FP&A functions should be at the forefront of value creation in companies. The fact that they are not reflects a failure of CFOs to understand how to make these teams effective and efficient. Solutions to fix this malaise have been readily available for a decade or two, but the vast majority of businesses continue with legacy dysfunctional systems and processes. The cost to companies runs into hundreds of billions of dollars.
The CFO Dive article “Bad FP&A costs US companies $7.8B a year” references a report on the subject by the University of Baltimore and DataRails, which highlights the failure of FP&A functions, but hugely underestimates the financial impact.
Dysfunctional FP&A is destroying enterprise value
The cost of failing FP&A activity can be broken into two parts: the wasted effort of low-value work on manual processes associated with data input and managing data, and the missed innovation opportunity arising from the inability to analyse in a timely manner.
These issues can easily be solved by using the right software tools to provide both a central database to support business modelling and dynamic connectors so that the data inputs needed for the business modelling can be automated. These software tools have been available for at least 20 years and are constantly be developed precisely to make FP&A a more agile operation. Implementation is relatively easy and very affordable.
Why have CFOs failed in FP&A?
The obvious question then is why have CFOs failed to adopt these tools in their FP&A functions? The easy answer is ‘ignorance’. Our research has shown that 90% of companies undertake FP&A using Excel without connecting to a central database. This is due to familiarity. Everyone knows Excel and many users have advanced skills to push it to its limits. However, Excel cannot cope with the complexity business modelling requires; it lacks the multi-dimensionality and collaborative attributes that are essential components of a nimble model.
CFOs need to understand this. If they do not have the required level of business systems knowledge themselves, CFOs must bring in people who have that knowledge and, crucially, understand how to deploy it rapidly. It is no use looking to a traditional IT function to find people who truly understand what can be achieved with the right business systems in the FP&A function; such people are rarely found in IT.
Too much effort on low value manual data work
The report, referenced above, concludes that 75% of FP&A staff time is spent gathering and managing data. What the article does not say is that this can easily be an automated activity within FP&A if you deploy the right software.
The report also quantifies the cost of manual data gathering based on 2 hours per week per FP&A staff, which is clearly an understatement if 75% of effort is going into manual processes on data gathering. Hence the report’s estimate that the cost related to low-value work is US$6.1 billion is very much a low-ball figure and must be at least 10 times higher.
The cost of missed innovation
This cost is much harder to quantify. The report estimates 0.1% of total FP&A staff cost, or US$1.7 billion, and cites low morale, slow reaction, and bad reputation as the main reasons for FP&A’s ineffectiveness in leading innovation. These factors can be interpreted as high staff churn, lack of automation of data gathering, and errors in modelling, the latter arising from the inappropriate over-reliance on Excel.
All of these problems can be solved, quickly and cheaply, leading to immediate improvements in the effectiveness and efficiency of the FP&A function and timely decision-making around innovation.
How can the CFO fix this?
It is often assumed that implementing change in FP&A is a long and expensive process. It need not be. Long gone are the days of huge local systems implementations. Planning and analysis can now be turned on quickly with links to bespoke business models hosted in the cloud. With SaaS services, companies can start small and cheaply, then grow as confidence in the systems develops. Cost may increase but so does value.
Here are some simple pointers.
- Scope the model you need; what are the inputs to the model? What is the structure of the business model? Someone with experience in business modelling can do this in less than a week for most businesses.
- Choose a software tool to fit your needs:
- Must have a central database, where your business models will be housed
- Must be capable of dynamic updates from your key inputs, eg ERP systems (this probably means having ODBC connectors or APIs, which are common)
- Must be capable of supporting at least 6 dimensions in the modelling (this sounds complicated, but is not)
- Must support multiple concurrent users inputting data for collaboration
- Must connect to a range of outputs, such as Excel, dashboards, graphics packages so you can inform management via a variety of interfaces
- Get on and do it
How long to be up-and-running?
You should expect to have real live models in a few weeks, certainly less than a month. These models come with security over the access, collaborative working, and a single version of the truth in the central database.
There are no excuses to be a laggard in FP&A.
Why should stakeholders care?
There are myriad benefits to getting this right, amongst them:
- CEO – timely analysis to light the path to innovation
- Shareholders – increase in enterprise value from improved efficiencies and impact of more effective FP&A, positive impact on share price
- CFO – improved bottom line with possible impact on incentive plans, happier FP&A team
- FP&A team – more interesting work, more visible, better career progression
- Business managers – better and more timely access to business intelligence