The FP&A Trends Webinar: Digitised FP&A Business Partnering: How Technology Can Support It
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The FP&A Trends Webinar: Digitised FP&A Business Partnering: How Technology Can Support It
Click here to view details and register
By Dr. Prashanth Southekal, Founder at DBP Institute
Financial planning and analysis (FP&A) which is an important department within the Finance function, is responsible for providing the organisation with the insights they need to make operational, financial, and strategic decisions. Specifically, the main objective of FP&A is to transform the company’s business performance using digital, data and analytics. However, one key component that acts as a backbone for FP&A performance is the Key Performance Indicator (KPI).
Why are the KPIs an important component in FP&A? What can organisations do to design and build a robust KPI framework and deliver improved business performance?
Let us first start by understanding the KPIs. A KPI is a quantifiable measure used to evaluate the success of the FP&A organisation in meeting its performance objectives. A good KPI framework covers the leading (predictive and prescriptive insights) and lagging (descriptive insights) metrics. Descriptive insights help to answer the question “what happened?”, predictive insights answer the question of “what will happen?” and prescriptive insights answer the question “what should be done?” Basically, if a business entity including the FP&A function is using KPIs to measure its performance, those KPIs typically drive business behaviour, results, and the organisation culture.
In other words, strong FP&A performance management is based on the fundamental principle that “what gets measured gets done.” KPIs provide the visibility to measure and manage business performance. Aberdeen Group examined the use of KPIs in more than 350 enterprises and found that the best-in-class companies derive performance improvements, including of 10 per cent increase in the time-to-decision making; 9 per cent increase in both profitability and revenue growth; and customer performance improvements of 9 per cent in both net-new customers gained and customer satisfaction.
There is no one-size-fits-all when it comes to choosing the "right" KPIs for your business. Building the FP&A KPIs framework that is specific to your organisation starts by formulating powerful questions. Questions are important as they provide the context to the insights or KPIs. One important factor to consider while formulating good questions is the framing bias. The framing bias is a cognitive bias that impacts decision making based on the manner in which the question is formulated. Given that we are all influenced by the manner in which the question is presented. For example, take two vendors whose quality of delivery needs to be assessed. One vendor performance says “10 per cent defects” and another says “90 per cent defect-free”. The framing effect will lead to us picking the second option because human beings tend to value options that are framed positively. Hence having the KPI definition i.e., “defect-free” or “defect prone” is very important as it impacts the data selected and ultimately the decisions made from the KPIs.
So how can an FP&A function implement a good KPI framework? First and foremost, the questions in formulating the KPIs should be tied to the strategic objectives of the business - the value drivers. Once the right questions are selected for the KPIs, three foundational elements discussed below should be factored in building a strong FP&A KPI framework. FP&A teams should be very careful in selecting KPIs because the wrong KPIs can potentially harm the organisation.
While many FP&A teams do a great job in identifying the consumers of the insights coming from the KPIs, unfortunately, the goals of the insight consumers are often not very clearly defined and do not align with the larger objectives of the enterprise. In January of 2019, research advisory firm Gartner reported that 80% of data analytics insights did not deliver business outcomes. One effective solution is formulating a good objective statement by asking questions, formulating a hypothesis, and defining the performance KPI framework based on the three key elements discussed above. Management guru Peter Drucker once said - “You cannot manage what you cannot measure”. In other words, insights from KPIs offer FP&A performance visibility, and visibility provides business value.
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