Why operational issues need quick action
Finance leaders must improve how they remediate operational performance issues and enable their organisation to act. “By the time we identify a performance issue, it’s too late. Once we determine the solution, we can only mitigate the outcome of the issue,” says the head of financial planning and analysis at one major energy company — echoing the sentiments of finance leaders who are challenged to address operational performance issues effectively.
No organisation is immune to operational performance issues — the unanticipated, material impacts to business unit profitability that require corrective action not in the annual plan. In fact, the average company experiences an operational performance issue three or four times a year. Issues may relate to revenue (e.g., unforeseen price pressure from new competitor) or costs (e.g., a sudden change in production costs). Each requires corrective action and the speed of that action is critical to containing the financial impact.
Slow remediation, on average, results in 2.9 per cent of lost profit per issue per business unit. Quick remediation, on the other hand, limits that lost profit to 1.7 per cent.
Early identification not enough
Finance leaders have been working to improve the speed and quality of performance information over the past few years. Many have developed good leading indicators and other predictive analytics to anticipate issues faster, but Gartner research shows that while 89 per cent of companies can identify issues before they hit the financials, just 19 per cent can remediate issues in a timely manner. Eighty-one per cent (of organisations) take too long to remediate performance issues once they are identified.
The average organisation spends 34 per cent more time than it should to remediate a performance issue. The impact when action is delayed nears three per cent of EBITDA profit on average, per business unit — 42 per cent more lost profit than when the issue is remediated in a reasonable amount of time.
Compress remediation process
To resolve intrayear performance issues more quickly and minimise the costs, the best finance teams compress the entire process — from spotting the issue to helping the business recognise its materiality and respond in a timely way. This compression can be challenging, as business leaders often need to be convinced of performance issues’ materiality.
Finance can do two things to help the business remediate performance issues in a timely manner: One, establish quicker buy-in around the fact that the issue needs to be remediated, and two, remove resource constraints to enable the business to act more quickly.
Establish quicker buy-in
Finance needs to validate for the business the real nature of the performance issue. Seventy-nine per cent of finance teams and 73 per cent of business leaders agree there is too much back and forth between the two in identifying a material issue. This must be avoided.
There are three major opportunities to reduce the back and forth between finance and the business:
1. Shorten the time it takes for the business to engage with finance’s information. Present financial information in a way that resonates with the business. Use business terms that make clear the urgency of performance issues.
2. Increase the business’ confidence to make decisions with lessthan-perfect information. Use the 80-20 rule to size the issue quickly and agree on root causes. 3. Eliminate requests to test root causes of issues that surface late in the process.
Remove resource constraints
Many business leaders (83 per cent of those surveyed by Gartner) say they feel that lack of resources limits the actions they can take in the response phase, and 77 per cent say it’s difficult to get additional resources midyear. There are two ways to do this:
1. Plan for contingencies at the beginning of the year. Instead of releasing funds and resources only once a year, or at predetermined intervals, finance can do more to create funding pools and other always-on mechanisms to help resources flow to the business areas with performance issues.
2. Free up idle funds from inflight projects during the year. Set up criteria for evaluating the allocation of unused growth funds to make sure all requests get a fair review.
Finance teams can speed up the remediation process when they eliminate the back and forth between finance and their business partners and free up needed resources. Only 12 per cent of organisations are currently successful at driving quicker buy-in and action. Of those that do, two-thirds are able to remediate performance issues in a timely way — making it more likely that they can reduce the financial impact.
Slow remediation, on average, results in 2.9 per cent of lost profit per issue per business unit