Recently, we hosted a panel on How Can Finance Leaders Bridge the FP&A Gap. We were joined by Gary Simon, Chief Executive of FSN and Leader of the Modern Finance Forum on LinkedIn, and Alok Ajmera, President and CEO of Prophix Software. Mike Tindal, a veteran of the computer industry and SVP of Corporate and Market Development at Prophix, moderated the discussion.
This was an opportunity to discuss the findings from our latest survey, Agility in Planning, Budgeting, and Forecasting, as well as larger trends in the finance industry, including digital transformation.
Mike: Let me start with you, Gary. One of the things that I took away from the report is that transformational leaders in the Office of Finance tend to outperform others. How are you defining a transformational leader? And what do you see them doing differently?
Gary: So, transformation leaders are the 6% of the respondents who have completely transformed their planning, budgeting, and forecasting processes (PBF) over the last three years. There were 509 companies in the study. In every single one of FSN’s stress tests, we looked at speed, accuracy, and the distance over which people can forecast with any degree of confidence.
The obvious question is, what are they doing differently? Well, the first thing is that they were ahead of the game. As organizations, they had already abandoned disconnected spreadsheets, for example. And, they had also achieved what we call data mastery. So, they were using data as a corporate asset and sharing it across the enterprise with the help of a unified environment. So, they weren’t replicating data across the organization.
On top of that, transformation leaders had invested in specialized planning, budgeting, and forecasting software, usually in the cloud. They were also more likely to use what we call advanced accounting techniques, which we’ll come to later. And finally, they were making good use of non-financial data.
Mike: One of the other major themes of the report is agility. Clearly, the pandemic seems to have accentuated the need for this. More specifically, how has COVID affected businesses, and what is revealed by not acting on a transformation?
Gary: Yeah, there were some very interesting lessons from the pandemic. Agility is the issue, as you rightly point out. We look at it from two points of view. There is agility under duress that we’re all facing because of COVID. But let’s not lose sight of the fact that agility is extremely important in the normal run of business events, such as acquisitions, reorganizations, competitor activity, and so on.
Last year, I interviewed a lot of CFOs and it was clear they couldn’t cope with changes driven by the pandemic. Perversely, they couldn’t contract new systems, as they were closing businesses or discontinuing products. It was just as difficult to contract as it was to expand their information systems in better times.
What we found from organizations that haven’t transformed yet is that even though they’re forecasting more quickly, the accuracy is deteriorating. So, we’ve seen a steady deterioration of a couple of percentage points in the last three years. And we’ve also found that as people spend more time on forecasting, it doesn’t make a lot of difference to the accuracy. So, you can spend one week or one month putting your budget together but it’s not going to affect the accuracy of what you’re doing.
And just some other key points – 80% of organizations can’t forecast with confidence beyond the year and 52% are unable to look out further than six months. And if you consider that the whole point of forecasting is to be able to marshal and plan your allocation of resources, you have to ask yourself the question, “what are people doing in the second half of the year?” Only 64% can prepare forecasts in under a week. But what’s been challenging for finance leaders, as I hinted at before, is being able to change the structure of their reporting, as well as their PBF processes.
So, what happened during the pandemic is they couldn’t change. They had to pull out a new spreadsheet and populate it from scratch. The automation gap is huge for those organizations that haven’t transformed. To address the second part of your question, we need to discuss how transformation is achieved. It’s two things – infrastructure and accounting technique.
In terms of infrastructure, it’s having one unified budget model for the whole enterprise, as well as utilizing specialist tools to eliminate standalone spreadsheets for data entry and reporting.
But in terms of accounting technique, it’s about using rolling forecasts to increase agility, zero-based budgeting to increase accuracy, and scenario planning to improve the distance over which one can foresee with some confidence. There isn’t a one size fits all solution to this, and we shouldn’t ignore the immense cultural issues in making these changes, but this is why most businesses failed miserably during the pandemic.
Mike: Let me draw you in, Alok, because I know you have a unique position in that you provide solutions to finance leaders and also lead a mid-size company that is going through a transformation. Can you share what you’ve noticed during the pandemic and also how it’s impacted your business?
Alok: Thanks, Mike. A lot of what Gary says is bang on. Let me give you my perspective as an operator of an organization, and then we can discuss the industry and the Office of Finance in general.
If you go back 12 months to last year, there was an incredible amount of uncertainty. We were in the early stages of the pandemic and we didn’t understand how long it was going to continue to impact us. We also didn’t know what impact it would have on the economy or our products and services, and depending on your location, we didn’t understand how long lockdowns would last.
So, we were thrust into a world of exceptional uncertainty with little time to prepare. From my end, and I’m sure this is the same for everyone, suddenly you’re locked into boardrooms where you’re having to answer what’s going to happen to the business? What’s happening to top-line revenue, bottom line, profit, cash, etc.? What happens if this goes on for a month or six months or two years?
For many companies, it became a question of how to tighten expenses and manage inventory and employees. For a lucky few businesses, it was the opposite, where they were thriving in this ecosystem and the pandemic propelled the organization forward. But that brought its own set of challenges managing the supply chain. Earlier on, we were talking about the price of wood and how hard it has been to get raw materials.
So, it really put a strong emphasis on 12-month rolling forecasts, not just for us, but for our customers and other vendors we work with. We also realized the importance of scenario planning, as we really relied on models.
I was in weekly calls with our board of directors and we often ended up looking at monthly and quarterly forecasts where we could deep dive into different scenarios. What would happen if there’s a shorter recovery? What happens to the business if there’s a longer recovery? What happens if churn goes up, and companies go out of business?
And so, it really put pressure on the Office of Finance to run very sophisticated scenarios and understand how they ripple through the entire organization, and how they will ultimately affect the bottom line.
Our CFO was using our software to do a monthly 36-month rolling forecast. So, every single month, we would close the books and roll a 36-month forecast out. Everyone would contribute because we needed to understand what the data said and how were trending. The challenging part of this is that during a pandemic, historical data has no bearing on what might potentially happen.
So, it was a confluence of getting an understanding of early data indicators but also trusting people’s intuition. And then the key for us, and for many people we ended up working with, is then layering on more sophisticated scenarios.
At Prophix, quickly running long-term forecasts with multiple comprehensive scenarios empowered us at the board level to make smarter decisions about the business. And I think that’s one of the most important things to come out of the pandemic – a need to look at the business in a much more comprehensive way.
Mike: Have you heard from any customers who didn’t use CPM previously and the impact it’s had on them during the pandemic?
Alok: Yeah, I can talk a little bit about that. Organizations that have not undergone a digital transformation still rely heavily on siloed spreadsheets and manual processes. And to run a 36-month forecast every month is a time-consuming activity if you don’t have organizational agility.
If you’re living in a world of manual processes and disparate systems, this kind of agility is simply not possible. There is simply not enough time in the day to do the sophisticated planning that Gary mentioned earlier, in any kind of format.
And that’s why people only forecast once a year – it’s just too time-consuming. And so, that was one of the major pieces of feedback I received – people were hitting a wall and recognizing a need for more agility. Finance leaders were being asked to forecast but they were physically not able to meet the requirements of their Board of Directors or C-Suite.
Mike: Gary, in terms of the three techniques our report mentions, do you have any advice on how to approach deploying these?
Gary: So, let’s talk about those three techniques – rolling forecasts, zero-based budgeting, and scenario planning. Firstly, I would go back to what Alok just said, which is that none of these techniques are really available to you in any meaningful way unless you’ve got the infrastructure to support them.
What was interesting about our research was we were able to identify what each technique brought to the party and when they should be used. The underlying consideration is that it doesn’t matter which of these techniques you use, they all considerably outperform what people are doing if they’re not using those techniques at all, but they each bring something different.
As an example, let’s say you get to the end of the year and you’re trying to look forward nine months. With a traditional budget, there’s a dead stop at the end of the year. Why? Does the business stop operating? With rolling forecasts, you can easily look forward with speed and accuracy, which is something that a budget can’t offer.
Zero-based budgeting is a technique that fell out of favor in the last few years, but it’s come rapidly back into focus because of the pandemic. If you’ve got to start with a blank sheet of paper, why not build up your budget from scratch (zero-based). You can justify all the spending you’re going to make, rather than what people normally do, which is tweak the prior year’s budget 2%-3%.
One issue with the traditional approach to budgeting is that people carry forward nested assumptions from year to year without a clear idea of what’s in them or why they were originally created. In contrast, we’ve found that zero-based budgeting contributes tremendously to accuracy. This is because you’re drawing a line in the sand and you’re justifying everything you spend within the budget or intend to spend in the budget.
The final process, although perhaps the most important, is scenario planning. What we find during a crisis is that people forecast more and more frequently. We call it the hamster-wheel effect. They are getting faster and faster but they’re not traveling anywhere because they’re not doing anything differently.
Scenario planning is primarily a strategic exercise. As Alok mentioned, this where you look at the long-term picture, the market, the geopolitical environment, and your competitors to determine what factors will impact your business. The value of scenario planning embeds within your organization because it allows you to look further into the future.
Mike: Alok, what is a software vendors’ role in all this? As we’ve discussed, the pandemic has drastically increased gaps in FP&A. That in turn has underscored the importance of the techniques Gary just described and increased the demand for CPM software. Can you talk a little bit more about that Alok? Why is that?
Alok: Before I jump into talking about technology, I want to address the cultural aspect. So, part of the puzzle is technology, which involves putting in the right infrastructure to make sure you can access one view of your data and that everyone is working off that one view. You have a common platform, common models that are being driven, automation – that’s important.
Technology is fundamental. Without the technology, you don’t have the time and energy to implement any of the techniques we’ve talked about. But transformation really requires is a very strong cultural alignment around the idea of using information and data. Getting people from across the organization involved in the process. There’s no point in doing a zero-based budget if you do not have buy-in from the entire organization – they have to believe it will be a valuable exercise.
Mike: Are there sectors or verticals that are doing particularly well and picking up on this transformation faster than others?
Alok: I’ll give you my perspective and then I’m interested to see what Gary has to say on verticals.
Holistically, I would say no. I think it comes back to the cultural alignment of leadership and the broader organization. CFOs and finance leaders that are actively thinking about the future tend to drive digital transformation and use PBF software in a much more meaningful way.
Organizations that collectively see the Office of Finance as a back-office function tend not to invest in these areas and as a result, don’t see the strategic benefits of deploying technology and advanced techniques in budgeting, planning, and forecasting. So, to me, I think it’s less industry-specific and it’s more about the overarching leadership and cultural focus of the organization.
Mike: I think that’s a great segue into our last question, Generally, how far along are most companies in their transformation journeys?
Gary: It’s an interesting question and I want to pick up on some of the things Alok said first. Yesterday, I had a conversation with a hotel group that was quite advanced in terms of its use of PBF technology and artificial intelligence. And I was thinking, you wouldn’t expect a hotel group to be advancing in the middle of a pandemic. So, to your point about good management – that was spot on.
There are a lot of cultural issues that present as barriers to digital transformation. The first is, historically, the imbalance between how much we spend on customer-facing systems and finance systems – it’s a huge divide and has been for years. Only 12% of finance projects are finance-inspired. So, that’s one problem.
The other is the best digital talent wants to work on glamorous front-end systems, they really don’t realize that accounting is glamorous. That’s why I’ve been doing it for 40 years! So, it’s difficult to attract the right talent.
Making the business the case is also a challenge for CFOs – how do you put a value on making a better or quicker decision? CFOs can also be their own worst enemy – they will burn the midnight oil to get things done, which causes the broader C-Suite to wonder whether it’s worth investing in expensive systems if the work is being done regardless.
So, it’s clear we must get through a few barriers, but I would say now is the opportune time. There has never been a better time for digital transformation, because over the last 14 months, the C-Suite has seen what it takes to produce a forecast.
Mike: Thank you so much, this has been very insightful!
You can listen to the full panel, How Can Finance Leaders Bridge the FP&A Gap, on our website.