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.