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How Financial Analysis Hurts Decision Making

More data doesn't automatically translate into better decisions; managers need to be shown how to use the data, and those providing it need to be shown how to make it more useful

It’s always been a beguiling idea that a bit more of the right information will lead to a better decision – whether it’s about how to run a clan, a country, or a company. But this largely comes from looking at mistakes in hindsight when a leader understands what they missed and why they didn’t make the right choice.

Unfortunately, life isn’t the same as a glossy advert for “big data solutions,” and there is no simple correlation between more data and better decisions. How “good” that data is will always depend on the person using it to make the decision, and CEB research shows that line managers are often prone to misusing the data they are given. In fact, the misuse of financial planning and analysis (FP&A) by managers can cost companies as much as 1% of revenue for big strategic decisions (see chart 1 in the linked post).

The biggest cause of data misuse is not the organizational culture or the characteristics of decision makers but the quality of financial analysis itself, which should be problem-focused and present trade-offs to business partners rather than provide a precise and definitive recommendation. As Albert Einstein once said, “the mere formulation of a problem is far more essential than its solution.”

How 75 Heads of FP&A See Financial Analysis Get Misused

Given that FP&A teams have such a big role to play in mitigating the misuse of its analysis, it makes sense to hear from them. Below is a summary of the observations of more than 75 FP&A heads who attended in meetings in Chicago, New York, London, Melbourne, and Johannesburg.

  1. Misuse is rampant: Attendees strongly identified with CEB analysis which shows that 61% of executives cherry pick data to support what they already believe, especially in situations where emotions run high, such as acquisitions or the capital allocation process.

    • One meeting attendee noted that it’s usually the gut feel of the most experienced or most charismatic that has the biggest say in decision making. The executive added that it’s incumbent on FP&A to deliver analysis that moves decision making towards something that has a financial foundation.

    • Another explained that it was really difficult to get business partners to move away from the short term and from “supporting whatever feels convenient.”

    • Another participant said that it was particularly difficult to prevent analysis misuse “in a rapid-fire decision making environment” and that the capital budget process was especially prone to analysis misuse.

  2. FP&A fosters misuse: FP&A teams tend to offer a partial view of a problem — an answer-focused approach that fails to present trade-offs and alternatives to business partners.

    • One attendee said that despite freeing up analysts’ time the team struggled to produce “something that adds value” and that the team’s analysis merely describes problems.

    • Another said that his team tends to be “data rich and information poor.”

    • One participant said that he would score his team 1 out of 7 on training analysts to flag trade-offs to business partners.

    • Yet another said that FP&A needs to get better at modeling for scenarios, “not just sensitivities.”

  3. From answer-focused to problem-focused analysis: The best analytic teams adopt a problem-focused mentality that reflects three characteristics: anticipating decisions, prototyping analytic models to illustrate trade-offs, and disrupting conventional wisdom.

    • One executive said that sometimes business partners do expect straight answers from FP&A, but that you need to build your credibility to be able to “throw a curveball” at the business.

    • Another commented that traditionally stakeholders asked for answer-based analysis, but the demand, and satisfaction of their services has greatly increased since educating them on how FP&A can provide more problem-oriented support.

  4. Financial analysis shouldn’t be a one-time activity: Analysis isn’t an activity that is discrete from core financial processes such as budgeting, forecasting, or reporting.

    • One FP&A head said she saw an opportunity to improve the relevance of routine analysis by doing more “look backs” at the strategic plan.

    • A power and energy company executive ties key performing indicators and key risk indicators to specific initiatives with a narrow focus on financial performance, which improves the value of monthly operating reviews.

  5. The effective use of FP&A also depends on staff collaboration and competencies: Attendees recognized the need for FP&A analysts to connect with business partners and develop their skills.

    • The managing director of a financial brokerage firm encourages learning and best practices through learning plans shared across the firm. The plans highlight the teaching points derived from applying a specific analytic approach.

    • The CFO of a large home improvement and tools company said the heads of different analytic groups act as the directors of the board of their analytics center of excellence, which drives greater collaboration when it comes to routine analysis.

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