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FP&A Done Right: Forecasting Revenue for Services-Based Businesses: A Growth Factor

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More than half of professional services firms can’t forecast project revenue beyond six months. Workday’s Mark David and Justin Joseph share insights into how organizations can get revenue forecasting right, even when business is anything but usual.

What is it about revenue forecasting that can be so challenging? For people-based industries such as professional services, their project revenue is based on talent supply. And people—including all 109 billion of them who have ever lived on Earth—can be difficult to predict. 

“People are highly variable,” said Justin Joseph, senior director of product strategy at Workday. “They aren’t always available. They go on vacation. And, as we’ve experienced the past few years, people leave, and there can be skills shortages. So there’s a lot of variability in how professional services companies generate project revenue.”

Beyond the variability of their employees and the impact of unprecedented trends and events, professional services firms also deal with different systems in different parts of the organization. These silos can cause data to be inconsistent and inaccurate—challenges that only get worse as an organization grows.

“The larger an organization, the more complex things get,” said Mark David, vice president of solution management at Workday. “Organizations then become more reliant on processes to manage projects and people, but that requires accurate data from disparate places.”

In this episode of the Workday Podcast, we’re 100% focused on revenue forecasting for professional services, with guests Joseph and David. They share trends impacting firms, the pros and cons of different types of forecasting, and how firms can start to solve their challenges to better plan and forecast.  

Here are a few highlights of our conversation, edited for clarity. Be sure to follow us wherever you listen to your favorite podcasts, and remember you can find our entire podcast catalog here.  

  • “The reason most companies can’t forecast their revenue more accurately is because they have different systems and data across their lines of businesses and services. And all those different systems mean that you have data that’s going to be wildly inconsistent. You’ll need a lot of integrations to pull this data together to make sure that you have an end-to-end process for revenue forecasting.” —Justin Joseph
  • “A year ago, a customer who runs a 5,000-employee professional services firm told me the one thing he needed was a good revenue forecast more than anything else right now. As you can imagine, this was especially needed with what’s happened over the last few years, which have made forecasting where your business is going even more difficult.” —Mark David
  • “With unexpected scenarios, you’re following the exact same processes as expected scenarios, but you have to forecast at a much faster pace and much more frequently because your assumptions are changing so rapidly, maybe hour by hour or day by day. How quickly can you pull this data together and then model it and share it out? It may sound contradictory, but they’re similar. Speed is ultimately what’s different.” —Justin Joseph

This blog post was originally published on the Workday Adaptive Planning blog.

Read more FP&A Done Right posts:

FP&A Done Right: The Changing Role of the CFO

FP&A Done Right: Financial Forecasting Processes that Guide Business Strategy

FP&A Done Right: Continuous Planning Leads to Agile Businesses

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FP&A Done Right: The Changing Role of the CFO

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This is a guest blog post from our partner Workday Adaptive Planning, explaining strategy and vision for the Office of Finance.

Companies are asking more of their CFOs than ever before. They’re expected to lead environmental, social, and governance (ESG) initiatives, oversee finance transformation projects, and ensure their teams have the right skills for the future. That’s why finance leaders need the right technology.

The role of CFOs is changing as their responsibilities keep growing. “Today, CEOs and boards are looking to CFOs to help outperform peers while navigating crises,” said Terrance Wampler, group general manager, office of the CFO, at Conversations for a Changing World, a global Workday digital event. “CFOs are moving from a sole focus of maximizing shareholder value to addressing a much broader set of stakeholder values.”

These broader stakeholder values—and expectations—require a greater focus on sustainability, talent acquisition, and digital acceleration.

Simply put, companies are asking more of their CFOs—especially when it comes to having the right technology.

Growing Revenue

“Revenue is all about growth,” Wampler said. “Successful growth requires striking the right balance between quick wins within three months, medium-term operational improvements spanning three to nine months, and longer-term, more strategic initiatives across one- to three-year plans,” he said. 

There’s a strong correlation between revenue growth and high-performing financial planning and analysis (FP&A) teams, according to a 2021 study by the Institute of Management Accountants (IMA). Companies with high-performing FP&A teams saw a 21% revenue growth, compared to just 4% growth among companies with the worst-performing FP&A teams. 

What does a strong FP&A team do well? 

“One of the most impactful things CFOs and FP&A teams can do is model multiple revenue scenarios,” Wampler said.

Workday can help them do that, Wampler explained: “With Workday, customers model and execute on short-, medium-, and long-term scenarios, incorporating financial and operational data and performing what-if comparisons.”

Controlling Costs

Reining in costs remains a primary concern for finance leaders: In a 2022 PwC survey, almost one-third (30%) of CFOs ranked reducing cost as a percentage of total revenue as a top priority.

When looking at organizations that are successful at optimizing spend and driving predictable cash flow, one of the biggest opportunities to manage discretionary spend lies with their suppliers and procurement practices. 

As they grow revenue while containing costs, CFOs also must ensure that capital investments maximize ROI. 

“A CFO is the guardian of the capital that he or she has been entrusted with,” Wampler said. “Planning in Workday can help organizations get the most return from their capital investments with improved forecasting of capital expenses, effective and efficient capital project planning, and, of course, fast and accurate reporting and analysis for the complete lifecycle of your capital assets. You can also plan and model capital asset acquisitions, automate depreciation methods, and gain complete visibility into the impact of capital on your financial statements.”

Meeting ESG Goals

Organizations and their CFOs face increasing pressure to deliver not only financial impact but environmental, social, and governance (ESG) impact as well. For 58% of corporations, there was a positive relationship between ESG and financial performance, according to a 2021 meta study by the NYU Stern Center for Sustainable Business and Rockefeller Asset Management.

Companies that have made ESG factors a priority can benefit from the ability to track sustainability data—not just within the organization but extending to third parties, as well. “Data you could track include things like a carbon footprint, climate change, even risk to the supply chain … all through a configurable dashboard,” Wampler said.

Recruiting and Retaining Talent

As the “Great Resignation” sees workers leaving their jobs in record numbers, CFOs must consider how they can best recruit and retain talent in a rapidly changing economy. Of employed U.S. adults, one in four plans to look for opportunities with a new employer once the pandemic subsides, according to a Prudential survey.

Employers need to leverage technology that can give them an edge in hiring. 

“A good software user experience translates to a great employee experience,” Wampler said. That’s why Workday prioritizes developing products that improve employee engagement, in part by automating processes, he explained. With intelligent process automation, Workday enables teams to work smarter, not harder.

Machine learning (ML) and artificial intelligence (AI), along with the opportunity to learn new technology skills, are additional ways to keep employees engaged, Wampler added.

Beyond providing better technology solutions, a cloud-based platform also helps support workers outside of the office. As many employees have adapted to remote or hybrid work environments due to the pandemic, Workday’s robust functionality allows employees to perform their duties regardless of where they’re located and gives them additional flexibility, Wampler said. 

The CFO Stakes

Employees, suppliers, customers, and communities can benefit when companies invest in transforming back-office processes and systems—suggesting that there’s a lot at stake today’s CFO.

The good news: 75% of CFOs say the pandemic has accelerated the digitization of their operations, according to the Hackett Group. “Next-generation technology is now considered table stakes not only to survive but to thrive in the new normal of uncertainty,” Wampler said.

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FP&A Done Right: FP&A Tips for Scenario Modeling During COVID-19

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This is a guest blog post from our partner Adaptive Insights, written by Steve Dunne. It is a unique Q&A with Kinnari Desai, Workday’s senior director of corporate finance, on how Workday responded to the FP&A impact of COVID-19.

Kinnari Desai, Workday’s senior director of corporate finance, has deep insight into scenario modeling and how Workday approached this following the outbreak of COVID-19. We spoke with her to get more best practices and tips for financial planning and analysis (FP&A) teams.

How did Workday have to adapt its business planning process following the start of the crisis?

We were coming off the back of our annual planning cycle and thanking our teams for their efforts in delivering “Plan A.” Then of course, everything changed with COVID-19. We had to spring right back into action, modelling scenarios in an environment that was so new—and seemingly changing hour by hour.

I believe that in an uncertain environment like this, it’s very important the FP&A team aligns with the leadership team, understands the context of what’s happening, and looks at a small number of relevant scenarios. It can be easy to get carried away producing several scenarios, but the goal is to provide the leadership with a range of likely outcomes and provide data, in a simple way, that would enable decision making.

In these situations, I’d imagine speed is of the essence, but you have to get it right if scenario modeling data is going to be valuable to your business leadership?

I do think it’s important to execute quickly, but in order to achieve our objectives, we had to be thoughtful in our approach.

As a business, you have to agree on your priorities. Are you going to focus on top-line growth, cash, the impact of employee relief programs, hiring pauses, and so on? Then you should consider the impact of those on the P&L and cash flow.

The next big thing is getting input from the business. While we are always in lock-step with our business partners since we can’t model in a vacuum, it’s more important than ever to meet with the operational business leaders, gather their perspectives, and understand what’s top-of-mind for them. You should be meeting with leaders multiple times to quickly narrow down focus areas that are a priority for them, such as support for employees, availability of equipment, and hiring direction.

From there, how do you start thinking about how you’ll use scenario modeling to drive decision making and elements such as forecasting?

In our case we had to adapt our scenario modeling frequency to help us make decisions faster. This impacts things like forecasting —we could no longer rely entirely on a monthly forecast process, so we adjusted the process slightly. This has led our FP&A team to a more continuous approach to planning, versus point-in-time or quarterly updates.

There are areas like revenue and cash that we are visiting on a weekly or even a daily basis. Then there are other areas that we may not review daily, but look at more frequently than before. We also discussed as a team that at times, the level of guidance we can give to other internal teams may not be as detailed or defined as it has historically been, since the situation is constantly evolving. As a result, we all need to remain agile.

Last but not least, we also identified drivers of large spend, and cost levers that can be pulled should the need arise.

Technology obviously plays a key part in enabling scenario modeling. Can you tell us a bit about how you used Workday Adaptive Planning to drive the whole process?

Part of our job is to provide a sense of calm amidst chaos, and the Workday tools and data model enabled us to do just that. We spun up different versions in Workday Adaptive Planning, and adjusted the drivers like new business and renewal rates for revenue. For expenses, for example, we tweaked the timing of hiring, and the related impact on other expenses like benefits and employee relations costs were updated right away since they are based on timing of hire.

We were able to leverage actuals data from Workday Financial Management into our forecasts. This enabled us to see the resulting impact on the P&L and cash flow right away. All in all, we were able to speed up the process and operate 50% faster versus using spreadsheets. And the ability to use one data model and driver-based forecasting was very valuable.

What is the magic number when it comes to scenario modeling?

We modeled three different scenarios, and I think that’s a good number to work with during a fluid situation like this. I strongly recommend for my friends and colleagues in FP&A that they don’t drive themselves crazy doing 15 different scenarios! We don’t know everything yet, and spinning up more scenarios isn’t necessarily going to provide the answers.

We aligned on three possibilities and reasoned why these are important. This allowed us to focus on what matters, keeping it manageable so important decisions can be made without data overload.

What would your advice be to other FP&A professionals looking at ways to improve their business planning models today?

I’d start with “over-communicate.” I really can’t emphasize enough the importance of communication. We’ve moved to a remote, digital world, so hallway conversations are no longer a possibility. We needed to ensure emails are not misinterpreted, so we checked in via Slack or had quick Zoom calls. We provided financial guidelines on how to operate in the near term and why these are key.

For publishing updated forecasts to finance, accounting, and lines of business, we heavily leveraged our management reporting capability in Workday. Keeping these stakeholders informed on the approach and current thinking, even when all decisions have not been made yet, goes a long way.

Educate the business as well as accounting. In a changing environment, accounting also needs to be informed of the latest plan so they know what to expect (actuals) relative to the plan. This helps them as they prepare for and move through a remote close —with confidence and in concert with FP&A. The business will also need guidance to understand the latest plan and take action accordingly. Keep an eye on the fundamentals of the business, and take this as an opportunity to rethink some of the processes and outputs.

And lastly, remain agile. As the market continues to shift, we will need to remain flexible so that we can continue to pivot as needed. This is not a one-time shift in light of COVID-19, but a new and more agile way of operating that will allow finance to continuously adapt to change.

This blog post was originally published by Adaptive Insights and appeared here.

Read more guest posts from Adaptive Insights:

FP&A Done Right: 3 Words for a COVID-19 World –“Flexible Budget Variance”

FP&A Done Right: What FP&A Must Do Differently to Make Planning a Success

FP&A Done Right: Modernize your Budget Process to Anticipate Change

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