Bad use of FP&A costs U.S. companies $7.8B a yearLosses stem from innovation that doesn’t happen and the hours analysts spend using inefficient data processes, a research collaboration between the University of Baltimore and DataRails finds |
Thursday, January 13, 2022 |
By Robert Freedman for CFODive.com About 15 years ago, the financial planning and analysis (FP&A) team at Amazon used modeling to determine which would be a more powerful business lever: giving customers 10% off or free shipping on purchases. The winner was free shipping. The finding led to the birth of Amazon Prime, a subscription service with 200 million customers paying $13 a month, making it one of the chief drivers of Amazon’s success. That kind of FP&A-driven innovation isn’t happening nearly enough in companies because data processes are too siloed, manual and error-prone, research by the University of Baltimore and financial automation company DataRails finds. The financial toll of inefficient FP&A data processes is $7.8 billion, the research calculates: $6.1 billion from hours of low-value data management work being done by high-value analysts and $1.7 billion from Amazon Prime-type innovation not happening. “The FP&A function has promised to take its place at the forefront of economic value creation … but this has not yet become the norm,” the study says. Value-added modeling Jason Child, CFO of data-analysis software company Splunk, played a key role in the birth of Prime when he headed up FP&A there some 20 years ago. It was his team that modeled out the impact of free shipping and then made a case for it with Amazon founder Jeff Bezos. “We asked how we can make this affordable every day [after factoring in] the impact of cannibalization, which is people already paying for free shipping,” said Child, who’s story is recounted in the report. “FP&A came up with the idea of a 5-day delay, where those who wanted to pay for the fastest free shipping would otherwise [face a] 5-day delay so it would be a separate class.” A common theme at companies that do innovation right is an FP&A function that isn’t bogged down by inefficient processes, the report says. At The Economist publishing company, FP&A modeled out how the storied magazine could adjust to the rise of digital readership. At Lego, FP&A calculated how the company could reinvest pandemic travel savings to help employees work from home most productively. And at Levis, FP&A showed how the company could get ahead of a shift in consumer preference away from skinny jeans to baggy jeans. Ideally, 80% of the time FP&A analysts spend should be future-focused. “By embracing the full economic potential of its function, FP&A will truly earn its place as a leader in business,” the report says. Inefficient processes But that’s not happening much. The typical FP&A team loses at least two hours each week for each FP&A staff person on manual processes, the researchers find using data from more than 1,000 DataRails customers. That’s consistent with other research that shows FP&A staff spend more than 75% of their time gathering and managing data, leaving only 25% of their time for the kind of value-added work that leads to things like Amazon Prime. “This percentage has been more or less the same for the last 10 years,” the report says. To derive the estimate that companies are losing $6.1 billion a year in lost FP&A productivity, the researchers looked at U.S. companies with between 50 and 999 employees — 839,880 companies in all. The smallest and biggest U.S. companies weren’t included on the assumption the smallest companies wouldn’t have an FP&A function and the largest would have the resources to use the function the way it’s intended. Starting with the 839,880 companies, the researchers multiplied the two hours each week that the function loses by the number of FP&A employees — between one and 12 in each company, depending on its size — and then by a typical analyst salary of $80,000. At this level of inefficiency, the report suggests, only 12.5% of organizations spend more than 40% of their time on high-value FP&A work. Lost innovation To derive its estimate of $1.7 billion in lost value-added innovation, the researchers assumed a 0.1% base amount of economic uplift from each FP&A analyst. “This is a very conservative level of impact which FP&As should be making to a company's growth,” the report says. When that 0.1% uplift is multiplied by the number of analysts, it comes out to $1.7 billion. The report suggests a few reasons why it’s not higher:
“Most financial and operating executives single out FP&A as one of the most important functions,” the report quotes FP&A consultant Jack Anderson as saying. They would equally cite it as “among the most underperforming functions.”
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