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How can CFOs adopt Financial Analytics?

My hypothesis, based on observations and discussions with industry analysts / consulting practitioners / senior executives, is that Finance Organizations have been slow adopters of advanced analytical techniques - e.g., statistical techniques (say for cash forecasts) or data mining / regressions (probably for bad debt predictions).

Rob Kugel's (Ventana Research) recent blog on Proformative validates my hypothesis. In a survey conducted with Finance users, 58% (about 3 in 5 people) say that “significant or major changes are required” in their analytical capabilities / processes / technologies. Ventana's survey also points to 71% of Financial Analytics users continuing to rely on spreadsheets, when 67% find that these very spreadsheets have been cause of the problem. Per Rob, four main factors seem to be driving this inertia within Finance - (i) slow to implement; (ii) adaptability to change; (iii) non-availability of skilled workers; and (iv) information that is inaccessible or difficult to integrate. .

In a recent blog post, Anders Liu-Lindberg claims that Finance has not adopted analytics with causes spread across IT and Finance departments - former not business savvy and later unable to find talent to analyze data.

While we debate on root causes, at least one thing seems consistent - Finance Organizations are indeed slow adopters of analytical techniques. This is further acerbated when seen in the light of Board of Directors’ expectation from CFOs – with CFOs (as performance data stewards) being increasingly asked to provide analytical insights to help organization / business partners make better business decisions. 

My belief on this topic is as follows - in the past, organizations primarily deployed resources on IT oriented initiatives such as Information Management, Business Intelligence, Master Data Management and Data Warehouses. However, as focus shifts to deriving insights from data, Finance needs to take the lead in -

  1. Hiring the right Financial Analytics professionals as power users within Finance (typically FP&A and Data Science skills)
  2. Equip such power users with nimble data discovery & visualization / predictive analytics / multi-dimensional online analytical processing tools. (e.g., Tableau / IBM Cognos TM1 / Oracle Essbase / SAS R etc.) by partnering with IT; and
  3. Create a culture in which power users are able to model business problems, analyze data, derive and share insights in support of business decisions, while co-exiting in a flexible ecosystem that grows in an extendable and governed way.

If CFO’s don’t step up to this challenge, organizations will continue to spend “Big $s” on "Big Data" initiatives with little Return on Investment (ROI) - assuming such organizations are even capable of measuring ROI.

Comments

Topic Expert
John Kogan
Title: CEO/CFO
Company: Proformative, Inc.
(CEO/CFO, Proformative, Inc.) |

I completely agree, RK. I think many finance organizations are so wrapped up in the monthly close and reporting cycle, the never-ending budgeting and forecasting cycles, and the month-to-month tactical details that they don't have much time for analysis beyond the rote, pre-programmed monthly comps that come out of the standard monthly reporting.

Part of the problem stems from the fact that FP&A is all jammed together into the same people. And since the "FP" part (along with monthly reporting) tends to take precedence (gotta get the numbers out) it crowds out the "A" part.

Finance needs to carve out the budget and the people to focus on analysis and helping the rest of the company become data and analysis experts. Finance should certainly be in the lead here since we tend to be welcomed in all functional areas of the company and are looked to as the data and analysis people. We should take that mantle and spread the love so that the systems and know-how, while they may be led by us, are available across the organization and all functions. That's a move from "owning" to "facilitating". I know the best finance orgs already do this, but at many (if not most) companies the tactical gets in the way.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Let's not forget the issue smaller shops have, those that are pumping out the numbers shouldn't be the same people to analyze them.

Think about editing a manuscript. When someone else reads the document they find errors you never knew about, even if you proof read that document a dozen times.

Analysis needs to be done by an "independent" party to the creation of the financials.

RK Paleru
Title: Principal
Company: Booz Allen Hamilton
LinkedIn Profile
(Principal, Booz Allen Hamilton) |

Thanks Wayne for the input. While I agree with "analysis" being separate from "FP" from a process standpoint and while I like also the analogy of "proof reading", I am not sure splitting planning and analysis people / skills is the best way to go about it. When together, there is a better and common understanding of the business problem in totality. I do agree that we need to make the FP process more efficient so people have time freed for the A.

RK Paleru
Title: Principal
Company: Booz Allen Hamilton
LinkedIn Profile
(Principal, Booz Allen Hamilton) |

John, Thanks for your thoughtful response.

To start with, you raise a very important point - freeing finance from the rigmarole and clutches of tactical processes - "close / consolidation" or the "plan / budget / forecast". I agree with you that "A" (or "Analysis") is an after thought. Not sure, though, if that is completely due to tactical processes taking precedence within Finance. My belief is that some tactical Finance organizations even go to the extent of myopically seeing an "end within the means" i.e., lack high quality "analytics" rigor in driving business insights to support decisions, sometimes leads these organizations to believe in "canned reporting" generated as part of their routine processes as "analytics in support of business decisions". There is a greater danger if that is the case (and hopefully I am proven wrong).

I cannot agree more with your "facilitating" versus "owning" thought. I am sure Finance is credible / capable of helping business partners to adopt self service analytics. The only catch here is working within the constraints of the political landscape. Who owns Analytics? Who is eventually going to be the Chief Analytics Officer / Chief Data Officer? Will it be IT OR Finance (as LOB) OR a different function within the enterprise OR a hybrid? All that depends on skills / capacities / tools / consultative mindsets...and the eventual answer will be organization specific. I blogged my thoughts about CAO and can be found here => http://informationanalytics.tumblr.com/post/106766909961/cheif-analytics-officer-big-job-or-big-data (planning on bringing this into "Proformative" very soon :-)).

Gurunathan Sv
Title: Consultant
Company: pvt
(Consultant, pvt) |

Dear Paleru

Thanks for your views.I fully agree with the points.By keeping the information, the finance team wants to retain their importance.today many activities /reports can be automated.

could you pls give an example of how advanced analytic s made- in a specific activity

Guru

RK Paleru
Title: Principal
Company: Booz Allen Hamilton
LinkedIn Profile
(Principal, Booz Allen Hamilton) |

Thanks Gurunathan for the response. I don't think Finance hoards any information. It merely acts as a steward of such information and sometimes proper governance needs to be in place given the day and age we live in with regards to info. security.

To your other questions, while there are many many advanced analytics use cases (check with Proformative blogs from folks like @Rob Kugel at Ventana), I did came across one that I blogged recently about how it is used in Consumer Small Business Finance. Thought I'd share. http://informationanalytics.tumblr.com/post/84275187396/analytics-in-consumer-small-business-finance

Topic Expert
Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

In addition to the good comments and insight given above, I’d like to add that finance organizations have a tendency to slowly adapt to new technologies as it implies “additional work” (assuming the technology is affordable to the company and can be realistically implemented). It is far easier to be complacent and pretend that change is not required and therefore can wait. That has to change.

CFOs’ roles have changed and the current expectation is for them to be a strategist and the CEO’s partner. Unfortunately, they often don’t have the right tools to perform their most essential job duties. Too many business decisions are based on erroneous data or lack of data all-together.

We all know that popular finance tools such as spreadsheets cannot deliver the analytics tools that organizations really need. Even many of the purpose designed software solutions used in FP&A functions are not quite where they need to be. Another problem I have observed for many years now is that most organizations do not accurately (or not at all) budget their balance sheets due to lack of proper tools. As a result of that, CFOs (and CEOs) cannot have proper insight into the financial health of their organizations. Here again, bad decisions (or no decisions) are often made at a great expense to these companies.

What we need is a completely new category of enterprise planning and analytics software that combines sophisticated planning with reporting that mimics actual period reporting, except using the plan data and its assumptions as the source for these future period financial statements. The data used in the compilation of these financial statements along with the actual data from accounting will be the input to the analytics system which will provide the data and insight for CEOs and CFOs to make better decisions and with a lot more confidence.

Unless there is a change here, I see FP&A personnel continuing to spin their wheels, month after month with very little meaningful results available to CFOs.

RK Paleru
Title: Principal
Company: Booz Allen Hamilton
LinkedIn Profile
(Principal, Booz Allen Hamilton) |

Thanks Alan and I agree! Laggard Finance organizations, who think there is all the time in the world to change (and hence put analysis off), need to change their mindsets and approach. Not sure if that is only because of software availability - tools are important but people / processes and above all the culture has to change.

I do agree with the tools becoming more sophisticated like you and Christie point out i.e., "a completely new category of enterprise planning and analytics software that combines sophisticated planning with reporting that mimics actual period reporting". There are products in the market like TM1, Hyperion Essbase etc. However, issue is these are expensive and not everyone can afford these tools as Christie points out.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

I like Alan's idea "a completely new category of enterprise planning and analytics software that combines sophisticated planning with reporting that mimics actual period reporting" - the biggest concern I have with this is cost. I still do my budget in excel because I have looked at budgeting software that integrates with our current software and I can't justify the expense at least not right now.

Thinking now is tactical, thinking long-term is strategic. The struggle seems to be allocating enough time to be strategic.

RK Paleru
Title: Principal
Company: Booz Allen Hamilton
LinkedIn Profile
(Principal, Booz Allen Hamilton) |

Thanks Christie! As also noted in my response to Alan, I agree with tools becoming more sophisticated i.e., "a completely new category of enterprise planning and analytics software that combines sophisticated planning with reporting that mimics actual period reporting". There are products in the market like TM1, Hyperion Essbase etc. However, issue is these are expensive and not everyone can afford these tools as you point out. Until then its Excel!

RK Paleru
Title: Principal
Company: Booz Allen Hamilton
LinkedIn Profile
(Principal, Booz Allen Hamilton) |

Hi Maureen - A good start would be to look at Business Analytics programs at Universities. I have heard NC State has a good program and GW also offers similar program (disclosure: I work for GW). Finally, analytics is about combination of skills in data / technology and business knowledge....have you checked online free courses - MOOCs. Check platforms like Coursera / Udacity etc. They are highly sought after by students who want to learn and if you ever like it you can work towards a Masters in the future. Hope this helps.

Maureen Brossard
Title: Inter-Entity Accounting Manager
Company: CommScope
(Inter-Entity Accounting Manager, CommScope) |

I find the problem is no good program for in-depth training on analytics. I have looked at Masters degree programs and seminars and can't find a good program. If any one knows of one, please post. Thank you.

RK Paleru
Title: Principal
Company: Booz Allen Hamilton
LinkedIn Profile
(Principal, Booz Allen Hamilton) |

Hi Maureen - A good start would be to look at Business Analytics programs at Universities. I have heard NC State has a good program and GW also offers similar program (disclosure: I work for GW). Finally, analytics is about combination of skills in data / technology and business knowledge....have you checked online free courses - MOOCs. Check platforms like Coursera / Udacity etc. They are highly sought after by students who want to learn and if you ever like it you can work towards a Masters in the future. Hope this helps.

Topic Expert
Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

Actually there are software solutions that can deliver what I was referring to at a surprisingly modest cost, very quick implementation time and little periodic maintenance. One such example is Budget Maestro with Analytics from Centage Corporation (www.centage.com), designed for small and medium sized organization, where the main focus is on delivering an accurate and complete set of future period financial statements and other reports, derived from a budget model that requires no user input of formulas, links, functions or any programming. CFOs at such organizations can have the tools they need in order to gain insight into the future financial health of their organizations, in almost real time by using existing actual data and budget data.