Financial Planning & Analysis (FP&A)
Subject: Enterprise Software Integration and Deployment
Case Study by Thomas Kingsley
Financial Planning & Analysis (FP&A) is the process of compiling and analyzing an organization's long-term financial strategy. This is a vital because the process involves strategic planning, management reporting, and decision and report controls. No matter what industry one works in, Financial Planning & Analysis (FP&A) in consort with rolling forecasts play an integral role in various capacities. In this case, financial planning and analysis played a primary role in the evaluation to replace the current practice management software.
An organization considered replacing their existing practice management software with a different enterprise solution. The proposed software vendor is not typical in terms of charging a straightforward fee. For example, charging by license or per user. The proposed company charges a percentage fee based on the total revenue the organization generates annually. In this case, the vendor proposed an 8% fee. Additionally, the vendor explained their business model would streamline the billing process while cutting costs through elimination of the entire internal billing department. The result according to the vendor’s proposal will yield higher revenue for the organization because the company will not have to staff a billing department and pay for associated benefits. Furthermore, the company will also save money from having to train new employees as the company grows, and because the software contract is all-inclusive in regard to software support and upgrades.
Conversely, the organization signed a 12-year contract with the current software vendor, and 11 years remains on the contract with associated fees. Furthermore, the company invested several months researching various enterprise software solutions to ensure they made the right decision choosing the current software. Additionally, the organization spent two months negotiating details in regard to the software initiative to include data migration from existing software, training employees, and determining the costs associated with upgrading the existing network; all of which came at a cost to the organization above and beyond the cost of the software. The entire process took the company 8 months from inquiry, to contract, upgrading the network, training employees, data migration, and finally going live with the current practice management software.
This case study will focus exclusively on the financial aspect regarding the cost of current software in comparison to the proposed software, and the influence the decision will have on the organization bottom line. The case study will bypass all details regarding research, training, hardware upgrades, database migration etc.
Financial Planning & Analysis (FP&A)
The analysis began with a review of the proposed vendor contract. In short, the percentage fee the vendor proposed is 8% of total annual revenue the organization generates. However, there are other factors to consider like the associated fees in the remainder of the existing contract, projecting payroll, and the organizational revenue. In this case, Thomas performed the following research:
- Determine the average annual revenue growth percentage the organization generated for the previous 11 years.
- The average annual revenue growth is 6%.
- Forecast company revenue for 11 years using the average revenue percentage.
- Determine the average annual billing department payroll percentage increase for the previous 11 years.
- The average annual billing department payroll increase is 3.7%.
- Forecast billing department payroll for 11 years using the average payroll percentage./li>
- Determine the contractual financial obligation to the current software vendor.
- The total financial obligation is $1,134,847.
- The monthly line item expense is $103,168.
- Forecast the new vendor fee using the proposed 8%.
The following table compares the cost of outsourcing a business unit versus keeping the business unit internal by illustrating the financial influence the decision of singing a new contract with the proposed vendor will have on the organization’s bottom line.
The data in the following table illustrates a projected 6% revenue increase year-over-year and a projected 3.7% increase in payroll expenses year-over-year. Additionally, the data illustrates the vendors projected cost using the proposed 8% fee. As previously stated, the organization is under contract with a vendor and has a monthly payment obligation of $103,138, totaling $1,134,847 over the remainder of the contract.
If Company X keeps a fully staffed internal billing department and existing software, year one, the company will incur payroll expenses of $532,279, and current vendor expenses of $103,168, totaling $635,447. If Company X signs a new contract, the company will incur expenses of $1,252,782 based on the proposed 8% fee. The result of this decision will cost the organization $617,335 more to outsource the billing department and use the new software compared to keeping a fully staffed internal billing department and existing software. In other words, Company X will incur a 49% increase in operating expenses for year one. Over the remainder of the contract (11 years), Company X will pay $10,557,138 in additional operating expenses, this is a 56% overall increase in operating expense over the remainder of the 11-year contract.
Thomas was brought in to help expedite the original project a few months after the initial contract was signed and work was initiated. Upon review of the project and contract, he noticed a couple important details the organization overlooked before signing the contract. Thomas pointed out the details for future consideration.
- One should carefully read every detail in a contract before signing. In this case, the contract was signed before a thorough review was conducted, thus eliminating the opportunity to negotiate vital details. In this instance, the contract specified a 12-year term and did not include a termination clause. These are two extremely important details that should have been negotiated. The company can move forward with the proposed vendor. However, the company is legally required fulfill its financial obligation to the current vendor because the signed contract is legally binding; meaning it met the fundamental criteria of a binding contract; offer, acceptance, and consideration.
- There is no such thing as a standard contract. Read every word carefully. If one does not comprehend the language in a contract, one should consult a lawyer for clarification.
Regarding the notion to replace the existing practice management software with a different enterprise solution. There were no problems with the current software or logical reason to replace the software that was deployed 16 months prior. The only opposition came from the new general manager who wanted to deploy practice management software he was familiar with. Thomas strongly recommended that the organization keep the current practice management software based on the results of his analysis. The lesson the company learned; its one thing to outsource operations after performing due diligence, but it's another to haphazardly outsource operations without performing any research. The negative consequences could have cost the company millions of dollars in unexpected expenses. Financial Planning & Analysis (FP&A) is about meeting organizational objectives while improving financial performance, taking risk into consideration, and controlling costs.