Part 1 of this series is available through this link: Part 1: Extended Planning and Analysis (xP&A) Defined.
In this second Part of looking at xP&A, we are going to take a look at how to use xP&A, how it fits in with the new role of the CFO and finally how it ties into Enteprise Resource Planning (ERP) systems.
How to Use xP&A
xP&A, as with most analysis, is only as good as the data that feeds it and the integration of the resulting analysis into strategy, management and decision-making. This is the main difference between traditional FP&A and xP&A is the variety and volume of data in xP&A is likely to be higher, as it involves non finance transaction data too.
An example of such data would be workforce planning in the case of an organisation providing care workers. A traditional finance system may capture the payroll level data as a journal. xP&A will capture far more data, allowing for detailed xP&A of hours worked, contract payments by customers etc.
The xP&A process starts with finance coordinating with other functional and operational leaders to understand their key metrics and how they impact business results. For example, if HR values retention and hiring costs or sales focuses on its pipeline numbers and revenues, their thinking goes into the xP&A process. By connecting every part of the business with an integrated plan, business leaders can steer their organizations more effectively, particularly during times of disruption. They can immediately analyze the impact on business performance of actual changes, anticipated shifts or even several different possible decisions.
If the business is facing problems in the supply chain, leaders can more quickly identify sourcing solutions. They can look at sales forecasts and projected marketing campaign ROI in correlation with macroeconomic trends to identify new growth opportunities. Integrating workforce plans with budget, revenue forecasts and corporate financial plans help the company determine when and where to expand next and how to staff the new locations or what practice areas to grow. Indeed, xP&A creates better visibility for all leaders to see what’s happening in all corners of the business. xP&A can also create a foundation for scenario-planning so that businesses can analyze the impact of various strategies to make the best data-driven decisions for the future.
xP&A and the Changing Role of the CFO
Much more than financial stewards, the role of the CFO is continuing to evolve. A recent NetSuite CFO survey found that the purview of CFOs — even in small and midsize businesses — is expanding beyond traditional responsibilities. Indeed, the biggest concern for CFOs is managing their multiple and growing responsibilities. An xP&A approach is particularly beneficial as CFOs advance their roles in the business; xP&A’s more holistic, data-driven analyses can empower CFOs to lead company-wide strategic initiatives and help optimize business outcomes.
CFOs in small and midsize businesses are now taking on the kinds of roles that once existed only in the finance offices of much larger enterprises. Their companies also want accurate, all-encompassing, real-time data and insight for decision-making. As a result, these CFOs will find value in xP&A processes and tools for delivering more complete and accurate financial intelligence and risk analysis across the business for competitive advantage.
9 Key Benefits of xP&A
The enterprise-wide integration, standardization and alignment that an xP&A approach confers a wide range of advantages not only for finance teams, but also for their entire organizations. Key benefits include the following.
- A holistic view of financial performance: xP&A breaks down organizational and data silos to create a single view of financial and operational activity. This gives finance leaders visibility into all assets, resources and changes across the company. In the past, such reconciliation would require significant manual labor. This holistic view enables finance to build a plan for the entire organization.
- Data harmonization: xP&A brings together different types of financial and operation data from across the business (finance, sales, marketing, HR, operations, IT) into a single platform with a unified data model, thus delivering consistent information.
- Shorter cycle times: Thanks to the automation and integration delivered by an xP&A approach and tools, companies can substantially reduce the cycle times for key planning processes. Budgeting and forecasting can evolve from quarterly exercises into continuous processes.
- Improved business alignment: Because xP&A connects information from all corners of the business to create an integrated plan, the enterprise becomes more aligned. Strategic goals can be connected to activities that drive the desired outcomes. In addition, leaders can quickly visualize and analyze the impact of changes or disruptions.
- Greater agility: Organizations that adopt xP&A can make processes like target setting and scenario planning more efficient. This is particularly important as organizations explore new digital business models and navigate economic uncertainties or volatility.
- Increased collaboration and accountability: When the entire organization is using the same data and assumptions, they can work together on business planning more effectively. The transparency conferred by shared data illustrates how one function’s activities impact another’s, promising greater accountability.
- More accurate forecasting: Integrated xP&A processes and tools can deliver higher-quality forecasts that incorporate key data from all business stakeholders. When the forecasts are more accurate, leaders can respond to variances more effectively.
- Scalability: The clarity and insight provided by xP&A’s unified data model can enable an enterprise to grow with its data. Consider the enormous volumes of data generated by digital marketing about customers and prospects, or by internet of things technologies about industrial machines on factory floors (just one example of potential IoT use).
- Easier identification of opportunities and risks: Thanks to increased visibility, leaders can more quickly identify cost or efficiency improvements, growth opportunities and emerging risks. Scenario modeling can be used to simulate the outcomes of proposed or anticipated changes.
6 Steps to Transition to xP&A
Extended planning and analysis may be the logical evolution of FP&A, but expanding the use of these processes, data and tools beyond the finance function takes careful forethought and planning. Organizations that want to introduce xP&A can take a number of steps to increase the likelihood of successful adoption across the business:
- Get buy-in. Evolving from FP&A to xP&A requires support from the executive team and departmental leadership. Finance must make sure that everyone understands not only their roles in these new processes, but also the benefits xP&A can provide them.
- Develop an xP&A strategy. Finance must create a plan for how it will lead the extension of FP&A across the business. It should also develop a strategy for the ongoing coordination of continuous planning and performance management, integrating input from key stakeholders.
- Rethink data and architecture. A “lift and shift” of existing systems may not be enough to realize the full benefits of xP&A. Determine what digital tools and capabilities will enable the organization’s xP&A goals. There will likely need to be changes in architecture in order to integrate all relevant business data in one platform. It will also be important to factor in increased data management requirements.
- Decide on key data and metrics. Finance can work with other departments and business units to understand what data is most important to both their operational performance and financial results, what changes might be made and, ultimately, which metrics to incorporate into xP&A.
- Invest in change management. Implementing xP&A demands changes from everyone involved — from executives and board members to managers and users — not to mention the IT department. Don’t skimp on change management and communication throughout the xP&A deployment process.
- Plan for continuous improvement. xP&A processes can be expanded and improved over time. Adopting a test-and-learn approach can enable greater success as organizations scale their use of xP&A to different functions, business units or geographic locations