A Six Sigma approach to optimizing your budgeting and forecasting costs

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With the average cost of the FP&A function ranging from 0.02% to 0.09% of revenue, how do you reduce costs while keeping the function in-house?

In an article about how companies have become extremely laser-focused on cost reduction, Michael Hinson, CFO of APQC (American Productivity & Quality Center), writes that the average cost of the Finance Planning and Analysis (FP&A) function ranges from 0.02% of revenue for a top performer, to 0.09% for those in the bottom performing group. Although these figures might sound low, what does it mean for a hypothetical $5 billion business performing on a 35% gross margin?

The “Annual Costs” on this hypothetical scenario should be understood as company “full costs,” which normally encompasses salaries, social benefits, indirect overheads as well as facilities, fixed assets, technology and other services; and by “Sales Needed,” I mean the amount of sales needed to cover these costs, again assuming a hypothetical “contribution margin”—gross sales less costs of goods and services sold (COGS).

Budget and forecast areas within the Finance function provide high-value, specialized information for business leaders, which enables them to navigate their businesses efficiently and make timely decisions with information they can rely on—revenue profile and trends, customer margin and profitability, advertising and promotional expenses efficiency, and COGS performance, to name only a few. And in spite of its criticality, just like any Finance-related function, FP&A can also represent a significant piece of company overheads that can be targeted for “reduction.” In pursuit of further efficiency, some companies will go down the outsourcing route, while some might play the “conservative” card, retaining 100% of their FP&A activities believing these tasks to be too confidential and critical to get outsiders involved.

With this in mind, for those wanting to keep it “in-house,” I would like to give some advice on optimizing the costs related to your budget and forecast process. This is a BPO-like approach and is pretty much in line to the old-saying “what you can’t measure, you just can’t manage”—using the widely-known six-sigma methodology “DMAIC”—Define, Measure, Analyse, Improve and Control technique:

  • Define—break down your FP&A cost vs. your revenue, look at how your peers are performing and decide on your appetite for risk in terms of source and retain.
  • Measure—this should include the cost center for each job family within FP&A, the cost trend on the last 24 months, breaking up the activity into data preparation and data analysis, and the time calculation per activity in minutes.
  • Analyze—look at the places where there is most potential for savings, and examine data preparation activities such as the potential for Robotic Process Automation (RPA) and the potential to source in mid-run. Check the frequency or periodicity per activity, and identify your current control and monitoring tools.
  • Improve—enhance the process through target setting, time monitoring tool set up, pilot testing, communication, training, deployment, productivity time (efficiency) per team member and new monthly incentives package for the most productive people.
  • Control—this should include periodic reporting, making your leaders accountable for reviewing set targets, revisiting your savings performance, and measure versus targets.

Few people in the non-BPO atmosphere are familiar with this framework, so most businesses will need a strong change management strategy and a good partner to help achieve it. But I can assure you that this approach and methodology has been tested to bring significant savings once you start delivering planned productivity by setting a goal, defining your measurement, and monitoring and controlling performance.



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