The 12 Principles of Best Practice FP&A: How does it all come together for effective Financial Planning and Analysis?
Summarizing our best practice FP&A blog series, we look at how to conduct Financial Planning…
This is the ninth of a 12-part blog series appropriately called “The 12 Principles of Best Practice FP&A“. These Principles are based on global research conducted with more than 700 organizations worldwide.
Principle 9: The best-performing companies do a better job of not only identifying what drives success in their business, but also developing measures for those drivers.
Most people working for a company would say they know what drives success in their business and call it conventional wisdom. What the best performing organizations do differently is they codify or formalize those beliefs so they become widely shared and understood. They then go a step further: they develop clear measures for those drivers.
As an example, in the high-tech industry innovation is considered a driver of success. The best performing organizations would take that driver and develop a clear measure for it, such as, “We measure innovation as the % of Sales coming from products introduced in the past two years.”
These are sometimes referred to as Key Performance Indicators. KPIs should be tracked not for the sole purpose of having something to put on a dashboard or scorecard, but because they’ve been determined to be success drivers.
Let’s take another example; for the hotel industry customer loyalty, occupancy, and the amount you’re able to charge for a room are frequently cited as drivers of success. The question then becomes how to measure those drivers. Customer loyalty can be measured by a Net Promoter Score (an index ranging from -100 to +100, used to assess to what extent a customer would recommend a certain company). A measure called RevPAR combines the occupancy rate and the average room rate to calculate Revenue per Available Room.
What’s worth noting here is these are drivers of success, or economic drivers, whether a particular hotel chain pays attention to them or not. Likewise, they remain a driver of success regardless of whether or not a hotel chain’s strategy addresses them or not. In fact, the strategy will impact the drivers of success one way or another — to the betterment or detriment of the company — knowingly or unknowingly. In our view, it’s far better to know how your strategy will impact the drivers of success, and better still if the strategy is designed to move those drivers in the right direction.
From a technology perspective, this leads to a discussion of Dashboards or Scorecards. The point we’ve made in this blog post is to carefully identify the KPIs, but how they are presented to the organization is important as well. Of course, the dashboard/scorecard should be uncluttered, visually attractive, easy to read, and just as easy to interact with (e.g., drill down roll up, and access relevant alternative views such as by Geography). Even better if they are accessible on any platform – laptop, smartphone, tablet or PC.
Knowing what to measure and communicating it effectively is half the battle, but just looking at numbers for the sake of viewing them is not the goal. Ultimately, we want to drive those numbers in the right direction, which is the subject of our next couple of posts.