The London FP&A Club aims to share case studies, contacts and knowledge about the increasingly important financial planning and analysis (FP&A) function. Members of the growing not-for-profit professional member organisation gathered to hear the chair Larysa Melnychuk introduce the first speaker to the Club, Dr Peter Bunce, director of the Beyond Budgeting Round Table (BBRT), talk about the beyond budgeting concept, which his company gets its name from. The idea is that an organisation’s performance management model and metrics are freed from annual, fixed and bureaucratic borders and instead transformed into a more continuous, adaptive and devolved model.
It’s possible to imagine some organisations and finance professionals adopting the beyond budgeting approach as a natural progression from an already visible trend towards greater flexibility in financial planning.
The problems that can arise in conventional budgeting processes are well known: it can be slow and expensive, add little value to the business or to the achievement of strategic goals and incentivise the wrong behaviour, like departments rushing to spend budgets for the sake of it rather than looking for ways to reduce costs. Budgets effectively create fixed performance contracts that may not match the changing needs of the organisation in an unpredictable, dynamic world.
The Beyond Budgeting Approach
Beyond budgeting aims to reduce the waste of time and resources associated with conventional budgeting by devolving more responsibility to autonomous units throughout an organisation. Companies actively adopting this model already include Southwest Airlines, Toyota, Swedish bank Handelsbanken and the huge Norwegian corporate Statoil.
Dr Bunce explained the principles upon which the theory is based at the second London FP&A Club event. These include governance through shared values not detailed rules; and transparency instead of secrecy, so different parts of the organisation can see what each other are doing. Teams should be organised in a network rather than around centralised functions, and trusted to regulate and improve performance rather than being micro-managed. Accountability should be based on holistic criteria and peer reviews, not hierarchical relationships. Goals should be ambitious and set for the medium term, rather than fixed and short-term, with rewards based on relative performance and not given for hitting fixed targets.
Perhaps most importantly, with budgets removed financial planning needs to become a continuous and inclusive process, not a lengthy, top-down annual event. Interactions across the organisation should be coordinated dynamically, rather than through annual budgets and planning cycles, with resources made available as and when required; and controls based on swift and frequent feedback, not artificially imposed budgetary rules.
Treasury or finance professionals following this approach separate out the three original purposes of budgeting – namely, targeting, forecasting and resource allocation – and then seek to improve each of those processes. Targeting becomes more ambitious, using relative key performance indicators (KPIs) where possible, with performance evaluated in a holistic way.
Performance should be reviewed continuously too, using a ‘Plan, Act, Check the Plan again cycle’, which assesses the risks associated with the different options and, at the check stage, looks at progress made towards the set goals in relation to peers and best practice. Then firms should ask themselves whether their strategy needs to change based upon this oversight.
“It’s not an easy world – it means relentless performance – but you’re much more in control of what you’re doing,” said Dr Bunce. “We think that this approach is the way forward for management in the 21st century. Budgets have had their time – there is a better way of doing this. And the IT solutions available today make all of these things so much easier, enabling transparency and collaboration, collecting the data that you need.” So-called ‘big data’ volumes and the mining and interrogation tools that are now available to deliver useful information from this resource can certainly help measure and hit pre-ordained targets.
The questions from the professional attendees at the London FP&A Club on 17 April, revealed a generally receptive attitude to the methodology, but there were also practical obstacles raised that could make it very difficult for many FP&A specialists to try to persuade their employers to implement the beyond budgeting approach. These obstacles included the size and structure of some companies, resistance from boardroom level managers – where the treasurer is not always represented – and regulatory constraints.
“It’s a big pill for some executives to swallow,” Dr Bunce admitted. “But senior managers can change their minds about this way of working, because they realise it’s better for the business over the long term.”
Conclusions and Networking
Ultimately, as London FP&A Club secretary, Larysa Melnychuk, acknowledged in her closing remarks for the evening at the Montcalm Hotel in the City of London, a change of culture may be necessary in many corporates if the radical dynamic approach advocated by Dr Bunce is to be implemented.
Melnychuk then led a discussion on current trends in FP&A, touching on the need for more flexible, driver-based models and collaborative models and risk-adjusted planning, before attendees took up the opportunity to network over a few drinks.
The meeting had begun with Melnychuk restating the core purposes of the club: to give professionals working in financial planning and analysis a chance to meet with their peers and discuss the issues that matter to them in an informal setting, including the inherent difficulties faced by FP&A specialists in overcoming the constraints created by inflexible technology systems and processes.
“We would like to find people who are passionate about this evolving FP&A profession, who are change agents, and willing to speak,” she reminded attendees. “We all need a place to discuss our various respective challenges, share best practice, and to help each other to learn. And we can help to create standards in this industry while doing so,” she added, referencing the Association for Financial Professionals (AFP) plans to launch a global financial planning and analysis (FP&A) certification next year.
Reaction Quotes: Second London FP&A Club Event
Following the second meeting of the London FP&A Club, delegates enjoyed some informal networking and discussion of the challenges that they faced in their day-to-day roles.
“There are lots of things to discuss and good reasons for the establishment of this Club,” said Hans Gobin, head of FP&A at McCormick Europe, who nevertheless was not entirely convinced that the beyond budgeting model was applicable to him. “You cannot have hundreds of sites doing bottom up forecasting. It all poses a lot of questions. It depends where you are and what the requirements of the business are as to what model you follow and universality is not always guaranteed.”
Stylianos Matthaiou, an enterprise-wide financial planning analyst at Autobar Group, was also sceptical about the beyond budgeting model, but pointed out that part of the purpose of the Club was to listen to different ideas. He added that he could see how the 21 attendees could get a lot out of the event in general and use it to network and brainstorm ideas. “The change of the culture at the organisational level is the key issue,” he said. “It’s not what you see on screens, but what goes on around you now. Now you can hear the real world around you, and the problems that people are facing in a ‘live’ environment.”
- If you would like to find out more about FP&A and the plans for the Association for Financial Professionals’ (AFP) certification programme please follow this link for more information, sign up to the AFP FP&A e-newsletter or visit the FP&A website. There are also two gtnews FP&A Interviews – with Fabrice Domange, senior vice president (SVP) and head of financial planning and analysis (FP&A) for Europe, Middle-East and Africa (EMEA) at AIG Property and Casualty, and Ricardo Losada Revol, director of corporate finance at World Fuel Services – for those interested in reading more about the subject.
- To contact the London FP&A Club about the free membership for FP&A and finance professionals or to find out details about forthcoming events please contact Larysa Melnychuk. The next staging of the London FP&A Club will be on 27 June 2013, when Steve Morlidge, founder and director of the Satori Partners consultancy will deliver a presentation entitled ‘Mastering Business Forecasting’.
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