August 03, 2018
August 03, 2018
Contributor: Jackie Wiles
Why finance leaders must improve how they remediate operational performance issues and enable their organization to act.
"By the time we identify a performance issue, it’s too late. Once we determine the solution, we can only mitigate the outcome of the issue," says the head of financial planning and analysis (FP&A) at one major energy company — echoing the sentiments of finance leaders who are challenged to address operational performance issues effectively.
No organization is immune to operational performance issues — the unanticipated, material impacts to business unit profitability that require corrective action not in the annual plan. In fact, the average company experiences an operational performance issue three or four times a year. Issues may relate to revenue (e.g., unforeseen price pressure from new competitor) or costs (e.g., a sudden change in production costs). Each requires corrective action, and the speed of that action is critical to containing the financial impact. “Slow remediation, on average, results in 2.9% of lost profit per issues per business unit,” says Gartner practice leader Johanna Robinson. “Quick remediation, on the other hand, limits that lost profit to 1.7%.”
Finance leaders have been working to improve the speed and quality of performance information over the past few years. Many have developed good leading indicators and other predictive analytics to anticipate issues faster, but Gartner research shows that while 89% of companies can identify issues before they hit the financials, just 19% can remediate issues in a timely manner.
“Anticipation doesn't actually speed up business recognition or business response,” says Robinson. “Eighty-one percent [of organizations] take too long to remediate performance issues once they are identified.”
The average organization spends 34% more time than it should to remediate a performance issue. The impact when action is delayed nears 3% of EBITDA profit on average, per business unit — 42% more lost profit than when the issue is remediated in a reasonable amount of time.
To resolve intrayear performance issues more quickly and minimize the costs, the best finance teams compress the entire process — from spotting the issue to helping the business recognize its materiality and respond in a timely way. This compression can be challenging, as business leaders often need to be convinced of performance issues’ materiality.
Finance can do two things to help the business remediate performance issues in a timely manner: One, establish quicker buy-in around the fact that the issue needs to be remediated, and two, remove resource constraints to enable the business to act more quickly.
Finance needs to validate for the business the real nature of the performance issue. Seventy-nine percent of finance teams and 73% of business leaders agree there is too much back and forth between the two in identifying a material issue. This must be avoided, as it causes “analysis paralysis” between teams. There are three major opportunities to reduce the back and forth between finance and the business:
Many business leaders (83% of those surveyed by Gartner) say they feel that lack of resources limits the actions they can take in the response phase, and 77% say it’s difficult to get additional resources midyear. Finance must alleviate resource constraints that limit effective business responses. There are two ways to do this:
Finance teams can speed up the remediation process when they eliminate the back and forth between finance and their business partners and free up needed resources. Only 12% of organizations are currently successful at driving quicker buy-in and action. Of those that do, two-thirds are able to remediate performance issues in a timely way — making it more likely that they can reduce the financial impact.
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