Financial planning and analysis (FP&A) is becoming the analytics hub of the business. Situated in the central point of the organization, it has access to data from multiple sources and can view, analyze and share information across the enterprise, providing senior management and business leaders with insight and foresight on how to improve enterprise performance.
A wave (or cloud) of change
The confluence of external pressures, technological advances and the shifting role of FP&A is bringing the function to an inflection point, with more companies adopting new ways of analyzing information and empowering finance to come up with better input for the data-driven, decision-making processes. The pressure to adopt more advanced analytics methods comes from having to navigate a complex and competitive business environment, and the growing availability of better, more affordable and less IT-dependent self-service analytics tools.
According to Philip Peck, vice president at the Peloton Group, “the pace of internal and external change continues to accelerate where our world is more complex, dynamic and filled with uncertainty.” Meanwhile, the organization is asking more of the finance function. “Now, the imperative is for FP&A to step up and provide more advanced analysis and deeper, more robust insights to help shape companies’ business strategies and improve data-driven decision-making in real time so companies can be flexible and agile,” Peck said. “To be indispensable business partners, FP&A needs to be better at performing analytics.”
For FP&A to be sharp, it needs to increase its understanding of the organization’s value chain and spread that knowledge across the company. Using predictive analytics, and coming up with potential action items, FP&A can deliver more insight into the broader organizational performance.
Technology allows finance to use advanced self-service tools, whereas before solutions had to be implemented and managed by IT, creating huge bottlenecks every time a new solution or a model had to be implemented, created or upgraded. Today, finance can implement new solutions more quickly, and not have to rely on overburdened IT departments. Moreover, the new technologies are more intuitive and user-friendly, and can be pushed to other users outside of finance, who can run their own analytics on the fly.
As a result, finance can step outside of its traditional comfort zone and get more involved in helping to analyze operational trends, using regression, correlation, clustering and segmentation techniques. It can fulfill its mandate to become a true business partner. According to Gary Cokins, a leading expert in the area of enterprise and corporate performance management (EPM/CPM) and author of “Predictive Business Analytics: Forward Looking Capabilities to Improve Business Performance”, “it’s no longer a technology issue. It’s a mindset. It’s a behavioral issue.”
The day-to-day implications
To leverage more advanced analytics capabilities, FP&A needs to start building driver-based models— essentially mathematical equations that take operational drivers and calculate their impact on key financial results, using an array of multi-dimensional relationships. Before FP&A can climb to the next level, however, some things needs to change.
- Where finance professionals spend the majority of their time: Too many practitioners spend too much of their time collecting data, churning out reports, and validating reports. “It’s taking far longer than it needs to, leaving limited time to deliver value added through insight and being more analytical. That’s probably the biggest barrier,” Peck said.
- Corporate inertia: Some organizations may fail to see the business case for investing the resources (human/technology/process) in improving analytical capabilities. They tend to fall back on the tried and true traditional rules of thumb and rely on individual intuition and experience.
- Skills gaps in the current FP&A team: Many finance organizations were built to deliver information and produce reports, but not for more exploratory work and delving into the unknowns. “It’s not necessarily in the DNA of many FP&A teams,” Peck said. It’s therefore important to train existing staff or hire new talent with advanced analytics and technology skills.
- Data availability, access, quality and integration across multiple internal and external systems:In many cases, finance lacks access to the right information to optimally leverage and deploy more advanced analytics capabilities. New cloud solutions make it easier to pull data from disparate sources.
The impetus for change is definitely internal and coming from the CFO. That’s very important, because buy-in from the top is critical. People are asking FP&A to do more. That’s in very large part the result of the explosion and proliferation of data, unstructured and structured, as well as its velocity and variability. That creates much greater opportunities to leverage data from an analytics perspective.
Already, FP&A is making the investments to improve analytics capabilities in order to improve its partnership with the business. Finance organizations that are lagging in making the right investments may find that they are not in a position to make a meaningful contribution to other business units. Analytics plays a key role in understanding and optimizing the profitability of products, services and customers.