Shadow Finance in FP&A: A New Shadow Area Emerging Alongside Shadow IT
The concept of Shadow IT may be familiar to many, as it has been covered extensively in articles and podcasts. Building on this analogy, I’d like to introduce the term Shadow Finance in FP&A, which can arise for similar reasons as Shadow IT, only in the context of financial planning and analysis (FP&A) tasks.
To clearly understand the parallel, it’s worth briefly reviewing what exactly we mean by Shadow IT.
What is Shadow IT?
According to Gartner,
Shadow IT refers to information technology systems, software, and services that are outside the ownership or control of the official IT department.
These tools are often introduced by departments themselves, typically because the official IT processes are too slow, inflexible or not tailored enough to meet specific needs. At first glance, Shadow IT solutions may seem efficient, offering quick fixes to problems. However, over time they can introduce significant risks – such as the lack of a unified data source or GDPR compliance issues.
What is Shadow Finance?
Since the term Shadow Finance has not yet been formally defined, I’d like to propose a definition, drawing inspiration from the concept of Shadow IT.v
Shadow Finance refers to the use of unauthorized or non-standard financial solutions and tools within an organization that are implemented and used without the approval or oversight of the finance department.
This also includes cases where employees outside of the finance function take on financial or controlling tasks without formally being part of the finance team.
For example, a business unit leader might track their financial plan using highly detailed Excel spreadsheets, investing additional time and human resources despite the fact that this information could be accessed through the company’s ERP systems.
The presence of these shadow areas does not always lead to problems, but it easily can. Their emergence is always the result of something. Let’s take a look at the causes, consequences, and risks side by side. We’ll see just how similar they really are.
The Importance of Recognition
Ideally, business, IT and finance functions work in close collaboration. Finance function is no longer a cost center, but profit driver. There is a dedicated FP&A team who support business with data driven decision making. However, this ideal concept is far from reality. Almost every company has some form of shadow area, and once one emerges, the first step is to recognize that it exists and start thinking about what to do with it.
The next step usually comes when the presence of these shadow areas starts to cause real pain for the organization. And I’m not talking about hackers scamming you, stealing money from bank accounts or accessing sensitive business information. A tougher market environment, where serious cost-cutting is needed, is often enough. At best, the current system cannot productively serve the growth needs of the company. When the decision is made by senior management, the transformation gains real sponsorship, and the rationalisation and thinking can begin on how to achieve data integrity, increase transparency and security to make the company more efficient.
If you feel that shadow areas have appeared in your organisation – whether in finance or IT – it’s worth exploring where these hidden systems lie before they create bigger issues.
If you are interested in this topic, or if you believe that your company may be experiencing Shadow Finance, or you want to take your financial planning to the next level while keeping Excel functionality, we would be happy to discuss it with you in an informal consultation.
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Author of the post:
Agnes Verebelyi - Senior Finance Professional - Controlling Advisor at Abylon Consulting.
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