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Throw Out Your 2015 Strategy and Budget Right Now

The arrival of a new year (and the beginning of a new one) brings a flurry of cognitive churning. As individuals, we 1/ reflect on the year passed, 2/ ritualistically write and read predictions for the next year, and 3/ make resolutions and set goals that are intended to inspire us to greatness during the next twelve months.

I’ve come to see this all as distinctly human but also quite strange. 1/ We can’t do anything about what happened in the past, and many of our “reflections” end up being revisionist history. 2/ The predictions we make – at least the most interesting of them – are almost invariably wrong, but we make them anyway as a way to either “exert control” on our world or to show others how smart we are. 3/ Resolutions simply <a
title=”Resolutions don’t work” href=”http://www.lifehack.org/articles/lifestyle/new-years-resolutions-dont-work-heres-why.html” target=”_blank”>don’t work. Most are actually a mild form of self-flagellation. We list the things we “should” do that we didn’t do during the last year as if beating ourselves up for not having done them will result in a desired behavior modification. My sense is that for most people, little good comes of this, yet we repeat the rituals annually.

Companies go through a similarly strange year-end rituals. In the case of companies, the effort is focused on strategic planning and budgeting. The same reflection on the prior year, prediction of future events and goal-setting ensues and in many cases, with equally predictable results. Companies that simply go through the motions often rationalize prior years results, 2/ Make unreliable and sometimes unfounded predictions about the future and 3/ Set goals and objectives that are “shoulds”, rather than will-full organizational commitments.

I’m in search of ways to have these individual and corporate year-end rituals be more productive. I don’t yet have all of the answers. On the corporate side of the ledger, I know that I’ve seen the strategic planning and budgeting process executed well and very poorly. It really comes down to how the strategic planning and budgeting process inform the Company’s direction during the following year. Getting it right takes patience and intention.

Patience Over Rigidity

Patience is critical. January 1st is one of 365 days we could have chosen to begin our tracking of earth’s orbit around the sun. There is nothing special about January 1st, yet we treat that date as if it is fundamentally different from December 31st, 2014. The whole planning and budgeting calendar gets calibrated around delivering an approved budget by the start of a the new year. There is some merit in having deadlines for sure. But I’ve also seen too many companies rush through the planning and budgeting process because of arbitrary deadlines. I’m not suggesting that the planning and budgeting process shouldn’t have a sense of urgency; they should. But lets not pretend that the arbitrary dates we set for the planning a budgeting cycle are fundamental at the expense of thoroughness and solidarity. A management team must spend a lot of time together before they can gel around a strategy, developing the buy-in that is necessary for unified action. The process or driving organizational alignment doesn’t always fit into or nice, neat planning calendars.

I’ve also seen many occasions where a management team tries to force a breakthrough during the strategic planning process. My experience is that breakthroughs don’t happen during formal planning processes; they happen organically when they happen. Breakthroughs are inherently unpredictable. Companies need to be open to breakthroughs occurring organically outside of the formal planning process, rather than trying to force them according to schedule.

Seeing the flaws in the formal, calendarized planning and budgeting ritual leads me to think of strategy and fiscal management as an every-day activity, not a once a year activity. Strategic planning should come out of its “off-site” conference room hiding place and into the light of the every-day discussions between the members of a management team. When strategy is an every-day activity, the planning process becomes about tweaks and alignment rather than major breakthroughs.When strategy is brought into every-day discussions, there is no need for a forced breakthrough during a scheduled planning season.

The same goes for budgeting. Budgeting is worthwhile because it forces companies to think about resource allocation, that resource allocation needing to be aligned with a strategy. But budgets are of little predictive value. This is why I vastly prefer twelve month rolling forecasts, updated monthly. It is taboo to call each new monthly forecast a budget, but it is also incredibly constructive to take a renewed look at resource allocation every single month throughout the year. After all, there is no way your budget can account for everything that will happen (both within and outside your control) throughout the next twelve months.

I’ve seen too many cases where the budget becomes the numerical representation of the script. The rigidity of the traditional strategy and budgeting process can actually be counter-productive, creating a box that makes it difficult for a management team to navigate the year in a flexibly opportunistic fashion. It is hard to stay true to an intention when the numbers have you in a box.

Intention over Tactics

<span
style=”line-height: 1.5;”>Intention is hard to describe but easy to identify; but I increasingly feel it is imperative in both a corporate and personal setting. It’s akin to purpose. Some of the best descriptions of intention come from mindfulness practice. Deepak Chopra’s describes intention as follows:

<span
style=”color: #333333;”>Intention is the starting point of every dream… Everything that happens in the universe begins with intention… An intention is a directed impulse of consciousness that contains the seed form of that which you aim to create.

Powerful stuff. I want some of that in my day-to-day personal life and embedded in every company in which I’m an investor. Imagine what would be possible if a management team went into every work day with alignment on “a directed impulse that contains the seed form of that which you aim to create.”

The formal strategic planning literature would probably refer to this as <a
title=”strategic intent” href=”https://hbr.org/2005/07/strategic-intent” target=”_blank”>strategic intent, popularlized by Hamel and Prahalad:

Companies that have risen to global leadership over the past 20 years invariably began with ambitions that were out of all proportion to their resources and capabilities. But they created an obsession with winning at all levels of the organization and then sustained that obsession over the 10- to 20-year quest for global leadership. We term this obsession “strategic intent.”

At the same time, strategic intent is more than simply unfettered ambition. (Many companies possess an ambitious strategic intent yet fall short of their goals.) The concept also encompasses an active management process that includes focusing the organization’s attention on the essence of winning, motivating people by communicating the value of the target, leaving room for individual and team contributions, sustaining enthusiasm by providing new operational definitions as circumstances change, and using intent consistently to guide resource allocations.

What I like about strategic intent is that offers a clear statement of purpose for an organization without delving into the specific tactics that should be employed to achieve that purpose. But it is very hard for an organization to keep its attention on purpose, allowing the tactics to evolve as necessitated by circumstances. But rigidity in tactics is a death-knell in fast-moving markets. And this is the core of my beef with traditional strategic planning; I’ve seen too many cases where strategic planning becomes tactics planning where each and every move to be executed by a company throughout the year is “scripted”. Scripting tactics might work in a 30-90 day window, but beyond that, it is a futile effort. Worse, it is damaging if a management team and/or board feel obligated to have the company follow the script despite changes in circumstances.

Alignment and Flexible Opportunism

I don’t have all the answers for how to build more patience and intention into the strategic planning and budgeting process. But I know the desired outcome. I want a process that results in the organization being aligned on a core sense of purpose and creates a platform for the organization to be flexibly opportunistic. I’m not convinced that traditional strategic planning and budgeting are the right tools for the job. And so my search for the right tools, both in my personal and corporate life goes on.

In the meantime, be purposeful and adaptable in 2015. No matter what your strategy and budget say, the year will end well if you and your organization are purposeful and adaptable each and every day throughout the year.

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You missed your numbers. Now what?

By now, you should know where you stand relative to your 2013 budget. Hopefully, you made it or beat it. For some, the finally tally will show a “miss to the downside”. When i say miss, I’m referring to performance against the original budget – the one you put together in December 2012. Performance against the 2013 re-forecast you prepared mid-year (hopefully not multiple times throughout the year), isa separate matter. The fact that you had to re-forecast because of  downside miss is a signal in and of itself.

So, you missed; now what? The first thing you should do is ask yourself: Why?

There are too many reasons companies miss plan to list in one blog post. Some are legit; many err on the side of “excuses”. I think it is important to attribute misses to reasons over which management had some measure of control. If you can’t control it, you can’t make a change in your execution strategy that adjusts for it. All the other “reasons” are interesting, but aren’t particularly useful, with the exception of black-swan style macroeconomic shocks, which aren’t excuses but are facts of life.  To simplify, I break down reasons for missing plan into two categories – forecasting error and execution error.

Forecasting error

A budget is a forecast with a lot of moving parts. Sales productivity, unit prices, churn, cost of goods, sales and marketing expenses, headcount, compensation levels, the list goes on. I think it is a good discipline review your budget and determine which specific assumptions (if any) are at variance with actual performance. Forecasting error will show itself when there is an assumption in the budget that is at variance with actual performance, management could not have know that the forecast was wrong and the error can’t be attributed to execution error. For example, the fact that your sales reps produced 50% of the bookings per rep that you budgeted is more likely execution error than forecast error, particularly if you had good reason for setting the forecast at the chosen level. Some might argue that forecasting error isn’t within a management team’s control, to which I’d respond:

If management didn’t prepare the budget, who did?

Forecasts are entirely within management’s control. No-one knows more about the assumptions that go into building a budget than the management team that is steeped in the business. That said, a company’s performance against a budget may be affected by factors beyond management’s control, however, that type of miss is probably a different type of error. Forecasting error will happen at a higher rate in earlier stage businesses or businesses where a new management team has been brought in. In both cases, the process of developing the drivers for a forecast/budget may not have the benefit of significant historical data. In the absence of historical data, forecasting is a process of making informed guesses, many of which may turn out to be wrong.

Forecasting error also occurs when a management team “misses” a plan to the upside. This type of forecasting error is forgivable, but is equally important to correct over time.

Execution error

The alternative to forecasting error is execution error. By default, no matter the stage of your business, you should suspect execution error before forecasting error for any miss, unless you can prove to yourself beyond a shadow of a doubt that you executed well. Execution error takes many forms, all of which require corrective action. Where execution error is present, it is critical for a management team to be honest with themselves and to take corrective action. 

Differentiating between forecasting error and execution error?

You know it is forecasting error if:

  • There was little to no historical data to back up an assumption in the forecast;
  • You made efforts during the year to improve performance against the assumption, but without success; and
  • The miss can’t be attributed to execution error.

You know it is execution error if:

  • There was good historical data or sound reasoning to back up the assumption in the forecast, but you missed anyway;
  • Efforts to improve performance against the assumption had a positive impact during the year, execution improvements made an impact; and
  • Team members responsible for performance against the assumption are viewed as under-performing.

Is one worse than the other?

For me the answer is yes. I’m much more forgiving of forecasting error than I am execution error. The caveat being that, over time, management teams should be able to increase their forecasting accuracy (reduce forecasting error) with the accumulation of experience, knowledge and data about the dynamics of their company. Management teams that are unable to close the gap between forecast performance and actual performance over time aren’t learning and forecasting error and execution error become indistinguishable.

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