Measuring the performance of your financial planning and analysis (FP&A) efforts is complicated by three factors:
- External issues outside FP&A’s control, like the increased volatility of the economic environment.
- Internal issues outside FP&A’s control. For example, FP&A may be responsible for creating the budget, but doesn’t necessarily control it—business units are the real owners.
- Lack of objective metrics. A lot of the new value FP&A adds to the business is qualitative and thus harder to capture. What’s the value of a good recommendation? A bad investment avoided? A product campaign improved?
3 ways to measure FP&A’s ROI
At one manufacturing and distribution company, the head of FP&A decided to improve his group’s ROI as his organization began transitioning from “accountants closing the books” to full-fledged financial planning and analysis. “We had the opportunity to show we can come up with ideas that generate revenues and cost savings,” he said. So FP&A started to track its work to be able to show it covers its cost and then some. “If you really believe you add value, you should put your bonus on the line,” he said.
To link compensation to results, he needed to devise a way to monetize that more elusive strategic component. At first, he asked colleagues embedded within business units to track their own performance, but ultimately it proved more manageable and useful to track the performance of the department overall, and only focus on meaningful projects. For example:
1. Improved gross margins. The company had a contract with a big strategic account that allowed different client sites to pick among several vendors, even though his firm was the preferred vendor. FP&A looked at the history of the purchases and identified what types of products the sites would purchase, what the gross margins were and thus what the best path was to win new, profitable business. Based on the resulting gross margin expansion, FP&A tracked its value.
2. Cost reduction. Another example was using what the company calls “economic order quantifies” on the sourcing side. Many times vendors offer a better price for higher volume. On a unit basis, that looks attractive. But FP&A analysis showed the business often ends up writing off unused inventory, offsetting any savings. FP&A generated substantial cost savings by developing a way for the business to quickly assess whether the discount is worth it economically. The team tracked the process and found that over only two months, the new tool helped save the company $100,000. Also by reducing the number of purchases, it could save overhead cost on number of AP and processing staff.
3. Higher sales. FP&A developed an algorithm that helps generate a “customers who bought SKU X also bought these five other SKUs” recommendation for the sales force, many of whom are new. The company has recently switched from a contract to an employee sales force and many did not make the switch, so it’s building up its staff, many of whom were leaving a lot of money on the table since they lacked institutionalized knowledge. FP&A estimated a potential $18 million in additional revenue as a result of using the algorithm.
For compensation purposes, FP&A has a system where it claims credit for the money saved or revenue generated off its ideas. It takes 30 percent credit when the idea is generated, 50 percent when it’s presented to the business and additional 20 percent when it’s implemented and generates savings or revenue. The credit is broken into pieces, because sometimes, for political or other reasons, ideas presented to the business are not adopted. For example, ultimately, the sales group decided not to adopt the algorithm FP&A developed. “We felt it was not fair not to get credit if the business chooses not to put the suggestion in place,” the FP&A executive explained.
“Good FP&A staff sometimes costs a premium,” said this exec. “This is a way to justify our existence and when it comes time to cut costs, management knows what the value is that we bring to the table in terms of revenue and cost savings.”
A longer version of this article will appear in an upcoming edition of AFP Exchange.