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By Matt Poleski, Regional CFO at Arthur J. Gallagher & Co
In the mid-1940, as a result of World War II, Winston Churchill developed the quote: "Never let a good crisis go to waste". The COVID-19 pandemic, a recent crisis, created short-term disruptions and provoked long-term changes in how the world lives and does business.
According to a McKinsey study, during the pandemic, about 50 percent of the companies in their research, "the outperformers", took advantage of the crisis, significantly increasing performance. At the same time, 50 percent saw no meaningful change. This article discusses what factors lead companies to outperformance and how Financial Planning and Analysis (FP&A) can help.
Lesson #1 – Outperformers spend more time on clear strategic messaging to employees. In the McKinsey study, outperforming companies increased their time devoted to messaging employees by 80%. How can FP&A help leaders deliver messages?
For example, in April 2020, we decided to reforecast our 2020 ground-up – customer by customer and employee by employee. The act of planning itself did not give us the answers to what the finances would be at the end of the year – there was no way to tell if customers would go out of business or how governments would react. By speaking with our salespeople who talked to customers, we could receive insight into what our customers were going through. We established lists of "at-risk" customers as well as developed potential models for growth rates which facilitate identifying what actions would need to be taken under each scenario. While FP&A was compiling data and talking to people, our management team was busy communicating updates via videos, webinars, and zoom calls that kept employees aware. FP&A's insight was one factor of many in the clear messaging.
Lesson #2 – Outperformers increased their reliance on networks of small, empowered, cross-silo teams by 61 percent. These teams focus on outcomes, such as greater customer value, instead of tasks. The virtual nature of the pandemic has allowed us to create virtual teams across geographical locations. In these teams, we can develop greater expertise for our clients, which can help us increase market share. Our goal is to grow teams to "critical mass" enabling economies of scale. FP&A participation and insight on these teams can help structure the teams so they are financially sound, balancing the value between rewarding employees with better career path opportunities, delivering a return on investment in excess of our cost of capital, and creating re-investment $'s to invest in additional projects.
For example, in the 4th quarter of 2019, our regional leadership team established our strategic growth plan. The plan included developing centers of excellence for areas in which we felt we could deliver superior value to clients. When the 2020 pandemic hit, we continued creating cross-functional teams to support these centers of excellence despite the short-term disruption in the business. Scenario analysis helped modify the strategic plan, which in some ways accelerated the plan as we proposed employees.
Lesson #3 – Outperformers spent more time on coaching and recognition. In Simon Sinek's famous TED talk, he proclaims it is important to start with "why" before determining "how" and "what". In FP&A, the accounting background of many team members can cause us to focus on the "what". We compare the precise answer to that of a digital thermometer. The digital thermometer will inform you it is 76.8 degrees Fahrenheit, but it will not tell you why that is the temperature or how to modify the temperature. In our FP&A team, we frequently will be asked to support spending requests. Frequently, spending requests are framed in relation to the budget. However, this relationship does not provide information relative to whether the proposal will provide a return on investment. For example, during the budget process, let's say the business asks for $1 million to drive a strategic initiative; however, the strategic initiative is delayed subsequent to budget approval. Requests to spend "saved" money from delaying the initiative are received, and since we have the money relative to the budget, there is no appetite to hear "why" it is not wise to spend it. Delaying investments may conserve cash, but economic value is only created when we can generate returns in excess of our cost of capital. Spending (or investing) money without knowing the "why" and "how" will be likely to deliver an inferior return on investment. By asking questions, FP&A can help management build their case for the "why" and "how" of investments which will help us deploy capital more efficiently. These questions can help both coaching and recognition.
Furthermore, we know the superior allocation of resources is the best way to outperform. It means investing in our people to make
1+1 = 3. In William Thorndike's book, "The Outsiders", CEOs have to do two things well: manage the business to optimise and deploy the profits. Most of what separates outperformers from their peers are in the second activity, capital allocation. FP&A can help plan and measure resource allocation, providing coaching/feedback to managers and helping them identify outperformers on their teams to recognize.
Lesson #4 – Outperformers were likelier to absorb and adopt new collaboration FP&A technologies. Our company continuously invests in new technology to assess the volumes of data we collect. We use this data to manage the company on a macro level and apply the data to individual clients, benchmarking customers against one another to make solid recommendations. FP&A has a risk of relying on the tried and tried sources of information that we are comfortable with as opposed to adopting new technologies. The more we can stay abreast of new technology and implement it into our toolbox to better scenario plan, the more effective communicators we will be with our management team.
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