Improving Finance’s Financial Planning & Analysis Capabilities

As the role of the finance function continues to evolve from reporting on what happened in the past to driving business performance and creating enterprise value, the function’s financial planning and analysis capabilities need to be improved.

More than ever, increased volatility and uncertainty is placing considerable pressure on finance leaders to support business decision-makers by delivering actionable real-time insights.

Finance leaders are required to have a 360 degrees view of the risks and opportunities the organization is exposed to and respond promptly to change.

Recently, CFO Research in collaboration with SAP conducted a global survey of senior finance executives across various industry segments to better understand how finance leaders are supporting decision-making and value-creation purposes within their organizations. Based on 335 senior finance executives’ responses, the survey revealed the following four key findings:

  1. Being agile is becoming an increasingly source of competitive advantage. In a volatile, uncertain, complex and ambiguous business environment, having the ability to respond and adapt to change is the key to survival and value creation. Unfortunately, volatility and uncertainty is the norm these days. This in turn is requiring finance to provide real-time analysis and decision support. Of the surveyed finance executives, 84% are expecting senior management demand for adhoc decision support and analysis from finance to increase more in the coming years.
  2. Current financial planning and analysis IT systems are failing to deliver actionable insights. Organizational CFOs are hungry to see their functions conduct highly sophisticated, predictive business analysis, such as scenario planning, “what-if” analysis and risk modelling. However, current IT systems are falling short of intensifying demands for real-time analysis. For example, 53% of the senior finance executives responded that they are trading off sophisticated, predictive business analysis in order to produce reports in a timely manner. Furthermore, 14% are currently able to instantly respond to ad-hoc reports for business analysis via interactive, self-service interfaces. The majority (61%) of senior finance leaders are responding within one day of receiving request and 20% are responding more than one day after receiving the request.
  3. Lack of integration between financial planning and core ERP systems. Only 36% of survey respondents indicated that their company’s financial planning systems are well integrated with each other, with minimal manual intervention. Further worrying, only 15% of the respondents indicated that those financial planning systems are very tightly integrated with their core ERP systems and require minimal data migration.
  4. There is increased pressure on finance teams to drive business performance and create value. One of the critical mandates of the organization’s finance function is delivering more forward-looking and more interactive information and analysis into the hands of business decision makers. As the business environment continues to evolve, 88% of the surveyed finance leaders agree that this mandate will increase more in the coming years.

In light of these findings, what should senior finance executives and their teams do?

  1. To be the organization’s sought-after trusted adviser, finance must move beyond focusing only on the company and its profits and start seeking new opportunities to grow the business and expand. A team is as good as its leader. The finance leader must make sure that his team constitutes people with diverse backgrounds but all working towards the same goals of delivering real-time actionable insights, managing enterprise risks and creating sustainable value. It is critical to have people who possess the ability to challenge current assumptions and ask the right questions. People who do not possess a herd mentality but are prepared to go against the status quo as long as they are bringing something tangible to the group.
  2. The finance function must become agile, innovative and adaptive. Disruption in the business environment demands the function to develop new management models, standardize processes and be responsive to threats and opportunities. Keeping abreast of what is happening in the business environment, both externally and internally, helps sense and respond to changes quickly. Playing a “wait-and-see” game is no longer sufficient in today’s ever-changing business landscape. Business leaders need to be able to thoroughly scan their operating environments, understand risks and opportunities and take immediate strategic action.
  3. In order to improve the function’s financial planning and analysis capabilities, senior finance executives must ensure that their organizations have invested in IT systems that meet the demands of real-time, ad-hoc analysis. For example, the IT system must be able to conduct highly sophisticated, predictive business analysis in timely manner. Finance must be able to deliver more than just reporting on historical data and have the ability to deliver clear, actionable, forward-looking and real-time insights. Furthermore, it is important that finance provides reports and analysis that is easily understood by all managers to enable them make effective decisions.
  4. The organization’s financial planning and the core ERP systems must be integrated to ensure more effective decision-making. As the providers of information and analysis for sound decision-making, finance should ensure that it is providing one version of the truth always. It is therefore critical to have tight integration of financial systems with the other ERP systems if the function is to provide decision support and help create value. The integration of the systems should require minimal manual intervention and minimal data migration. In other words, there should be a reduced amount of time, attention and resources devoted to data migration and manual reconciliation connected with financial planning and business analysis. Having an integration of systems helps achieve consistency in processes and transparency of data throughout the consolidation data to financial results.
  5. Not all data is important for decision making, some of it is just noise. One of the barriers to improving financial planning and analysis capabilities is lack of data standardization across the organization. In today’s information age, it is critical that finance leaders and their teams are able to separate the wheat from the chaff. Data used for planning purposes must be validated and consistent throughout the company. How reliable and timely are your data sources? Also, there is need to train employees on the importance of data decision-making and data science.

As the pressure on senior executives intensifies to manage increasingly complex businesses and improve the organization’s competitive position, finance leaders will always be expected to deliver insights and analysis that are able to make the most difference to the business.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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