FP&A Board Maturity Model: Best-in-class FP&A and how to get there
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“The same companies that vow to respond quickly to market shifts cling to budgeting – a process that slows the response to market developments until it is too late.”
- Jeremy Hope and Robin Fraser, co-founders of BBRT
With analytical driver-based models, FP&A’s processes become more flexible and dynamic. A new generation of systems allows for agility, easy management of FP&A routines and collaborative planning. FP&A systems are now more often managed in the finance department, which helps to eliminate the problems of ‘black boxes’ and heavy reliance on expensive programmers and IT departments.
Today, we are seeing the emergence of a new generation of FP&A professionals, who are different from traditional accountants. These practitioners can see the big picture, understand key business drivers, build models and generate valuable business insights. Most importantly, they can communicate the insight for effective decision-making and also inspire people across the organisation.
The basis for this evolution is a changing business culture. The traditional, outdated budgeting mentality is being challenged more and more. Target negotiations, political games and biased planning processes cost companies a lot of money. These conventional budgeting practices are non-value adding and need to be abandoned if organisations want to stay competitive in this dynamic business environment.
While the process of moving away from a traditional budgeting mentality is painful and slow, it is happening around the globe. The question is, are we ready to abandon the traditional budget completely?
Going Beyond Budgeting
The proponents of the ‘beyond budgeting’ movement are convinced that the budget attempts to fill too many roles, namely:
One of the biggest conflicts of interest lies in trying to combine planning with target negotiations. It is a well-known paradigm: the budgeting process is a process of heavy target negotiations. Targets are linked to remunerations. This makes traditional budgeting a very emotional process: it is a battle for next year’s pay package of the participants. Can it still be objective and unbiased? Probably not.
This is a game, where ‘subjective’ or ‘objective’ are often forgotten. When this subject is discussed at FP&A Club events in different countries, it invariably produces smiles on FP&A professionals’ faces. They can strongly relate this behaviour to inefficiencies in their processes. Unfortunately, this traditional process is still so heavily embedded in business practices around the globe that often it is very difficult to challenge the status quo.
Luckily, change is already underway. More and more, companies are realising that budgeting is out-of-date before its finalisation and, therefore, is not that relevant for business.
Some companies have even started to think about abandoning the budgeting process altogether. Norway’s StatOil and Sweden’s Handelsbanken are among those to have done so, demonstrating that it is possible to survive and prosper without a budget.
However, this cannot happen overnight. Going beyond budgeting requires serious changes in business culture. It is well-known that such changes are the slowest and most painful.
What is Beyond Budgeting?
Bjarte Bogsnes, vice president, performance management development of StatOil, defines beyond budgeting thus: “The main purpose is liberation from dictatorship, micromanagement, number worshiping, calendar periods, hierarchies, secrecy, stick and carrot.”
The main problems of traditional budgeting may be summarised as follows:
Looking at the problems of traditional budgeting, many realise that it does not fit for purpose. Are we ready to abandon it though?
Many FP&A professionals find the idea of abandoning the budget difficult to comprehend. Typical responses include:
The reality is that the beyond budgeting philosophy does not leave an empty space. Once the budget has been abandoned it gives new management tools that allow companies to overcome inefficiencies and a culture of dysfunctional behaviour.
Beyond Budgeting, Step-by-Step
Basically, the first step should involve separating the three processes that are historically combined in the traditional budgeting routine; namely target, forecast and resource allocation.
The next step should consist of improving each of these processes:
The instruments of beyond budgeting are different. In general, it is based on rolling forecasts, balanced scorecards, analytical driver-based models, modern FP&A systems and efficient FP&A departments.
Above all, the most important factor for beyond budgeting is business culture. While some organisations are not yet ready for this change, they may well become so over time and the process will be evolutional.
Many companies are currently in a stage of transition: deeply dissatisfied with their FP&A processes, overworked and bombarded by deadlines, and looking for new FP&A talents that can be difficult to find. They are beginning to take the first positive steps towards a better FP&A business culture: implementing rolling forecasts, driver-based models and modern FP&A systems.
However, the culture is often driven from the top of the organisation. Chief financial officers (CFOs) and chief executives (CEOs) have lived with budgets for too many years.
The simple test in order to understand how embedded the "traditional budgeting culture" in your processes is to ask your FP&A team the following questions:
If you can answer ‘yes’ to the above questions, then probably you are ready for the beyond budgeting journey.
If not, good luck in your search. Please remember though that if you want your FP&A department to become more strategic and influential, you have to challenge the existing status quo.
This article was first published on http://www.gtnews.com and http://www.afponline.org/
You can read more on Beyond Budgeting here.
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