Preliminary results from the 2015 AFP Risk Survey, produced in partnership with Oliver Wyman, show over half of financial executives expect greater risk and volatility in the next three years. This quick-shifting environment is not getting any better, a fact which affects all aspects of forecasting, budgeting and planning. “The world is as complex or more than ever,” said Kevin McCollom, group vice president, general manager, governance, risk and compliance solution and platform sales at SAP, at a recent SAP Conference in Las Vegas. “Along with risk, there’s also increased competition and a constant need to innovate. You have to work across the organizations.”
According to McCollom:
- 78 percent of executives are not feeling confident in their companies’ risk management capabilities
- 98 percent want to analyze data more quickly
- 56 percent currently cannot develop deeper data insights.
“CFO’s are asking tougher questions that need to be answered faster, with more insight,” he said. “Best in class companies deliver better performance because they embed risk into the business process.”
To answer these tougher questions, FP&A needs to upgrade its analytics capabilities, i.e., apply logic to data to gain insight, according to Dave Williams, vice president, global product marketing, enterprise performance management and governance, risk and compliance at SAP. That’s gotten harder.
In today’s environment:
- Volume of transactions is greater
- There are more conversations (social media)
- There are machine-to-machine conversations.
There’s no question that combining enterprise performance management (EPM) and enterprise risk management (ERM) drives better decisions, noted Gary Cokins, founder and CEO of Analytics-Based Performance Management, who spoke at the same event. He suggested that finance break risk into three categories: preventable risk, strategic EPM execution risk and external risk.
Cokins recommended that FP&A incorporate these risks into the planning process. Preventable risks need to be part of the control function. EPM and execution risks are the core part of the forecasting and planning processes. External risk needs to be modeled and run through scenario and sensitivity analysis. According to some practitioners at the event, some companies actually have begun to create a budget for risk. That’s not common but it does show there’s more room for FP&A to ensure risk plays a key role in its day-to-day work.
Up your competitive game
According to a 2015 Hackett Group Study, the demand “emanating from changes in the external business environment, business strategies focused on innovation and the information revolution puts tremendous pressure on FP&A organizations for reinventions.” FP&A groups that remain “stuck” in merely facilitating the annual budget process are missing out on valuable opportunities to support enterprise performance.
To avoid this fate, FP&A “must pursue a very broad transformation agenda, simultaneously making core FP&A processes more efficient, developing new BI and analytics capabilities, integrating financial planning processes with the operational and strategic planning domains, and building partnerships with the business,” the study explained.