Financial Planning and Analysis: Selecting the Right Organizational Model

Growing volatility in the business environment (risk, competition, variability of outcomes), cost pressures and a new focus on enterprise performance is sparking a renewed interest in how to best organize the financial planning and analysis (FP&A) function.

So does the increased realization among companies that FP&A can add substantial value by supporting management decision-making and acting as a business adviser to the operations.

Ultimately, the goal of any organizational structure is to develop an effective ability to support internal customers. Depending on the company, that may mean a centralized function at headquarters, a decentralized function with FP&A professionals embedded in the operations, or most commonly, a hybrid.

A fully decentralized structure allows FP&A to make high-touch decisions, stay close to the business, be flexible and part of the team. Centralized approaches, meanwhile, can easily pull data into one place, clearly see the big picture, run advanced analytics and provide quick insight and foresight

What drives the model?

CFOs should consider the following factors when considering which FP&A model to adopt.

Market maturity. To select the right organizational structure, companies need to take into consideration whether they are in mature, slow growth markets, or fast-growing geographies or market segments. Each presents a different challenge.

Low market maturity often requires a more distributed finance organization. When market maturity is high, companies can be centralized and do a lot more out of corporate headquarters.

Business complexity. In addition, the more complex the organization, the more distributed the FP&A organizational model. A simpler business model can accommodate a more centralized function.

Growth curve. Fast-growing companies need to be able to make decisions, fast, and thus are more likely to have embedded FP&A personnel at the business level – a more decentralized approach. A central function may not be able to respond quickly enough as the business grows.

Technological capabilities. What matter too are the financial-system capabilities of the organization. If the organization relies on Excel spreadsheets or an on-premise financial planning application, it’s hard for it to support a decentralized FP&A organization.

On the other hand, companies with distributed dedicated financial applications can connect FP&A staff in remote location and still ensure everyone sees a single version of the truth. This allows FP&A to forecast, budget and plan while being embedded in business units and to maintain an enterprise view.

The three models

A fully decentralized structure allows FP&A to make high-touch decisions, stay close to the business, be flexible and part of the team. It’s suited to companies that must be very agile in responding to change.

Centralized approaches, meanwhile, can easily pull data into one place, clearly see the big picture, run advanced analytics and provide and senior management with quick insight and foresight.

Yet the drawback of a centralized approach is that it stands a step away from the business and needs to work extra hard to build business partnerships. It makes it harder to engender accountability at the business unit level.

The drawback of a fully decentralized structure is that it lacks the big-picture view and often works in islands of technology, which makes it hard to roll up a group forecast and budget, as well as quick analytics input to the top. 

That’s why most companies deploy a hybrid approach. They establish a more sophisticated model that relies on a Center of Excellence (CoE) and/or Shared Services Center (SSC).

The hybrid straddles the benefits of a decentralized and centralized approach: It maintains close touch with the business and enables fast decision-making, while at the same time has a holistic view of the business and relies on a single source of the truth to deliver quick insight to management and business leaders.

With the CoE and SSC, companies can become more efficient and eliminate duplication of skills and activities. The CoE lets companies put high-level skills in one location and dispatch “commando teams” to help different business units meet specific project needs.

The SSC meanwhile pulls together lower-value repetitive activities and frees up FP&A executives’ times to focus on high-level analytics.

“The more you are viewed as adding value to your customer, the greater the credibility FP&A can garner and the broader its role can be”

Case in point: Littlefuse Inc.

Headquartered in Chicago, Littlefuse is the world’s leading supplier of circuit protection products for the electronics, automotive and electrical industries. With over 7,500 employees globally, the nearly $1 billion company operates in three geographic regions: the Americas, Europe and Asia-Pacific.

The FP&A function was created in 2004 and has grown since to include two senior professionals who report to the CFO and a team of six professionals at an SSC in the Philippines.  

“While they’re based in the Philippines, their role is not to support the local manufacturing operations,” according to Littlefuse’s FP&A director. “We’ve centralized our cost-center planning work. Now the timeline schedule and inputs are centrally managed by us, leading to faster results and less discrepancies in terms of assumptions.”

Having a team in Asia means the US corporate team can get things handled overnight. While the Philippine team is not physically embedded in the business units, they are embedded from a functional standpoint. “With people traveling so much and the use of technology, we found that you don’t have to be in the same location.”

The Asia-based team does a lot more than just transactional support, according to the FP&A director. They also act as a Center of Excellence. They have a real say in how the company runs its business.

“The SSC provides a really nice advantage for us: we can cost-effectively support special projects because we have the option to pull people quickly as we need them. The more value they can add, the better they become in their job,” the FP&A director said.

“The benefit of the team in Asia is that it allows the function to branch out and be viewed as value-add, working on business opportunities and pricing models. We are able to get involved in the ‘fringes’ of the role of the FP&A group.”

At the corporate FP&A level, meanwhile, FP&A provides decision-making support and analysis to the CFO, CEO and COO. Corporate is also charged with rolling up the quarterly forecast and budget.

The benefit of this organizational structure is that FP&A has been being able to focus on strategic work. “We spend 80% of our time working with the business units; that’s where we add the most value.”

For the function, that means an organizational structure that best aligns with the goal of supporting the business. “The more you are viewed as adding value to your customer, the greater the credibility FP&A can garner and the broader its role can be.”

How to select the best structure?

To create the right organizational structure, companies need to:

Examine market characteristics. Look at growth trajectory, market maturity and operational complexity.

Assess their technology. Figure out whether your technology platform is robust enough to support a centralized or even a hybrid approach by enabling sharing of data and connecting the dots.

Keep it dynamic. What worked for the past five years may not be the right structure for the next five. Companies should take the time to review and reconsider how they’re organized on some periodic basis.

Look at other functions. The organizational structure of other groups in the company may offer clues about other ways to run the FP&A operation.

Separate accounting from FP&A. Push transactional work outside of the function. Accounting is about being right. FP&A is about being good.

Ensure buy-in from the top. Senior management support is critical to the success of the FP&A function and its ultimate structure. That’s critical for the function’s ability to secure the right kind of resources.

Think of the customers. Consider who the ultimate customers are and work back from there.

Finally, ask yourself these questions:

  • Should FP&A be performed in-country?
  • Should it be centralized or else moved to the business units?
  • Should the more transactional aspects of FP&A be moved into a Center of Excellence and/or Shared Services Center?
  • What kind of skillset is required at each level?
  • What are the more effective reporting lines for FP&A staff, both centralized and embedded?
  • What common processes and technologies could make the operating model more effective?

About the Author

Nilly Essaides is Director, Financial Planning & Analysis Practice, at the Association for Financial Professionals (AFP), a US-headquartered professional society that represents finance executives globally. For more information on creating a structure that maximizes efficiency and delivers decision-making support, download the AFP Guide to FP&A Organizational Structures.

Copyright © 2016 Association for Financial Professionals. All rights reserved.

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