I recently attended a conference in New York City hosted by CFO Conferences titled Leveraging Analytics to Turn Data into Insight. I believe it was an eye opener for many of the accountants attending. Why? Accountants take pride in their number crunching skills and their ability to analyze financial income statements, balance sheets, and budget variances. But the conference speakers highlighted the type of analytics that focused on non-financial data rather than the accounting reports that in reality translate operational activities into the language of money – currency such as dollars or Euros. A key takeaway was the CFO function should expand its role beyond toiling with compliance and regulatory reporting – counting the beans – to analyzing what best actions grow the beans.
Accenture’s Jeanne G. Harris, co-author of the recently published book Analytics at Work, was the kick-off speaker. Her message was that the stakes have never been higher for managers to make better decisions by choosing from abundant and available data. She provided case studies describing companies that successfully leverage their data to out-think, out-smart, and out-execute their competitors. High-performing enterprises are building their strategies around data-driven insights that generate results from the power of analytics of all flavors, such as segmentation and regression analysis. For example, the business model for Netflix, the DVD movie rental company, is basically based on an algorithm that suggests to its customers next rental choices based on each customer’s rental patterns and others similar in preferences to them.
One of the more inspiring presentations was from futurist Thornton May, Executive Director of The IT Leadership Academy and author of The New Know: Innovation Powered By Analytics. Thornton’s message emphasized a shift toward applying predictive analytics. He observed that in today’s environment, finance and operational executives need a working knowledge of not only what just happened but also on what will happen next. To get this knowledge requires real-time, insightful data – specifically from analytics. He noted however that identifying and harnessing the right analytics is a struggle within any organization given the vast amounts of information available, the different disparate technologies in place, and the conflicting departments who own the data.
The presentation from David Axson, a management consultant, reinforced the need for predictive analytics. His message was that increased volatility is now the new normal. Examples of volatility include consumer preferences, foreign currency exchange rates, and commodity prices, just to name a few. Trends can develop quickly such as oil dependence, emergence of country economies (e.g., India and Brazil), and instantaneous Internet-based global communications. Unanticipated shocks can come from occurrences like the Asian tsunami, H1N1 flu, or the current global credit crisis. This means that traditional practices like detailed annual budgets and five year plans can quickly become obsolete.
Axson observed that a shift must be toward more agility, speed, frequency, and visibility in reporting of all information, not just managerial accounting information. More importantly, the reporting must more quickly lead users to gain insight, inferences, and conclusions. Therefore, rather than the accounting department annually producing detailed line-item expense budgets each month, the shift is toward rolling financial forecasts with less detail and more summarized spending as the planning horizon stretches into the future. The sources to calculate the levels of resource capacity and spending come from a variety of other forecasts, such as demographics and sales plans. Predictive analytics are needed for each data source, and they are all eventually aggregated in the financial projections. Risk management cannot be left out of the equations. The potential magnitude of an unplanned and undesirable event and its likelihood of occurrence dictate how much risk mitigation insurance-like projects are needed. These too now are increasingly included in financial projections.
Although CFOs are already pressured with compliance reporting, such as Sarbannes-Oxley, the main theme of the conference was to motivate them. Who could be better in an organization to promote the use of analytics? It can be the finance function. They are the numbers people.