Robert Kugel's Analyst Perspectives

The financial planning and analysis (FP&A) group is the linchpin of any transformation effort in the Office of Finance. Our recently completed Office of Finance benchmark research was conducted against the backdrop of the idea that finance organizations must play a more strategic role in the management of the modern organization. This transformation envisions a finance department that’s more of a partner to the rest of the company — one that is less focused on “bean counting,” instead directing its resources and energy to providing more insightful analytics, facilitating transactions of value and communicating actionable data analyses that enable managers to make better decisions more consistently. The research uncovered advances in how corporations handle analytics as well as budgeting and planning. Yet the research also indicates that there is much left to be done in most companies.

The use of analytics is a core competence of FP&A. Analyzing a company’s results and assessing the potential impact of possible actions is essential to improving an organization’s performance. Likely for that reason, in our recent research, analytics were the top choice for the technology area critical for improving operations and performance, selected by 76 percent of participants. The research found improvements in the use of basic analytics in the finance function compared to similar research completed five years ago, but companies still lag in applying more advanced techniques such as predictive analytics.

The research revealed that 22 percent of organizations said the process for creating finance analytics works very well compared to just three percent five years ago that said the same. This is significant because the quality of finance analytics processes is correlated with the breadth of financial analyses performed by the department. Companies where the process works very well on average routinely perform 6.2 types of financial analysis compared to 4.6 where the process works well and only 3.6 where the process is just adequate. Yet, although performance has improved, finance analytics capabilities need improvement in the remaining 88 percent of companies — sometimes significant improvement.

Technology is likely an important contributing factor behind the improvement in the top-performing group of companies in analytics. For one, easier-to-use analytical tools has probably contributed to a more efficient process for creating analytics and automating report creation. Technology also has helped make analytics more consumable through dashboards and self-service reporting. The research found that 46 percent of senior executives have full access to finance analytics compared to 26 percent four years ago. Similarly, 40 percent of vice presidents, directors and managers have analytics that are completely accessible versus just 20 percent in 2015. There’s a people dimension, too: 34 percent of participants rate the skills of the people creating finance analytics in their company as excellent compared to just 14 percent that said the same in earlier research.

Our research also suggests that the improved performance in the use of analytics and planning may be related to an increase in the share of companies with a finance IT function. This function consists of one or a group of individuals who are well grounded in core finance and accounting disciplines but also knowledgeable when it comes to software and information technology. More than half (59%) of midsize and larger companies in the latest research say they have such a group compared to 45 percent in 2014. The research found a correlation between having a finance IT function and achieving superior performance in a range of core finance department functions. For instance, half (50%) of companies with a finance IT group say their department performs financial analysis very well compared to only 29 percent of those without a group.

The scope of what finance departments can analyze has significantly expanded over the past two decades, providing easier access to a wide range of operational and financial data insights. A growing list of tools to assess, visualize, and communicate data enables analysts to provide greater insight, visibility and guidance to executives and managers.

The research also found improvements in how businesses conduct budgeting and planning but here too there’s considerable room to do more. Significantly, the share of companies reporting that their budgets remain relevant throughout the period rose to 66 percent from 49 percent. Companies today are reviewing their actual-to-budget results somewhat earlier than our research found four years ago. Half (52%) of them now do this within six business days compared to 44 percent in 2014; 19 percent complete the review within three business days compared to 14 percent earlier.

The research finds a correlation between the type of software a company uses for budgeting and financial planning and how well these processes work. Two-thirds (66%) of companies that use a dedicated third-party application said they have a budgeting and planning process that works very well, compared to just 36 percent of those that use spreadsheets. However, spreadsheets are still the norm: 58 percent of midsize and larger companies continue to use spreadsheets to manage their planning and budgeting processes.

Ventana Research advocates integrated business planning (IBP), a high-participation continuous approach to corporate planning that enables individual business units to plan in the manner that works for them but also makes their planning data available to the rest of the business. This approach enhances accountability compared to top-down planning: It’s no longer “the finance department’s plan.” IBP uses driver-based modeling to plan “things” — headcount, units produced and advertising campaigns — as well as their financial impact. IBP utilizes five- or six-quarter rolling plans and forecasts to continually adjust to business conditions and more closely align business units’ plans. And because IBP is built on rapid planning cycles, the organization can focus on executing the plan and can more readily collaborate across business units.

I recommend that midsize and large companies replace desktop spreadsheets with a dedicated application for their planning and budgeting requirements. It doesn’t matter if they just want to create an annual budget and manage a simple forecast process, want to adopt more sophisticated planning techniques such as driver-based planning, or seek to evolve to employing an IBP approach in corporate planning and budgeting. There are wide variety of options that match the specific process requirements of companies and are affordable for any midsize or larger corporation.

Regards

Robert Kugel