Sometimes the more things change, the more they stay the same.
A few weeks ago I attended the Financial Forecasting & Planning Innovation summit at Boston’s Seaport Hotel. The summit advertises as bringing together finance executives in charge of financial planning and analytics to discuss innovation in the field and learn from each other. Industry conference and trade shows I find to be some of the best places to meet professionals and to learn about the current state of the art. This summit in particular was interesting because it had a strong focus on the technology used by finance forecasting professionals and their experiences in implementing it. As a result it also attracted a fairly large number of salesmen.
It’s been a few years since I have dealt with financial forecasting. Last I left the field it was a sysiphean task of crunching numbers that were obsolete before the results were even ready and meaningful guiding analytics were a vague dream beyond the horizon.
Some things have remained the same – 85% of companies are still spending the majority of their time organizing and collecting financial data and only 15% are using it to steer managerial and executive decisions. CFOs are still being fired for unsuccessful CPM/ERP implementations and financial forecasting consultants are still trying to consume budgets instead of providing value (which drives fear into the financial execs facing new implementations). There is still a dearth of quality software out there.
Here is what I’ve learned about the challenges of the attendees when dealing with their financial software solutions:
1. Most of the work week is spent on organizing data instead of analyzing it. This is the big one. As long as the flow of financial information is not smooth and integrated, the financial professionals will always be serving data, instead of having information serve them.
2. Turning data into information and gaining visibility into the drivers of business processes. Once your organization spends less time on collecting and organizing data, it hits the next wall of trying to convert it into information. This includes establishing key financial metrics for business units and drivers of business processes. The challenge here becomes less technical, instead it appears that most organizations are hesitant to invest large amounts of business analysis time to properly create processes that extract information from the gathered data.
3. Getting buy-in from business owners. This challenge is more political, but the first two challenges may be caused by non-cooperative business owners who shirk their responsibilities to provide visibility into their business units.
4. Owning the financial systems by the finance department instead of relying on external (consultants) or internal (IT) owners. This includes training to be conducted by finance professionals. Finance departments that have previously been hit with scope creep and runaway budgets are now taking the radical step of directly assuming control over the FP&A systems instead of having them managed by the internal IT departments or having a support contract from a consulting company. This underscores the issue of inefficiency of implementations.
5. Fixed price, low cost, quick to implement. Financial software is complex and fallible to all of the standard project management issues such as scope creep, cost and time over-runs. Due to the level of complexity and the critical nature of the software, this can play a bigger role than other internal IT solutions.
While these are ongoing challenges for finance professionals, there are also new opportunities that are opening up for vendors and modern solution creators in this area. One of the larger themes of the conference are the greater expectations of finance professionals from their vendors and their software solutions. I would also like to highlight new opportunities that are not yet matched by quality vendors:
1. It is still difficult to create a financial system that adds values instead of connecting a graphics package to a database. I think the greatest opportunity still remains the lack of investment of business analysis in FP&A software, which leads to the customers spending more time on manual labour. Someday a company will appear that will invest the necessary time to create properly automated FP&A packages.
2. Dealing with different planning strategies. Most FP&A aren’t geared toward different strategy scenarios. What if I want to concentrate on increasing the efficiency over the next 12 months instead of growing the top line? What if we’re interested in contracting by winding down operations instead of growing? How do I plan for that and what financial impact will those scenarios have? I would like that in 3 keystrokes or mouse clicks, please.
3. Dealing with macroeconomic uncertainty and market-level issues. Currently forecasting large macroeconomic events is done mostly by spreadsheets. Tracking the current state of the economy at large and the specific market of a company relative to the financial situation of a company automatically still remains a dream. At some points FP&A systems have to evolve to start including macroeconomic events.
4. Forecasting based on P&L vs balance sheet management. Some businesses require strict covenant and cash planning, either due to the nature of a capital-intensive business or a restructuring plan. Other businesses are in full growth mode and are focusing primarily on their P&L. These two firms require very different methods of planning and similar to scenario planning, the FP&A software has to be able to account for that.
5. Forecasting for Lean methodology. For companies implementing Lean methodology, there currently no convenient to do value stream forecasting to monitor changes in future value addition of different business processes. A quality product in this space would make it a lot easier to manage forecasting for a Lean organization.
6. Integration with product lifecycle management. Most products offered by customers follow the traditional model of product lifecycle management with growth, plateau and decay. Currently it is a struggle to get a financial forecasting package to recognize different stages of a product’s life to plan accordingly.
9. Financial tools for the financially illiterate. Last but not least is the powerful idea that some financial tools should be purposefully designed for the financially illiterate. A lot of business stakeholders do not fully understand basic accounting principles and will not engage with an FP&A effort simply because they are dealing with unfamiliar, complex concepts. There exists a great opportunity in creating simplified products that could be understood by someone without a background in finance.
I hope that these insights were helpful towards understanding the existing challenges and opportunities in the FP&A market. Please don’t forget to comment below if you would like to share your opinion on this blog post.