Why FP&A teams must lead the charge on technology and process to a more flexible, agile approach to business planning.
The days of creating an annual plan and then reviewing that plan twelve months later, as we begin the new annual planning season, are over. In 2023 and beyond, the rate and magnitude of change continue to increase and the premium of being able to make better, faster, smarter decisions continues to rise. Over the course of twelve months, there may have been major upheavals in your industry, in the economy, or in technology. If you haven’t thought about making adjustments to the changes in your world in real-time, you may be missing major opportunities or warning signs.
We are living in a world where our technology is changing much, much faster than our business processes and philosophies. Given that we have moved so far from living in the relatively static world of the past, does the idea of planning the old-fashioned way even sound proper, much less lead to the proper solution?
In today’s world, we need to be able to strike a balance between flexibility and strategy. The goal is to create an expansive, accountable plan, and then revisit that plan on a regular basis to adjust to changes (both positive and negative) that have occurred. We need to respond with tangible actions that reflect the new reality we face.
The flexibility of dynamic planning
Dynamic planning enables companies to evaluate risks, seize upon new opportunities, adjust to new challenges, react quickly and properly to threats, adapt to changing technology, and enable the entity to make decisions that encourage the organization to thrive.
The organization must still set unambiguous, broad, visionary goals. Goals are like a road map for determining whether an opportunity has a high enough ROI to pursue.
Just like planning a trip, if you don’t know where you are going, how can you tell if you are on the right path to get to your desired destination? Dynamic planning still requires the organization to create longer-dated plans and goals; the big difference with static, traditional planning is the horizon one sets for themselves (much shorter) and not to make planning a one-and-done process.
The traditional planning process is focused on predicting (guessing) what will happen in the future, often within a time frame of a year or more. Dynamic planning is more focused on shorter-term periods. The strategy is to concentrate one’s efforts in a more step-by-step process to lead to your ultimate goal, all the while adjusting to changes, both pro and con, that occur.
The idea is, for example, instead of estimating what the next twelve months will look like, truly break your planning process down into four quarters, and adjust the forward quarters’ plans as each previous quarter rolls off.
You want to focus on the short term while actively analyzing the results of your efforts. By monitoring your activities, in the short term, you will gain the flexibility to effect change as your surroundings vary.
A simple way of viewing this technique is if you think about taking a car trip across the United States. Your goal is to travel from New York City to Los Angeles, roughly 3,000 miles, and you expect it will take 6 days. As you are traveling, you may encounter traffic, road closures, weather, etc. that cause you to deviate from your expected path, but still keep you focused on your ultimate goal. Your attention is much more on the immediate, focusing on how to minimize your time given changes in your environment.
The goal of dynamic planning is not just about minimizing the downside; it is also about maximizing the upside. It is very hard, if not impossible to forecast, predict, or plan for unforeseen opportunities. By breaking your planning process into smaller consumable pieces, you’ve given yourself the ability to seize upon opportunity. Maybe a competitor goes out of business or changes their business plan. By giving yourself the flexibility to deploy resources, you can take immediate actions that will move you toward whatever your long-term goals and plans are.
Learning to adapt to limitless demands
Now I would like to focus on some of the impacts of adapting the planning philosophy and process.
To shift to a dynamic planning environment, there is a much greater premium placed on the ability to communicate the following to all the parties involved: why a change is taking place, what that change is, and how the change will benefit – or disadvantage – the organization as it strives to reach the goals that have been set.
As a basic rule, nobody likes change. Even if that change has no material impact on us, it still creates some level of uncertainty and perhaps frustration. As humans, we tend to avoid change. I have always found it useful to share Spencer Johnson’s “Who Moved My Cheese” with my teams and colleagues before implementing a new system or process. (As a general rule, it’s just a good idea to read this book or watch the video every 18-24 months).
One of the benefits of static planning is its stability. We get the game plan at the beginning of the year, and we pretty much follow that strategy until the end of the year. Unfortunately, we now live in a world where that luxury of stability no longer exists, and we must have the flexibility and agility to adapt to our increasingly uncertain world.
The ability to communicate within our teams and across departments is vital to the success of implementing and executing dynamic planning. I like to use the image of a competitive sailboat race to illustrate. While our goal is constant – to win the race – there are many actions the crew must take at the right time and place to succeed. Whether one is tacking or jibing, every crew member must know the role they have to perform and always watch for the boom as it swings through the maneuver.
A benefit of dynamic planning is that it forces different departments and teams to cut across the silos that may exist and to operate in a more informed and coordinated manner. The idea isn’t to have more frequent planning meetings, but to get the organization to think in a more integrated way.
Dynamic planning also affords the organization the ability to track its progress on a much more real-time basis. By studying what is and is not working, on a more frequent basis, organizations are able to embrace successful tactics more quickly and discard those activities that are failing sooner.
The sooner we are able to identify we are on the wrong path to reaching our goals, the greater amount of time we give ourselves to adjust and redeploy resources to overcome our challenges. That, in turn, will increase the likelihood of success.
An additional benefit of dynamic planning is it instills the philosophy of allocating resources where they are needed when they are needed. The old style of planning basically afforded departments one opportunity to apply to the “bank” once a year and then not to ask again for additional resources until next year. This old thinking is so counterintuitive to how life actually works. The idea that we miss opportunities because we don’t process precognition is unreasonable and outdated in the fast-moving and changing world we actually inhabit.
The opposite is also true. Just because we were able to secure resources at the beginning of the year, we shouldn’t be operating in a world where we will be penalized if we don’t consume them all, whether it makes sense or not. Dynamic planning permits the movement of resources where they are needed most, without punishing anyone else for releasing those resources.
FP&A teams looking to introduce a dynamic planning model into their current workflows will need to heavily rely on the critical capabilities of their financial systems. Quickly accessing the latest organizational data, automatically creating forward-looking analyses and scenarios, running comparisons to historical benchmarks, and generating summary recommendations and potential outcomes to be shared with cross-functional stakeholders, and doing so in real-time will become critical.
We live in a world with a high degree of VUCA (Volatility, Uncertainty, Complexity, and Ambiguity); dynamic planning is one tool that should be utilized to address the world we live in.
About Brian Kalish– Brian is available as a public speaker addressing many of the most topical issues facing Treasury and FP&A professionals today. He has spoken all over the world to audiences both large and small. Brian is passionately committed to building and connecting the global FP&A community. He continues to host FP&A Roundtables and events in North America, Europe, Asia and South America.