Aspiring Business Partner: When Financial Planning and Analysis Needs an Overhaul

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At a Glance

• With many companies experiencing both the uncertainty from the economic downturn and rapid change in customer behavior, they are calling on their FP&A teams to help the business navigate this turmoil.
• Many CFOs have been transforming FP&A for years, but most still give their FP&A teams low marks for delivering services that contribute to the company’s business strategy, or providing value-added analysis.
• CFOs committed to transforming FP&A will typically encounter five challenges, starting with lack of alignment or buy-in among business leaders.
• These companies also need to take new approaches to the FP&A organization; address critical gaps in skills; adopt new ways of working; and develop better technology and data solutions.

Can financial planning and analysis (FP&A) groups keep up with the rapid, profound changes in many companies?

Consider, for instance, what’s shaking up the media industry. Consumption patterns have changed as traditional television viewing’s share shrinks, digital streaming rises, and content creators can more easily self-publish and distribute their shows. FP&A teams at media companies thus need to assist with insights around the shift in revenue and profit from traditional television viewing to digital streaming models; around more ways to monetize content; and around the investment required to set up direct-to-consumer models.

Similarly, the software sector has been moving from a traditional license and maintenance model to a subscription model. Here, FP&A teams are called on to assess the impacts on growth and profitability, to support communications with customers and investors, and to reallocate operating expenses and capital spending, all in order to help the business navigate the complex transition to software as a service.

The Covid-19 pandemic and subsequent lockdowns accelerated some of these trends. In retail banking, for example, several years’ worth of shifts in digital behavior were compressed into months, as many people tried contactless cards and mobile payment apps for the first time. The pandemic also intensified cost and liquidity pressures on companies in many industries, so FP&A must improve capabilities in cash flow forecasting and working capital management.    

FP&A, whether it’s a dedicated team at the center or finance business partners embedded in the business delivering FP&A services, is on the front lines of helping businesses contend with such turmoil.

Specifically, business leaders and CFOs want their FP&A teams to become stewards of value creation. FP&A should spend less time explaining the numbers and more time working with the business to manage them. As one finance executive told us, “I need an operating thought partner, and not someone that is just keeping score.”

It starts with timely, accurate, and standardized reporting combined with faster, sharper insights to understand what factors drive business performance. But that’s table stakes. 

Finance leaders increasingly want FP&A to devise early warning signals to better anticipate risks and tap opportunities. They want FP&A to help them steer the business through increasingly complex, often volatile, changes in business conditions and adapt to changes in business models. They want FP&A services delivered in a consumer-grade experience underpinned by rapid access, often through self-service, to real-time information analytics from any device, rather than static spreadsheets that require hours of manual manipulation and preparation. And they are looking for a single source of truth for data that will inform business decisions.

In short, they are looking for nothing short of a full-scale transformation in how FP&A services have historically been delivered (see Figure 1).

Advanced FP&A groups deliver a consumer-grade experience for their internal customers

CFOs and their finance teams have recognized the need to transform FP&A for some time. Yet despite years of hard work redesigning processes and investing in new technology and data, many have not achieved the results they expected. 

For example, in a 2019 survey by the American Productivity & Quality Center and the Association for Financial Professionals of 430 CFOs and finance leaders with greater than $500 million in annual revenue, only 32% rated FP&A as very or extremely effective at delivering services that contribute to the company’s business strategy. FP&A spends an average of only 25% of its time providing value-added analysis, respondents said.

If so many FP&A transformations are falling short of expectations, what needs to change to make greater progress faster? Our experience working with CFOs and finance groups reveals five challenges commonly encountered by companies trying to transform the FP&A function:

• lack of alignment or buy-in among business leaders;
• sticking with the traditional approach to the FP&A organization;
• inability to address critical gaps in skills;
• inability to adopt or scale up new ways of working; and
• inadequate technology and data.

Lack of alignment or buy-in

When business leaders have not aligned on the business strategy and how value will be created in the future, FP&A will be hamstrung, forced to react to events and requests rather than anticipating them with an eye to furthering the goals. It’s particularly challenging when businesses are in a state of transition, as in the media and software cases described above. In these circumstances, it’s important to align not only on the end goals for the business, but ultimately the path and timing to get there.

If not done right, the business will typically add new tasks for finance. This creates an unsustainable workload for finance, and also confuses the business as it gets inundated with vast sums of data and analysis, rather than highly focused metrics relevant to performance. Consequently, FP&A must align with the business on what should get added to and come off its plate.  

The traps consist of transforming FP&A in isolation, without involving the business, or by changing multiple processes at once without considering the level of disruption to the business. All of these behaviors result in poor outcomes. Successful transformations require a strong partnership between finance and the business leaders from the start, rather than finance acting independently and then reporting back to the business on the results. That’s because the business must make the trade-offs on the future sources of value creation and the path and timing to get there.

Only once leaders agree on goals should they define how FP&A, working with counterparts in the business units, will undertake initiatives to support those goals. And any program of initiatives should be pragmatic in mitigating disruptions to the business requirements and focusing on simplicity in processes.

Retail giant Target about five years ago realized it had to invest more in its digital footprint in response to changing consumer behavior. Led by CEO Brian Cornell, the senior executive team aligned around a handful of strategic priorities, including on-demand shopping. Cathy Smith, Target’s CFO at the time, recounted in an interview with Heidrick & Struggles how analysis by the finance team determined that the company’s initial impulse to close many stores would be harmful. Stores were great distribution points, the analysis showed, and having a strong physical and digital presence improved brand awareness and gave customers more ease and convenience.

This analysis informed subsequent investments in a joint physical-digital experience. And FP&A’s measurement system and simple scorecard kept the leadership team on track in reaching the digital goals.

Sticking with the traditional approach to FP&A organization

Traditional FP&A organizations tend to rely on a group of generalists to carry out a broad scope of responsibilities. However, the bar for expertise in FP&A continues to rise as companies enter and exit customer segments, products, countries, business models, and channels. With deeper specialization now at a premium, organizational design can help make this happen, and CFOs are increasingly turning to new organizational models for FP&A, most notably hub-and-spoke configurations and centers of excellence (see Figure 2).

New FP&A organization models are emerging to deepen expertise and provide higher-value service to the business

Management-reporting centers of excellence that produce and distribute standard management reports have been around for years. What’s new is the extent to which FP&A teams are creating greater levels of specialization in their organizations. For example, FP&A organizations may split financial planning, budgeting and forecasting, reporting, and decision support into separate teams within FP&A. Other organizations are creating a data analytics hub that serves all FP&A staff in the field. In the most extreme approach, it may mean carving out specific disciplines, such as compensation planning, and creating dedicated centers of excellence in FP&A around those disciplines. FP&A field teams would then become smaller and pull on the services of these centers of excellence in a virtual model.

One example of these more specialized models is Nielsen Global Media. Over several years, Nielsen moved from a highly decentralized to a more centralized organization. In the process, Nielsen created a central FP&A analytics hub that owned the data to create a single source of truth, and performed cross-functional analytics used by the entire organization. Teams colocated in the business were smaller and focused more on interacting with the business than on running the analytics. As a result, Nielsen reaped cost savings and also improved the service level of the business—by simplifying forecasting, cutting the budgeting process time in half, and minimizing the time that operational and commercial teams spent on planning.  

Persistent gaps in critical skills

FP&A teams composed only of people with a traditional finance or accounting background often lack a deep understanding of the business domain. Partial allocation of staff time between FP&A and other areas also limits the ability of finance professionals to build competence in FP&A.

To build the required skills, it’s critical to first dedicate some group of finance professionals to FP&A work and not split them between FP&A and accounting or other transactional work. The best finance leaders look beyond traditional skill sets for people with backgrounds in business or data science or analytics.

Of course, this is easier said than done. Successful FP&A transformations do more than identify these new skills to succeed. They design and invest in the leadership, training programs, and rotational programs to make it happen, rather than relying solely on external recruiting to fill the gaps.

Cathy Smith, the Target CFO, asked her team to assess how finance would create value five to seven years out. Through that “future-back” exercise, they realized that the group needed light coding skills for robotic process automation, and skills around blockchain, especially for intercompany transfers, and around predictive analytics for forecasting. 

Inability to adopt or scale up new ways of working

This pitfall manifests itself through the failure to adopt innovative practices, or the tendency to make a large number of small bets with scant results. The main remedy is to pick a few areas in which to double down investment, where innovation will have the largest positive effect on the business goals. Once finance and the businesses identify those areas, a test-and-learn approach using Agile methods will help to quickly scale up the most promising ones.

As part of a major cost-reduction campaign, one large telecommunications firm took the opportunity for the FP&A function to reinvent itself. FP&A installed better tracking of performance management and initiatives, which improved accountability. It built a budgeting tool that improved key performance indicator (KPI) analysis and general reporting. And a cloud-based, initiative-tracking tool ensured that savings initiatives stayed on course.

Inadequate technology and data

As economic volatility grows, the business is increasingly requesting more frequent forecasts from finance. A recent FP&A survey by the Association for Financial Professionals found that in 2019, 14% of organizations forecasted either on a daily or weekly basis. By 2020, 23% were forecasting at the same pace, and the share is rising. However, FP&A teams preparing the forecast spend half their time on data gathering and preparation—a situation that is becoming unsustainable. Access to clean data and the right tools becomes critical for organizations to forecast at this increased frequency.

Upgrading technology usually requires expensive, substantial change from outdated planning models and accounting systems. Waiting for a large core system upgrade will take many years and have questionable ROIs; such projects often are sidelined by higher priority IT investments in other business areas.

Instead, it pays to take a phased approach using a portfolio of existing and new technology solutions. Cleaning data and addressing other data issues is a good start, after which FP&A can layer on more advanced tools. In addition, many companies have had success moving to the cloud to integrate planning, budgeting, and forecasting processes.

Microsoft’s finance organization has been on a transformation journey since the early 2000s. Central to the transformation has been improving the control of data and standards across the company. Finance created a single master data source to generate all financial reports and analysis.

More broadly, Microsoft Finance has fostered a culture that continuously brings innovative technology solutions to its internal customers, particularly in FP&A. Examples include a business management portal, self-service analytics on a global KPI lake, interactive financial statements, a cash flow analytics platform, and machine learning in forecasting processes.

Many of these innovations were developed and launched quickly—for example, 8 to 10 weeks for machine learning in revenue forecasting and 14 weeks for the global KPI lake adopted by business users. As a result, Microsoft Finance has realized a 20% reduction in time spent validating and compiling data, and has significantly upgraded the quality of support provided to the business.

Choose your spots

As companies commit to transforming their FP&A function, choosing the right focus and pace is essential. A few useful principles apply here:

• Set the ambition appropriate for the starting point of the company and industry.
• Enroll business leaders to copilot the effort.
• Align with those business leaders on the sources of value creation for the future, then work backward to redesign FP&A around them.
• Have finance staff dedicated to FP&A, ensuring that FP&A is separate from accounting and transactional finance activities.
• Select the right organizational model that fits with the company and culture.
• Invest to develop great FP&A leaders and practitioners.
• Pick and choose your battles on technology and data; focus on the foundation of data governance first.

That’s how to raise the odds of FP&A shifting its role from scorekeeper to true business partner.