What’s New in FP&A – Part 2

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This is a busy time of year for FP&A professionals, with planning and budgeting for 2017 well under way in most organizations.  In a recent blog post, I called out FP&A as the “cool” department in Finance that is attracting the interest of many Finance professionals. 

I also interviewed Nilly Essaides, the Director and Practice Lead, Financial Planning & Analysis (FP&A) at the Association for Financial Professionals to get her perspective on what’s attracting people to careers in FP&A.   Since then, Nilly has been busy collecting survey data and the AFP recently published their 2016 FP&A Benchmarking survey.  In reviewing the survey results, I found this to be a comprehensive body of work and was able to reconnect with Nilly to get her perspective on the survey results.  Here’s what she had to say.

John:  Nilly, it’s great to speak with you again.  Can you tell us what the goals were for the 2016 AFP FP&A Benchmarking Survey?

Nilly:  Sure John, it’s great to speak with you again as well.  This is the first in a series of annual benchmarking surveys. It’s designed to give us a snapshot of where FP&A functions are today across a variety of categories such as the investment in systems, cycle times for budgeting and forecasting, the use of budgeting and forecasting methodologies and the number of FTEs in different areas of the function adjusted for revenue size, as well as what kind of data FP&A teams have access to today, and what they see as critical in the future.

The idea with the survey is to repeat some of the questions every year but also take deeper dives into specific areas, like forecasting or talent development, so we can track the evolution of FP&A over time, and provide more detailed insight into these specific areas. The survey provides a way for FP&A professionals to identify where they fall vs. best performers across these various categories and find out in what areas they may need to improve, or validate best practices.

John:  That’s great, I love the recurring nature of the survey.  Who were the main targets and respondents? 

Nilly:  This was a very good sample of FP&A professionals.  We received 255 responses, 73% of them came from North America with the rest spread in Europe, South and Central America, Africa and the Middle East.

  • 40% of the companies that responded were publicly owned and 44% were private with the remainder being non-profit and government organizations.
  • The responses came from across a broad spectrum of industries, with the top 5 being professional services, banking, manufacturing, software and pharma.
  • 46% of respondents came from companies with over $1 billion in revenue
  • Most of the answers 76% came from the FP&A staff at HQ.

 John:  That’s impressive.  What were the key findings of the survey?

Nilly:  Overall, we found that FP&A is a function in transition. It’s moving from where it is to where it wants to be, and the key to this transition is investment in technology, better access to data and the adoption of more advanced analytics.

The number one finding is that higher Investment in technology translates into shorter cycle times and less grunt work. That, in turn means FP&A can free up its time to focus on more strategic tasks, like partnering with the business and helping management make smarter decisions. Furthermore:

  • We found that companies that invest under 10 percent of their overall FP&A budget in systems spent 384 FTE days processing and collecting data. By increasing that investment to 10-19 percent of the overall budget, respondents were able to slash that time by more than half.
  • In addition, companies that invested under 10 percent of their overall budget on systems completed the budget in approximately 90 days and the rolling forecast in almost 16. Meanwhile, companies that spent 10-19 percent on systems did so in 74 days and 13 respectively, and the cycle times were even shorter as the investment in systems went up.

John:  Wow, those productivity gains from technology investments are impressive.

Nilly:  Next we found that more companies want to improve their ability to look forward. While only 18% have current predictive analytics capabilities, more than half expect to have it in the future. FP&A wants to be able to see further down the road so it can give management the heads up on what’s going to happen - not just what happened and what’s happening today -  so the company can have time to adjust course and plan better. Separate surveys confirm this conclusion.

big_data.jpgFinally, we found that FP&A is using better access to data to be able to put in place more advanced budgeting and forecasting techniques. One third of respondents already have ready access to information from inside and outside the organization and run predictive models. But over a half see that as a key competitive advantage going forward. That data is deployed to run techniques like driver-based modeling at nearly 60% of companies, rolling forecasting at almost a half of the respondents and zero-based budgeting at 39% of organizations. We found that more companies are now relying on data from non-financial systems to run their models, for example, supply chain data and transaction-level information.

John:  It’s great to see that FP&A is showing greater interest in leveraging “big data” and focusing more on predictive analytics.  What types of tools are being used to support FP&A currently?

Nilly:  It would be great to say that FP&A is fully enabled with dedicated financial planning systems. But the reality is that Excel still reigns supreme. It’s used by 40% of organization to measure and manage performance and over 50% to perform core forecasting, budgeting and planning activities.

Larger organizations, not surprisingly, are more likely to use dedicated applications to manage performance and execute their planning activities.

John:  Not that we all don’t know this already, but what did you learn in the survey results about the pitfalls of using Excel for planning and forecasting?

Nilly:  We didn’t ask that question directly, but we did learn indirectly from the data when we looked at the correlation between technology investment and process efficiency. While there’s no correlation between the overall size of the FP&A budget or the amount of money invested in technology and forecast accuracy, there is a clear link between how much companies spend on systems and the time it takes them to complete their planning and forecasting process.

One likely reason may be that using Excel chews up a lot of valuable time in creating multiple versions, re-inputting data and consolidating information that’s submitted by the field. A dedicated financial system allows FP&A to automatically collect forecasting and budgeting data from business units, run models and analytics and create the forecast and budget in a lot less time.

John:  You’re preaching to the choir on that point.  What did the survey reveal about technology investments plans – is there increasing demand for cloud-based FP&A tools?

Nilly:  The survey didn’t ask about plans for future investment in cloud solutions. But we know from other surveys that CFOs are planning to sharply increase the amount of technology dollars they plan to spend on cloud tools. Right now the survey data shows that cloud solution adoption trails legacy, on-premises applications. However, the demand for cheaper, faster to implement and collaborative tools is likely to speed up the adoption of SaaS solutions as FP&A seeks to move away from Excel, adopt predictive analytics capabilities and gain better access to real time, and bigger data.

finance_in_the_cloud.jpgOld ERP and CPM solutions were built around functional silos. Reengineering them to cut across departmental barriers is nearly impossible. The only way FP&A can collect and analyze enterprise data in a real time is through cloud applications, either from SaaS vendors or the cloud solutions increasingly offered by traditional vendors. Excel spreadsheets will never go away. But without a dedicated overlay system that pulls data into a single repository it will get harder and harder for FP&A to execute on its mandate of streamlining its core processes, and elevating its role by performing more advanced analytics and acting as an adviser to the business and senior management.

John:  We are totally in agreement on the advantages of the cloud.  What’s type of productivity gains does FP&A see from improvements in technology?

Nilly:  As I noted earlier, the gains show up clearly in less time spent on collecting and processing data, as much as half as much with a doubling of investment and much more with an increased to 20-40% investment as portion of the overall budget, as well as sharply reduced cycle times for budgeting and forecasting.

John:  Speed of processing is certainly important.  But what are FP&A departments doing to improve the accuracy of their forecasts?

Nilly:  The survey didn’t ask how FP&A is improving accuracy but it did reveal they are religiously tracking it. And that’s not a surprise. Recall the $1 billion forecast error by Walgreen’s last year? The CFO got fired and the stock price took a sharp dive. Most companies report a variance of plus or minus 5 percent. What matters is not the variance but its root cause. From talking to practitioners we learned that they look carefully at the reasons the forecast is off: is it off in the same direction every time? Is the same Business Unit getting it wrong in the same direction or was there an unexpected event? The important thing is to figure out why the forecast is wrong and fix it at the source.

John:  How about increasing business agility?  What level of adoption are you seeing of dynamic planning techniques such as Rolling Forecast and Driver-Based Planning?

Nilly:  The survey included some great data on this.  Overall, 57% of respondents across all company sizes use driver-based modeling and 48% practice rolling forecasting. I’ve seen other research that pointed to higher adoption levels for driver-based modeling, as high as 80%. A lot of companies rely on driver models but don’t necessarily define them as such, and that may be part of the issue. Driver-based planning means linking operational KPIs to the financial outcomes they produce. It’s a lot simpler and more straightforward than some people think.

John:  We’ve certainly seen increasing adoption of rolling forecasts in our client base.  What type of trends are you seeing in terms of using “big data” in planning?

Nilly:  There is certainly a lot of upside potential here.  The survey results about big data showed that 40% of companies are still holding data primarily within their business units, have limited access to external data and focus on historical analysis. Only a third of respondents have gained access to big data on a real time basis and are using it to look at today and tomorrow. But what we found encouraging is that 56% of FP&A professionals see real time access to big data as the way to keep their companies competitive in the future.  Big data can do a lot to help FP&A teams.

  • It can improve forecasting.
  • It can feed models with better and more diversified KPI
  • It can better help predict working capital and identify growth opportunities.
  • Finally, it can help secure a stronger strategic role for FP&A.

AFP Published a guide on How FP&A Can Embrace Big Data earlier this year, and it contained company examples of how Finance puts big data to work in helping the business make better decisions about marketing campaigns and customer relations. There’s no question that as FP&A evolves, it will incorporate big data strategies into its mission.

 John:  Nilly, thanks again for your time and insights on the survey results, and congratulations on a great piece of research.  Where can readers learn more about the survey results? 

Nilly:  A summary of the survey results is posted on the AFP web site at this link: http://www.afponline.org/publications-data-tools/reports/survey-research-economic-data/Details/FPASurvey/

To learn more about the latest trends in FP&A, check out the Virtual Event: Insights on Streamlining the Budgeting & Planning Process.

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Posted by on November 1, 2016
Topics: FP&A

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