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 Douglas Yeung, Director of Business Operations at 8x8
Driver-Based Planning is a powerful approach that helps companies plan better by focusing on key business drivers, or in other words, key performance indicators (KPIs) that can impact the business.
While companies usually use high-level assumptions for their strategic plan, they can use more specific KPIs for Driver-Based Planning in their operational plans.
There are already a lot of articles and studies on how to implement a driver-based plan. This article focuses on the post-planning stages and the challenges that arise at this point. More specifically, the difficulty experienced in identifying key business drivers after company functions have started to build the initiatives that support the business plan.
Another challenging area that has often been overlooked is how the driver-based approach can effectively extend into actual operations after the planning is done. Once the company has identified the KPIs it will use for planning, it goes into an elaborate planning cycle. The cycle includes aligning assumptions, analysing data, and creating a good plan using those inputs. While many companies can track and compare the drivers versus the plan within dashboards and reporting tools, the challenge is translating the impact of business activities or initiatives devised after the planning cycle.
To illustrate the problem, let us take a consumer goods company’s revenue line and apply a Driver-Based Planning approach.
The immediate drivers at the most simplistic level of revenue are the average selling price and the number of customers. If we focus on the number of customers in this example, we can further identify the quantity drivers as:
Normally, during the initial planning, the company identifies new customers and existing customers as two main drivers but does not dive further into this detail. However, as the company operationalises the plan, the different functions start programs and initiatives to drive results. The marketing team, for example, may want to define these categories further when working on the initiatives. As an illustration, the marketing team may break new customers down further.
The management team then look at the business as usual (BAU) activities, choose to continue activities that will improve the new customer acquisition metric and create various dashboards to measure the effort versus plan.
However, the teams may come up with new initiatives that are not BAU for the business. For example, seasonal drives or one-off investments. The reporting then becomes more ad-hoc, and in many cases, data is captured through manual reports like spreadsheets, making the overall reporting cycle more tedious and prone to errors.
This situation is further complicated when different functions start to individually identify BAU and initiatives that are unique to their operations. For example, marketing can focus on social media while deploying tools like online marketing banners, keyword optimisation and SEO. In contrast, the sales team may drive new customers through channel expansion.
One single driver may expand out to multiple sub-drivers, and different functions may end up being responsible for various sub-drivers. It means that reports may miss some of these activities or fail to consolidate all the applicable ones.
As part of the feedback loop, the FP&A team can play an important part in helping the business identify, analyse, and report all these activities. This will provide management with an accurate and comprehensive view.
To do this, FP&A need to work with the various functions and implement a three-step approach.
As the Driver-Based Planning process moves from strategic to operational, the amount and diversity of data required for analysis and reporting increase significantly.
From a practitioner’s standpoint, implementing the framework to identify and track ad-hoc initiatives may be easier said than done. Especially when it comes to identifying parameters and their relationship to the drivers. However, FP&A can leverage technologies in three areas.
In conclusion, the Driver-Based Planning approach effectively allows companies to identify their most important areas. However, challenges in the post-planning part of the cycle can be mitigated with the FP&A team’s involvement. This includes helping identify specific business activities in the data that will help measure them.
While this may have been difficult in the past when data and analysis were less accessible, the latest improvements in technology now provide companies with much better insight. AI/ML and better data handling technologies, data warehouses, improved financial systems, and dashboards make this process much simpler.
This article was first published in the D!gitalist Magazine.
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