Research from A.T. Kearney estimates the cost of complexity at up to 5 percent of sales for global organizations. What’s more, the Harvard Business Review found that most executives view internal complexities as a key barrier to growth—one that needs to be better managed. By extension, complexity management is a challenge that’s becoming of similar importance to finance executives—especially those in treasury and financial planning and analysis (FP&A) roles.
One major obstacle stands in the way of more effective complexity management: the processes and structures that organizations use to plan, manage and govern their business. More specifically, immature and outdated ones that obscure risk, reinforce functional silos, suboptimize resource allocation and impede change. The underlying problem? Inadequate integration.
Integrating enterprise planning and performance management (P&PM) processes is not a new idea. In fact, it’s an explicit objective of many organizations. However, few achieve mature processes that fully integrate strategy, finance and operations. One reason is that legacy software tools don’t always support them.
Using legacy P&PM tools can stall your efforts to improve and integrate strategic, financial and operational P&PM processes. They may leave your organization unable to make meaningful improvements to resource quantification and strategy and profit alignment—two objectives that define the degree of P&PM process integration and maturity.
Despite investments in software and other management approaches, capability gaps often remain. I call this the “complexity gap.” While many factors comprise this gap, I will focus on two. These factors expose critical flaws in legacy P&PM software tools, while also highlighting incremental capabilities supported by newer and innovative ones.
Integrated scenarios are collaborative processes that simultaneously evaluate the financial and operational impact of potential actions or events, on all aspects of a business, across multiple functions and legal entities. What distinguishes these processes from traditional ones is that they are enabled by integrated models that are shared by financial and operational applications and processes.
Integrated models come in two forms, classic examples of which come from the manufacturing sector. The first and more basic type uses operational modeling logic such as planning bills of materials and routings to drive P&PM processes. The second and more advanced model uses prescriptive analytics—tools with highly advanced activity, supply chain and financial planning logic. For example, these processes provide the means to quantify how revenue, direct and indirect costs, enterprise capacity, direct cash flows, working capital and foreign currency exposure would be affected by the following events:
• Loss of a major customer
• Changes in demand volume or mix
• Replacing a domestic vendor with a foreign one
• Moving a major product launch forward or backward.
The capabilities underlying such scenario planning processes go well beyond those of legacy P&PM software tools. The best evidence of this lies in cash flow forecasting. It remains one of the least developed and most problematic financial processes in global organizations. One reason is that legacy P&PM tools aren’t equipped to support them. They lack modeling capabilities that can accurately adjust for changes in volume, mix and operational constraints. What’s not always appreciated is that the models needed for mature cash flow, working capital and tax planning and forecasting are the same ones that support mature supply chain planning processes.
The key point is that global organizations require advanced planning models that can cope with complex supply and demand relationships that often span multiple functions and entities. What’s more, these models need to be shared by finance and operations as part of a single work flow, one that integrates rolling forecasts and sales and operations planning. What results from such integration are vastly superior scenario planning processes that effectively identify and respond to risk.
Who owns the performance of key business processes, like order to cash? For most companies, the answer to this question is not always obvious. In fact, in many cases, it’s no single person. While you may have process coordinators that maintain flow charts, procedures and measures, you don’t have process owners with decision rights—ones that have the authority to change processes and targets, while reallocating resources across multiple functions and entities to fund these changes.
The foundation for such ownership lies in the ability to provide business process cost information that people believe is accurate. At a minimum, this means that actual and budgeted process costs must be always reconciled to all financial records. This also means that P&PM processes must also incorporate business process management. In other words, they must support what I call matrix planning. This capability is beyond what legacy P&PM tools support.
The absence of this capability is one of the primary reasons why only 20 percent of organizations achieve effective cross functional alignment, according to the Harvard Business Review. And it’s why an Alix Partners survey found that 70 percent fail to achieve improvement targets related to lean and six sigma. After all, you can’t govern what you can’t plan!
Dean Sorensen is the founder of IBP Collaborative.