In the voguish world of venture capital where, by definition, it pays to know about the next big thing as early as possible, investors talk excitedly about backing a new unicorn. These are start-up companies that have repaid their early proponents handsomely by becoming so successful that they are valued at $1 billion or more.
Some of the best and brightest of these firms have now become household names. Companies like Uber, Spotify, Airbnb, and Xiaomi have changed different aspects of people’s daily lives — the way many of us eat, shop, work, and entertain ourselves. Unicorns have shaken the status quo in industries where it had long been thought indisputable, and delivered a powerful lesson about change.
But it’s not just about whole companies, this lesson can be used within big companies as well. Financial planning and analysis teams, for example, can — and should — disrupt the function’s traditional approach to evaluating capital expenditure (capex) proposals.
The problem with FP&A’s usual approach to capex analysis is that it relies on assumptions and details of market trends that business partners present it with. But this information is not always accurate.
As the function that manages the capital allocation process and evaluates profitability, FP&A can change the game by preventing decision makers’ capex nightmares — misallocated resources and funds lost by investing in the black hole of underperforming projects — from coming true. In particular, there are two ways FP&A can learn from unicorns and disrupt the status quo.
Leading by Example – When Leadership Walks the Talk
FP&A teams can develop their own perspectives to question business partners’ assumptions — and senior FP&A leaders can push for their team members to do this by leading by example.
At home improvement and appliance retailer Lowe’s, CFO Bob Hull set an example for his staff by demonstrating the behaviors he wanted to see on his team. Instead of just passively taking the information presented to him by business partners at first hand, Hull analyzed different sources of intelligence himself to form his own opinions of, for instance, the market, growth opportunities, and customer trends (see chart 1).
Using several sources helped Hull question business partners’ assumptions, which sparked discussion of the feasibility of different proposals (see chart 2 for sample questions). Leading by example in this way, will help finance teams disrupt conventional thinking among business partners, and fulfil the function’s mandate probe deeper on investment decisions.
Chart 1: Sources of market intelligence used by Lowe’s FP&A team to synthesize customer trends Source: Lowe’s Companies Inc; CEB analysis
Chart 2: Finance focus in customer and market trend identification Illustrative Source: CEB analysis
Being a Challenger: When to Push Back
When evaluating capex projects, FP&A is often faced with an array of promising business cases, leaving the function struggling to prioritize the most valuable proposals. And with so many opportunities, it is critical for FP&A to sort through the abundance of business cases and weed out flawed ones. The function can do this by pressure-testing stakeholders’ assumptions.
One retail company in CEB’s network of FP&A teams that preferred to remain anonymous did this by revamping its approach to evaluating business cases for new projects. FP&A at the company started its assessment of business cases by dreaming up hypothetical disruptions, and asking business partners how they’d cope.
For instance, an FP&A employee might say, “So let’s say we only get a rate of return of X. What would have caused this to happen?” This question leads business partners to think through their business case backwards — an approach that the FP&A team called a “project pre-driver audit” (see chart 3).
This forced business partners to conduct contingency planning analysis, and identify large or small risks that they hadn’t thought through (see chart 4). In turn, these conversations pushed business partners to reassess their own assumptions while enabling FP&A to gauge how prepared the line were to deal with risks. FP&A used the framework below to decide if the function should feed, kill, or ask stakeholders to revise a business case (see chart 5).
Chart 3: Potential approaches to pressure-testing business cases Illustrative Source: CEB analysis
Chart 4: Disruptive scenario conversation Illustrative Source: CEB analysis
Chart 5: Framework for project proposal next steps following disruptive scenario conversation Illustrative Source: CEB analysis