Targets—Do we need to set targets?

With the annual budget cycle comes the process of setting targets. These are set for each area whether it is revenues or costs and then trickled down to cost-center owners or functional owners. During the goal setting process, there is constant back and forth between the  bottom-up process and top-down expectations. Even though companies have backed away from top-down goal setting, every company gives guidance and has a strategic outlook for the growth of the organization. On the other hand, the  bottom-up process helps us understand the needs of the functional managers who recognize  the needs at the lower levels of the organization.

But the give-and-take process between the  bottom-up and top-down processes often leaves a feeling of dissatisfaction for all parties. The managers who worked to develop a  bottom-up approach sometimes believe that their inputs were not taken into consideration and a number was just passed along. On the other hand, top management spends a lot of time managing the politics between different groups and divisions and come to think that strategic needs are not taken into consideration by the functional managers.

Target setting that has become part of the annual budget cycle is an important exercise for any company. As stated in a Small Business Chronicle article,[1] “Successful companies set goals. Without them, they have no defined purpose and nothing to strive for; consequently, they stagnate and struggle for meaningful accomplishments.” For the goal setting to be a meaningful exercise, all parties should understand “why” certain decisions were made and the process should be transparent.

The bottom-up process is a very meaningful exercise to appreciate the perspective on the shop floor. Transparency should be built at each step during a  bottom-up process to understand assumptions and the what-if scenarios. The senior managers need to know the impacts and risks of various scenarios without cushioning the numbers. On the other hand, top management needs to provide some high-level guidance on the overall market expectations and guidance to help the teams below understand how decisions will be made during the budget process.

Financial Planning and Analytics (FP&A) teams own the annual budget and strategic planning process for companies. Building transparency of assumptions from the bottom-up and guidance from the top-down helps to streamline the process and reduce friction. The reconciliation and decision-making meetings should be done in a more working-session manner with the ability to do what-if scenarios. This would allow stakeholders to understand the impacts of their decisions, reduce the effects of politics and lead to more data-based decision making. Collaborative technologies, cloud-based computing, and technologies mining big data can help streamline the target-setting process and FP&A has a big part to play in making this process more digital, collaborative and analytical.

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[1] https://smallbusiness.chron.com/importance-setting-goals-business-834.html

Need for Holistic Analysis

I recently attended the 2nd series of the Greater Missouri Leadership Challenge Program in Kansas City. During those 3 days we looked at a multitude of challenges facing the state of Missouri as well as Kansas City and the creativity of people and organizations trying to find solutions. One of the most impactful presentations was made by Julie Carmichael, Director of Programs at Amethyst Place. She presented simple case studies of how an increase in minimum pay affects the other benefits that a family might be eligible for. There is an interconnectedness to the decisions that may be made such that no policy or action exists in isolation. It is imperative to understand the holistic effects of decisions. Most importantly she did a great job of weaving a story around those numbers and case analyses that got an immediate reaction from the audience.

Governments and communities have a lot of issues to think about and solve for. But this presentation also got me thinking of the need for holistic analysis for short-term and long-term projects that are brought forward for approval within any organization. Finance plays an extremely important role leading the organization through the decision-making process to select and fund projects that are related to the strategic vision of the company, have good value and balance the portfolio of long-term and short-term benefits.

But one of the most important roles that finance teams can play is putting together the holistic story of the short-term and long-term effects of all the various projects under consideration. This narrative needs to be expressed to help the executive(s) understand the full impact of the decisions considered. Every investment dollar has an opportunity cost and a risk assessment attached to it. Financial Planning and Analysis (FP&A) professionals are in a unique position to understand the big picture and not simply be working within the silos of individual functions. Visually putting together the story of the investment decisions being made not only in the current fiscal period but including in it the ongoing impacts of decisions made previously helps to understand the whole picture and make strategic decision-making a more meaningful exercise with accountability and responsibility. 

Here are  5 most important analytic methodolgies that need to be performed for project selection and strategic decision-making:

1. Comparison of projects: To understand that balance of the portfolio requires a qualitative as well as a quantitative comparison of projects—market-based, financial-based and resource-based—this should be done various ways. For example market share vs market growth, internal strength vs external need or threat etc. 
2. Risk impact: This should have two parts which would include not only what is the risk of project delivery, but also, what is the risk for the company if the project is not funded.
3. Financial impacts: This should include the financial impacts of projected benefits as well as expenses in all parts of the company that are affected by a proposed project. For example, an IT project providing a new mobile customer information app may be projected to increase revenue for one department but will have an increased expense in the IT department.
4. Historical information: A summary of historical projects approved, and actual benefits or expenses expected from those projects should be included in this analysis.
5. Dynamic analysis of scenarios: The strategic decision-making team should be able to understand the results of its decisions in a dynamic way to make the trade-offs, understand the risks of those trade-offs in a holistic manner, and consider the impact on current decisions under consideration of previous decisions made.

With the increasing availability of different analytical applications as well as the proliferation of data, FP&A analysts need to transition from the narrow view of just the NPV, ROI, and payback period analyses of projects to performing holistic analysis of financial, risk, market, and resource impacts of decisions and trade-offs.

Ongoing Costs of Transformation Projects

Digital transformation is the need in every industry. Bill Schmarzo defines digital transformation as “The application of digital capabilities to processes, products, and assets to improve efficiency, enhance customer value, manage risk, and uncover new monetization opportunities.” [1]

There is a lot written about how to justify the need to invest in digital transformation and calculate the value that it will create. Funding the digital transformation projects is essential, but CIOs and CFOs must balance the funding needs with the returns expected.

There has not been a lot of conversation about the ongoing costs of maintaining and upgrading transformation projects. Digital transformation using the agile method allows small changes to be made and brought into production quickly. The old legacy systems are not shut down and transitioned into the new systems at once which was the old waterfall approach. But what this means is that the company will have expenses for legacy as well as for the new systems which leads to an increase in run expenses for a certain time period  in addition to the cost of funding the transformation.

As a business partner to IT, finance should help IT understand the overall expense estimates for the period of transformation and beyond and message that to the business. Here are 3 points to consider while assessing and planning for ongoing expenses:

1. Legacy system retirements: One of the most important questions to ask when estimating the impact of ongoing expenses of transformation is “will this new application replace an existing system/application?” In agile methods of development, parts of the old legacy systems are replaced with new applications along with providing new capabilities. But for some time, both the new application and the legacy application run side-by-side. This leads to incremental maintenance expenses during that period because IT cannot shut down the legacy systems and free up the resources. It also means help desk or service agents must be trained to service both systems and understand the capabilities provided by both applications.
2. Cloud consumption: With the movement to cloud computing, investments in fixed hardware-based data centers have been replaced with ongoing cloud consumption-related expenses. Companies that are moving towards cloud computing are doing so in stages with some applications while other applications might still be in the existing data center. This means that business will see an increase in cloud consumption-related expenses but with a minimal decrease in the existing data center costs. Data already in storage in existing data centers requires investment in order to be cleaned up and moved to the cloud. This does not happen as a big-bang approach but rather the move is slow and may take years. In the meantime, the business may be growing, so the overall data-related expenses may be growing. Finance needs to work with IT to help business understand that although the per-unit cost of data might be declining, the overall data/cloud consumption may increase; thus the company will see an overall increase in cloud expenses during and after transformation.
3. Infrastructure needs: An  iPhone10 will not be able to perform to its capacity if it is run on a 2G network. The user will be frustrated that he or she has spent $1000 in equipment that does perform, but the problem is the network, not the equipment. With the upgrades in applications and systems and the move to cloud computing, the infrastructure of the company also  requires an upgrade to keep up with the transformation. This means the company’s personal computers and networks also need continuous investment so the employees can take the full advantage of the digital transformation. And this means that there will be in increase in the pace of rising infrastructure upgrade expenses during transformation.
   Digital transformation is a huge change-management project. It requires a culture change within the company and support for the required investment by the investors and shareholders. But this large investment also needs a holistic funding and impact analysis with transparency around the budgets and expenses. Finance needs to partner with IT to explain both the long-term and short-term value of the investment and prepare the business on an ongoing basis for the future changes in expenses, and this will require tough decisions and prioritizations.

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[1] https://www.cio.com/article/3199030/analytics/what-is-digital-transformation.html

7 Skills You Need to be an Astute and Successful Leader in Finance

A few days ago, Monsanto’s CFO Pierre C. took a break from his busy day, to meet and be interviewed by 10-year old, Miles Jensen. Miles had recently played Monsanto’s CFO at the St. Louis Junior Achievement Biztown Program; and was excited with meet the company’s real CFO. The boy’s mother, Missy Jensen, is one of Monsanto’s business partners at HLK agency. As an employee, I was proud to see how Monsanto leaders truly demonstrate our values - building meaningful and valuable relationships with business partners, that are beyond transactional.

Watch the video for their fun interaction, including a Q&A and an entertaining Rapid Fire.

Taking a cue from the above, having worked in Finance for 15+ years in various industries, I am often asked by young finance managers what the top skills are to be an astute finance leader. So, here you go… 

You have your bachelor’s degree in finance, accounting or business and plan to pursue CPA certification or an M.B.A. later. You interview with a few companies and have offers from 3 companies. You consider the offers, benefits and position, and accept the offer that seems most suitable. You are excited and eager to begin your career and you meet some of the company’s leaders.  You want to see yourself in their shoes at some point in your career. Now you wonder—what would it take for me to be a strong and astute leader in finance.

Here are top 7 skills you need to develop to become an influential leader in finance:

1)   Nail the finance basics:  To be a leader in finance you need to become an expert in the basics of finance, i.e. planning, forecasting, and budgeting. You should spend time in various areas of finance and controllership such as accounting, external reporting, and business partner finance. As a financial expert, you should be able to help your business partners understand the financial and accounting impacts of their decisions.

2)   Understand the business: As an influential leader in finance, you cannot work in the silos of finance and accounting. You need to understand how the business works, so you can influence strategic business decision-making through analytics. For this, you should spend time in various departments in the business—whether assuming a role in the business itself or taking on various business partner finance roles. You should understand the company’s customers and take every opportunity to visit various sites, meet with the customer, spend time with marketing, sales and customer service departments.  Look for the experts in the business and make it a priority to learn and ask questions. This would mean that you need to work outside the excel sheets and understand the impacts of financial processes and decisions.

3)   Collaborate closely with experts in compliance and tax: Compliance with regulatory requirements is changing dynamically and can have far-reaching impacts. These impacts are complicated and difficult to translate into ordinary business language. Business turns to finance to help them understand the impact of regulatory compliance and taxation on business decisions.  As a finance leader, either you or with help from the right experts need to be able to understand the impact and communicate what you learn in a business-friendly  language.

  

4)   Influence beyond finance: To be an influential finance leader,  you need to reach out and work across functions and departments.  Business cannot make any strategic decisions without understanding its financial impacts, and weighing the risks.  In one of his articles,  Joel Bernstein, CFO of SAP’s Global Field Finance, refers to the current role of a CFO as the “internal secretary of state” and says, “A CFO needs to think strategically, communicate well, and interact with many different constituencies and stakeholders—from the board to customers to investors.”  To be a finance leader, you need to learn how to communicate the story that numbers are telling, and use your influencing skills to lead to impactful business decisions.   

5)   Leverage technology and automation: In today’s world, digital transformation is the mantra for business success. Technology is rapidly changing and affecting all businesses and functions, including finance. An perceptive finance leader not only needs to understand the technology used by finance, but also that used by the enterprise. This combination will guide the strategic decisions needed for digital transformation. There are a lot of technologies that are being developed, but a finance leader needs to be astute as he/she prioritizes and guides investment decisions. He/she also needs to consider the impacts of these changes on the skill sets needed to be successful in the future finance function.

6)   Be agile:  As Stephen Hawking very rightly said, “Intelligence is the ability to change.” Change is one of the most common words used in business today. This change can be brought by internal reorganizations or shifts in the marketplace.  To be successful in finance today, you need to be agile and develop it as one of your strengths, to not only survive change, but also to thrive, develop and provide guidance in changing environments.

7)   Be a People Leader: People are the most important asset in any function.  A finance function may have the latest systems, the most reliable data sources and defined processes, but if it does not have the right people managing the systems, analyzing the data or executing the processes, the finance function will not perform well. To be a finance leader, you need to be able to attract, hire, develop, and retain a highly skilled team of finance professionals that includes a good balance of people. This team should include experts in accounting, compliance and reporting, as well as business partners with great planning and analysis skills.  

Financial Planning for Digital Transformation

Both Finance and IT work towards the same goals for the company—create growth and value. But the way both functions want to achieve the goals differ, which inherently leads to a conflict. Finance wants to control its SGA expenses and relate it to revenue trends while IT expenses tend to follow the quickly changing technology marketplace.  But as Gartner managing vice president Barbara Gomolski said very rightly “IT (Cost Optimization) also means that simply cutting the IT budget and waiting until the economic environment is more favorable to make digital investments is a flawed approach to remaining competitive.”[i]

So how should the IT department work with finance to better plan for its expenses.   Let’s examine this in the context of top-down and bottom-up budgeting processes. A lot has been written about both the budgeting process and the pros and cons of it.  Applying the top-down approach singularly to IT expenses would lead to a number based on previous year trends.  Adjustments will be based on revenue trends to maintain a specific target of IT expenses as a percentage of revenue.  While this process would be faster and aligned with company goals at a high level it would miss the details and the needs of the IT department itself. This process would also not take into consideration the innovation and modernization investments that might be needed in specific areas.   The investments would be dependent on the current economic environment—if the revenue trend looks good, IT expenses might be increased and vice versa if revenue trends are not positive.   This in turn might increase the technical and competitive risk of the company as digital investments are becoming essential to maintaining competitiveness in any industry. 

In a bottom-up budgeting scenario, the IT function would do a detailed analysis of needs and put together a budget that aligns very well with the goals of the IT function. All the participants would need to coordinate with each other to understand the cost impacts of various projects/changes. It would also foster the innovation and reduction of technical risks with investments based on the changes in markets.  With this method, the IT function may be aligned internally regarding the investments but it might not be fully aligned with the goals of the company since the company must balance the needs for investments in IT vs. investments needed in other functions.

To make sure budgets and financial plans are aligned across functions and there is commitment from leadership, there must be a step of goal alignment with budgets between the top-down and bottom-up approaches. Goal alignment meetings should be conducted with a comparison of investments and budgets to the goals of the company and the function to make sure that prioritization of expense and investment is done based on the strategic goals of the company while keeping in the mind the needs of the functions too.  This prioritization exercise is imperative to make sure the functional goals are aligned with the strategic goals of the company and that the budgeting exercise mirrors this.  

As stewards of the company’s finances, financial planning & analytics (FP&A) analysts should guide the process of alignment of budgets to goals and prioritization of investments within the company and functions. FP&A should partner with business to help them make appropriate decisions regarding the best use of limited resources based on data and analytics.  

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[i] https://www.gartner.com/smarterwithgartner/how-cfos-can-tackle-the-cost-optimization-equation/

Going Back to the Raw Data

In finance, we tend to report based on cost centers and categories. We combine cost centers or cost categories and report on performance based on this. We forecast and load based on those cost centers and cost categories. We are tied to the way we have organized our data, and we tend to invest in projects in order to organize our data in a different way so we can better report if the current system of organization is not working well. 

But in the end, are we looking at and analyzing the raw data? For us in finance, the raw data consists of our journal entries, sales, invoices, etc. How much time are we spending looking at that raw data and making sense out of it? When we look at reorganizing our data, do we spend time putting together rules of how to create journal entries that make more sense so we can do data mining and machine learning? As FP&A professionals on the cusp of harvesting the potential of "Big Data," we must escape the view of cost centers and cost categories and start doing deep dives into the raw data. 

We have a treasure trove of data in the current financial systems and we need to be able to use it. As

an example, lets dive into IT expense analysis. An IT department today in any company may be organized based on reporting structures. The function may have decided to put all the licenses in one cost center to manage the procurement process much better rather than by putting it in different cost centers. So, if the company is spending money on data center, help desk or SAP licenses—the expense for those licenses might come directly into that one cost center. The function could have employees in one cost center working on two different services such as data center and help desk.  To help understand the actual cost of providing data center services or help desk services, one must pull the expenses from various cost centers and categories. One solution is to reorganize or have more cost centers so we can track these separately, but that can cause other issues such as inefficiencies in license management.  No one way of organizing the cost centers is perfect and needs will be changing constantly, so to obtain any insights, we need to go back to the raw data.

Doing the analysis on the raw data we currently have as well as connecting that data to business drivers or operational metrics today does not require huge investments in ERP systems. It requires more manual work of extracting the raw data and doing the detective work.  The majority of that work is done in Excel today. This kind of manual analysis is not sustainable in the long term as it takes time and resources and is prone to errors, but it might be the first step to take to prove the value of such analyses.  It is very important to prove the value of the analytics needed in small pilot projects or proof of concepts so the company can invest in the right software and tools to enable to the analytics. 

So, go out and explore your raw data and breakout of the cost centers and cost categories. 

Collaboration - An Essential Skill for an FP&A Professional

Finance planning and analysis ( FP&A) professionals of a company are in a unique position .  FP& A professionals are exposed to a holistic picture of the company's performance. They bring together the information from different groups and put it together to understand the trends and the metrics.

This unique point of view sets these FP&A professionals up very well to be the collaborators within the company.  It is an FP&A professionals deep knowledge about the company and the variables that impact the performance, that makes these professionals the translator of needs between various teams.  The three groups that FP&A needs to collaborate closely with to continuously drive business value and become the analytics champions of the company are  business partners, data scientists and compliance/ regulatory specialists.

Business Partners: Finance has already been collaborating very closely with business partners to drive business performance.   So much has been written recently about the importance of being embedded in the business and  understand how business runs . Business partnering provides FP&A to ability to drive valuable decision making. This will continue to grow in importance as big data becomes embedded in the way we do business.

FP&A - Collaborator of the Future

Data Scientists: With data becoming an essential tool to drive business performance , data scientists are playing a very essential role in harnessing the value from that data. FP&A professionals have the knowledge and expertise not in data and analysis but also in business. This makes them the natural translators to explain business needs to the data scientists. Similarly, they will be able to work with data scientists to translate story that the numbers are telling back to the business in the language that is familiar to the business.

Compliance/ Regulatory Experts: Compliance and regulations needs are changing dynamically  and can have far reaching impacts. These impacts are complicated  and difficult to translate to ordinary business language. FP&A professionals have a very strong background of compliance and regulatory needs. They also work very closely with other teams within finance on a regular basis to understand the impact of changes in the regulatory / compliance environment. The business looks to finance to guide them in this area. FP&A  professionals with their knowledge of business as well as analytics will become the go-to collaborators to understand the impacts of regulatory changes and guide the business accordingly.

To be a valuable FP&A professional, one needs to be an expert in the area of financial analysis and at the same time collaborate across  the functions of business, data science and compliance. The skill of collaboration will continue to grow in importance as technology will drive the digital transformations across companies. 

My Journey of Loving Finance & Analytics

Wish you all a very Happy New Year  - hope you all had a great break  and are back refreshed to achieve you goals in the year 2018.

This break I took a 4 day backpacking trip to Joshua Tree National Park  in Southern California. I have always enjoyed hiking  and camping and this trip  was a great refresher back to nature.   While hiking on the trails of the desert I got to thinking of why I love hiking and also why I love working in finance and with numbers.

The one thing I love about being out in nature and hiking is that it  requires  not only a physical fitness level but also  a level of mental concentration. At times when I was descending down a steep hill, all I thought about was how and where do I make the next step so that I don't slip. I had to look for  rocks,  type of soil , the position of my feet and also the load I was carrying on my back and take each step carefully. It required all of my concentration. But I had  to also look up and see where I was going  and understand the bigger picture. I stopped a few times to just admire the view, take a break, refuel  and  plan the next 2-3 hours.   I am  happiest when I am working on problems with data and analytics  and concentrating  to understand the story the numbers are telling me . All of my energy is concentrated on understanding the analytics and modeling.  But I have to step back sometimes and know  the goals  of the analysis ,  understand the bigger picture and plan the next few steps. This   helps me make sure I am on the right path  and all of my energy is not wasted in going  to someplace I did not want to be .

Another very important aspect that makes hiking  and camping very enjoyable is to make sure you have the right equipment.  To make sure your body supports you in the experience you should have the right backpack so that the shoulders don't hurt and you are able to carry everything you need, the right shoes so that your feet are protected and don't form blisters and the right sleeping bag  and tent so you remain safe, dry and warm.  If we don't have the right equipment, a 4 mile hike  that should take about 2 hrs could take 4 hours with injuries  or harm to your body along the way.   In the same way, analysis is dependent on the data quality as well as the systems one uses. One can continue to rely on old technology   but the same analysis that should take minutes can take hours or days with errors in it. To make the journey of transitioning into big data  and analytics ,  the tools used  should also be upgraded  to make the journey more sustainable and impactful.

Lastly,  for me hiking and camping brings a lot of joy if I  do this activity with  people  who make  the whole experience enjoyable and fun. In these group of people you might find people who have a passion for outdoors or nature, know a lot about geology or ecology of the area or people who have never done it before . In all cases either you learn something  or you have an opportunity to teach something.  As long as the people  that you are hiking or camping with have a passion to learn, try new things,  enjoy the twists and turns  of walking along a trail ,  even the smallest or easiest of the hikes becomes a fun experience.  In the same way, it is the people around me that makes my work fun. Some of the people love analytic, some are experts in accounting  and regulations while others are great business partners who are experts in their own areas. Collaborating with all these people help me perform my best, gain new insights and become a valuable business partners.

In this journey of walking along whatever path you enjoy, don't forget to stop and enjoy the view, take breaks to refuel and have fun.