Financial planning and analysis (FP&A) is recognized as an essential tool for driving business success. At a time when agility has taken center stage, though, FP&A is giving way to the new discipline of extended planning and analysis (xP&A). Why? Because in a world where agility is paramount, actionable real-time feedback is essential.
The Origin of xP&A
Gartner coined the term xP&A, and in its 2020 Strategic Roadmap for Cloud Financial Planning and Analysis Solutions, analysts Robert Anderson and John Van Decker noted, “By 2024, 70 percent of new FP&A projects will become extended planning and analysis (xP&A) projects, extending their scope beyond the finance domain into other areas of enterprise planning and analysis.”
Plotting your course is an important step in preparing for a long journey, but it is just as important to check your progress along the way. Good navigation ultimately requires periodic course corrections. For example, when NASA scientists launched the New Horizons probe to explore Pluto, they knew it would be impossible to calculate an exact trajectory. Instead, they planned for periodic adjustments to correct the spacecraft’s course.
Fortunately, the flight to Pluto is a long (and fairly predictable) journey, with plenty of opportunities to fine-tune the navigation. In July of 2015, over nine years after its initial launch, New Horizons completed its successful fly-by exploration of Pluto.
A rapidly changing environment doesn’t offer that luxury, though. A Formula One race car driver, for example, needs to make adjustments on a virtually constant basis. The steering wheel of an F1 car may have as many as 35 buttons and switches and can display over 100 different data points. Drivers may shift gears as many as 4,000 times within a single race, without ever taking their hands off the wheel.
Rapid adjustments like that require near-instantaneous feedback. The ability to monitor the situation and respond quickly is a key factor in winning the race.
The same is true in the business world. Now, business leaders are learning to appreciate the value of actionable real-time feedback from across the entire enterprise.
When Change Accelerates…
In the normal course of events, business leaders can expect a certain amount of change over the course of time. In most cases, that change is at least somewhat predictable.
In 2020, though, change appeared in the form of a pandemic that dramatically changed the way we live and work. There were disruptions to supply chains. Businesses were temporarily closed. Large portions of the workforce stayed home. Priorities changed on a global scale. A slate of new keywords began to compete for the top spot in C-level mindshare: agility, adaptability, and resiliency.
When change is at least somewhat predictable, most businesses can get by with adjustments in just a few key areas. When demand spikes, factories can add a second or third shift. When cash balances are too low, the company can accelerate collections, renegotiate payment terms, or tap into a line of credit.
When massive change occurs across nearly every dimension of the business, however, it underscores the importance of having systems that provide real-time feedback across the organization. When the world is unpredictable, business leaders must think less like a NASA scientist and more like a Formula One driver.
That’s where xP&A comes into play.
Businesses Need a New Way of Thinking and Acting
xP&A enables business leaders to consolidate forecasts and performance metrics from across the entire organization. You can integrate information from various departments and business units into a holistic view of the business. This, in turn, drives better decisions.
Consider how a large dairy in the northwestern United States responded to the COVID-19 pandemic. Because restaurants and institutions were shut down, demand for bulk-packaged cheese fell precipitously. At the same time, grocery stores saw an increase in consumer purchases. The company had to reconfigure production lines to produce smaller packages and accommodate the sudden shift in demand.
At the same time, labor shortages were making it difficult to meet that demand. By asking their customers to take whole-pallet deliveries rather than case lots, the company was able to decrease time spent loading trucks and reallocate labor to the production line.
Those kinds of changes have profound implications for finance, production, operations, sales, and human resources. Under an FP&A model, finance teams would evaluate the impact of such changes from a predominantly financial perspective.
With xP&A, business leaders can forecast, monitor, and evaluate things holistically. They can see all facets of the problem and the proposed solution.
Data from xP&A can subsequently feed into the various reports that drive organizational intelligence, including traditional financial statements. When teams consolidate all information from across the organization into one place, managers can understand the company’s performance in terms that align with their priorities, understanding the health of the business as a whole, in addition to its constituent parts.
(To learn more about how to benefit from continuous and extended financial planning, download Eight Key Factors to Consider when Evaluating Continuous and Extended Financial Planning Software today.)
Key Benefits of xP&A
xP&A extends the wisdom of FP&A to all areas of a company, incorporating a financial perspective into a broader range of decisions. That elevates the CFO and the finance organization to a strategic advisory position for the entire enterprise.
Here are just a few of the key benefits of adopting the xP&A approach:
1. xP&A Provides a Holistic View of Your Organization
Traditionally, finance has been responsible for managing a well-defined set of metrics, usually associated with core financials like general ledger, accounts payable, and accounts receivable, while extending to logistical operations when necessary.
When multiple departments need to add their inputs, information is first gathered from multiple departmental systems. Data are then combined and analyzed (often in Excel spreadsheets), in which copy/paste mistakes can introduce errors into the process. Differences in taxonomy and timing can create inaccuracies that further distort the resulting analysis. To put it simply, building cross-departmental reports is often a tedious and error-prone process.
In the real world, you should understand every business decision in the context of its overall impact on organizational health and profitability. Unfortunately, the built-in reporting tools that come with most software are limited to a specific business domain such as ERP, CRM, or operations. xP&A leverages reporting and analysis tools that more easily lend themselves to cross-functional use, thereby providing a more complete and accurate view of the organization.
2. xP&A Fosters Agility
When the COVID-19 pandemic hit, businesses across every industry struggled to assess their options and adjust to the new reality. For most, that process needed to happen fast. Unfortunately, many businesses were poorly positioned to rapidly assess the situation.
When organizations begin with a cross-functional view of business performance, they are better positioned to understand what’s happening on the ground and assess the potential impact of decisions quickly.
That assessment process inevitably starts with gathering all the relevant information from department heads. Only after you have collated and harmonized all of those data can you develop actionable insight from them.
xP&A takes a proactive approach to this problem by establishing an integrated view of the business as a baseline for all decision-making. When a crisis hits, the pieces are already in place to quickly assess the situation, evaluate options, and move forward rapidly with a solution.
When you have access to real-time information about key factors that drive the business, it becomes possible to make the necessary course corrections earlier, and therefore with greater benefit to the enterprise.
3. xP&A Provides a Single Source of Truth
Many organizations struggle with conflicting information from multiple systems. This issue has become more pronounced as the size and complexity of IT systems has increased and as the volume and variety of available data has skyrocketed.
Conflicting versions of the truth are a drag on management productivity. Instead of focusing on meaningful business decisions, leaders must spend their time trying to make sense of contradictory information. xP&A increases accuracy by proactively harmonizing data from disparate sources and eliminating the cumbersome and error-prone copy/paste process of consolidating data.
The result is a single source of truth. When business leaders from across all departments are on the same page, they spend less time arguing about the numbers, and they can instead focus valuable management attention on the concrete actions that will improve business outcomes.
4. xP&A Fosters Collaboration and Accountability
Because xP&A supports a cross-functional view of the business and a single source of truth, business leaders can align department heads around key performance indicators that support the success of the business as a whole, rather than focusing on incentives that enable successful departmental silos.
Departmental silos frequently foster a culture of finger-pointing. Reporting silos tend to exacerbate this problem because they allow departmental heads to engage in debates about the numbers, rather than focusing on the actions necessary to produce better business outcomes.
When department heads have visibility to organizational KPIs and can understand how they directly impact those metrics, accountability is clear.
At its heart, xP&A is about breaking down the silos within an organization and enabling a commonly shared vision of success. While C-suite executives typically approach the business from a holistic point of view, departmental priorities often conflict with one another. xP&A facilitates greater alignment of priorities across those departments, which, in turn, supports effective collaboration.
5. xP&A Enables Scale
Businesses are striving to deal with higher volumes of data than ever before. Moreover, those data are coming from more diverse sources than in the past. As marketing has moved further into the digital realm, for example, the scope and granularity of CRM data have increased dramatically. Audiences can be micro-targeted based on an array of different demographic and behavioral factors. Businesses are able to measure the responses to campaign activities in mere hours rather than days or weeks, provided that they have the right reporting mechanisms in place.
This trend is not limited to digital marketing, though. In supply chain management, IoT devices are bringing real-time intelligence to bear on planning and execution processes. In manufacturing, machine metrics are providing visibility to efficiency and utilization rates. Dedicated expense management software lends itself more easily to analysis than the systems that preceded it.
Effective planning tools create real business value from all of that information.
Making xP&A a Reality in Your Organization
Rolling out an effective xP&A initiative requires planning and foresight. The disruptions brought on by the COVID-19 pandemic have served as a wake-up call for organizations across every sector of the economy. The crisis has underscored the need for accurate real-time information to underpin planning and to drive rapid, well-informed decisions.
With xP&A solutions from insightsoftware, your business can increase organizational agility and achieve rapid benefits to the bottom line.
To learn more about how you can become an agile organization, download our ebook: Why Extended Planning and Analysis is a Necessity for Every Organization today.