As we continue to battle our way through the pandemic, uncertainty about the future has made scenario planning increasingly essential to the survival of most organizations. CFOs (chief financial officers) can play a key role in stabilizing the business and positioning it to thrive when conditions improve, directly contributing to the organization’s financial health and resilience.
To fulfil this role, the CFO and finance function need to deliver actionable information that leads to creating value and preserving decisions. This requires:
- Well governed, good quality, internal and external data to ensure plans, budgets and forecasts are realistic, and reporting is accurate and meaningful
- Events driven planning and forecasting, allowing the organization to respond quickly via astute scenario planning, creating competitive advantage
- The ability to make insightful business decisions in real-time
A recent survey by Forbes suggests that CFOs’ optimism is on the rise and they are preparing for explosive growth in 2022[i]. Taking advantage of their growing influence, CFOs need to leverage EPM. KPMG’s 2021 EPM survey shows that 72% of mature EPM clients have already embarked on their EPM journey[ii] through supporting centers of excellence, predictive forecasting and upskilling their employees. They have witnessed a 20% increase in revenue over the past three years[iii].
EPM – The basis of successful business partnership
Enabled by technology, EPM is an enterprise-wide capability that provides a 360° business view to translate strategy into action for improved performance. It allows businesses to holistically align their strategies with plans and actions.
EPM has been around for years in various forms. Despite its rewards, it is a challenge for finance and accounting professionals as understanding and communicating value creation is an iterative undertaking, not an exact science. However, EPM has become a necessity for most organizations since the pandemic started, and has been pushed up on their agendas.
The evolution of EPM
Sixteen years ago, FP&A (financial planning and analysis) was a team within the finance function that was notorious for working late nights and using PowerPoint, whilst the rest of finance were managing their own versions of “death by spreadsheet”. Leaders across organizations struggled to interpret insights from finance.
Today, EPM has evolved. According to Gartner, 54% of finance organizations still struggle to provide data that supports stakeholders’ decisions[iv] despite advancements in modern analytics and business intelligence (A&BI). Insights often lack context and are not easily understood by most users who spend their time in predefined dashboards, which FP&A teams spend hours populating manually. In some organizations systems are outdated, and budgeting platforms still require up to four months to complete a budget.
Globally, organizations who embarked on their EPM journey have shifted their EPM offering from ‘reactively descriptive’ to ‘forward looking prescriptive’. Spending more time providing the forward-looking guidance that management needs to capitalize on the next opportunity provides more meaningful insights and better decision making. This can be achieved through predictive and prescriptive analytics.
In the UAE, this shift is less prevalent. The evolution of EPM can be described through four key phases:
This is the simplest and most basic form of analytics, using data mining and data aggregation. Descriptive analytics is used by 90% of organizations today[v]. It answers the question “what has happened?” analyzing real-time and historical data for insights on how to approach the future by learning through previous success or failure.
For example, companies may analyze consumer behavior and engagement with their businesses by mining historical data to identify and address areas of strengths and weaknesses. This type of analytics uses tools like MS Excel, MATLAB (MaTrix LABoratory), STATA, etc.
This is performed on internal data to understand the “why” behind what happened and obtain an in-depth insight into a given problem, provided they have enough data at their disposal to identify anomalies and determine relationships within data.
For example, to understand why an organization missed their profit margin goals, they can drill the sales and gross profit down to various product categories. Healthcare organizations can understand the influence of medications on a specific patient segment.