Do You Use The 80/20 Principle In Your FP&A Team?
You are in the middle of the monthly business review with the VP of Sales. Towards the end of the meeting, she asks you to make an educated guess about how the current sales pipeline will translate into sales in the next three months. What feeling is running through your body when she puts in this request? Are you happy that she involves you in her business? Are you scared and concerned because you know you will not be able to make anywhere close to a 95% correct prediction of the outcome?
This might seem like a trivial example, however, your answer to the question has a big impact on your chances of succeeding as an FP&A professional. Why? Because we live in a VUCA world where there is rarely time to get a complete picture of any situation and make all data available. Hence, if you cannot deal with ambiguous requests like the one from the VP of Sales you will rarely be able to share timely insights that can influence your stakeholders’ decision-making. That is why we encourage FP&A professionals to use the 80/20 principle in many instances.
A principle that helps prioritize your efforts
The 80/20 principle is simple. It says that…
“80% of the effect comes from 20% of the causes”
If this principle is true that means FP&A most often should take a very different approach to many of the requests that we get or challenges that we deal with. Let us look at the example from the VP of Sales again. If you know that 80% of sales will come from 20% of the deals you have already eliminated 80% of the deals for making your educated guess. That likely means that you only need to qualify the 20% largest deals and can spend your time discussing with the sales reps who own those deals.
This probably feels uncomfortable to you and you are stuck with many questions such as…
- What about the last 20% of the sales – do I not need to qualify those?
- What if sales in our company typically do not come from the largest deals in the pipeline?
- What if the VP asks questions about some deals that I have not covered in my analysis?
These are all relevant questions but mostly they are not important. What is important is that you make conscious choices about how to conduct the analysis. If you can explain what you have done and why the VP will likely accept your assumptions. She already knows you could never make an accurate guess. What is important though is that you understand if the assumptions you make hold true in real life. If your analysis turns out to be way off the 80% accuracy you need to understand why. In that way, you can refine your approach and give the VP better insights next time.
The devil is not always in the details
Finance and FP&A professionals have been brought up with needing to understand the last detail, that accuracy is king, and that it is better to under-promise and over-deliver. However, the devil is not always in the details but rather in your inability to share timely insights that can influence decision-making. Senior stakeholders rarely have time for you to deep-dive on the numbers. They would rather want a quick back-of-the-envelope analysis in 2 hours than an in-depth 20-page long memo produced in 2 weeks.
It is true that the 20-page memo might have information that could make the decision to take even better. However, the reality is that the information would come too late to be factored into the decision-making. FP&A professionals must ask themselves if they would rather be right or be involved and influence decisions. If the latter, then perhaps now is a good time to adopt the 80/20 principle into most of what you do.
What are your thoughts on the 80/20 principle? Is this how you work, or do you prefer to be more accurate? We understand this natural tendency and that it can be very uncomfortable to not have done the in-depth analysis to answer senior stakeholders’ questions. However, is it not better to at least be a part of their decision-making?
This blog is presented by ValQ in collaboration with Anders Liu-Lindberg, Business Partnering Institute.
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