A Lean Six Sigma approach to FP&A?
Posted by Amrish Shah
What is this article about?
This article explores to what extent both LEAN and Six Sigma can be applicable to FP&A work. Both of these are productivity philosophies that are focused on the elimination of waste and variation and are predominantly focused on processes. Lean Manufacturing originated in Japan in the 1960s with Toyota as being the one mostly credited with its introduction. Motorola is largely credited with the initiation of Six Sigma in the 1980s. Lean Six Sigma only entered into popular parlance in 2000s.
Why is it important?
Are such techniques still relevant today? The answer is yes. The changes in consumer needs, expectations, demands and actual purchasing behavior is leading to more demanding (and less loyal) consumers. The increased transparency and availability of data enabled by technology is forcing organisations to be more responsive and offer much better customer experience than ever before. In addition, organisations are caught between many competing forces, for example, going for both growth and productivity. Being more responsive whilst guaranteeing consistent quality. Being more efficient whilst increasing service levels. What this means is that the focus on process excellence (Lean Six Sigma), improving quality by minimizing variation (Six Sigma) and reducing waste (Lean) becomes critically important.
What are the key considerations?
Given that the origins of such techniques are from manufacturing, what relevance can this have for FP&A? The key is the focus on process and not on product. As for overall finance, the product of FP&A is ultimately “information” of one sort or another. However, before FP&A provides “information”, it has to be “produced” and there are a number of underlying processes behind this. Therefore, we can also explore whether Lean / Six Sigma can be of relevance for such processes. At this point it should be noted that the application of Lean / Six Sigma is easier to understand when applied to core transactional finance processes such as Accounts Payable or Accounts Receivables.
Let us look at some core FP&A activities. The list below is not exhaustive, but I have chosen some more common ones in the hope that it illustrates the relevance of Lean / Six Sigma applicability.
- Business Performance Reviews
- Management Reporting
- Annual Planning
- Key Business Controls and approval improvement
- Business Case development
- Supporting key decisions
- Expense budget control
- Standard Presentation Pack production (e.g. for Investor Relations, the Month performance analysis for Board etc)
All of these will have an output associated with it and therefore an underlying process that delivers this output. Crucially, note that all of these are to “serve a customer”, predominantly internal customers, but customers nevertheless.
Let’s look at Lean first. The focus of Lean is to reduce “waste”, which can be both visible and hidden. What is waste in the context of FP&A activities? We can identify a number of waste elements that make sense even in the context of FP&A work output. For example:
- Defects – Errors that lead to wasting time in a decision making setting, or errors in an analysis that require rework.
- Cycle time – relates to the length of time to produce something and often the root cause here is fragmented data landscape, for example doing an in-depth category or channel profitability assessment.
- Obsolescence – reports or analysis once in the assortment but now never actively used but still being produced. For example, the stock report at a product line level which never gets referenced anymore.
- Under utilization – of FP&A time on the things that matter more to the business. For example, the inability to get anything else meaningful done in the 7 day month end close cycle.
- Non added value steps – for example, approval steps in signing off a customer bonus that is not needed
Now let’s look at Six Sigma. Six Sigma is inherently trickier to apply as it’s primary focus is to eliminate variation in the output of a process. And by definition, a lot of FP&A output is not exactly the same in nature. And the concept of a negative variation (defect) is seen from the eye of the customer and their acceptability criteria. And usually, these are not clarified upfront between FP&A and its internal customers. And last but not least, Six Sigma is best applied to a large number of repeated and repeatable activities.
Nevertheless, with a bit of creativity, the fundamental idea underpinning Six Sigma – elimination of defects – can be applied to the more recurrent FP&A processes. The focus should be about increasing the positive acceptability of outputs even if there can be a slight variation in the process (the way of organizing to deliver). The best targets from an FP&A perspective would be things that are done on a regular basis (at least once a month), are done across a number of units (so there is some scale) and where there is a high degree of standardization in the process. Budget Control meetings can be a good example. In year re-forecasting and annual planning would not be.
Are there any critical success factors or risks?
Apply good judgement on choosing what area in FP&A operations to apply Lean / Six Sigma to. Choose activities where the customer expectations are clear and measurable. Where there is sufficient volume of activity from which some baseline performance can be extracted from. And look for where there is a lot of manual intervention, working involved. Once the activity is chosen, isolate the underlying process(es) and then apply the familiar process improvement approach of Defining, Measuring, Analysing, Improving and Controlling to implement changes. One watch-out: as FP&A activities touch business operations and therefore the stakeholders involved in these operations, stakeholder management, communication and change management should be actively designed in the improvement cycle.
I hope that this very short article has demonstrated that even FP&A activities and processes can benefit with the rigorous approach that Lean / Six Sigma demands. If the quality and impact of FP&A activities are raising concerns, then such methodologies can add great value. As can also adopting, for example, a Zero Based Budgeting approach (out of scope of this article). In any case, as Lean / Six Sigma has been proven to add great value to core business processes, a deep understanding of such methodologies would benefit anyone working in FP&A.