The Financial Planning & Analysis (FP&A) world continues to transform from what I like to call Financial Planning & Reporting (FP&R)—an emphasis on reporting—whereas FP&A emphasizes analysis. The old days of being a former accountant who crunches numbers no longer cuts it. With how quickly things change in today’s world just looking back at explaining what happened is not enough.
Look at job postings for almost any FP&A position today and you will see a few requirements in virtually every job description:
- Strong computer skills (ERP, financial planning tool, business intelligence tool)
- Ability to work with large quantities of data
- Understanding of accounting principles
- Financial modeling
- Strong analytical skills
- Strong communication and presentation skills
- Ability to create reports
This website has a great overview of the role of a financial analysts and provides more detail on the above requirements.
None of the above should come as a surprise as all of the skills above are important, but truthfully, they are minimum requirements for an FP&A job. If you do not have the above base skills, you are probably in the wrong profession.
In addition to the above, you will often see the posting talk about the need to be a good business partner. It might say something like:
- Develop and maintain close partnerships with business/operational counterparts of the organization, or
- Work and communicate collaboratively across groups and divisions
This is what we often refer to as a soft skill, and as long as you have the technical skills, this is one of a handful of soft skills that will set you apart. Your business partners will love it when you are able to partner with them to drive results. This requires more than just reporting the results, though; it requires truly being able to conduct and explain analyses that drives financial value.
Business partnering is a critical skill, but I believe there is another skill that will set you apart more than being a good business partner. This skill can be applied to any business role—not just finance—but finance professionals possess the technical skills necessary to do the detailed analysis. It is a skill often overlooked in traditional FP&A roles, but it is critical if you are going to help the companies you work for achieve a competitive advantage (i.e. above average returns).
It is the ability to provide sound strategic thinking and analysis to every project. Before we spend time talking about how to define strategy and share examples of how FP&A can use it I will share a personal story from my schooling that taught me the importance of strategy when doing financial analysis.
Professor Gallinger was one of those finance professors that you think you will never survive. He was tough and demanding and required you understand your numbers, but he always brought back any analysis you did to the company’s industry, and strategy. He required you to think about how the numbers supported the strategy. Every case started with a write-up to include an industry analysis and an understanding of the company’s strategic position and how that impacted the company’s financial position.
This type of thinking is critical if you want to provide the kind of analysis that companies need to obtain above average returns. A company will know that it has a good strategy because it will show up in the P&L. A company will be able to sustain above industry average returns when it has successfully implemented a strategy.
I have talked about the importance of strategic thinking and how this thinking is so important but have not defined strategy. You will find a lot of different definitions on what strategy is, but for me I like to focus on Michael Porter’s definition. Many consider Michael Porter the father of strategy, and he defined strategy in his famous 1996 Harvard Business Review article, “What is Strategy.”
Michael Porter argues that competitive strategy is “about being different … It means deliberately choosing a different set of activities to deliver a unique mix of value.” If we are the same as other companies and just trying to be more operationally efficient, we are in a race to the bottom where margins will erode, and no one will have a sustainable competitive advantage.
Michael Porter is not arguing that operational efficiency is not important, but that it alone is not enough, and anytime we compete to be the best instead of being different in business, we will lose.
As FP&A professionals we should be able to link the financial analysis we are doing back to the company’s strategy, and if it is not aligned, we should reflect this in our analysis.
We see around us many cases of when companies move away from their strategy and find themselves in trouble and in these situations, finance should speak up and voice concerns. Listed below are some strategic mistakes that companies have made over the years and a link to articles about them:
- American Express launches reloadable card aimed at low income and unbanked customers
- Coors – launches Rocky Mountain Spring water
- Traditional airlines starting low cost carriers – Ted, Go Fly
In each of the above examples iconic companies decided to change the business model that had made them so successful for a new product/business launch, and each case they lost money, and ended up either selling or cancelling the product/business. In each case finance should have been able to help the company understand why it did not align with the strategy.
If we look at American Express, the company has always relied on a strategy that focuses on wealthy clientele. This is accomplished by charging the merchant more for each transaction and providing the customer better service than the competitor. When American Express launched Serve and Bluebird it focused on a customer who could pay minimal fees, and a product with razor thin margins. The service and distribution model that Amex built did not work with this customer. After a few years, AMEX acknowledged this was a failed venture by writing off a large amount of the technology and assets related to the endeavor, and eventually selling the card portfolio.
Similar to the above example, United Airlines tried to compete with Southwest on price while still running a full-service airline. United was not built around the same tradeoffs as Southwest and therefore did not have the cost structure and carrier model in place to compete with Southwest. After a few years the TED venture was closed. TED is one of several examples of failed low-cost carrier launches by full service airlines.
When reviewing the above product proposals, finance should have been able to clearly show how the new idea would not result in above average returns to the P&L. With American Express, finance could clearly show that the higher service costs inherent in the overall business model would put American Express at a disadvantage to its competitors in the reloadable space. With the low-cost airlines, finance could have clearly demonstrated how many of the costs aligned with the traditional strategy would not be low enough to compete with true low-cost carriers. Examples of this include the hub and spoke model and the variable plane size.
When finance analyzes projects, it is important that they not only do the financial analysis but have a strategic framework with which to analyze the project to ensure that the project aligns with the companies stated strategy
Within the strategy community there are several different frameworks that can be used, each of which has its own set of strengths and weaknesses. A great site providing an overview on some of the popular models is ClearPoint Strategy. Below I have provided a brief overview on some of these strategies and encourage you to take the time to read up on them:
- SWOT Analysis – The SWOT analysis focuses on looking at your strengths and weaknesses (Internal Environment) and your Opportunities and Threats (External Environment)
- PEST Model – Similar to SWOT, PEST is a model where you look at key factors that could impact your business. The acronym stands for political, economic, sociocultural, and technological. This analysis is often done in conjunction with SWOT and or Porter’s Five Forces
- Porter’s Five Forces – The five forces model analysis is the key forces that impact the profitability of an industry or market. The forces are:
- Threat of Entry – How easy is it for other companies to enter the market; the easier it is, the less attractive the industry
- Threat of Substitutes – How easy is it for customers to replace your product with another; the easier, the less attractive the industry
- Threat of Suppliers – The more power suppliers have in negotiating costs to your input, the less attractive the industry
- Threat of Customers – The more power customers have in determining/controlling your products price, the less attractive the industry
- Threat of Rivalry – As the number of competitors in an industry increase, the less attractive the industry becomes
Each of these strategies and many others will prove to be very helpful as you do your financial analysis on new business projects.
I would recommend anyone working in FP&A spend some time to read up on strategy and strategic thinking and implement a framework that works for you. A lot of terrific books and articles have been written on strategy and at the end of the article I have listed some of the classic strategy books. Next time you do a business case, take the time to use a strategic framework model to enhance your analysis—your business partners and career will THANK YOU!
Competitive Advantage: Creating and Sustaining Superior Performance, Michael E. Porter
Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael E. Porter
Understanding Michael Porter: The Essential Guide to Competition and Strategy, Joan Margretta
Good Strategy, Bad Strategy: The Difference and Why it Matters, Richard Rumelt
Blue Ocean Strategy, Expanded Edition: How to Create Uncontested market Space and Make the Competition Irrelevant, W. Chan Kim
Strategy Safari: A Guided Tour Through The Wilds of Strategic Management, Henry Mintzberg, Joseph Lampel, & Bruce Ahlstrand
Strategic Management and Competitive Advantage, Jay B. Barney
Great Read! Sharing!!!
Paul – Thanks for another outstanding article!