Growing volatility in the business environment (risk, competition, variability of outcomes), cost pressures and a new focus on enterprise performance is sparking a renewed interest in how to best organize the financial planning and analysis (FP&A) function. So does the increased realization among companies that FP&A can add substantial value by supporting management decision-making and acting as a business adviser to the operations. Ultimately, the goal of any organizational structure is to develop an effective ability to support internal customers. Depending on the company, that may mean a centralized function at headquarters, a decentralized function with FP&A professionals distributed throughout the operations, or most commonly, a hybrid of both.
What drives the model?
Factors to consider:
- Market maturity. To select the right organizational structure, companies need to take into consideration whether they are in mature, slow growth markets, or fast-growing geographies or market segments. Each presents a different challenge. Low market maturity often requires a more distributed finance organization. When market maturity is high, companies can be centralized and do a lot more out of corporate.
- Business complexity. In addition, the more complex the organization, the more distributed the FP&A organizational model, while a simpler business model can accommodate a more centralized FP&A function.
- Growth curve. Fast-growing companies need to be able to make decisions, fast and thus are more likely to have embedded FP&A personnel at the business level and a more decentralized approach. A central function may not be able to respond quickly enough as the business grows.
- Technological capabilities. While that’s a more efficient and standardized approach it’s not without drawback.
A fully decentralized structure allows FP&A to make high-touch decisions, stay close to the business, be flexible and be part of the team. It’s suited to companies that must be very agile in responding to change. Centralized approaches can pull all the data into one place, see the big picture clearly, run advanced analytics and provide management and senior management with quick insight and foresight.
Yet the drawback of a centralized approach is that it stands a step away from the business and needs to work extra hard to build business partnerships. It makes it harder to engender accountability at the business unit level, whereas a fully decentralized structure lacks the big picture view and often works in islands of technology, which makes it hard to roll up a group forecast and budget, as well as that quick analytics input to the top.
That’s why most companies deploy a hybrid and increasingly establish a more sophisticated model that relies on a center of excellence (CoE) or shared services center (SSC). The hybrid’s objective is to straddle the management benefits of a decentralized and centralized approach, i.e., maintain close touch with the business and enable fast decision-making while at the same time have a big-picture view of the business and a single source of the truth so they can deliver quick insight to management and business leaders. With the CoE and SSC, companies can become more efficient and eliminate duplication of skills and activities. The CoE lets companies put high-level skills in one location and dispatch “commando teams” to help different business units meet specific project needs. The SSC meanwhile pulls together lower-value repetitive activities and frees up FP&A executives’ times to focus on high-level analytics.
Case in point: Littlefuse Inc.
Headquartered in Chicago, Littlefuse is the world’s leading supplier of circuit protection products for the electronics, automotive and electrical industries. With over 7,500 employees globally, the nearly $1 billion company operates in three geographic regions: the Americas, Europe and Asia-Pacific. In 2013, total revenue was almost $800 million with approximately 64 percent of the company’s sales to international customers, including approximately 20 percent in China. The FP&A function was created in 2004 and has grown to include two senior professionals who report to the CFO and a team of six professionals at a Philippines SSC. “While they’re based in the Philippines, their role is not to support the local manufacturing operations,” according to the FP&A director. “We’ve centralized our cost center planning work. Now the timeline schedule and inputs are centrally managed by us, leading to faster results and less discrepancies in terms of assumptions.”
Having a team in Asia means the U.S. corporate team can get things handled overnight. While the Philippines team is not “physically” embedded in the BUs, they are embedded from a functional standpoint, according the team at HQ. “With people traveling so much and the use of technology, we found that you don’t have to be in the same location,” the FP&A director said.
However, the Asia-based team does a lot more than just transactional support. They act as a CoE. They have a real say in how the company runs its business. “The SSC provides a really nice advantage for us: we can cost-effectively support special projects because we have the option to pull people quickly as we need it. The more value they can add, the better they become in their job,” the FP&A director said. “The benefit of the team in Asia is that it allows the function to branch out and be viewed as value-add, working on business opportunities and pricing models. We are able to get involved in the ‘fringes’ of the role of the FP&A group.” At the corporate FP&A level, meanwhile, FP&A can provide decision-making support and analysis to the CFO, CEO and COO. Corporate is also charged with rolling up the quarterly forecast and budget.
The benefit of this organizational structure is that FP&A has been being able to focus on high level work. “We spend 80 percent of our time working with the business units; that’s where we add the most value.” For the function, that means an organizational structure that best aligns with the goal of supporting the business. “The more you are viewed as adding value to your customer, the greater the credibility FP&A can garner and the broader its role can be.”