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Introduction to data analytics for financial decision making
This article provides an introduction to data analytics for financial decision making
The traditional role of financing in business has shifted from mere reporting to insights-driven decision-making. As we saw last week with the evolution of cost management, emerging technologies in automation, artificial intelligence, and data analytics (eg, ‘big data’) are generating waves of insights that will continue to improve – and challenge – the financial state of businesses in the twenty-first century. However, not all businesses will see this improvement.
“By 2025, there will be a nearly unbridgeable chasm between Data Laggards and Data Elites.” – Wayne Eckerson [1]
Watch: Eckerson Group’s Wayne Eckerson on the coming divide between “data
This is an additional video, hosted on YouTube.
Eckerson believes we have entered a new era of decision-making, one that’s “fuelled by data science, artificial intelligence and machine learning”. An ‘analytically immature’ organisation (“data laggards”) may discover sooner rather than later that their data-driven competitors (“data elites”) are thriving elsewhere without them. Whether or not a telling ‘data divide’ is just around the corner or not, let’s seek to understand what sets top performers apart from the pack today.
[2]According to PWC, successful businesses spend more of their time on analytics, they pay the relevant professionals more, and top performers run at significantly lower costs. What we also discover is that savings are used to adopt new technologies and invest in people and skills (to harness the potential of new technology).
Imagine you could ask these top performers why they are successful. What would they say? They would say things like…
- “We are clear with our value proposition.”
- “We focus on continuous improvement and do not settle for business as usual.”
- “We focus on efficiency to decide what can be standardised and automated.”
- “We are committed to a lean environment and drive continuous year-on-year improvement in ways of working.”
- “We embrace change to understand new ways of working.”
- “We embrace new cloud based and robotic technologies.”
- “We effectively garner skills that are essential to deliver insights.”
The Finance triangle: Insight, compliance and control, efficiency
As financing functions serve increasing demands on its resources and the value it generates, an appropriate balance between insights, compliance and control and efficiency is required.
- Business insights: Relevant, accurate and timely KPIs to support business managers in decision-making.
- Efficiency: Elimination of waste, standardisation and automation to free up resources for value-adding activities.
- Compliance and control: Sustainable, flexible, control mechanisms used to meet current and future obligations.
PwC has developed a useful conceptual framework, the finance triangle (see image below), to help coordinate a productive balance between these three objectives:
[3]Let’s take a closer look at each of these aspects to learn what they entail or mean in a high-performing finance function.
1. Business insights
Business insights in high-performing environments include performance measures that are directly tied to business strategy. When it comes to reporting, planning and analytics, top performers invest in highly knowledgeable resources—ie they invest in talented employees. The emphasis on acquiring the right person for a job means that data-driven companies are also investing time into the planning and decision-making process, not on transactional processing and data manipulation.
Business insights in high-performing environments also feature streamlined and simplified legal structures, an efficient strategic planning process, as well as standardised data and reporting (which includes the necessary governance policies and procedures).
2. Compliance and control
The second set of coordinates to consider are compliance and control. We saw last week how important it is to create a data-driven culture at every level of a business or organisation, which includes a culture of corporate governance and ethics. In order to help balance competing objectives, financial and operational controls should be integrated into the larger business operations, and effective risk management should be measured – and rewarded – at each level of the organisation.
In top-performing organisations, individual staff and divisions own their controls (they are ‘federated’, as Eckerson would say) and are supported by an effective technology framework that enables control measures.
3. Efficiency
The final aspect of PwCs finance triangle is efficiency. A good measure here of an efficient cost structure is if it can be maintained at less than 1% of the total revenue. In addition to using automation, top performers aim to shift activities to lower-cost industries and sectors to leverage on profitable and cost-efficient labour; transitions into common global process models happen through standardisation and by consolidating business services across units and regions. Efficiency requires large spans of control, a culture of continuous improvement, and the most successful businesses today have a high use of key performance indicators (KPIs) and performance management frameworks.
A key takeaway here is that top-performing organisations and leadership free up time and people to perform value-adding activities while maintaining an optimised business environment. Again, this is a balancing act, something that needs to be carefully and continuously coordinated over time.
What aspect of PWC’s finance triangle do you think presents the biggest challenges? What has your experience been like balancing objectives across these three domains?
References
[1] Eckerson Group’s Wayne Eckerson on the coming divide between “data laggards” and the “data elite” [Video]. Eckerson Group; 2019 Nov 25. Available from: https://www.youtube.com/watch?v=v-TZbNjx7_Y
[2] Stepping up: How finance functions are transforming to drive business results [Internet]. PwC, 2017. Available from: https://www.pwc.co.uk/finance/finance-matters/insights/finance-effectiveness-benchmark-report-2017.html
[3] The evolving role of finance [Internet]. PwC, 2018. Available from: https://www.pwc.com/my/en/services/consulting-index/finance/finance-evolving-role.html
This article is from the online course:
Financial Analysis for Business Performance: Data-Driven Decision Making
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Financial Analysis for Business Performance: Data-Driven Decision Making
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