the financial analysis will depend on the likelihood, impact and timeframe of the threat or opportunity, explained Rob Torok, principal at consulting firm BetterVu. For example, a driverless car may be in the market in five years while a driverless truck may take 20 years to develop. How FP&A analyzes the impact will depend on the lifecycle of the asset. The longer the duration of the asset or investment, the more important it is to think about the financial consequences of the competitive scenario. If one is investing in assets today, be it vehicles or training for drivers, will the cost of the asset be recovered, profitably, over its useful life?  A smart FP&A executive will use data to proactively assess how these competitive forces will play out, from the short term to the long run, and encompassing both threats and opportunities.

Work as a team. Coming up with the right scenarios must be a collaborative process. The CFO and CEO identify the scenario, or it may come out of competitive intelligence or be suggested by any other area within the organization, according to Axson. The scenario needs to include an understanding of the risk, it’s likelihood of occurring and the degree of impact it may have on the organization, i.e., how material would it be. “When it’s not a collaborative process you risk coming up with the wrong view and the wrong way to address it,” he said.

Challenge the status quo. FP&A cannot break out the innovative toolkit if it doesn’t operate in the right culture. Won insists that in order for these transformation initiatives to be truly meaningful and successful for any organization, the senior management team and in particular the CFO need to embrace changes and must be willing to challenge the status quo. “Organizations that are prepared for digital disruption will have a senior management team that encourages innovation and fosters that culture,” he said.   

Evaluate success. According to Torok, FP&A has the additional responsibility to ask and answer the question of how and when the company will know that the response it has taken is effective. For example, if the company decided to drop prices by x percent in year one in order to maintain market share, was the expected result achieved? And was it the most appropriate financial strategy? If the revenue decline in year two or three proved more precipitous, how should the reaction change? “FP&A needs to set up the trigger points for when and how to review the response,” Torok said. “Two years into the scenario, the company may need to take an entirely different action.”
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