Let’s talk about a real problem that most companies face: business leaders who sandbag their targets to increase their chances of personal success, and accounting who always has something up their sleeves to improve results for a rainy day. Both problems distort real company performance. When you don’t know your real performance, you don’t make the right decisions. It’s as simple as that.
Just consider how many additional resources you might be able to allocate to other projects if business leaders revealed what they truly thought they could deliver. To change this, FP&A must once again take a leading role. I’ll show you how.
Let’s get real about risks and opportunities
First, we must have open conversations. Only when we know the most likely performance of an initiative or business unit (balanced with risk and opportunities) can we make the right decisions. When we then stack it all up and look at a portfolio of initiatives (some P50, others P10 or P90), we can make the real bets a company needs to make to get into the top quintile of financial performance. Here’s how to work with and encourage “open risk portfolios”:
- Discuss items such as improvement, growth potential, and risk separately.
- Make risk versus opportunity decisions at a portfolio level rather than a product or business unit level.
- Make sure you plan to make big moves you can’t easily reverse and that you discuss real options as opposed to just one favored initiative.
- Adjust incentive schemes to reward people based on the risks they take. For example, if you only take sure bets and meet your targets, you shouldn’t be rewarded the same as those taking more risks and succeeding.
As you can see, this is a completely different planning approach compared to what most companies use. It doesn’t leave room for sandbagging your efforts. Instead, business leaders will say what they believe they can deliver and at what probability. If they all claim their plans are balanced—for example, a P50—then someone must call it out during the separate risk discussion. You can read more about the “open risk portfolio” approach in the book Strategy Beyond the Hockey Stick.
FP&A should lead the portfolio discussion
FP&A must take the lead on making this happen. To change incentive schemes, it takes collaboration with finance at the business unit level, as well as with global regions and HR. Still, it’s only FP&A that can facilitate an objective view on the portfolio.
It’s also only FP&A that can have a frank conversation with accounting about what the balance sheet looks. There might be hidden reserves that can either be used, or earnings that can be shielded once your company embarks on a true hockey stick journey.
Hiding stuff up the sleeves doesn’t help anyone. Sandbagging only leads to wrong decision-making, and it’s selfish of business leaders to do so. However, it’s tough to blame them because that’s how the strategy game has been played for decades.
It might seem incomprehensible now; however, this is for FP&A to get done. You will find that once you take a proactive approach on this (and with research about successful companies in hand), it’ll be tough to dismiss this approach. At least the CEO will have a tough time defending subpar value creation for long.
Are you ready to punch the sandbag and roll up the accounting sleeves to have real conversations about what your company can achieve when done well?