In my last blog post I delved into top four performance
- Providing more insightful reporting and analysis to support decision making 76%
- Understanding key drivers of profitability across various dimensions (customer, channel, etc) 53%
- Cost containment and efficiency 48%
- Improving and shortening budgeting and planning process 47%
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Scenario modeling to analyze the impact of various drivers, initiatives and
risk factors 41% - Linking long-range strategic planning and forecasts to short-term operational plans 35%
- Becoming a better strategic partner to the business 23%
- Streamlining the financial consolidations and close process 21%
Scenario Modeling to Analyze the Impact of Various Drivers, Initiatives, and Risk Factors (41%)
This is a topic near and dear to my heart. Any student of business or the economy is well acquainted with the notion of uncertainty and change. The shifting sand beneath our feet is particularly problematic for planners. All too often organizations budget or forecast with one economic (or underlying) scenario in mind. Finance organizations often feel a great sense of accomplishment in completing “the budget” or “the forecast”. It’s understandable. The budget process for most companies is daunting. Past research conducted by Axiom EPM showed that over 85% of the organizations surveyed needed at least 2 months to complete a budgeting cycle. In that time hundreds if not thousands of person hours were consumed completing the process typically centered on one scenario. The reasons for this are many. In some organizations it is a cultural issue. Management teams and boards of directors are quite comfortable with a singular view. For example, when senior decision makers believe strongly in their prognostications, they unwittingly become too comfortable in their own beliefs about the future – even to the extent they are willing to bet the future on one set of operating assumptions. The truth is there are many potential futures, and well-tuned finance organizations have the ability to quickly model different scenarios giving consideration as to how the strategy could be altered if conditions change. Some organizations get locked into one scenario due to the practical shortcomings of their modeling environment.
What’s clear is that the budget (or forecast) is essentially the financial representation of the interplay between the external operating environment and strategies, tactics, and resources the company plans to position for the coming year. The level of uncertainty around key business drivers for nearly every business is significant enough to warrant a more thoughtful approach to planning than what many organizations are embarking upon today. To most practitioners in finance, the benefits of scenario planning are quite intuitive and easily understood. Scenario Planning enables the organization to:
- Understand and define the key drivers of the business
- Quantify the sensitivity to key drivers, creating important institutional knowledge
- Become more expansive and imaginative in its thinking
- Eliminate (at least in part) bias or aspirational thinking that is not grounded in reality
- Test the strength and flexibility of a strategy under adverse conditions
- Manage risk and uncertainty more effectively by modeling scenarios that break with current trends
Linking Long-Range Strategic Planning and Forecasts to Short-Range Operational Plans (35%)
The idea represented in this initiative strikes at the very heart of enterprise performance management (EPM). It’s the idea of a closed loop process that begins with strategy and cascades down to operational plans and metrics. EPM is the broad set of integrated financial planning and performance monitoring processes, including multi-year financial forecasting, capital planning, detailed budgeting, KPI definition and scorecarding, performance reporting, and profitability management. However, in most organizations these functions aren’t well integrated. Planning and measurement activities are supported by a patch-work of spreadsheets and proprietary applications based on incomplete and fragmented data silos. It is the fragmentation that works against Finance, requiring more manual intervention thus reducing the time for more value-added analysis that can enable better decision making.
What is the goal here? In a word – alignment, which is the connection between the mission and all operational activities of the enterprise. Organizations that are vertically aligned are able to translate strategy into execution. Each operating unit, even each employee, understands the larger mission and how their role fits into the big picture. Broad targets are distilled down to operational KPIs and metrics. Long-range plans at the corporate level are deconstructed into budgets and forecasts at the line of business level or department level. Developing great strategy isn’t enough; it must find traction throughout the organization to be impactful. Finance is in the driver’s seat to facilitate this broad set of processes that can translate strategy into execution. It was not surprising to see this initiative at top of mind for over a third of our respondents.
Becoming a Better Strategic Partner to the Business (23%)
As I wrote in my last blog post, I was disappointed that this initiative of Becoming a Better Strategic Partner rated so far below Cost Containment and Efficiency (48%). I would have liked to have seen these two swap places. Haven’t we wrung enough costs out of our businesses? Wasn’t that a top priority during our last recession? Almost every empirical measure would suggest that we’re operating more efficiently than ever before, which partially explains the jobless nature of this recovery. While not pleasant, it is rather easy to be the gatekeeper. It isn’t particularly difficult to cut away at spending, but there is a greater value-added function than ensuring cost containment. It is becoming a better strategic partner to the business. It entails getting more closely connected with the business, having a seat at the table, assisting in analyzing, advising, quantifying etc. It’s time finance becomes an enabler to strategic growth not just a gatekeeper. In using a standard two-by-two matrix we can see that the Strategic Partner embodies all the characteristics and skills of the
Streamline the Financial Consolidations and Close Process (21%)
The last initiative in our set of eight has to do with the financial close process. In working with scores of customers it’s quite evident that most companies have made great strides in automating and reducing the cycle time necessary to close the books. They have rationalized their data sources, done the necessary data cleansing and mapping, prebuilt the reconciling reports, automated the inter-company entries and currency translation logic and have constructed a full set of predefined reports and schedules that constitute their financial package. During the height of the