FBP - Series 2, Post 3: Being Directionally Correct
II. Collaborative Planning as a Catalyst for Growth, Post 3: Being Directionally Correct
Time to wrap up the Finance Business Partnering series with one of my passion topics or pet peeves in finance - to be precise or not to be. Sometimes when we try to make our budgets, forecasts, analyses super precise, we lose touch with the reasons we are doing the modelling in the first place. And depending on the reasons we should know what level of accuracy we should go for and keep in mind that being directionally correct is always better than being precisely wrong.
The structure of the FBP series that we’re concluding today is and was:
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 (3 November 2023)
https://www.roosimagi.com/p/fbp-series-1-post-3-strategic-implications
II. Collaborative Planning as a Catalyst for Growth
Stakeholder Engagement in Vision and Strategy Alignment
https://www.roosimagi.com/p/fbp-series-2-post-1-stakeholder-engagement
Sustainable Growth through Collaborative Financial Planning (1 December 2023)
https://www.roosimagi.com/p/sustainable-growth-through-collaborative
Being Directionally Correct (today)
Introduction
As the world and our operating environment seems to change at an exponential pace, as Finance Business Partners (FBP) the pursuit of absolute precision seems to be slowing us down and we are not able to bring the value that our business stakeholders need. That is at least my perception and seemingly the common theme in FP&A related discussions and posts in LinkedIn as of late. A more pragmatic and in my assessment a more value added approach is to be “directionally correct.”
To me this concept relates to one of my favourite themes of systems thinking, adaptability, strategic thinking, stepping out of our comfort zones. Given these themes, I have used for the current blogpost books such as Donella Meadows’ “Thinking in Systems,” “Good Strategy Bad Strategy” by Richard Rumelt, and “The Comfort Crisis” by Michael Easter. From finance operators, I’ve drawn inspiration from recent podcast episodes with Netflix ex-CFO Jim Cook, Oracle ex-CFO Jeff Epstein and CJ Gustafson of Mostly Metrics fame.
Strategic Adaptability and Navigating Constraints
To kick off on a broader note, I believe adaptability and the ability to navigate business constraints are critical skills in FBP. Fortunately on unfortunately we cannot rely as finance professionals on precision and rigid frameworks anylonger. Accounting and good data quality is yes the foundation that we work on, but as FP&A/FBP professionals we are expected to take on an agile (lower case) and responsive approach, where I propose that being directionally correct is the only way how to provide value to business as opposed to trying to attain perfect precision.
I believe that this is a shift in mindset that requires a deep(er) understanding of the interconnected nature of the business we work with while appreciating the complexity and unpredictability of market dynamics, and the ability to balance being nimble enough to react to the circumstances as well as have a solid foundation to survive the inevitable downturns. Introducing the themes further elaborated on below:
Embrace Systems Thinking:
Inspired by Donella Meadows’ systems thinking, FBPs must recognize the interconnected nature of business functions. Finance no longer works in a vacuum, but influences and is influenced by other business areas. Through this lens we take move from transactions based thinking to a strategic approach to financial planning, where the focus extends beyond precisions and elaborate modelling to a broader business impact.
Navigating with Feedback Loops:
The concept of feedback loops, both positive (reinforcing) and negative (balancing), is at the foundation in systems thinking and, by extension, in FBP. I do have to say that looking at the feedback loops at university lectures was disconcerting at first, but reading both Donella Meadows and Peter Senge made me believe in the concepts at the core. Hence, also in FBP we should see that what we do creates ripples across the business, as well as we should understand what business activities feed into each other and ultimately ripple though our financial statements. Recognizing and responding to these feedback loops enable FBPs us to know how to be directionally correct.
Adapting to Complexity and Change:
The unpredictable and complex nature of modern business environments, highlighted by Meadows, calls for a flexible approach in financial planning. Being directionally correct allows FBPs to adapt strategies as situations evolve, rather than being confined by the rigidity of precision. As a mental model (not covered further in the blogpost), as finance professionals we should understand in terms of the Cynefin framework what situation we area dealing with at present and adapt our approach accordingly. We may hope that we are dealing with complicated systems and create intricate models that will solve the questions once and for all, but more likely we are facing a complex environment where we should first probe, then sense and only then respond by understanding the emergent properties. Life of an FBP is not easy… Being adaptable in our approach and mindset enables us to navigate the volatile and evolving business landscape.
Identifying and Leveraging Leverage Points:
Systems thinking encourages the identification of leverage points within business systems – areas where small, strategic changes can yield significant impacts. For FBP, this translates to recognizing opportunities where capital allocation would bring most benefit or where our business is more sensitive than perhaps conventional wisdom would suggest so that our insights and input can profoundly influence business outcomes.
Taking on a mindset of being directionally correct in FBP is not just a theoretical ideal but a necessity both considering the exponential changes that we seem to be in as well as the value added that through this mindset we can bring.
Systems Thinking in Finance Business Partnering
Donella Meadows’ “Thinking in Systems” provides a framework that I’ve repeated in several posts also before, as I believe it to be highly relevant for Finance Business Partnering in general as well as the notion of being directionally correct. Complex systems (i.e. any organization out there) means that being precise is a futile effort for FP&A.
Trying out a slightly different approach than usual, I will reflect on how the chosen books relate to the concept of being directionally correct in FBP in the form of five themes for each book. From the systems thinking perspective at first:
Understanding Interconnectedness:
In Meadows’ systems thinking, every part of a system is connected to and influences other parts. For FBPs, this means understanding how decisions and activities in one area of business affect other areas and how they flow into financials as well as how one financial decisions cascades into downstream financial effects. Having a holistic view allows for more strategic guidance, as opposed to focusing solely on precise financial metrics.
Feedback Loops:
Systems are influenced by feedback loops – both positive (reinforcing) and negative (balancing). For an FBP, recognizing these loops means understanding what aspects might be preventing business to gain speed as well as what factors enforce eachother in potentially unexpected ways. This understanding allows FBPs to anticipate and respond to changes effectively, rather than looking at only the first order changes.
Dealing with Complexity and Change:
Meadows emphasizes that systems are complex and often change unpredictably. For FBPs, this implies that being adaptable and flexible (directionally correct) is more effective than striving for absolute precision. Business environments are dynamic, so a rigid approach to financial planning is less practical or even detrimental compared to a flexible, adaptive approach.
Leveraging Leverage Points:
In systems thinking, leverage points are places within a system where small changes can have significant impacts. For FBPs, identifying these points in can lead to more effective interventions and adjustments in support of both capital allocation as well as risk management decisions.
Balancing Short-term and Long-term Perspectives:
Systems thinking requires balancing immediate concerns with long-term outcomes. One could argue that we should be precise in the short term in order to be relevant in the long term. Being directionally correct is about long-term growth, even if it means accepting ambiguity or imprecision in non-material aspects.
Incorporating systems thinking into Finance Business Partnering encourages a shift from a narrow focus on precision to a broader perspective of being directionally correct. We should acknowledge the complexities and interconnectedness of the organizations we operate in and take on a more adaptive, strategic, and holistic approach to financial decision-making. By this we allow ourselves as FBPs to navigate the uncertainties and dynamics of modern business environments with both a calmer mind as well as achieve more effective results.
Real-World Insights: Embracing Directional Accuracy and Insight-Driven Analysis
Looking now how some finance operators have reflected on the theme, the FP&A Today podcast episode “Partnering & Chill” with Netflix’s first CFO Jim Cook offered several good concepts to think about from the perspective of being directionally correct as an FBP.
One of the most compelling insights from the episode was the concept of aiming for 85% correctness. This approach is not about accepting mediocrity, far from it. The idea is about taking conscious calculated risks and learning from the experience. The traditional pursuit of absolute accuracy can even become a hindrance in our exponentially changing business environment. By designing strategies and recommendations with an 85% success rate in mind, we take on the mindset of innovation and adaptability, using the 15% margin as a space for learning and growth. This mindset fosters a culture of continuous improvement, where each iteration or decision is a step towards greater efficiency and effectiveness - both themes that as finance professionals we adore.
Design for failure, because then you're designing for learning. As long as you're still 85% correct, you're going to be great, but do not try to be 100% and then turn that 85% to 90%. Learn from the 10% error rate, make it a 5% error rate. Strive to be five nines and you’ll never get there. Design for failure and design for course correcting. And it just opens up a realm of opportunities and realm of creativity.
Another critical insight from the podcast revolves around the real product of FP&A: the insights derived from data, not the spreadsheets or intricate models as artefacts. In a data-driven world, it’s easy to become fixated on the numbers only. However, the true value FP&As bring to the table lies in their ability to distill/simplify complex data into three or four key insights that drive business decisions. This shift in focus requires FP&As to develop a keen sense of what truly matters to the business. It’s about becoming a strategic advisor who provides clarity and direction.
In essence, these two insights of 85% success rate and the real product of FP&A from Jim Cook align perfectly with the concept of being directionally correct. It’s not about delivering exhaustive reports or intricate financial models. Instead, it’s about understanding the core needs of the business, offering insightful recommendations, and embracing the journey of continuous learning and adaptation. By focusing on the essential insights and accepting a degree of uncertainty, FBPs can contribute more effectively to the dynamic world of strategic finance.
Real-World Insights: Directional Correctness in Annual Budgeting - Learning from CJ Gustafson
Looking now into the every finance professionals favourite topic of annual budgeting, the insights from CJ Gustafson, as featured in the Role Forward podcast Breaking Down Annual Planning episode, provide fresh and down to earth perspectives on approaching budgeting. CJ Gustafson underscored in the podcast the importance of understanding the business model, setting realistic goals while tackling the challenges of planning with incomplete data and needing the ability to adapt.
Echoing the theme from Jim Cook, Gustafson stresses the importance of moving forward with about 80% of the desired information. This mindset emphasises adaptability and swift decision-making, recognizing that waiting for complete data, especially in a startup environment, is often impractical or even detrimental. The ability to make informed decisions with available data and adjust course as more information becomes available is foundational for a great FP&A/FBP professional.
I also think that people will wait until they have all the information and guess what that never shows up especially in a startup life […] you got to move with 80% of the info that you wish you had and you course correct along the way […] being able to work in that gray area I know it's not a probably not the best feeling for a Finance or accounting person who is really numbers driven
Furthermore, Gustafson underscores the significance of cross-departmental collaboration for successful budgeting. He advocates for a strategic dialogue between departments, ensuring that financial plans are not only sound but also align with the organization’s broader objectives. Alignment is another facet an FBP needs to focus on beyond the numbers. And also from numbers perspective, this collaborative approach helps in creating budgets that reflect the operational realities and strategic goals of different business units.
Supporting the philosophy of being directionally correct, Gustafson advises focusing on extracting key insights from data, rather than getting mired in the minutiae of detailed spreadsheets. He encourages finance professionals to transcend the role of data analysts to become the strategic advisors who provide actionable insights that drive business decisions.
Gustafson further emphasized embracing flexibility in the budgeting process and viewing it as a continuous learning journey. We cannot take it to heart when our perfect final model needs to be “reopened” - it wasn’t closed in the first place. He talks about the value of running experiments to identify what is important and impactful, advocating for a culture where learning from each iteration is as important as the outcomes themselves. When we go into the process with a learning mindset, as opposed to trying to be right or correct, we can let go of the disappointment of needing to run version 115. Version control is needed, but why even count the iterations?
Overall, CJ Gustafson’s insights (as interpreted by me) align perfectly with the concept of being directionally correct in the annual budgeting process. It came down to three things:
understanding the business model
making informed decisions with incomplete information, and
fostering a culture of strategic dialogue, insight-driven analysis, adaptability, and continuous learning.
As finance professionals we navigate the complexities of budgeting in dynamic environments, so embracing this mindset enables us to achieve a more effective, strategic and relaxed financial planning process.
Crafting the “Just-Right” Budget: Insights from Jeff Epstein
Continuing on the theme of budgeting, as one could argue that budgeting and forecasting is one of the trickiest and most contentious areas of FP&A and FBP, the next example I stumbled upon just this week: a new FP&A Today podcast with Jeff Epstein ex-CFO of Oracle, now of the Bessemer Venture Partners. The theme discussed in the podcast is covered also in an article “How CFOs Build a Goldilocks “Just-Right” Budget” from where you’ll see also quotes below. The last time I was fortunate to have a resource provided by FP&A Today the same week as writing the blogpost was during early November when writing up: FBP Series 1, Post 3 on Strategic Implications of FBP.
Going to the insights, in budgeting we can discuss having multiple iterations and learning to find the ultimate truth, but why does one make budgets in the first place? When we understand this, we can also gauge how important is it to be accurate in the particular version.
As the article states, “Finding that 'just-right' budget can be a CFO’s toughest job.” In target setting we can endlessly debate how to strike a balance between aggressive growth targets and realistic, achievable goals. Jeff Epstein proposes an excellent framework with the underlying theme of emphasizing that the most effective budgets are those that are neither overly optimistic nor excessively conservative, but rather, they hit the sweet spot – the "Goldilocks zone."
Coming back to “why do companies have budgets at all?”, as a finance business partner you need to know why you’re doing the budget, not just trying to “be precise” in your forecast. Based on the article we should think about three reasons (and not overthink it):
Motivate teams to achieve at their highest levels;
Invest resources in the highest priority projects; and
Protect the company if things go wrong.
Even stating 90% (or less) means that we need to embrace uncertainty and flexibility in the budgeting process. Sounds crazy? But don’t wing it. Build “a budget with probabilities in mind.” The world is full of probabilities, even though the outcomes are binary. The article differentiates the level of probability you should go for depending on the nature of the area and your own need. For instance, a 50/50 probability might be suitable for new market ventures or experimental product lines. In contrast, a higher certainty level, like 90%, is more appropriate for well-established business segments or recurring revenue streams and giving investor guidance.
For revenue, we like the Andy Grove approach: 50/50. As Grove says, there’s something about a 50/50-win rate which seems to motivate teams to achieve peak performance—the optimal balance of risk and reward.
For profit, we want to protect the company and be more conservative. 70% achievement seems about right to us. […] For many private companies, cash flow is a more important metric. In this case, use a 70% probability of achievement for cash flow.
For Wall Street guidance, a key goal is establishing and building credibility with investors. Missing published forecasts can lead to the additional cost and distraction of securities litigation. For this, we’d be even more conservative, aiming for a 90% achievement rate.
For sales quotas, in our experience, the best sales people are optimists. [...] We like to set sales quotas at a 30% achievement rate.
Absolute precision is a false ambition and works against what you need to drive your business. As an FBP you need to know why you’re running the budgeting process and give away control where being right supports your ego, but hurts the business.
Your job as an FBP comes down to aligning your stakeholders with the broader business objectives. “A budget should align with the company’s strategic goals and be grounded in what the team believes they can achieve.” Moreover, the collaborative nature of building a “just-right” budget highlights the importance of teamwork and stakeholder management. The process involves "inputs from every part of the organization," – a key aspect of systems thinking in FBP and echoed as well by CJ Gustafson as summarized above.
These insights from Jeff Epstein support the overall narrative of being directionally correct as an FBP through a practical lens. In the world of finance, being “just-right” comes down to a mindset of letting go of trying to being right in order to be adaptable, strategic, and above all, directionally correct.
The Art of Good Strategy for FBP
Coming back to more traditional resources that I deeply value, “Good Strategy Bad Strategy” by Richard Rumelt offers valuable insights that are relevant to the concept of being directionally correct in Finance Business Partnering (FBP). This book shows and discussed good vs bad strategies (well, that’s also the title), emphasizing clarity, focus, and pragmatic considerations over vague and unrealistic goals.
Using the five bullet structure for books in the current post, let’s see how the theme’s in the book resonated with the idea of being directionally correct in FBP.
Identifying the Kernel of Strategy:
Rumelt talks about the “kernel” of a good strategy, comprising a diagnosis, a guiding policy, and coherent action. In FBP, this translates to diagnosing the financial health and needs of the business, i.e. understanding your stakeholders and business logic. Based on this we can guide the (fiancial) policies to implement the coherent actions that are aligned with business goals. This approach favours directionally correctness as opposed to precision by being adaptable and focused on real issues, not only the ones you can model and measure.
Leverage Points:
Good strategy often involves finding and using leverage points where small changes can make a significant impact. In FBP, this can mean identifying areas where strategic or operational changes can significantly influence business outcomes. There are areas that we think are important and there are areas that have real impact. Being directionally correct here involves focusing on impactful financial strategies that drive value, rather than getting lost in the minutiae of precision.
Avoiding Fluff and Bad Strategy:
Rumelt warns against “fluff” – superficial restatements of the obvious presented as strategy. In FBP, this can translate into avoiding vague financial goals or initiatives that lack substance. Being directionally correct allows you to focus on setting clear, aligned, realistic financial goals that drive business outcomes, rather than pursuing disconnected broad objectives.
Facing the Challenge and Focusing on Strengths:
Good strategy acknowledges and faces challenges head-on. In FBP, this means recognizing both operational and financial challenges, constraints and developing strategies to address them. Being directionally correct requires a realistic assessment of the financial standing and crafting strategies that leverage the company’s strengths while mitigating the risks.
Creating a Hypothesis and Adapting:
Good strategy often starts with a hypothesis about a problem and a proposed solution. This hypothesis is then tested and adapted based on results. In FBP, adopting a similar approach means approaching your analytics and modelling based on hypotheses about business needs and future trends, then adapting your approach based on learning from your stakeholders, actual business performance and changing market conditions.
The principles in “Good Strategy Bad Strategy” are applicable FBP through the concepts of clear, focused, and pragmatic approach to your modelling and analytics that address real challenges and leverage organizational strengths.
Embracing Challenges to be Directionally Correct
“The Comfort Crisis” by Michael Easter presents ideas that, though primarily focused on personal development and overcoming physical and mental challenges, can be surprisingly relevant to the theme of being directionally correct in Finance Business Partnering (FBP). The book encourages stepping out of comfort zones, embracing challenges, and learning from experiences, all of which are needed to embrace the mindset of being directionally correct. When business is used to only getting from finance “correct numbers”, you will need to step outside of your comfort zone to step up to what the business needs, not what they want.
Stepping Out of Comfort Zones:
Easter advocates for pushing beyond one’s comfort zone to achieve growth. In FBP, this translates to venturing beyond traditional finance roles and embracing a more strategic, consultative position. Being directionally correct involves taking (not avoiding) calculated risks, trying out new approaches in financial planning, failing, learning and embracing innovative strategies that are outside the comfort zone of traditional finance professionals.
Embracing Challenges and Uncertainty:
The book highlights the importance of facing challenges head-on and using them as opportunities for growth. In the context of FBP, we can look at this through engaging with the complexities and uncertainties of business. Instead of striving for absolute precision in your work, FBPs should embrace being directionally correct in order to be flexible and adaptable to changing circumstances.
Continuous Learning and Adaptation:
Easter emphasizes the value of continuous learning for personal growth. Similarly, in FBP, continuous learning about the business, market trends, and finance ways or working and tech is crucial. Being directionally correct is not about having all the answers upfront but about adapting strategies based on new information and learning from the outcomes of your decisions.
Resilience and Mental Toughness:
A key theme in “The Comfort Crisis” is developing resilience and mental toughness. In FBP, this can be seen in the ability to handle the stress and pressure of making significant financial decisions, particularly in times of uncertainty. A directionally correct approach requires resilience to stay the course even when you might not get to be as precise or certain as you would like.
Valuing Experiences Over Material Success:
The book argues for the value of experiences over material success. Perhaps it’s a stretch, but to me this idea resonates with enjoying the learning and iterations for an ultimate goal rather than going for short term (material) success of nailing down the minutiae of the financial model or previous period allocations. It all comes down to trading off the short-term gains for the organization’s long-term success.
To conclude, the principles outlined in “The Comfort Crisis” resonate well with the dynamic and often “non-traditional” role of FBPs. They encourage a mindset of growth, resilience, and adaptability, essential for being comfortable in directional correctness.
Conclusion
The journey towards being directionally correct in FBP is much more than a shift in perspective—it’s a transformation in approach and methodology. Using as the basis a modified five-step process of FP&A described by Jason Hershman last week, I’ve combined the concepts in this blogpost as follows:
Quantifying Business Activities: As FBPs, our first step is to lay the foundation for the next steps. We need a strong foundation both quantitatively as well as through understanding how our organization works as a complex system and where are the leverage points.
Summarizing Information into Knowledge and Insights: When extracting actionable insights from data, we need to keep in mind what is the relevant directionally correct approach we take and not get bogged down in unneeded data points. In order to provide value, we need to distill the complexities down into meaningful financial insights that lay the groundwork to drive strategic decision-making.
Communicating Simply for Everyone’s Understanding: Once we have these insights, we need to communicate these clearly. When we bridge the gap with our business stakeholders by bringing out accessible information we ensure that our hardworked insights are understood and applied across the organization.
Aligning to a Plan: The fourth step involves building alignment between various business units as well as the finance team. It’s about creating a cohesive plan that everyone understands and is committed to, aligning individual goals with the organization’s strategic objectives.
Driving Outcomes Through Coordination: Finally, our role is to estimate the results of the plan and ensure coordination across the organization to drive desired outcomes. This involves proactive management of resources, continuous monitoring, and adapting our approach as needed.
By embracing the mindset of being directionally correct, we go beyond the limits of precision. Our role is about more than mere data analysis so that we can be the strategic advisors who contribute to actual business outcomes.
The journey of a Finance Business Partner is marked by continuous learning, resilience, and a focus on long-term growth over short-term gains. To provide the value that the business needs, we’ll need to step outside our comfort zones and embrace the challenges that come from stepping out of the familiar traditional finance roles. By understading how our complex organization and financial models works, what are the feedback loops and leverage points, our roles start to add long term value. Being directionally correct empowers us to deliver the strategic, adaptable, and impactful financial guidance that we want to offer our business stakeholders so that our organizations thrive.
Thank you for riding along!
A reminder again on the FBP series that has now reached the end:
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 (3 November 2023)
https://www.roosimagi.com/p/fbp-series-1-post-3-strategic-implications
II. Collaborative Planning as a Catalyst for Growth
Stakeholder Engagement in Vision and Strategy Alignment
https://www.roosimagi.com/p/fbp-series-2-post-1-stakeholder-engagement
Sustainable Growth through Collaborative Financial Planning (1 December 2023)
https://www.roosimagi.com/p/sustainable-growth-through-collaborative
Being Directionally Correct (today)
Let’s see what comes next year! See you in January!