FP&A Professionals' Biggest Headaches in 2011

When the economy nose-dived, many CFOs and controllers froze their plans for investing in financial planning and analysis capabilities. Some consolidated analyst positions while others set aside proposals for advanced software solutions. Investments, if made, tended to aim at core transaction processing, not value-adding decision support. Now, those decisions are coming home to roost.

Figuring out exactly which opportunities will yield the strongest returns — and which legacy businesses or brands to jettison — is trickier than ever, especially for companies competing in complex and fast-moving fields. Adding to the pressure, boards of directors no longer want spare cash locked up in balance sheets. With the U.S. economic recovery grinding slowly forward, boards and CEOs want to invest in smart business ideas that have been well-vetted for risk. That will be tough without sound decision-support.

Flash Points

Ready or not, financial planning and analysis (FP&A) professionals face several recovery challenges that are vexing and somewhat new. The first is how to develop performance plans and targets that are mindful of major business risks such as disruptive technology, unexpected competition, or supply chain misfire. At the 2011 Financial Planning and Forecasting Summit produced by IE Group in late February, there was plenty of talk about how to identify and quantify business risks and then integrate that insight into investment decisions and contingency planning. Indeed, recent APQC research confirms that strategic risk identification is a conundrum for the majority of large enterprises.

According to Leo Sadovy, one of the conference chairmen, "people were complaining that this recovery is hard to read. The demand signals are weak, and it's not clear where capital and resources should be concentrated. It's a given that all products and regions are not going to rise in line." Sadovy, a former director of finance at a global electronics maker, now serves as director of marketing for performance management at SAS.

Making matters worse, extreme levels of business complexity cloud the analyst's view of options, risks, and outcomes. "The strategic financial analyst must look at a preponderance of variables: channels, products, brands, geographies, and customer segments," says Sadovy. "Out of 400-plus configurations, you have to decide where the best opportunities exist for generating the highest economic return at an acceptable risk level. You run out of time and have to place a bet."

Uncontrollable external events such as the mass uprisings in the Middle East make the financial analyst's job even tougher. Geopolitical risks are "more fluid than ever," says Larry Maisel, managing partner at consulting firm DecisionVu and a recognized leader in the field of strategy and performance management. He points to the power of predictive analytics — a management concept now embedded in software tools — as a counter-acting agent to cope with these uncontrollable scenarios. In essence, predictive analytics allows the analyst to pose the question: What can I see, and what can't I see, right now that will hurt or help us — and what could and should we do about it?

Maisel explains that the approach isolates and focuses on the performance drivers. "Consider the airline analyst. He or she would be looking at events that are impacting or could impact fuel cost on a daily, weekly, and monthly basis. And that analyst would then view the probable scenarios that would produce various financial outcomes over differing horizons." The key, he adds, is that "the approach is forward looking and focuses on the relationship between events and outcomes."

The kicker is that the performance modeling assumptions that companies became comfortable with during happier times remain baked into performance management protocols. That's a problem for analysts looking ahead to the next 18 months. Just one illustration: a recent survey by the Association for Financial Professionals found that when modeling the cost of capital over the past two years, analysts relied on assumptions that did not capture all exposures to variable cost.

In recent memory, we've seen the cost of a barrel of oil go from $50 to $150 back to $80. Some say it could reach $250 this year. This leaves us wondering: What will it take to convince CFOs and controllers to put some muscle behind their FP&A capabilities?