"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.
Anticipation doesn't actually speed up business recognition or business response
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%.”
Early identification isn’t enough
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.
Compress the whole remediation process
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.
Only 12% of organizations are currently successful at driving quicker buy-in and action
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.
Establish quicker buy-in
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:
- Shorten the time it takes for the business to engage with finance’s information. Present financial information in a way that resonates with the business: use business terms that make clear the urgency of performance issues. Note that technology investments may improve data quality, but even if finance gets the “perfect” data, it will still have to make the data relevant for the business to get them to engage with it quickly.
- Increase the business’s confidence to make decisions with less than perfect information. Use the 80-20 rule to size the issue quickly and agree on root causes. Teach the business to self-assess the impact of its decisions on shareholder value.
- Eliminate requests to test root causes of issues that surface late in the process. Effective finance teams surface and track latent beliefs about business drivers. A shared catalog of “official” and “off the record” drivers can help finance quickly gain the attention of the business and generate buy-in about material performance issues as they emerge.
Remove resource constraints
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:
- Plan for contingencies at the beginning of the year. Instead of releasing funds and resources only once a year, or at predetermined intervals, finance can do more to create funding pools, resource fungibility and other always-on mechanisms and triggers to help resources flow to the business areas with performance issues. Build contingency budgets based on multiple scenarios for costs categories that are flexible, variable, and material. Use risk-based assessments to determine where to cut spending, and pool those funds centrally for allocation to the business during the year as needed.
- Free up idle funds from in-flight projects during the year. Surface unused funds from growth projects and zero-base them for midyear reallocation (i.e., re-evaluate and cost them from scratch, rather than in relation to the existing budget). Monitor human capital assumptions at a granular level to surface potentially trapped funds. Set up criteria for evaluating the allocation of unused growth funds to make sure all requests get a fair review, and establish guardrails for what is eligible for such funding to prevent the business from inundating finance with unnecessary requests.
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.