On November 18, 2020, the International FP&A Board welcomed two FP&A thought leaders - Mike Huthwaite from the USA and Michel Haesendonckx from Belgium - to discuss the important subject of Empowering FP&A to bridge the Strategy Gap.
The meeting started with an overview of the strategic process and the evolution of strategic thinking through the years. Even though the first English strategy book was published in 1962, almost 60 years later around 67% of well-formulated strategies still fail due to poor execution. As the modern world focuses on analytics and using data more efficiently, FP&A plays a major role in the strategic process in the current, Agile, stage of strategic development.
Eliminating the strategic gap
Despite the best efforts, strategic planning can turn into a waste of time due to two major pitfalls: 1) poor integrated planning and 2) outdated approaches to strategic planning due to inability to adjust fast enough. What’s on CFOs’ minds as it relates to strategy? All too often, middle management does not understand strategic plans and it can create issues during the budgeting process.
A new approach has a potential to alleviate this issue. At the webinar, the Strategic & Tactical Planning cycle was presented with its emphasis on continuous screening and evaluation of opportunities and threats. A static approach where a strategic vision is set over a couple of weeks at the beginning of the year is no longer sensible as Black swans that are resistant to statistical predictive analytics can arise as we saw with COVID-19 in 2020. It is vital to first have ongoing conversations across an organization through the year to get very important buy-ins from stakeholders and only then to further cascade it down.
Collaborative Enterprise Planning
The Strategy implementation should also be examined from a technological view. The webinar discussion focused on the importance of driver-based models in which current technology helps with the integration of various segments of the business.
Participants around the world were asked to share the level of integration of their FP&A functions and the results revealed the clear existence of a gap as only 12% (or 1 in 10) had fully integrated FP&A processes, while 47% had integrated FP&A between operations and finance and only 18% had integrated FP&A between finance and strategy. As the percentage of technological integration between finance and operations increases, there is an opportunity for improvement that FP&A function is looking forward to.
The webinar discussion further touched upon the new embedded innovative techniques, including the Value Driver Tree Visualization which is a simulation where connections are made between various internal and external factors, and in which a decision in one area can easily affect the outcome in a completely different area.
A polling question revealed that despite all the technological progress made in recent years, only 4% of respondents can run scenarios in real-time while 68% of attendees conceded that they can run scenarios but this process is time-consuming for them to analyze the data at a more granular level. Thus, we’ll continue to see the value in technology as it evolves and integrated platforms supporting pro-active business solutions are developed.
Possible solutions to strategic pitfalls
At the webinar, the new ways of target setting were discussed with an important suggestion to make an emphasis on value creation through discounted cash flows and linking of executive compensation to strategic plans. It is important to take valuable considerations into account and to involve other stakeholders such as HR, Legal etc. into these conversations as strategic target setting involves buy-ins across an entire organization. It is well-known that the important ingredient in any FP&A platform is the ability to bring different domain expertise together and to make sure that thought leaders look at the same data elements.
The conversation delved deeper into how best to think and measure strategy both on micro and macro levels. Presenters underscored that in order to solve the problem it is imperative to ask the right questions which will help to recognize the problem and to invest time in order to break it down to the appropriate bottleneck that exists.
A considerable amount of time was spent focusing on the J-curve (lifecycle or survival curve) and the metrics worth considering and questions worth asking at every stage of the lifecycle of the company. As the machine learning is developing further, it helps FP&A professionals to delve deeper and to analyze and learn from past experiences which is vital to setting up a winning strategy.
Conclusion and Key Takeaways
Among the key takeaways from this hour-long discussion were
- focus on continuously strategic rather than static planning
- focus conversation on the Strategic Business Unit (SBU) life-cycle
- choose a portfolio approach
- make sure that various stakeholders (Strategy, M&A, Treasury, Investor relations etc.) join these important discussions
- use an integrated platform enabling pro-active business steering
As building a visionary company requires 1% vision and 99% alignment, FP&A function is in a great position to be the driver of these groundbreaking changes. The webinar concluded with the Q&A session where participants brainstormed how FP&A can become a solid leader in Agile stage of strategic development.