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Leveraging FP&A as a Marker for Innovation in the Private Sector

Every company has a Finance, Planning, and Analysis (FP&A) function but the way it is used in the organization can significantly vary. Some organizations use FP&A primarily as a bookkeeping function while others leverage it as an extension of the corporate strategy team. There isn't a concrete way of defining all of the attributes that reside in FP&A, but regardless of its full scope, the inclusion of project oversight and governance is essential in its function.

With the quantitative easing of monetary policy in the U.S. and globally following the Great Recession, record low interest rates allowed for businesses to obtain capital easily. Along with that influx of capital accompanied a lack of discipline to seek a required rate of return on projects. This presented itself in excessive valuations in private equity firms, higher ticket prices of real estate assets, and the start of new capital expansion projects.

Post COVID in 2021, the market began to change, and companies began reducing staff headcount and offloading costs to overcompensate for expansionary policies that may not undergo the proper due diligence to assess ROI. In one case, the IT department of an international marketing conglomerate increased its headcount by 15% only to release each of these people within a 20-month period. This was not because of market forces (after all IT does not directly sell to business), but rather a failure of the CIO and CFO charged with running the finance function to manage and monitor internal initiatives effectively. As a result, the company was forced to realize $500M in losses in its IT transformation initiative because it failed to not only institute new IT platforms, but also failed to measure productivity of the staff assigned to these solutions.

This case study leads to three simple takeaways that are required for FP&A and its interaction with other functions within the organization:

  1. Weighted Cost of Capital Thresholds: There needs to be clear quantitative definitions of success for the organization. Regardless whether the function is business development, information technology, or internal audit, everything has a value either in revenue generation, cost savings, or cost avoidance. Many organizations do not track cost avoidance effectively because they do not measure "likelihood" or the economic cost of losses effectively. Determining what "good looks like" for each initiative is key and should not easily change with market dynamics when adhering to core principles.

  2. SMART & Independent Business Case Analysis: Every organization says it institutes business cases to determine "go/no go" decisions. However, not all actually have an analysis group to validate assumptions presented by the business. Independent analysis based on determining the threshold for an initiative adding value is key to the business. Furthermore, it is necessary to have good assumptions of what Return on Invested Capital (ROIC) should be over time. Often times, financial analysts use the current interest rate as the given reality for the duration of a project which results in suboptimal estimates. Sound investments should develop scenarios to supply up to 3 likely scenarios which allows FP&A teams to more accurately estimate ROI and trigger points for employing different financial strategies.

  3. Institute Project Management Reviews (PMRs): Once a project is a "go", the single most important measurement of success for an organization is its financials. Incorporating quarterly mechanisms to track burn rates along with productivity is key. Now as simple as it may sound, many program leaders are incentivized to not be forthcoming with progress and it requires FP&A to either sound the alarm or directly force action to underperforming programs. That action could include the decision to continue funding programs or instituting operational changes to help the program realize success. This presents a double edge sword for leaders to know when to change course - this means assessing if there's an opportunity to realize objectives or not and working closely with the C-suite and HR to determine changes. Quarterly PMRs are about tracking progress against sound and well-thought-out milestones at the start of an initiative with the Finance Head, Program Manager, and accountable C-Suite executives and along execution teams the ability to pivot when and where needed.

If a program or individuals can't be held accountable for performance by independent entities, then the financial governance is essentially flawed. Additionally, FP&A needs to be held accountable for accurately identifying issues and raising flags when they occur in a timely manner. This isn't about cutting costs (of course there are times when that is necessary), but rather realizing value for the organization.

Often, FP&A is looked at as an adversarial gatekeeper or the guys whose job it is to say "no." Like internal audit, their job is to avoid projects that present significant risks that could result in business catastrophe and result in lost profit and jobs. There is a value to this job which is often undervalued and appreciated. Sometimes, saying "yes" when the answer should be "no" will lead to pain that the entire team will feel later. But FP&A can add value by supplying value added perspective and highlighting where weaknesses can be fortified to realize the objectives. When engaged in that feedback loop as a part of the governance process, FP&A becomes a valuable partner in an innovation effort to strengthen the design of new efforts and expected returns to the firm.

The ability to provide effective governance starts with strong FP&A but extends beyond to corporate strategy, HR, and other C-suite business leaders. Effective governance is key in both when assessing new acquisitions or the start of new programs. Implementing checks and balances is the difference between success and failure. This comes down to having a sound team and processes in place to accurately evaluate and track effectiveness.


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