Nearly all companies today are facing competitive disruption—often of the digital nature. Think brick-and-mortar retailers, the auto industry (driverless cars), and photography. Some threats are pretty clear; others are less visible. All can seriously affect companies’ margins and market share. They therefore have a direct impact on forecasting, budgets, and planning.
What’s more, as financial planning and analysis (FP&A) becomes the analytics hub of the organization, it must be able to step up and help business and senior leaders anticipate how competitive disruption may affect financial results and prepare an action plan.
“We’ve seen a significant increase in FP&A involvement in scenario and sensitivity analysis,” said David Axson, managing director at Accenture Strategy, CFO & Enterprise Value. These are essentially different ways of evaluating the financial and operational implications of future events. For example, retailers are looking at ways their business models are being disrupted by digital channels. This is not a new force, he concedes, but it’s taken on a new urgency in the last three years as there’s been a significant uptick in online shopping. FP&A is increasingly being engaged in assessing the financial implications of this customer behavior, and coming up with the options for reaction. “In the old days, there was a budget and a single-point forecast,” Axson said. “Now there’s more variability around that.”
What can FP&A do?
- Break the silos. “Many organizations still work in silos while leveraging models and processes that are difficult to manage and ill-suited to meet various organizational changes,” said Peter Won, manager in The Hackett Group’s EPM Transformation Practice. “These silos cause various inefficiencies across teams, thereby significantly influencing their ability to manage their business, not to mention their ability to handle change.” To identify threats, successful finance teams promote cross-functional teams that work effectively together.
- Leverage Big Data. The ability to come up with multi-point forecasts and run various scenario analyses has a lot to do with having more information at the ready. “In large part, that’s because FP&A now has much richer data, both financial and operational, to tell a richer story to help make better decisions,” said Axson. “By planning ahead of the competitive impact, FP&A buys management time to consider the impact and ways it can react to that.”
- Get specific. The nature of the financial analysis will depend on the likelihood, impact, and timeframe of the threat or opportunity, explained Rob Torok, principal at consultancy BetterVu. The longer the duration of the asset or investment, the more important it is to think about the financial consequences of the competitive scenario. A smart FP&A executive will use data to proactively assess how these competitive forces will play out, from the short term to the long run, and encompassing both threats and opportunities.
- Work as a team. Coming up with the right scenarios must be a collaborative process: The CFO and CEO often identify the scenario, or it may come out of competitive intelligence or be suggested by any other area within the organization, according to Axson. The scenario needs to include an understanding of the risk, its likelihood of occurring, and the degree of impact it may have on the organization.
- Evaluate success. Finally, according to Torok, FP&A has the additional responsibility to ask (and answer) the question of how (and when) the company will know that the action it has taken is effective. For example, if a company decided to drop prices by x percent in year one in order to maintain market share, was the expected result achieved? And was it the most appropriate financial strategy? If the revenue decline in year two or three proved more precipitous, how should the reaction change? “FP&A needs to set up the trigger points for when and how to review the response,” Torok said. “Two years into the scenario, the company may need to take an entirely different action.”
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