Role of FP&A in Mastering Company Ecosystem Complexity
Most large and medium-size companies are within ecosystems with increasing complexity and evolution speed. Globalisation, regulations, technological changes, competitor moves, innovations, customer demands change and a few others are the source of this increase in complexity and change speed. Ecosystem and evolutions need to be watched and understood by different levels of management and departments i.e. developing an in-depth business and competitive intelligence.
Completely neglecting to do that does not happen in such size companies. Yet, (more or less) important disconnection between “the few strategists” and the rest of the management is quite common. It is a source of inefficiency, potential failures in strategy or tactics implementation and/or insufficient results. In many cases, this is not just the result of missing information or lack of communication, it is a cultural issue.
Cultural issues are definitively multi-facet. Still, one aspect is generally present. The difficulty to apprehend complexity and the more or less systematic default attitude to call it complication and research simplification whereas complexity and complication are two different issues.
Whereas complication would be adding in a process/system steps or mechanisms that do not bring any added value, potentially reducing its effectiveness; complexity is the exhaustive description, explanation and understanding of an ecosystem with all its interactions.
Whereas the paradigm of simplification is a solution to the complication, it is definitively not to complexity. If applied in the domain of complexity, it brings simplistic solutions that are as detrimental than complication.
The complexity of a given ecosystem is creating qualities that are not in each of its individual components. It may also limit some of the component qualities within the whole. Focusing on each element (separately) or only on some of them, is denying the effect of complexity and missing to address a lot of potential issues or values.
Another way to look at it, is that “complexity” is used when people are not willing (are incapable?) to understand/explain an ecosystem in all its aspects and revert to a “short view” that is within their scope. This “simplification” may effectively bring them to basis they understand and can work with but generally reduce significantly their ability to understand and master their problematics. It has material impacts on their ability to act on those problematics and brings unbalanced, inappropriate or misfit/maladjusted actions and decisions.
This applies in all company domains and all specialties would be able to give relevant examples showing that understanding and mastering company's complexity is essential.
What role for finance and FP&A?
Let us focus on 3 practical areas:
- Data management.
- Finance tools.
Data management and more particularly the different data referential that constitute the backbone of data collection, analysis and classification.
It shall cover the different interactions of the company ecosystem i.e. it is not by far an on the shelf set. System providers give a toolbox to build it with general guidance. It is still common to see limitation or major shortcut taken restricting/constraining the company natural complexity representation into a shell that is a pale image of what it should be. Products, customers, geographies, currencies, orders/contracts, suppliers, cost centres, projects ... there are many domains where information tends to be lost or reduced to a skeleton or unnecessarily expand damaging the ability to properly analyse and manage the company complexity. Furthermore, commercial, industrial and finance domains may not be fully aligned to the same representation. Another way to say it would be that proper business and competitive intelligence needs to be fully embedded in the design and that company that has done it correctly have largely enhanced their capabilities to perform.
Finance tools. Driven by cost issues, they tend to be “standardised”. They generally include a toolbox to customize your applications within certain limits. Depending on the business type it may be sufficient or not. Furthermore, the implementation might be lacking the creativity to adapt to the company natural complexity. Consistency between operational and financial systems is another dimension of potential issues. It generally happens when different representations of the company complexity are embedded in different systems.
Processes. Same issues, same consequences.
The focus tends to be on what is best / more modern (say rolling forecast versus budget, storytelling versus reporting, data visualisation versus spreadsheet types, performance management, profitability management, automatization, etc…) or on how to make it (obsession) quicker, less resource intensive, simpler rather than on fitting it to the natural complexity of the company.
Those three are not independent. They are inter-linked and shall be looked at as a whole i.e. in their whole complexity and matched with the company/business natural complexity.
Data collection, analysis, reporting, forecasting, performance and profitability management, etc … shall not be seen as independent elements but as a part of an ecosystem that would include a number of other interacting elements such as culture, competitive and business intelligence or innovation and technologies.
Few examples of issues:
- All product/customer segments managed through the same forecasting and/or performance management processes whereas they have very different time from order to revenues,
- In “B to B to C” type business only working around the “B to B” part,
- In highly price-sensitive markets, “bypassing” the discounts/price reductions information (and then losing the ability to explain/understand revenues and profitability evolution),
- Shortcutting the currency information i.e. losing track of the pricing/billing currency information.
- Similarly, in raw material high volatility prices markets, losing track of each individual transaction unit price within the chain of information.
- The conflict between the industrial view of the products/services and the commercial packaging,
- Lack of integrated project tracking,
- Cost allocation and time tracking inconsistent with the complexity of products/projects/customers giving inconsistent profitability assessment,
Furthermore, this is not only about data management, tools and processes. The human interactions are key. Making sure that different management levels and departments truly understand the ecosystem and its evolution is fundamental. It is not only about having good inter-departments relationship/partnership, but it is also about creating together true added value for the business by correctly assessing and managing all aspects of the company complexity. This cannot be achieved by only producing and managing a limited number of KPI’s or scorecard items (5 to 10 are commonly recommended) except if you are in a very simple market/company. Most companies of material size are in complex ecosystems that require many more internal and external elements that need to be followed and managed collectively. By collectively, I mean where each department effectively collects, assesses and shares its side of information in order to come to a common “vision” of the past, present and future performance and environment.
A particular aspect is a way your ecosystem respires (i.e. what are the key “time to”) and how your processes periodicity matches those. Short term, medium term and long term shall be managed as per your ecosystem rhythm’s not as per “academic” or (calendar) finance reporting requirement. Short-termism might be normal in high volatile business but not in maturing or mature markets. In some markets, you need to manage daily/weekly revenues (and cost of sales), in others monthly or quarterly is sufficient. In some, there is no order/contract stage, in others managing orders/contracts is of the essence. Key “time to” evolutions needs to be followed and matched process wise e.g. introduction of web retail might have a material impact on revenues key time to.
In summary, the natural complexity of any business/company is largely an externality that needs to be understood and adhere to in order to improve performance and the chances of success. Our ability to perceive and make a representation of that complexity is essential in order to build an efficient overall organisation that is neither complicated nor simplistic.