It looks bad from an FP&A perspective if a company's marketing function ends the year $1 million over budget, but from an xP&A perspective, it might look like a stroke of genius. That's because xP&A — extended planning and analysis — can create visibility into operational achievements that traditional FP&A misses, specialists said in a CFO Live panel this week.
xP&A is the idea that planning should go beyond traditional finance data to include the kind of data from all functions of the business that align with company goals. The key is understanding what each function area is driving towards, how its goals contribute to the overall organization's success, and then identifying the data that measure each function area's performance against its goals.
"The role of finance is evolving to own the operational metrics, the strategy, essentially the roadmap for the company, and enabling the business teams to know what tactical steps they need to make to achieve long-term vision," said Simon Edwards, CFO of field service management software company ServiceMax.
The idea of operationally focused planning isn't new, but is reaching an inflection point because of technology tools becoming available that make extended planning feasible, said Simon, whose company implemented an xP&A tool last year.
"If you're working in an FP&A department and this is something you're interested in, find the executive sponsorship or managerial support within your department and then be accountable to the process," he said. "Your finance and cross-functional peers will follow your leadership."
The main difference between traditional FP&A and xP&A is in the amount, and range, of data that goes into your analysis, and how your analysis links to the company's business goals, said Gregory Panik, vice president of FP&A at global engineering company CTDI.
If sales quotas, pipeline and revenue are the most important metrics of the sales organization, those sets of data go into the analysis. If the cost of hiring and retention is most important for HR, that goes into the analysis. And if commission amounts and gross profit are key to finance, those are included as well.
But before deciding what metrics to include, you must engage each function head to understand why they track the data they do, how success under those metrics contributes to the overall success of the business, and what tweaks to the metrics are in order.
"You can't say what information to pull out to make a robust forecast until you know the business in and out," Panik said. "It starts with working with the leaders in each operational area, like marketing, HR and operations, understanding the nuances of what makes that business drive, then enabling them to manage their own information eco system and understand what good looks like."
To the extent all function areas contribute their key data to the analysis and tweak that data so it best reflects the company's goals, one can pull out otherwise hidden insights, Simon said.
"What if you could tell [the executive team] you were able to generate $10 million in incremental leads, the majority of which are going to convert in Q4 of this year and provide us with an additional $5 million worth of bookings by the end of this year," he said. The cost of achieving that? Marketing went over budget by $1 million.
"You start to think about making trade-offs," he said. "How do I tie what's happening in my financial statements with, operationally, what's happening to the business more from a trajectory standpoint? And what are the insights I can infer from that activity?"
When you're managing your planning in this way, he said, finance becomes a valuable strategic business partner to all the function heads.
"So, I have the FP&A team partner with the operating team to allow them to make investment decisions in the context of the overall business," Simon said. "By understanding what they do, how they spend money and how they perform their activity, you will influence their results longer term and also the other departments' results longer term, and ultimately the company trajectory."
To evolve your FP&A function into something more closely resembling an xP&A function requires buy-in from the executive suite and all of the function heads.
"There's this notion of executive sponsorship, which is really just clearing roadblocks," Simon said.
"I often hear that senior leadership doesn't understand this," Panik said. "Or it doesn't understand how we do this in engineering, what the impact of this is in operations, or the impact of this in HR. But by getting each of these partners involved in the big picture of managing the business, it allows them to have a voice."
It also gets people motivated at the individual level, because the process of someone identifying and taking ownership of their data in each of the function areas helps people feel they are making a difference in the company's success.
"When you're a young person in your career and have aspirations, at a basic level, you want a seat at the table," Panik said. "This process, by definition, encourages people to get to the table and have a conversation."