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Agile Finance Principles: How FP&A Teams Should Prepare

  • By Bryan Lapidus, FP&A
  • Published: 10/5/2018

Agile Finance PrinciplesThough agile methodology began in the IT department, it soon spread throughout the entire organization. Agile finance principles have major implications for FP&A.

How did a group of software engineers hijack the corporate world?

In 2001, a group of software engineers published The Agile Manifesto to break free from the rigid tyranny of The Waterfall project methodology. The agile development movement proclaims that solutions evolve through “collaboration between self-organizing, cross-functional teams utilizing the appropriate practices for their context,” and then set out four values and 12 principles.

Elements of agile have seeped into all facets of corporate life: open floor plans to promote collaboration, incorporation of the customer in product design, the “two pizza rule” for the size of a team, the notion of “failing fast.” There are two implications for corporate finance—first that we can adopt some of these practices in our own finance organization, and second, we need be able to optimize our activities to meet the organization that fits this paradigm. We will start with a framework developed by to Steve Denning in his book, “The Age of Agile,” and then will present the implications for corporate finance.

The Law of Small Teams. Jeff Bezos at Amazon popularized the so-called two-pizza team; if a team couldn’t be fed with two pizzas, it was too big. The idea is that smaller teams have higher accountability and ownership, coordination and communication, and move with more speed.

The Law of the Customer. As Peter Drucker wrote: “It is the customer who determines what a business is. What the customer considers value determines what a business is, what it produces, and whether it will prosper.

The Law of the Network. Turn the organization into a set of teams that interact and collaborate with other teams with the same passion as they do within their own small team, connecting to the larger mission. In other words, create a team of teams, as popularized by General Stanley McChrystal. Implications:

IMPLICATIONS FOR FINANCE AND FP&A

Plan continuously

Just as software development moved from waterfall to agile, companies are looking for a way to transition from command-and-control, hierarchical styles to flexible approaches.

Finance actions:

• “Innovation that happens from the top down tends to be orderly but dumb. Innovation that happens from the bottom up tends to be chaotic but smart.” Finance needs to manage this top-down and bottom-up process by providing a framework to create, capture and evaluate ideas throughout the year
• Strong business partnerships allow finance to interact with the business at levels close to the customer; be sure to take part in scrums and business meetings
• Budgets should not hinder reactions or reprioritization; reallocate capital and resources as the situation dictates
• Reforecast frequently to incorporate new information.

Divisional P&Ls mean less

If the organization is a group of cross-functional, ever-changing networked teams, at what level do you create a profit and loss statement? While legal entities and lines of business have required structures (boards, reporting requirements), the desire and ability to push P&L responsibility to low levels in the name of transparency will inhibit the reaction to the marketplace.

Shifting organizational structures will create a nightmare for finance folks trying to calculate year-over-year comparisons and necessitate endless adjusted results.

Discrete reporting units, such as transactions for products and services, may not focus on the most critical, forward-looking metric—the lifetime value of the customer. Metrics that show customer success often are cross-departmental, such as lifetime value of a customer or process costing.

Finance actions:

• While ERP and EPM systems provide a new ability to understand costs at a minute level, don’t get lost in the trees. Ask yourself how well is the company executing against goals and the activities that drive value? Will saving money on P&L increase costs somewhere else?
• At a minimum, reporting systems should allow for easy changes related to re-organizations and personnel movements
• Look for non-accounting metrics that define success, such as activity-based costing of processes, LTV, churn rate, recurring revenue
• Consider the importance of accounting metrics at all; read Baruch Lev on the topic.

Increase decision velocity

It is said that we live in VUCA world, one characterized by volatility, uncertainty, complexity and ambiguity. This means that risk of indecision may be greater than the risk of a bad decision. In management speak, that leads to a bias towards action, and “move quickly and break things.”

Finance actions:

• Anticipate issues that may arise and consider reactions (scenario analysis)
• Understand interdependencies, including reactions to your own reactions
• Increase experimentation through frequent mini-tests, stage-gate investments, and acceptance of failures in the effort to be a learning organization
• Consider applying shorter project charters to longer, detailed business cases
• Recognize that reactions to events cannot be slowed by rigid decision hierarchies; develop decision and risk guidelines to clarify span of control.

Build agile operations

Agile has a unique implementation in every company; Microsoft has adopted the agile protocols whereas Google has created the “Google way.” There are certain commonalities, such as management relinquishing some control to better navigate the business landscape; requiring employees to live in a changing environment and live up to the empowerment they receive. Systems need to be flexible as well. Data needs to flow freely to where it is used, but also be managed so that it is trusted.

To paraphrase Denning, agile teams and units increase the overall operational agility which leads to the grand prize of strategic agility and the capability to create new markets for the customer.

Finance actions:

• Introducing agile to your company will require an investment and be considered a major change management process
• Consider investing in enterprise data management products to ensure a single source of truth and appropriate access rights
• Look for ways to reduce/eliminate rigid, disconnected systems or spreadsheets that create islands of data away from the mainstream

Consider your staffing structure, including the number of people in the management layer, the flexibility of your people to re-structure, the flexibility of your work cycle to allow different schedules, remote work, and your compensation structure to support dynamic teaming.

New macro forces besides agile methodology are creating new capabilities resulting in new models for work. To succeed, you need to master key dimensions of FP&A. Use this interactive tool to learn more

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