What’s next when it comes to enhanced insights?

In addition to being a BRP, I do a lot of executive coaching, mentoring and business development coaching.

One of the key questions I always ask my client is: what’s next? Having an actionable plan to carry out what you have just learned or the data/insights you received is as vital as learning or receiving the information.

One of the buzz phrases in business today is that Big Data is one of the most significant gifts created by digitization. It provides critical insights into consumer behaviour and what shareholders expect from a company. But it’s one thing having these insights and another to entrench them within the company appropriately.

It is imperative that CFOs transform data into insight and communicate this appropriately. I recently read a report by Ernst & Young (EY) which discusses this in detail.

Advanced analytics: extracting ESG insights from data

Advanced analytics capability is one of the main priorities for finance leaders in terms of their technology investments over the next three years. This capability is likely to be key to enhanced reporting because advanced analytics can help organizations structure, synthesize, interpret and derive insights from large volumes of data and create credible and useful ESG reporting.

Ross Lacey, EY Global Finance Consulting Leader, points out that analytics capability that can capture and factor in financial and nonfinancial data is key in areas such as building insight into an organization’s carbon footprint and the implications of different ESG-based decisions. “When you are looking at the carbon footprint of your suppliers, you can examine databases that look at the carbon implications of different suppliers’ production processes and materials,” he explains. “If you then have data on where suppliers are shipping from, how they are transporting materials and where they are transporting them to, you can start to build a total picture of the carbon footprint of different purchasing approaches. You may find, for example, that one supplier may be cheaper, but another is less carbon-intensive in both the manufacture and distribution of the materials they are providing. If you are able to model that sort of data, you can then make considered trade-offs.”

Advanced analytics solutions are particularly important in ESG reporting because there can often be a requirement to address and relate significant amounts of unstructured data. Take natural language processing (NLP) as an example, which is a machine’s ability to interpret and analyse spoken and written human language, allowing users to extract context, meaning and intent from unstructured data. It can help organizations generate actionable insights from unstructured data with unprecedented precision and scale.

The report adds that, while this technology is not new, NLP and machine learning approaches are now more technologically and financially viable, thanks to general advancements in computing power and processing capabilities, the availability of open-source software within analytics environments, and new techniques. These approaches go far beyond rudimentary keyword searches or manually created lexicons that are commonly used in industry today. Open-source NLP repositories are much more sophisticated and act as accelerators in the development process. NLP techniques capture the ambiguities, variations and nuances of natural language, helping us identify relevant signals more comprehensively while reducing errors that make keyword-based techniques unwieldy and error-prone.

Lawrence Lau, EY Greater China FAAS Leader, believes that the COVID-19 pandemic injected significant urgency into the digital agenda for finance leaders in China and provided a strong supporting case for investment into advanced technologies. “In China, finance functions had already wanted to mobilize more IT and AI to deal with increasing volumes of finance work,” he explains. “But before the COVID-19 pandemic, it was more challenging to prove the value of these investments to CEOs and boards. Then, as people had to work from home because of the COVID-19 pandemic, CFOs were able to show the importance of making significant investments and doing it quickly. This was essential to cope with the demands of remote working, with AI and other technologies needed to support daily finance operations, such as closing the books or analyzing operational information to make better and more rapid business decisions as the COVID-19 pandemic unfolded.”

The report points out that deploying these sorts of advanced solutions should be a cross-disciplinary effort that combines advanced data science experience and business domain expertise, including finance and ESG domain experience. The finance team should work together with key stakeholders, such as the CSO and analytics centres of excellence, to define the use cases for advanced ESG analytics and then collaborate during the development process. Developing an approach that mimics human efforts is a guided process – it is not simply developing algorithms; it can require learning and incorporating the human decision-making process. Finance function domain experts and data scientists should work together to adequately define the use-case requirements and the problem scope, which are often overlooked when adopting new technology. An effective solution is a balance between allowing machines to detect patterns and guiding the development work with domain expertise.

Rebooting financial planning and analysis (FP&A)

The report points out that before the COVID-19 pandemic, financial planning could be time-consuming for FP&A teams. During the COVID-19 pandemic, when the speed of insight became more important to many and market changes happened so fast, it quickly became clear that organizations required more agile scenario planning and strategic modelling capabilities.

The research confirmed this. Finance leaders surveyed identified “adapting to fast-changing business drivers, such as changing customer behaviours and modelling the implications” as their top response to “the main advantages of a more agile approach to forecasting.”

The report adds that greater agility could be achieved by moving from traditional backwards-looking analytics of data and information to more advanced approaches, including predictive and prescriptive analytics. However, the research noted that finance functions also have fundamental data issues, such as a lack of timely data and inefficient data integration. The top two obstacles to a more agile approach to FP&A are related to data. Making use of advanced technologies, including machine learning, AI and visualization, could be important in helping to build an advanced analytics platform for FP&A. Analytics starts with data, but techniques such as predictive modelling, statistics and visualization can be important in turning that data into timely and actionable insights.

The way forward

The report points out that there are three areas for finance leaders that will likely be important as the finance function continues to evolve and provide the trusted and enhanced reporting insights their business requires:

• Finance leaders should help to resolve the ESG reporting gap with investors. Finance leaders can play an instrumental role in helping to meet ESG requirements from investors. As a starting point, they could assess their organization’s current approach to ESG performance measurement and reporting to better understand what material is and how they could move the focus toward what is truly important to drive long-term value. And, given that finance leaders will increasingly be asked ESG-related questions at results announcements and other investor-facing events, they should establish a clear narrative that addresses questions such as – what are their ESG priorities? What are their mid-term and long-term ESG strategies? And how does the organization stack up against its competitors and peers on ESG?
• Finance leaders should take the lead in advancing the ESG agenda among their C-suite peers. As well as making sure there is a strong connection between financial and non-financial reporting and that ESG reporting is material, finance leaders should be proactive and work with CEOs, COOs, CSOs and risk officers, and their boards, to advance ESG and sustainability performance as important strategic objectives.
• Finance leaders should take the lead in catalysing change and driving innovation across operating models, advanced data analytics and talent. While the COVID-19 pandemic has been a major societal crisis, it has also been a time when organizational functions – such as finance – have responded with great creativity and innovation as they found new ways to operate in a COVID-19 pandemic world. Today, there is an opportunity for CFOs and financial controllers to build on that trend: demonstrating the important strategic role they can play in reframing a new future for finance and continuing to drive a culture of innovation.

Strategic imperative

As South Africa faces a number of ongoing business challenges in logistics, energy and supply chain, inflation and rising interest rates, agile financial modelling and reporting have become even more important to the business ecosystem. Gone are the three weeks’ wait for month-end reviews. Real-time financial information is required in order to better inform critical, time-sensitive decisions.

This issue is so significant that Finance Minister Enoch Godongwana recently signed a bill allowing regulators to impose hefty fines on companies and auditors who fail to meet the appropriate standards for financial reporting.

Financial reporting is about clarity. Reporting insights received from Big Data will allow shareholders to see their return on investment and will help companies plan and navigate the immediate future of the company more appropriately.

Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner.