Growth companies love effective results. Their goals are met, or even exceeded, and it highlights what their product brings to the market. But with the recent market downturn, many companies are seeing the need to focus on efficiency instead. Part one of the two part series “Building the FP&A Dream Team” will focus on the differences between efficient FP&A results and effective ones, and what each department should focus on.
What is better: an efficient FP&A team or an effective one?
“Efficient” and “effective” often get thrown around a lot in the business world. Although they both correlate to doing things in a timely manner that maximizes employees’ expertise, there are some big differences. Sometimes, one can come at the expense of the other. Which one is better to focus on when building an FP&A team, efficiency or effectiveness?
According to investopedia, business efficiency “is a measurable concept that can be determined using the ratio of useful output to total input. Increased efficiency minimizes the waste of resources such as physical materials, energy, and time while accomplishing the desired output.”
In essence, the simple definition of efficiency is like a machine: Output vs. Input. But the technical definition of efficiency in regards to a machine is simpler: “The ratio of the useful work performed by a machine or in a process to the total energy expended or heat taken in.”
Efficiency is how much output is created in relation to the input (time, money, resources, etc.)
Many people, including the Cambridge Dictionary, define effectiveness as the ability to be successful and produce the intended results. This is a broad explanation which needs to be explained more in depth.
While both efficiency and effectiveness are a way of measuring desired results, in reality they both have very different paths in getting there. The most obvious difference is the aspect of time. You can’t talk about efficiency without time, while effectiveness often has no mention of time at all, as long as the results are there.
Based on this, efficiency can be greatly improved by implementing tools and processes in order to produce better time-focused results. Efficiency in action comes in the form of hitting targets and deadlines, balanced team sizes (money output is also an important metric), and high accuracy and few mistakes.
Effectiveness, on the other hand, is measured mainly through the impact of delivery and ROI. While time still plays a factor in delivered results and ROI (if something took twice as long as it should, the ROI will be lower even if it produced great results) it is not a crucial aspect of effectiveness. Effectiveness means performing meaningful work, creating a high impact on the business, and frequent and new opportunities.
In essence, the two terms come down to time and impact. Efficiency is all about being on time, accurate, and achieving results through optimized resources. Effectiveness is all about the overall impact of the team, usually measured through the ROI on objectives, priorities, and decisions.
Efficiency vs. Effectiveness: Is it a tradeoff?
Some companies focus exclusively on efficiency while others tend to focus solely on effectiveness. Is there a right answer as to what is better? Does one have to come at the expense of the other?
Although both efficiency and effectiveness each have a large amount of advantages, they don’t come without their downsides as well. When focusing exclusively on “efficiency” the main drawback is repetitiveness. If everything is time based and focused on efficiency, employees feel that they have endless tasks, lack of prioritization, boredom, and low visibility into the broader view of the company.
If teams focus solely on effectiveness the main downside is not being able to see results in a clear or numerical way. This can lead employees to bad habits such as procrastination due to targets being unclear or far off, perfectionism, mismatched tasks with skills, burn out, and attrition.
Because both mindsets have very different focuses, strengths, and ultimately weaknesses, balancing both together without one coming at the expense of the other is the ideal equilibrium to achieve. Teams are most successful when they balance the efficiency of their processes with the effectiveness of their outputs.
Due to data driven decision making, there are endless ways for finance teams to report on their goals and metrics. With more complex data and metrics available, executives tend to focus on growth and revenue metrics which focuses mostly on effectiveness. The problem with focusing on impact metrics is that many employees will put most of their energy in reaching the numbers needed, which can mean taking shortcuts or even reducing expectations in order to reach them.
This is where efficiency comes in. Adding a layer of efficiency as a support mechanism for high impact work regulates how and when that impact is achieved. Efficient processes not only compliment effectiveness but are the anchor for repetitive impact on the business in the long run.
Efficiency is crucial
The importance of efficiency can’t be ignored, even with its downsides and the trend for organizations to focus more on effectiveness (especially among growth companies). In fact, a study by the University of Baltimore and FP&A automation software company Datarails showed that $7.8 billion is lost to inefficient FP&A processes every year in the US alone.
FP&A involves a combination of dynamic forecasting (such as rolling forecasts) and long term goals and objectives. Therefore, they are responsible not just for predicting results, but also for driving them- which is done through efficient and timely processes.
Financial planning sets the tone for the rest of the company as it is the starting point for everything related to planning, forecasting, budgeting, or anything goal oriented. Therefore, the efficiency element is just as important as the effective element, as it keeps the company f up to date and consistent in order to reach those lucrative effective goals that executives want to achieve.
Now that we have established that efficiency and effectiveness intertwine together in order to produce long term sustainable growth, the second part of the series will explain how to build the ideal efficient and effective FP&A team that will produce those results.