Are your numbers – real news or fake news?

Are your numbers – real news or fake news?

By Matt Poleski, CFO, Northeast and Mid-Atlantic Region at Arthur J. Gallagher & Co

One of my favorite sayings is – “if you say it enough times, it becomes true”. Within my organization, I’ve heard many sayings I know are simply not true that become believed. For example, I used to hear: “We added $80 million in revenue and have not added a single person to the support team”. Nobody disputed the statement, and multiple people were repeating it to demonstrate how hard we were working. The main point of the statement was correct – we had not added proportionate support resources relative to the increased revenue, but the numbers in the detail were wrong. There were 4 new positions added.
 
This article addresses how FP&A can present context to arguments using real numbers and preventing fake news from being repeated. In an era where FP&A professionals are pushed to be more “playmakers” than “scorekeepers”, keeping score fairly is critical to making sound business decisions and remains a tremendous value add.  
 
Here are some examples when the narrative does not match the numbers.

  •  The numbers are just wrong.  Once a business leader claimed his operations were growing 5% organically.  In fact, same stores sales (organic growth) had declined 5% year over year.  How did he get the difference? He looked at a report that included acquisition growth in addition to organic growth.  Acquisition growth and organic growth are not the same thing! Salesman by their nature, have confirmation bias towards information that makes them look good. And they are all too happy to repeat information that makes them look good. If incorrect information is repeated enough times, the information becomes believed – much like today’s “fake news”.
  • The numbers are incomplete. Business leaders within our group will ask for pure data to support their resource requests. When they analyze data, they may exclude or even double counted some of the numbers! While business manager conclusions may be correct, FP&A can provide an independent verification to explain how the numbers were compiled, and also analyze what is excluded. 

The bias to focus on the numbers supporting one’s position is described by Robert Cialdini, in his book Pre-suasion. Cialdini describes what’s focal is causal, meaning that whatever is put squarely in the center for an audience to view is going to be believed to be important regardless of its true relevance. For example, we had a business manager who could not understand why his year over year growth was negative 5% when per his analysis, he hadn’t lost a single account. When we ran this year over year numbers, we showed him several accounts that he lost. His response was he has excluded the business he knew he lost from the prior year, and only included lost accounts we did not know about! Unfortunately, the known lost accounts were driving his year over year revenue decline. 

  •  The data has noise in it that needs an adjustment. We were in the middle of the budget and a forecast came out showing our region’s organic growth was 1.3% when it was closer to 3.0%. In the budget season, a 1.7% swing can make a huge difference in terms of allocated resources for the next year. Was the underlying data wrong? No, it just needed an interpretation that our accounting system is not currently capable of differentiating. We had recently sold business that was included in the prior year’s numbers, but excluded from the current year’s numbers.

 
FP&A provides solutions to the above problems. Our FP&A team works to get the numbers supporting the narrative correctly. Our FP&A structure is setup in and hub and spoke manner similar to what Richard Reinderhoff describes in another FP&A trends article.  We have financial analysts in the field to work with business leaders and a centralized hub team to distribute reports and act as data scientists. 

Here’s how we utilize that structure to get the calls right:

  • The centralized team distributes monthly reports with the true scores on our key metrics such as organic growth, new business %, retention %, etc.  We have regional financial analysts in the field to help interpret the data to prevent business leaders from misinterpreting – i.e. interpreting acquisition growth the same as organic growth.   
  • The standard monthly reports can be flagged for review similar to the National Football League’s (NFL) instant replay system. The regional financial analysts review the centralized team’s numbers for reasonableness. If the numbers are not indicative of what’s going on, they can request a review. If both the regional team and the centralized team agree an adjustment should be recorded to normalize the results, the numbers are adjusted. Similar to the NFL where there are restrictions on the numbers of reviews per game, we only review critical variances that would impact business decisions based on the numbers changing (or the call being reversed).
  • When management wants us to track a new initiative, we can analyze subsets of populations and know what we have included and what is excluded. We can determine numbers relevance to the population as a whole, and speak to the pros and cons of including versus excluding data. The key here is that the financial analyst team works closely with management to really understand the business, knowing what is proper to exclude and include in their analysis. 

 
In conclusion, there is a lot of importance in getting the numbers right for decision making. Despite a recent push to have FP&A professionals move from scorekeepers to playmakers, the scorekeeper is actually an important position that requires a lot of judgment. The ability to interpret data based on business knowledge to see the pros and cons of upcoming decisions makes sure the data is presented fairly in a proper context.

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