How to Drive Value via FP&A Transformation

This approach delivers company benefits in:

  • Higher productivity (+15% to +30%) by creating lower spending on FP&A staffing (-15% to -30%).
  • Faster business decision-making by delivering higher sales growth (+1% to +5%) or lower cost of goods (-1% to -5%).
  • Greater confidence in the financial planning process by improving overall controls and stewardship.

The US Institute of Management Accounting (IMA) – which also has offices in China, the United Arab Emirates (UAE) and Switzerland) – states in the statement of professional ethical practices, “FP&A is responsible for functioning with integrity and in an unbiased manner to provide consistent, reliable, relevant, and meaningful information.”

However, this is only possible if the infrastructure is in place to enable the achievement of these goals. For most companies the infrastructure is lacking, so FP&A delivers integrity and unbiased information through brute force and gut instinct versus work processes or tools designed to deliver an intended outcome.

The FP&A process tends to be non-standard, executed with minimal planning or methodology, and with little coordination. As the IMA states – and as many industry leaders confirm – there are very few companies with well-designed and coordinated FP&A processes. The lack of an organised financial planning process delivers inaccuracy, ineffectiveness or inefficiency; depending on the current state of a company’s financial planning design it may experience all three.

The resulting frustration of senior leaders is often compounded if the organisation takes months on end to create a financial plan that makes little business sense by the time it is published. By intentionally developing and rolling out a synchronised financial planning process, the organisation can quickly deliver value creation that exceeds industry standards.

Current Key Metrics for FP&A

 

Metric

Worst

in
Class

Avg

Best

in Class

What delivers best in class performance?

Days to complete strategic plan 

120

64

15

Strategy linked to the operational FP&A
monthly or quarterly cycle

Cycle time for budget 

75

60

45

Work process, organisation, and tools designed
for efficient budget preparation

% of time  

non-value add 

50

34

20

Work process, organisation, and tools designed
to drive out non-value work

# of days  

to prepare forecast 

30

16

5

Policy eliminates low-level adjustments, use
of risk and opportunities, company culture

 

Source: The Hackett Group Study 2013

 

Metric

Worst
in Class

Avg

Best in Class

What delivers the best in class performance?

Higher Sales 

0%

1%

5%

More timely data provides improved business
decisions

Lower Cost /Inventory 

0%

-1%

-5%

More timely data provides improved business
decisions

Productivity (annual head count change) 

0%

3%

6%

Centralises work in business and service centres

Salary and benefit savings (annual saving) 

0%

3%

8%

Savings driven by the improved productivity in
FP&A

Wage arbitrage  

(annual saving) 

0%

1%

3%

Savings driven by the move of work to low-cost
locations

Project cost overspends or underspends (one- time) 

50%

15%

(25%)

Cost reductions as a result of improved
FP&A project transformation; cost avoidance

 

Source: SynFiny Estimates 2014

   

There is a significant range between metrics of the worst and best in class when it comes to FP&A. However, though the key metrics can be quite different the drivers of the differences can be quite straightforward, or at times easy to fix once the organisation has been given senior leadership support to address the outages. More importantly, the changes to improve typically do not require costly and intrusive systems projects. Unfortunately, most companies kick off costly systems projects when they decide to fix FP&A instead of checking if there are simpler and less costly work process or organisational options.

The Building Blocks of Value Creation

The building blocks of FP&A value come from many different elements; it is not simply the impact of improved productivity or wage arbitrage of moving work to low-cost locations. The value comes across the income and balance sheet statements.

Areas of financial plans with the greatest impact as a result of FP&A transformation efforts include:

  • Productivity (+15% to +30%): The creation of centralised resources for forecasting, budgeting and analysis creates a significant benefit in productivity.
  • Increased sales (+1 to 5%): By linking financial and operational strategies, the organisation is more focused on delivering the financial goals of the company, which ensures business teams have timely and accurate demand or sales data to make the right decisions.
  • Decreased costs of goods or inventory (-1% to -5%): By linking financial and operational strategies, the organisation is more focused on delivering financial goals of the company, which ensures business teams have the inventory, supply, demand or cost data to make the right decisions.
  • Salary and benefits savings (-15% to -30%): By redesigning and assigning tasks in the business and centralising the work, the organisation becomes more productive; this productivity can be brought to the bottom line.
  • Wage arbitrage savings (-20% to -30%): By redesigning and assigning tasks between “business knowledge required” and “technical FP&A creation” a company can move the more technical tasks to lower-cost locations.

Other non-direct financial areas that also improve include:

  • Improved data cycle time (< 50%): It is possible to reduce a company’s cycle time by well over half, which provides faster data to its business teams.
  • More timely and visible data (2x faster): The use of technology and work process delivers data in a faster and timelier basis for supporting business decision-making.
  • More reliable and sustainable forecast accuracy: The development of clear and well understood work processes enables the organisation to create a more accurate forecast.
  • Improved Stewardship: The details of the financial plan will be more transparent, eliminating forecast or budget surprises that create control issues.

The bottom line benefits from FP&A transformation can be sizeable for a company. However, the added benefit of having financial data (both actuals and forecast) on a more timely and accurate basis for business decision-making is arguably more important. This benefit enables a business to react quickly to rapid changes in the external environment (related to currency, commodity or country crises) or actions being taken by competition (marketing or sales activities).

Transformation by Standard FP&A Work Process

The implementation of a standard FP&A work process opens up opportunities across a company. This process delivers on the aforementioned IMA goal and takes guesswork out of the FP&A team effort. Finance and all other functions involved in FP&A activities can instead focus on business strategy, deeper penetration of the financial plan, and more impactful analysis.

There are many examples across industries about inefficient and/or ineffective work processes. For example, in a large global consumer goods company, a regional marketing budget process required multiple levels of management to approve the creation of a basic internal order (a SAP collection account for tracking marketing event level budget and spending). In every other region of the company, a clerk could execute this process with no approval needed. In one region, there were three levels of management needed to approve the creation of the internal order. When asked why the multiple levels of approval were required the organisation answered, “It was always that way.”  

Although a relatively simple example, most work processes suffer from similar issues. The work process becomes part of the fabric of the organisation, and until a close examination of the end-to-end work process there can be no understanding of the inefficiencies or ineffectiveness.

Benefits and Future Direction of FP&A Work Process

The process of developing a standard work process leads to maximum productivity benefits and data transparency, delivering higher savings and improved business decision-making.   Key benefits of standardising FP&A are:

  • Delivering real-time data through release of “fit for use” forecast or budget data
  • Driving cycle time reductions through tools and work processes delivering tasks each day
  • Data quality is right first time and fast through organisation and imbedded quality control
  • Delivering productivity and reduced cost through right first time and organisational designs
  • Improved stewardship through greater transparency across the forecast.

The future for FP&A is becoming clearer as the benefits grow more readily achievable. There will continue to be an industry drive to more standard ways to approach basic capabilities (i.e., work processes, tools, and organisation design across the financial planning processes). The American Productivity and Quality Center (APQC) has published FP&A capability white papers from US companies as diverse as Mutual of Omaha, Discovery Communications, Infosys Ltd., UnderArmor, AT&T, Clarient Inc., and Intel. The same transformation experiences are occurring across companies and industries around the globe.

 

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