Tag Archives: FP&A

Should Financial Planning and Analysis Functions Be Outsourced?

Close-up of businessman explaining a financial plan to colleagues at meeting

See how, with the right tools and control over the process, most organizations don’t have to outsource their FP&A functions

 

A number of years ago Deloitte UK released a white paper titled “Financial Planning & Analysis – The Next Frontier of Business Process Outsourcing?”

In the paper the authors explore outsourcing critical finance functions, such as planning, budgeting and analysis – functions usually synonymous with FP&A (Financial Planning and Analysis) activities.

The authors state that transactional functions have already been outsourced by large organizations to certain service vendors and that the same organizations are currently contemplating transitioning certain FP&A functions to these and other specialized vendors.

According to Deloitte, the argument in favor of outsourcing is gaining popularity among the largest organizations for a number of reasons:

  1. Potential substantial labor cost savings in the finance organization, where financial planning and analysis functions are usually performed by experienced, highly paid employees.
  2. Opportunities to centralize FP&A functions by delegating them to specialized outside vendors.
  3. The ability to streamline processes and leverage the outsourcing vendors’ specialized talents.

Deloitte realizes that not all FP&A functions can reasonably be outsourced.  Among those functions that large finance organizations are likely to keep in-house are:  strategic planning, policies (accounting, tax, etc.) and acquisitions and divestitures.

Although there are many arguments in favor of this newly developed practice, Deloitte admits that the hardest part is the transition of financial planning and analysis functions to the outsourcing vendor.  This is particularly true for organizations that have complex structures, span large geographical areas and that have fragmented information technology systems.  Another concern for the CFO is the project’s complexity, the initial high cost and the time required to make the transition. Another factor is the uncertainty of success, always a factor at the time the decision is contemplated.

In an actual case study in the white paper, certain benefits were identified:

  • Turnaround time was reduced for a significant number of management reports.
  • Higher-level analytics than was possible before the transition.
  • More accurate reports.

What about SMBs (Small and Medium-size Businesses)?

The white paper references only large organizations, not mentioning smaller companies, and probably for a number of good reasons.

From my experience working with such organizations, I believe that outsourcing financial planning and analysis functions is not applicable for SMBs due to complexities in the transition, high up-front cost and on-going expenses that cannot be justified in smaller companies, especially those that employ a small or no finance organization (where finance functions are performed by accounting personnel or solely by the controller).

Fortunately, SMBs have excellent options to maintain FP&A in-house, and even make the process more robust and streamlined, with meaningful insight into the company’s financial health, present-day and future.

A great example is a financial planning and analysis software solution developed and published by Centage Corporation of Natick, Mass.  The application includes Budget Maestro, Link Maestro and Analytics Maestro, which together provide an all-encompassing solution, from planning, budgeting, forecasting to analytics.

The software’s real-time and tightly integrated approach to linking to closed accounting periods and treating budget output as an extension of the actual accounting into future periods allows managements to gain insight into the financial health of their companies, identify potential rough spots and additional opportunities, well ahead of time, and support critical decisions.

I have covered many aspects of the Budget Maestro suite in this blog as a user of the application since it was first released and know with confidence that an SMB organization employing Budget Maestro will never have to resort to outsourcing critical financial planning and analysis functions.

Financial Planning & Analysis – Art or Science?

How technology reduces the “art” element in successful FP&A activities

This morning I received an e-mail from Proformative.com inviting me to a webinar titled “The Art (and some Science) of Great FP&A”.  I am glad to see a resurgence of such an important facet in any company’s finance department and the increasingly stronger endorsement of this function by executive management.

FP&A stands for Financial Planning and Analysis. This function is performed in the finance organization and consists of preparing financial plans and budgets based on strategic plans and historical data, gathering actual and current data and comparing with budgeted data and doing re-forecasting during the budget year. The analysis performed is used to provide upper management with information they need to make strategic and operational decisions.

Historically, and to a certain degree even today in many organizations, FP&A is only performed annually, during the so-called “Budget Season”, with little attention to analysis (the “A” in FP&A). There are several reasons for this:

a. The planning and budgeting processes are complex and very tedious. In the past, each iteration of the budget required an enormous amount of work to update data and correct newly discovered errors and omissions. By the time the budget was completed and approved, it was in many cases already obsolete.

b. The budget data had little or no correlation to the actual data. In fact, many budgets had a structure that did not tie directly to the actual accounting data structure; there was no 1 to 1 relationship between specific budget items and actual accounting general ledger accounts.

c. Due to existing technology, planning and budget data resided primarily in spreadsheets.  Eventually, this data found its way to more “purpose designed” applications, which initially borrowed from the spreadsheet model, albeit in a more robust database environment. The results were inaccurate, incomplete and often suffered from serious logical and computational errors stemming from the budget model as implemented using spreadsheets and other software.

The end result is often a budget that is not used for its intended purpose. Management does not get the benefit of having the insight into the company’s future financial health, due to the disconnect between the budget data and the actual results as produced by the accounting department. Often, bad business decisions are made, not supported by solid data, as intuition and prior experience, if available, play a major role in making these decisions, a risky behavior at best.

When true analysis is performed, all of the data used resides in the analysis module representing actual and budgeted data, with separate budget data for each version of the budget where applicable. The analysis system will then display the required data, either visually via graphs and charts or in tabular format, all of which can be printed or forwarded to a pre-defined distribution list.

The content and format of this data can be pre set according to management’s needs and for clarity, only the required data should be conveyed. In a properly set up environment, FP&A’s software solution is linked to the ERP software and data is automatically available as soon as an accounting period is closed. This allows the decision process to start sooner and since the data can include specific indicators about future period performance (e.g., forecasted financial ratios), management can make tactical and operational decision with greater confidence.

Today there is a lot more science and less art in FP&A activities. To me the “Art” in all this is having vision and recognizing what technology solutions are available and pairing the technology with company processes and existing systems. Once properly set up, the technology will do the rest, allowing FP&A to successfully do its job.