The Association of Financial Professionals (AFP) recently released a guide to its members entitled, “FP&A Organizational Structure: Trends and Best Practices”. It states the three basic structures of FP&A: Centralized, decentralized and hybrid. With the increased volatility being seen in every market due to the increased pace of change caused by technology, social and demographics as well as the changing needs and desire of consumers, is there a fourth way to build an FP&A team and still meet business objectives?
First A Look At What FP&A Does
FP&A picks up where accounting leaves off. By its very nature, accounting is always looking backwards and all the reports generated by an accounting system are based off historical information. FP&A on the other hand looks forward producing pro-forma financial information. FP&A looks to answer the question, based on where the company is today, where will we be tomorrow? If the answer is not what management wants, then the plan needs to be adjusted accordingly. Services provided by FP&A may include but are not limited to the following:
- Planning, budgeting and financial forecasting
- Capital budgeting
- Performance monitoring and tracking including variance analysis
- Financial systems support and maintenance
- Ad hoc management reporting
- M&A advisory
- Strategic planning
- Internal consulting including business intelligence and
- Project management services
Opportunities For Improvement
One of the biggest challenges in working within any staff level department of an organization is the perception from the businesses operating units that you are a cost center and therefore do not add value to the firm. Although we all know that is not the case, it is sometimes hard to quantify the impact the FP&A services may have causing undue frustration. Often I have seen executives pay outside consultants to come in and do the same work their FP&A team could have done and value it higher because they had to write them a check for it.
It is impossible to improve what you cannot measure. Although I have been unable to find any sold facts on this, I have seen others pose the statistic that about one-third of allorganizations and half of large organizations utilize some type of dedicated software (E.g. Hyperion, SAP, etc..) to manage their financial budgeting and forecasting process. Assuming that is true, then two-thirds of all businesses must use spreadsheets as their primary planning tool. The benefits to implementing a new financial planning system may be clear to you, but how much time will the utilization of a forecasting system save and assuming you will not lay people off how will that extra time be utilized to increase the value of the company?
By changing to an FP&A professional service operating model, you can shift or enhance the perception that FP&A is not a cost center but a value enhancer and better quantify the financial benefits it produces. In is important to note that perception is reality and the way an internal department is perceived within an organization may have a significant impact on resources, compensation and influence. Therefore, the management of internal perception is very important in order to remain relevant.
The Professional Services FP&A Operating Model
Most professional services firms (consultants, lawyers, accountants) charge clients on either a billable rate basis or project basis. This allows the client to track the work performed to ensure efficiency and mitigates the risk to the professional services firm due to unknowns in a company’s business process or possible client scope changes.
For cost accounting purposes many companies lump FP&A into accounting and allocate costs to business units via a percentage of revenue or some other arbitrary driver. This assumes that larger business segments utilize more resources then smaller business units. Although this linear relationship makes sense for accounting which is primarily transaction based, this may not be the case for FP&A. The need for more intense analysis, budgeting and planning is greatest in smaller, high growth areas within a company then they may be for larger more stable businesses.
So what if all FP&A professionals utilized a billable hour method to allocate their resources? This would allow an enterprise the flexibility to allocate resources to areas that are most needed as well as allocate the cost more appropriately.
The standard FP&A operating models proposed by the AFP and others are too ridged for today’s business environment. The centralization and decentralization of FP&A resources assumes that all operating units need the same degree of support and are stagnant. Business units are bought, sold, changed, grow and decline. A structure that is not flexible to account for that and dynamically reallocate resources to the areas that are most needed will be at a significant disadvantage.
Any corporate consolidation functions such as debt covenant or investor reporting could be billed to a corporate shared services cost center and allocated out just as accounting, if desired. By tracking the time spent on providing these services a company would be better able to identify the true cost of debt and equity by applying those costs just as they would interest rate expense.
Benefits and a Few Challenges
The tracking and billing of FP&A time and subsequent inter-company billing would allow for clear results in regards to anticipated efficiencies and/or the amount of time being taken to complete each management request or report.
It would unchain FP&A professionals from their desk. Regardless of their physical location, they could allocate their time to multiple projects or businesses at once. For each project, report or process in which they own, they would have a business leader as a client but directly report up to a corporate FP&A leader. This would provide the benefits of a distributed FP&A model while minimizing political intricacies that sometimes occur when an FP&A person reports up to a business operation executive.
Recently there has been talk about the possibility of outsourcing FP&A. Depending on what services being offered, an FP&A professional service operating model would allow the company to leverage outside resources in a challenger champion capacity against internal resources, rewarding work to the most productive, profitable, etc… provider.
A professional service FP&A operating model may lead to employee backlash, especially older workers who may be more accustom to not tracking their time. Although culturally this may be a difficult change, new employees may appreciate the flexibility and control that a professional services model would provide.
Determining appropriate internal bill rates may prove difficult. Should it be cost plus pricing? Pure cost with no overhead? Should bill rates be based on what similar services cost externally? If the professional service model produces a phantom profit based on bill rates, how is that eliminated through consolidation in corporate?
An FP&A professional services operating model would allow for increased corporate flexibility, a more productive allocation of resources and the potential to clearly communicate efficiency gains that software or other new process may garner. It may be worth a look for your organization.