According to recent research by corporate advisory firm CEB, 25% of decision-makers are not using financial analysis in their decision-making processes. Meanwhile, 61% of FP&A directors use it selectively to validate a gut instinct, and nearly half of decision-makers misinterpret the analysis.
The value of FP&A comes from anticipating the future. Running scenarios for the financial impact of what-if events, and understanding trends and how they could impact the future, is where FP&A really becomes useful. The key reason that decision makers are not using FP&A as much as they could, or should, for their decision making is that the analysis provided either does not always fit this criteria, is not presented in such a way that it can be seen to fit the criteria, or simply that the data is not accurate enough.
The first thing that finance leaders need to do is utilize the technologies that make FP&A more effective. A report by Grant Thornton and the American Productivity and Quality Center (APQC) found that only 24% of finance leaders use any predictive analytics techniques, and instead rely on data focused on the past. FP&A needs to work closer with IT departments and data scientists to bring predictive and prescriptive analytics into play. They also need to look more towards explanatory analytics.
Predictive analytics is highly useful, but it can only gives you a likely outcome if nothing changes. Obviously, you can run a number of different scenarios to see the outcome of different decisions, but it still fails to tell you why an outcome is likely. Explanatory analytics tells you why something will happen, which enables you to really alter the outcome. This is at the heart of ensuring FP&A becomes as integral to decision making as it should. FP&A teams need to move away just providing answers, and focus on providing potential problems. By concentrating on giving decision makers the right answers and recommendations, they are really just obscuring the alternatives and financial tradeoffs implied by the recommendations. FP&A teams need to anticipate the impact of decisions in the long term, and engage with stakeholders to show them issues around them. They also need to pinpoint and correct decision-maker prejudices, and raise questions of the conventional wisdoms around the processes being applied.
Fundamentally, how decision-makers go about making their choices is outside of finance’s control. What FP&A can do is ensure that access to good quality, accurate, data is available whenever and wherever it is needed, and that analysis is presented in a way that is easily understood and its value well communicated.