Use it or lose it: Tim Caudill says among other reasons to use technology in change management is that it makes people happy
Predictive analytics is a fancy term for an approach that is as old as time itself. Human beings have always attempted to measure and quantify things with a deep desire to peer into the future. Prophets and visionaries have been practicing predictive analytics for centuries. So it is only natural that, in modern times, the impulse to have some understanding of potential future events remains a key part of how our world operates.
Today, organisations rise and fall based on their ability to predict change and to respond quickly to it, such as the rapid rise of inflation the world is currently facing.
Finance professionals aim to create highly precise methods for predicting outcomes based on large data sets strewn across various spreadsheets. Without the help of technology and AI-based solutions, making sense of the data deluge is time-consuming and, in the face of such rapid change, a sure-fire way to limp behind the competition.
Recently, a conflation of events has happened in succession: the Covid-19 pandemic, rising geopolitical tensions, pandemic- and war-related supply chain disruption; and, most recently, global inflation: a blend of challenges that would make any business leader’s stomach turn.
The annual consumer inflation rate in South Africa is hovering just under the 8% mark at present. The impact on consumer behaviour ranges widely, depending on the sector. But not all inflation is created equally. In other words, some industries, such as oil and gas production, are feeling the effects much more strongly than others, such as the price of fresh fruits and vegetables. Nonetheless, the impact of these price fluctuations has an overall influence on the economy and consumers’ purchasing power.
Research from the Business Application Research Center shows the use of predictive planning is skyrocketing: one in four organisations already use predictive algorithms and machine learning productively as they seek ways to produce their plans and forecasts in less time, with less effort, and with better and more accurate results.
How can organisations leverage the highest benefit from these solutions to offset the effects of the current inflationary environment?
A three-pronged approach
An organisation’s strategy is only as good as its ability to plan. Finance professionals can adapt to the effects of current inflation in three ways: through business partnering, predictive planning technology, and through sensitivity analysis and scenario planning.
Business partnering
Business partnering and economic uncertainty are directly related. The higher the uncertainty, the closer finance professionals need to partner with the broader business. They need to take on the role of strategic adviser to help navigate economic rough patches. It also requires consistent and meaningful interaction with people across all departments.
Finance professionals are not just on the receiving end of the organisation’s data pile, but rather positioned in the mix to assist in co-creating strategies for both managing and planning for the characteristic volatility of the current economic environment. As business partners, they can review the following factors for opportunities to increase revenue and/or reduce expenses:
- Product portfolio: review the entire portfolio and look for opportunities to drop unprofitable products, bundle products as a way to increase revenues, and increase prices
- Expenses: consider a zero-based budgeting process and require the business to review and justify all expenses
- Working capital: work closely with treasury to develop cash management strategies that maximise working capital
Predictive planning technology
Digital transformation in financial planning is more important than ever given the increasing importance of including external data sources, sensitivity analysis, and a review of multiple different scenarios. And further: technology makes people happy and there’s evidence to prove it.
According to the 2022 FP&A Trends survey of finance professionals, respondents who relied on technology to create their forecasts were more satisfied with it than those who used other techniques. Only 39% of respondents rated forecast satisfaction as either good or great; however, that number leapt to 50% for organisations using a cloud-based planning tool and 63% for those using artificial intelligence (AI) as part of the planning process.
Predictive planning and AI technology make for a more robust and complete planning process. In addition, a solid cloud-based planning tool can make it easier to collaborate across the business; implement external data sources; use AI and machine learning to highlight trends in consumer behaviour, alerts, and opportunities; and compare various business scenarios.
AI is a tool that can be used to help improve the accuracy of forecasting by taking historical and external data factors and finding trends and data correlations that can help improve overall forecast accuracy. It cannot, and does not, replace human judgment. Nor should it. But it can augment human beings’ unique ability to make rational choices based on the data before them.
Sensitivity analysis and scenario planning
Sensitivity analysis is the process of taking a key input and seeing how a key driver changes because of that input. An example of a sensitivity analysis is taking the cost of sand and seeing the impact on a building contractor’s overall profitability at different sand cost points. Running a sensitivity analysis on drivers and inputs can help finance professionals determine how each driver and input will affect the overall financial health of the organisation.
A static budget with only a point estimate is no longer sufficient in today’s rapidly changing environment, and running multiple scenarios is more important than ever. Every organisation should build plans for how it will operate and manage based on different scenarios that could occur in the coming months and years.
Every organisation should ask itself: what will we do if inflation stays stubbornly high for the next two to three years or soars even higher? What will we do if the global economy heads into a major recession? These questions are the first step in modelling and planning for potential scenarios.
Predictive analytics is like every other type of analytics. If you do nothing with the information you receive, it is just noise. Taking decisive action based on careful analysis is the best way to adapt to an inflationary environment along with all the other unpredictable events that life brings our way.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.