FBP - Series 1, Post 3: Strategic Implications of Finance Business Partnering
I. Strategic Alignment through Finance Business Partnering, Post 3: Strategic Implications of Finance Business Partnering
Time flies when you’re having fun. It’s time for the third post in the first section of the Finance Business Partnering series. I stated the title of the post as “Trends in Finance Business Partnering” in the previous article, but at some point I had shifted my notes to “Strategic Implications of…”. I do like to think more about strategy than trends, so I didn’t revert back the topic. The last sign to focus on strategy was a podcast episode that came to my Snipd list earlier this week on the strategic role that Audible’s FP&A has played over time.
So, first a reminder of the series structure (never final before a post is out) and then to the post itself!
I. Strategic Alignment through Finance Business Partnering
The Evolving Role of Finance (9 October 2023)
https://www.roosimagi.com/p/fbp-series-1-post-1-the-evolving
Collaborative Tools and Strategies for Finance Business Partnering (20 October 2023) https://www.roosimagi.com/p/fbp-series-1-post-2-collaborative
Strategic Implications of Finance Business Partnering (current post)
II. Collaborative Planning as a Catalyst for Growth
Stakeholder Engagement in Vision and Strategy Alignment (17 November 2023)
Sustainable Growth through Collaborative Financial Planning
Being Directionally Correct: Navigating Business Constraints
I. Finance Business Partnering & Strategy
Introduction
As mentioned also in the previous post, I believe that finance is moving from controlling to a strategic role. So, what does strategy stand for and what role I believe finance business partnering should play in setting one up and help business execute on it? One of the books that has resonated with me on strategy is Rumelt’s "Good Strategy, Bad Strategy." In the first section of this blogpost I’ll describe the main concepts of strategy and its alignment with Finance Business Partnering concept. Further sections bring in practical examples from Shopify and Audible, and finally I discuss based on concepts from Brave New Work how finance can evolve to take on the strategic role as finance business partners.
Kernel of Good Strategy and Finance’s Role
Kernel, as defined in "Good Strategy, Bad Strategy", is the core of a strategy that comprises of i) the diagnosis, ii) guiding policy, and iii) coherent actions. Rumelt argues that many strategies fail because they do not have a clear kernel.
"Diagnosis: a definition of the challenge and the most critical aspect of it."
Diagnosis: This refers to the process of simplifying the complexity to identify the critical aspects or challenges. Before formulating a strategy, one needs to assess the current state of affairs. This involves from finance perspective analyzing financial performance, existing processes, and the market environment. For instance, a diagnosis can include an understanding whether cash flows are a constraint or not, are there any inefficiencies in budget allocation / resourcing, or how do current external environment affect our profitability today and in the foreseeable future. In this stage finance interprets the data into actionable insights to understand the underlying issues to be addressed in the strategy.
"Guiding policy: a clearly outlined approach to cope with the challenge identified by the diagnosis. A guiding policy draws upon an organization’s sources of advantage and focuses a company’s efforts toward targeted objectives that meet the challenge."
Guiding Policy: The guiding policy outlines an overall approach for dealing with the challenge identified in the diagnosis. There should be a broad approach or guideline to address the identified challenges before setting specific goals. For a finance business partner, this entails modelling and providing insights into the scenarios that business is considering as well as what finance itself is usually the expert in, e.g. costs, but also pricing and growth, as well as broader input into new investment opportunities and their financial implications, as well as looking inward what does finance itself need to do make sure that our processes and tooling can support the direction. Finance business partner will be there to propose also the performance indicators that can be used to evaluate the strategy and give insights to when changes are needed.
"A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component."1
Coherent Actions: These are the specific steps or initiatives to be taken based on the guiding policy. In this execution phase, finance business partners help to implement and monitor the coherent actions that have been chosen to execute the strategy. Finance business partners will not be there to “support” business, they’ll be there to provide the insights and accountability that the actions are not an isolated set of activities, but through having a 360 degree view of the business, can steer that the efforts are coordinated and drive the business forward in line with agreed strategy.
From the perspective of finance business partnering role in more detail:
Recognizing Patterns: Finance professionals must be adept at recognizing patterns in financial data. This requires understanding both the technical fundamentals as well as how business actually work. This skill is invaluable in the diagnosis phase and how you’re able to present your understanding will shape the direction of the strategy based on both the opportunities and constraints you are able to bring out.
Decision-Making Frameworks: The guiding policy is essentially a series of decisions about how to proceed. Finance should be able to steer the decision-making through knowing the relevant decision-making frameworks, so that the business decisions are systematic, consistent, and aligned with organizational goals.
Execution Excellence: The best strategies can falter with poor execution. And culture eats strategy for breakfast. Finance must ensure that the coherent actions are implemented effectively, monitored regularly, and adjusted as needed based on feedback and results. Finance is also there to promote a culture of learning and discussion, definitely not to be the “strategy police”.
Distinguishing Good Strategy from Bad Strategy
"A good strategy defines a critical challenge. What is more, it builds a bridge between that challenge and action, between desire and immediate objectives that lie within grasp."
Not all strategies are made equal. Finance business partners should provide the clarity needed to discern actionable, clear strategies from generic, aimless ones that ultimately just get dates changed every year on the title page after 55 meetings.
Fluff: It is possible that a strategy that has gone through multiple discussion layers has had all the corners polished resulting into a nice round bubble. Hence, finance business partners as either the coordinators of the strategy process or as one of primary contributors must themselves communicate clearly, using precise financial terms and ensuring that all stakeholders understand the strategy's objectives and actions.
Failure to Face the Challenge: Denying or downplaying financial challenges or even unexpected upsides can be disastrous. Whether it's declining revenue, rising costs, or market volatility, finance must play also the role of risk managers by understanding the base, positive and negative scenarios. Even a positive scenario may end in financial ruin when unit economics are not understood or cash flows (AR/AP) are not managed properly. Finance business partners can understand the consequences when they put together the professional competence they have and the business reality that they have learned.
Mistaking Goals for Strategy: While setting financial targets is important, it's not the same as strategy. Merely stating that the company aims to increase revenue by 10% is not strategic. Finance shouldn’t propose such a metric “out of the blue”. The strategy must delve into how this will be achieved - whether it's by entering new markets, launching new products, or optimizing current processes. And finance needs to think beyond P&L in their proposals, i.e. propose metrics that show whether we are successfully executing on the strategy.
Template-Style Planning: One-size-fits-all rarely works in strategy. While certain financial models or templates can be useful, they should not limit the strategy formulation process. We’ll also likely not be happy with the precision of the data we have, but we need to be directionally correct, as for planning it seldom matters whether you come to EUR 12mn or EUR 11m in the outcome. The number will be wrong anyway. What matters is that you’re able to adapt and understand what is important to state directionally and what financial management measures might be needed irregardless to not put the company into jeopardy by following through on the plan. Utilize any templates and data you have for your benefit, just don’t follow them blindly.
Leveraging Financial Strengths for Strategic Advantage
"The most basic idea of strategy is the application of strength against weakness. Or, if you prefer, strength applied to the most promising opportunity. A coherent strategy can be, in effect, a form of arbitrage—exploiting a gap between the challenge you face and the resources you bring to bear on that challenge."
In "Good Strategy, Bad Strategy," the author underscores the importance of pinpointing and capitalizing on strengths. For finance business partners, this translates to:
Data-Driven Insight: Finance professionals are equipped with the tools to mine data for insights. One of course needs to possess the skills to utilize the data. By analyzing the financial and operational metrics—like profitability by product line, customer segment profitability, or capital efficiency—they can identify the organization's financial drivers and blockers.
Resource Allocation: Once these strengths are identified, finance can make recommendations on how these resources (both capital and operational) can be optimized and funneled towards these areas to amplify success. It could be as simple as identifying which product line is delivering a higher margin than others and illustrating how it might make sense to allocate more marketing budget to it. In order to provide these recommendations, one of course needs to have built trust and an environment of open discussion beforehand.
Strategic Alignment: Financial strengths should inform the broader business strategy. If the finance team identifies that the company has a strong cash generation capability, strategies around further IT investments, mergers, acquisitions, or increased R&D spending might be pursued.
Overcoming (Financial) Inertia
"Inertia is the natural state of an organization. It is the tendency to keep doing what you are doing, to follow the path of least resistance, to avoid conflict and change."
Inertia in business, especially when related to finance, hampers growth and agility. Financial business partnering as a concept, when aligned with the concepts of "Good Strategy, Bad Strategy", can be pivotal:
Identifying the Inertia: The first step is diagnosis. Is the company too reliant on a declining revenue stream? Has it been too risk-averse to diversify its investment portfolio? Finance can highlight these points of inertia by contrasting historical data with current financial trends.
Challenging Status Quo with Data: Armed with financial data and trend analysis, finance professionals can present compelling arguments for change. Showing a declining ROI on a once-profitable venture can be a wake-up call.
Guiding Policy for Change: Once inertia is recognized, finance can develop guiding policies to initiate change. This might involve policies on diversifying revenue streams, exploring new investment avenues, or reallocating budgets from stagnant areas to more dynamic ones.
Strategy Execution: A Financial Perspective
"A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment. And it is a hypothesis that must be tested. A good strategy is not just ‘what’ you are trying to do. It is also ‘why’ and ‘how’."
"Good Strategy, Bad Strategy" makes it clear: without execution, strategy is just wishful thinking. Here's how finance ensures strategies are grounded:
Budgeting & Forecasting: A vision without the necessary funds is bound to falter. Finance plays a crucial role in ensuring that the strategy is backed by a solid budget, and potential financial outcomes are forecasted. This also helps in setting realistic KPIs.
Monitoring & Feedback: Once a strategy is rolled out, finance tracks its financial implications. Are revenues in line with projections? Are costs overshooting? Regular financial reviews provide feedback, enabling timely course corrections. Just a reminder, do not be the “strategy police” still. We’re not controllers, we’re business partners. You will be heard when you provide advice and feedback, not when you show blinking red lights.
Risk Management: Every strategy has inherent risks. Finance can foresee potential financial pitfalls—be it cash flow constraints when growth is good or when unit economics are off —and put in place measures to mitigate them. Speak to your business stakeholders, including explain to your sales staff when appropriate what payment terms support growth and what will make you burn through cash too fast. Speak up on success metrics when you see they can be detrimental to the financial health of the company. Also sales staff care about financials when you bring out that they can’t get commissions when there’s no cash left.
II. Real-World Applications: Insights from Shopify and Audible
Turning Finance into a True Strategic Business Partner at Shopify
Russ Jones, the former CFO of Shopify, guided the company’s finance function from startup to IPO and spoke about his experiences in a Role Forward: A Strategic Finance podcast episode from August this year. Below are the aspects from the podcast that both resonated with me for the current blogpost as well as in general to keep in mind:
The Growing Significance of FP&A
In Shopify's early years, FP&A was a one person function. As the company expanded, so did its FP&A (Financial Planning & Analysis) function, which became as crucial as accounting. The first FP&A professional was onboarded two years into the startup’s life. The team’s task became to drive business growth and maximizing profitability (a both-and approach). Through this approach, the FP&A team was the strategic driver of Shopify's financial strength.
Laying a Solid Foundation
Ross Jones pointed out that preparing for an IPO is akin to running a marathon; the groundwork is crucial. Jones highlighted that it’s easier to set in place relevant measures and processes when the company is smaller than during the pre-IPO phase. Lapses in processes can hinder your IPO preparations. Hence, prioritizing automation early on can enable a smooth trajectory towards an IPO. Outside IPO as well, finance processes need to be built to be scalable so as not to hinder business growth. Can you imagine going to business saying that they need to stop growing because finance cannot handle the flows?
However, Jones cautions against seeing automation as a magic wand; if the underlying process is flawed, automation only magnifies the inefficiencies. I bet this is relevant with any finance transformation, i.e. you can’t fix a broken process by making it more efficient… You’ll just get to incorrect outcomes faster.
The Underestimated Managerial Debt
While the tech world is rife with discussions on 'technical debt', Jones introduces the concept of 'managerial debt'. Analogous to its technical counterpart, managerial debt impedes the swift rollout of new features and bogs down processes. The antidote? Delving into the root cause, periodic process reviews, and proactive troubleshooting.
Building a Cohesive Finance Team
One of Jones's critical insights revolves around team dynamics. Recognizing individual strengths and weaknesses isn't just introspective; it's fundamental in crafting a balanced team. As the finance function evolves, it becomes essential to bridge skill gaps, so that competencies grow together with technological capabilities.
Strategic Roles & Inter-departmental Synergy
With growth, companies often grapple with the dilemma of when to introduce specialized roles. Jones is unequivocal about the indispensability of dedicated FP&A partners for every business segment, with each FP&A professional envisioning themselves as mini CFO/COOs - i.e. Finance Business Partners.
Beyond business focus, he underscores the importance of fostering collaboration between the finance and accounting teams. Finance Business Partners need to be strong partners also to their accounting and IT/BI counterparties in order to be able to fulfil their roles.
The Essence of Being a Finance Professional
Jones brought out lastly that finance professionals should exhibit patience, including that situations are rarely as extreme as they might seem. There can be upside also in unexpected outcomes. He also encourages professionals to be catalysts in discussions, thinking about your impact by whether you “add or subtract oxygen” to discussions. Having strong opinions is also expected from FP&A, although it’s necessary to be open to adapting your position based on discussions.
In essence, Russ Jones's journey with Shopify serves as a good guide for FP&A professionals thinking about Finance Business Partnering. His insights show how finance can shape a company's trajectory through contributing to strategy, understanding processes and people. Two ideas particularly stuck with me:
having a dedicated FP&A counterparty for each business line giving them a mini CFO/COO and
thinking whether as an FBP you add or substract oxygen from situation.
Strategic Finance Insights from Audible's FP&A Head
An even more recent (earlier this week!) podcast episode FP&A Today - This is Audible FP&A explored an array of FP&A related insights ranging from learnings from the Head of Audible’s FP&A Frank Aburto.
The podcast episode discussed how FP&A is about bringing value, not reports, how finance can take a strategic role, having the curiosity to navigate the ever-changing business landscape.
FP&A as Understanding How To Deploy Resources Effectively.
The episode started with the guest’s reflection on what his early career had taught him that is valuable also for FP&A. Understanding objectives and efficiently achieving them was a core principle that was one of his first experiences in the military that is applicable also for an FP&A professional. Know the business, the resourcing and say how you see business can execute on their plans.
Intellectual Curiosity and the Customer-Centric Approach
Frank Aburto brought out as well that intellectual curiosity is more than just a desirable trait—it's the heart and soul of the profession. When serving various teams and projects, FP&A professionals must continuously adapt, innovate, and above all, keep their curiosity up.
FP&A supports in Audible product management, growth, paid media, product marketing. As customer behaviour infleunces the company’s P&L, FP&A professionals need to be able to link the business metrics to financial outcomes. To have a customer-centric viewpoint, intellectual curiosity is key. Finance and accounting skills are the foundation, but you bring differentiated value when you can view the situations through the customer lens.
The Strategic Value Proposition of Finance
Finance at Audible is by no means confined to number crunching. Frank Aburto brought out that you don’t make friends by delivering reports, you make friends by bringing value.
The value-driven partnership is evident in involvement in strategic projects, collaborating with both marketing and product teams as well as liaising between various teams from BI to product managers. Finance takes a strategic role when you act as a connector between different teams and senior leadership, while keeping the customer top of mind.
Technology and FP&A
As the technological advancements touch both business and finance, FP&A professionals need to continue learning as well. The guest brought out his own latest experiences in learning how to better use SQL and Tableau, i.e. also head of Audible FP&A cannot stand aside and expect that “somebody” will understand and drive the technological skills development in finance. With modern tooling becoming accessible for non-technical users, it’s possibly the time that higher technical competencies become expected from FP&A professionals.
Navigating the FP&A Terrain
Excelling as an FP&A professional requires understanding both the customer and company benefits. Both hard and soft skills are paramount, e.g. one should have a strong foundation in accounting and FP&A, but you need to possess relevant problem-solving frameworks as well as ability to articulate your thinking in a way that business and management can relate to.
Of course Excel skills are timeless, you just need to utilize your data analysis and finance understanding effectively knowing what is accurate, what is precise and what is relevant. In any case, you need to understand and define the problem that you want to address, which is a skill that not all possess.
To summarize, the episode with Audible's Head of FP&A brought out the need to be curious, make friends by bringing value, not reports as well as moving from fundamentals to understanding the product of the company to take a strategic role.
III. The Evolutionary Path of Finance as per Brave New Work
Stepping now into the “how” of Finance Business Partnering, "Brave New Work" by Aaron Dignan explores how organizations can take a more proactive stance to create a more adaptive, creative and resilient workplaces. While the book extensively discusses organizational design and work processes, its implications on the finance function bring a fresh perspective into how finance should evolve over time. Aside from the book, I recommend also their podcast.
The OS Canvas and Finance’s Role in Strategy
The OS Canvas from "Brave New Work" presents a framework that identifies and addresses key components of an organization's operating system. In terms of finance, this canvas helps to understand what drives success of the organization and how finance should structure their own function. The canvas includes sections such as authority, purpose, structure, and processes.
Consider “purpose”, the heart and soul of an organization. It's not just about profitability, but also encompasses sustainability and growth. The “structure”, meanwhile, becomes a mirror reflecting the architecture of the finance team, be it centralized or decentralized. And “processes”? They're the lifeblood - the workflows, the strategies, the methodologies that the finance team adopts. Trust the process, but not blindly.
Dignan suggests that evolutionary organizations are not just focused on efficiency but also adaptability and responsiveness. Finance should keep in mind that ultimate efficiency may result in trading off ability to respond to changes when there is negative slack in the organization.
Adaptive Mindset in Finance
Dignan stresses the importance of being adaptive, an attribute he believes modern organizations should possess. With the world becoming more volatile, uncertain, complex, and ambiguous (VUCA), FBP professionals need to be proactive, adapting to changes in business environment. This could mean willingness to iterate your scenarios and models on the go, not to lock yourself into 3-5 year “agreed” forecasts to operationally helping business to discuss pivoting investment strategies or reallocating resources based on changing external conditions. The keyword to succeed in this? Adaptability.
Decentralization of Decision Making in Finance
One of the core principles discussed in "Brave New Work" is decentralizing decision-making to empower teams and individuals. For finance, this could mean empowering FBP professionals to embed themselves into the business units they support and take full responsibility of their financial results.
Rather than having a top-down approach or CFO mediating business needs or validating the work, finance business partners, with their deep understanding of their business domain, can create more relevant financial forecasts and insights. This bottom-up approach, advocated by Dignan, ensures that finance contribution is more relevant and actionable.
Integrating Real-World Applications
It is possible to draw parallels from the insights from Shopify and Audible to the principles of "Brave New Work".
For example, Shopify puts emphasis on dedicating FP&A partners to specific business functions and them taking on a mini CFO/COO role. Russ Jones's insights on managerial debt and the importance of recognizing and addressing root causes resonates with the book's focus on continuous improvement, including not letting problems linger.
Similarly, Audible's FP&A Head discussed the importance of a customer-centric approach and the strategic value proposition of finance, which mirrors Dignan's sentiments on purpose and value-driven processes.
Conclusion
In essence, "Brave New Work" provides a fresh, evolutionary lens through which we can view the finance profession. Finance needs to take a forward-thinking perspective in the modern business landscape by embracing adaptability, curiosity and creativity. Decentralized decision-making is key so that autonomous Finance Business Partners can provide real value to their business counterparties. Finance should not only try to keep pace with the rapid changes, but be the strategic partners that enable organizations to fulfil their purpose.
IV. Conclusion
The Convergence of Finance and Strategy: As business landscapes evolve, finance is no longer a mere number-crunching function. It stands at the intersection of data, strategy, and execution, facilitating decisions that drive business forward.
The Importance of Adaptability: With real-world insights from companies like Shopify and Audible and the concepts from Brave New Work, it’s evident that adaptability is key. Finance professionals must continuously hone their skills, stay curious, be willing to iterate on the go, and keep a strategic mindset.
Collaboration is the New Currency: The success of modern finance hinges on inter-departmental collaboration built on trust. Finance Business Partners need to be embedded into the business lines they support as well as have strong relations with accounting and IT.
Reimagining the Role of Finance: Inspired by "Brave New Work," it’s essential to see finance as a dynamic function that evolves together with the business. By fostering a culture of curiosity, continuous learning, and customer-centricity, finance can shape the future, not just try to be the fast follower.
So, how do you know you’re succeeding in being a strategic finance partner to your business? Ask, are you invited to business meetings?
Thanks for making it this far!
A reminder on the structure of the blogpost series below, including when I expect to write the next one (and start the second part of the series).
I. Strategic Alignment through Finance Business Partnering
The Evolving Role of Finance (9 October 2023)
https://www.roosimagi.com/p/fbp-series-1-post-1-the-evolving
Collaborative Tools and Strategies for Finance Business Partnering (20 October 2023) https://www.roosimagi.com/p/fbp-series-1-post-2-collaborative
Strategic Implications of Finance Business Partnering (current post)
II. Collaborative Planning as a Catalyst for Growth
Stakeholder Engagement in Vision and Strategy Alignment (17 November 2023)
Sustainable Growth through Collaborative Financial Planning
Being Directionally Correct: Navigating Business Constraints