By Karl Mouantri, APAC General Manager of CCH Tagetik at Wolters Kluwer. Karl leads the expansion of the CCH Tagetik Corporate Performance Management (CPM) platform throughout the APAC region; aiming to empower finance leaders to leverage digital transformation to make faster and better-informed decisions, better integrate their business planning, and dramatically simplify regulatory compliance processes.
In an era of relentless change, organisations are navigating an increasingly complex and dynamic business landscape. The ability to anticipate and adapt to these shifting tides has never been more critical. Enter Predictive Planning and Forecasting (PPF), a transformative concept within Extended Planning and Analysis (xP&A) that promises to revolutionise how businesses prepare for the future.
While effective in their time, traditional approaches to planning and forecasting often struggle to keep pace with the rapidly evolving global markets, disruptive technologies, and unpredictable events that define our modern world. In contrast, PPF represents a paradigm shift, where data-driven insights, advanced analytics, and machine learning converge to empower organisations with the foresight needed to make proactive, informed decisions.
However, few organisations today have made the shift to predictive planning. The FP&A Trends Research Paper 2023, sponsored by Wolters Kluwer, reported that only a very small percentage of respondents to an ongoing FP&A Trends webinar survey are using automation, predictive analytics, and artificial intelligence/machine learning in their financial planning and analysis (FP&A) processes.
The FP&A Trends Research Paper 2023, and a survey conducted by FP&A Trends in 2022, both looked at how organisations can combine predictive analytics and xP&A to take a more analytical and harmonised approach to planning and forecasting. Here, we explore some critical insights of from that research.
So What are the Advantages of PPF over Traditional Financial Planning and Analysis?
PPF offers a number of advantages over traditional planning methods, which rely on a fixed calendar and generally don’t do an excellent job of accounting for uncertainty. According to the FP&A Trends Research Paper 2023, those advantages include:
- Enhanced collaboration and integrated processes
While traditional planning activities tend to be siloed across strategic, financial, and operational departments, PPF takes a unified approach, allowing for greater collaboration and enabling a holistic understanding of data and key business drivers – that is, measures that represent specific business activities or factors that have a direct impact the company’s financial result. This ultimately leads to better-informed decisions and greater agility in constant change.
2. Comprehensive approach to modelling
Traditional planning models tend to focus on profit and loss to the exclusion of other financial statements. By contrast, PPF models are highly dynamic and interconnected, encompassing all three financial statements: profit and loss (P&L), balance sheet, and cash flow. This comprehensive approach simultaneously considers profitability, cash, and return on capital investment, facilitating real-time updates and enhancing decision-making effectiveness.
3. More insightful target setting
While traditional planning usually involves setting goals by looking at the previous year’s performance and adding an arbitrary increment, PPF employs predictive analytics to discern patterns from internal and external data for more accurate goal-setting and improved performance control through driver management.
4. Enhanced adaptability
Unlike traditional planning, PPF also embraces a multi-scenario approach to planning, enabled by driver-based models and predictive analytics, facilitating swift scenario management for better preparedness and impact mitigation. The xP&A approach unifies scenario management processes across the organisation, providing immediate visibility into updates from any level, enhancing adaptability in today’s fast-paced business landscape and offering a more intelligent approach to planning and forecasting.
5. More satisfying user experience
PPF reduces the need for human intervention by automating most, if not all, of the activities involved in planning and forecasting, enabling rapid adaptation to new conditions and freeing users to concentrate on insights and informed decision-making.
PPF Solution Framework
The goal of PPF is to enable an agile approach to scenario management, which involves continually assessing risks and opportunities facing the organisation.
Quick scenario assessment is crucial to the decision-making process in today’s uncertain climate. However, in the FP&A Trends Survey 2022, only 38% of respondents reported having systems that allowed accurate scenario assessment. Of those, a mere 20% could perform them in less than a day. Additionally, 26% said they were unable to run scenarios altogether.
According to the FP&A Trends Research Paper 2023, the framework for an effective PPF solution comprises five key elements:
- Integrated processes
PPF automates strategic, financial, and operational planning, allowing senior managers to set targets that can be automatically cascaded throughout the organisation. It incorporates xP&A, extending planning beyond finance to all departments, enabling scenario evaluation and flexible resource allocation.
2. Three-way driver-based models
PPF processes involve creating models that connect strategic, financial, and operational plans based on key business drivers. These drivers represent specific activities or factors impacting economic outcomes, such as sales volume linked to inquiries and competitor activity. While only a small percentage of organisations currently use fully driver-based models with predictive analytics, these models offer benefits like increased understanding, efficiency, agility, focus on essential areas, and a small IT footprint, making them a valuable choice for enhancing planning and forecasting processes.
3. Predictive analytics
Predictive analytics, which leverages machine learning (ML) algorithms to uncover patterns in historical data, is becoming increasingly crucial for informed decision-making. The FP&A Trends Survey 2022 indicated that only 25% of respondents currently use predictive analytics to experience efficiency gains and insights. However, 25% of survey respondents indicated they plan to implement it soon, and 27% said they viewed it as a long-term strategy.
4. Flexible modern technology for FP&A
Organisations tend to be over-reliant on Excel-based systems in FP&A, with the FP&A Trends Survey 2022 finding that 58% of respondents use spreadsheets for planning and forecasting. However, the adoption of modern cloud-based planning platforms supporting PPF is rising among survey respondents, doubling from 10% in 2020 to 20% in 2022. These platforms offer comprehensive, integrated models with predictive capabilities and enable collaboration and accountability across functional areas, ultimately empowering business leaders to align strategic objectives.
5. Multi-skilled FP&A professionals
The people component is crucial to PPF success, because PPF demands skills uncommon in traditional finance roles. In the FP&A Trends Survey 2022, respondents indicated that the most significant skills gap for PPFs is technology and data expertise. To bridge this gap, two key roles are essential: the FP&A architect, who facilitates communication between finance and IT, designs systems and creates real-time analytic models, and the FP&A data scientist, who serves as the link between finance and data science, responsible for data analysis with statistical solid modelling and machine learning skills. Additionally, a basic understanding of predictive analytics is essential for anyone analysing data effectively.
Implementation Challenges and Considerations
PPF delivers many advantages over traditional planning methods, including greater accuracy, faster forecasting, improved business insights and actionable outcomes, and more informed decision-making. Using highly accurate statistical models also helps overcome conscious and unconscious bias.
However, the FP&A Trends Research Paper 2023 highlighted several challenges organisations face when implementing PPF, including:
- Lack of resources
The FP&A Trends Research Paper 2023[RJZ1] highlights that FP&A teams are burdened with manual tasks, spending only a third of their time on high-value activities, while the increasing demands of ESG reporting and regulations underscore the need for automation to alleviate their workload.
2. Poor data quality and availability
PPF relies on clean, accurate, and timely data. However, FP&A’s 2022 survey found that respondents face numerous data quality issues, including a lack of a single source of data that everyone trusts (27%), data complexity (20%), inconsistencies in taxonomy and definitions (15%), and data timeliness (13%), highlighting the need for organisations to prioritise data quality improvement and establish robust data governance for effective predictive planning.
3. Inadequate analytic expertise
PPF requires specialised expertise in constructing advanced analytical models and applying complex algorithms to identify drivers and make accurate predictions. Organisations are increasingly seeking data scientists and analytics professionals to support FP&A teams in developing and implementing effective PPF strategies.
4. Lack of suitable FP&A systems
PPF requires modern FP&A systems for collaborative and agile planning. However, the FP&A Trends Survey 2022 revealed that approximately 50% of responding FP&A departments use outdated technology over three years old, with obstacles to investing in new systems including difficulties justifying ROI compared to short-term initiatives (28%) and FP&A not being seen as a strategic investment area (21%).
5. Organisational culture
PPF requires organizations to change how they plan and make decisions, by fully embracing xP&A and extending planning. However, the FP&A Trends Survey 2022 survey reveals that only 16% of respondents have fully adopted xP&A, while 49% are in the early stages of adoption, emphasising the need for a cultural shift towards data-driven decision-making for full PPF benefits.
6. Fear of the unknown
Fear and resistance to change can hinder the adoption of predictive analytic tools in FP&A, with concerns about skills, process redesign, and trust in black-box approaches. Still, these perceptions can be addressed with senior management support and education on the value technology brings to FP&A.
The Stages of PPF Implementation
The FP&A Trends Research Paper 2023 outlines that the journey toward effective PPF involves five progressive stages of maturity, ranging from “Basic” to “Leading,” each marked by increasing sophistication in model content, predictive analytics application, and technology integration. A summary of these stages, outlined in the research paper, include:
- Basic Stage: Organisations use separate models for strategic, financial, and operational planning, relying on intuition and manual data input, with limited predictive capabilities and spreadsheet-based technology.
- Developing Stage: Organisations introduce more detailed models, employ basic statistical methods, and begin to consider automation, but still maintain separate models and limited integration.
- Defined Stage: Organisations establish automated links for data flow between strategic, financial, and operational plans, introduce rolling forecasts, and incorporate machine Learning (ML) algorithms for granular predictions supported by modern planning platforms.
- Advanced Stage: Organisations integrate a 3-way financial view (P&L, balance sheet, and cash flow), with detailed lines of business or product groupings available for most measures. They combine human intelligence and ML algorithms, fully automating model functions and enabling real-time scenario management.
- Leading Stage: The highest level of maturity, where organisations harmonise planning across all dimensions, automate driver relationships using ML algorithms, and fully embrace advanced predictive analytics within a modern planning platform, enabling data-driven, real-time decision-making.
Charting a Course to Success
Embracing PPF represents a crucial step toward an orgnanization’s ability to thrive in our increasingly complex and dynamic business environment, where foresight and adaptability are paramount.
Organisations looking to reap the full benefits of PPF need to embrace continuous learning and stay attuned to evolving trends and techniques in FP&A.
If you’re eager to unlock the transformative potential of PPF and xP&A for your organization’s planning process, you can’t afford to miss the FP&A Trends Research Paper 2023, sponsored by Wolters Kluwer. This invaluable resource is packed with illuminating case studies and expert insights, making it an indispensable guide for finance professionals. Check it out now
