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Analytics for Finance-Part I of IV-Culture

Analytics for Finance-Part I of IV-Culture

Welcome to this article that is part of a four-article series for Finance where we explain how to build a culture of analytics, how to build insights and foresight, and sharing of some cases. In combination with the Business Partnering Institute, our aim with the series is to further push the finance function in its on-going transformation towards being a strategist with the business.

Part I of IV: Why Finance Needs a Culture of Analytics

For ages the finance function has been occupied with roles of compliance i.e. closing the books, complying with rules and regulations, and controlling company performance to incentivize that the company delivers on its targets and strategy. Focus has been on looking at historical information and, at best, comparing it with a budget prepared once a year which quickly got outdated.

In recent years this has been changing as uncertainty has increased and the amount of data available to companies has grown to unimaginable amounts. There’s been a clear call-out for someone to make sense of it all yet, while many including Finance have been trying hard, few have managed to do so. This has got to change, and we see Finance taking a lead role in building a culture of data driven decisions using advanced analytics and let us explain why.

Without insights you have nothing

First, it’s important to understand that while you can analyze as much as you want on the vast amounts of data available to you, it’s worth nothing without you deriving insights from it. Insights is that which you don’t know and if known will influence the decision that will be made. Further, insights must be clearly understandable and discuss-able with business stakeholders. This has been the Achilles Heel of Finance.

Up until now we have analyzed and analyzed in large spreadsheets and BI tools but been unable to provide true insights. We simply recorded WHAT happened. That was obvious to the business stakeholders themselves and while they liked our waterfall chart and first-level explanations they needed no more from us. An e-mail would do for any future interactions. To break this deadlock, Finance needs a strategy and, in our opinion, it’s simple.

  • Explaining WHAT happened allows you to send the e-mail
  • Explaining WHERE it happened makes people open your e-mail
  • Explaining WHY it happened gets you a seat at the table
  • Making predictions about WHAT MIGHT happen IF changes are made gets your opinion heard
  • Making recommendations as to HOW to make it happen influences your stakeholders’ decision-making

While it does sound simple it has proven hard for Finance, in general, to crack the code on how to do this effectively. We’ve been so used to just sending e-mails (and reports generated on stakeholders’ request) without knowing what they show or without following through on their effect.

The sad fact is that many of the activities done in the finance function today could be stopped tomorrow and no one would feel the difference. Things must be done differently, and it starts with developing insights as to WHERE and WHY something happened. Without those insights we should drastically reduce the size of Finance.

Building insights means building an inquisitive culture

In later articles we’ll explain how to build insights but first we need to understand what has prevented us from doing it and what we must do differently to make insight-building second nature. We must go from being unconsciously incompetent to unconsciously competent and it’s going to be somewhat of a journey. The journey is not long, hard or expensive and, simply requires the discipline and roadmap to get there.

Based on the strategy above we can try to institutionalize the process of analytics which will lead to building a different culture in the finance function. Essentially finance people see something happening in the numbers every day. Items in the P&L and BS are constantly on the move and non-financial metrics are all over the place. It’s not that you lack information but rather that you need to structure it in a way that you can both understand and can use to facilitate a dialogue with your stakeholders.

The structure should help you with the WHAT. Once identified, the WHAT will guide you to drill-down into the numbers to understand exactly WHERE unexpected changes happened. WHERE is particularly important as without it you will be asking questions to business stakeholders without knowing where you’re going. Your questioning will be very ineffective, and you’ll never get to the WHY.

The WHY is the essence and power of humans. You need to start asking questions like, “So, based on what we see, can we explain that which happened with the non-financial metrics and/or from feedback from the frontline?” Without asking questions or having an in-depth business understanding you will never get to the WHY. You need to add inquiry and curiosity to your finance function to get to this next level.

Remember when we say questions we’re not talking about the typical finance question of “Why didn’t you hit your targets?” or “Can you please explain this negative budget variance?”. These questions typically lead to defensive answers, so you need to ask in a way that encourages the business stakeholders to talk about what happened in the business during the period you’re discussing. The data and WHAT will lead you in the right direction in terms of the questions to ask.

Also, you need to make sure the inquiries are open ended like “Let’s talk about how business is doing in segment A or geographical area B”. Don’t just ask about performance in underperforming parts of the business. Also ask about places where business is doing well, as opportunities can be found all over the place. Uncovering the WHY is also what will help you deliver insights to your business stakeholders. Piecing together information from the numbers and your stakeholders will enable you to share with them things they don’t know.

Now comes the big challenge though! Wait, I thought I had already stepped way out of my comfort zone getting to the WHY! That might be true, but you cannot stop there, as to truly build a culture of analytics you need to be able to make predictions about WHAT MIGHT happen IF you took so and so actions and make recommendations as to HOW to improve performance.

We will describe this in a follow-up article as it has to do not only with gathering insights about WHAT, WHERE and WHY but also about creating foresight into what will happen. Once you can start to have an opinion about what could happen in the future you’re much better situated to make recommendations as to HOW to improve business performance.

The end goal is an analytics culture but how do you build such a culture?

In this article we’ve explained the end goal of the analytics culture you must build in your finance function, but we need to take you through how you can build such a culture. This is all about Mindset, People, Process and Systems which we will dig deeper into next week.

Authors

This article is a collaboration between the Analytic Intelligence Institute led by Robert J Zwerling and Jesper H Sorensen, and the Business Partnering Institute based in Denmark led by Michael Bülow and Anders Liu-Lindberg.

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