The annual business planning and budgeting exercises would start now, with preparations of forecasts, annual targets, resource allocations, templates and promises of visionary transformations. The epidemic that the world has been faced with during the last six months has resulted in businesses tumbling like nine pins, closing overnight, making a mockery of all the estimates and forecasts of the current year.
However, this offers an opportunity to make a clean break this year, and relook at the entire planning and budgeting process.
Change the purpose
The planning and budgeting system is to help senior executives predict what the company should do to deliver smooth performance and control activities to make sure employees conform to plans and deliver results.
However, more than delivering smooth performance (EPS growth) improving performance(ROI & earnings growth) has a much greater impact. It pays to plan for higher performance than for predictable earnings.
The traditional budgeting model is ineffective in periods of crisis. Historically, most of the businesses had to ditch their original plans to cope with uncertain market conditions brought about by epidemics, social unrest, military conflicts, terrorist attacks, financial shocks, environmental crisis. In such a scenario, long term forecasts will be unreliable, and sticking to original plans will be more dangerous.
Effective planning and budgeting define success as improving outcomes (customers, employees, community, investors) and not hitting targets. It focusses on learning, adapting, growing and not trying to predict the unpredictable. It tells the truth about forecasts, exposing the uncertainties and potential pivots and not pretend they are unthinkable.
Shift the focus to strategic success
During the budgeting process, typically the Finance head issues the financial targets and spending guidelines. When the final budget submissions are collated, it is typical to find that the total is way over the targets. Now the financial head prioritises the investments and trims the budget of various divisions to bring it within the targets set. This is an impressive feat but it hardly works out in reality as the business heads should decide their priority and it is their responsibility to bring it within the target set or justify the additional allocation in terms of the implied returns.
A better approach would be to turn the targeted outcomes into strategic portfolio guidelines that drive the budgeting and adaptation process. These guidelines force discussions that allocate resources based on strategy rather than from individual projects. Some typical questions the guidelines might rise
- What outcomes will be most important?
- In the light o these priorities, where should the resources go?
- What is the right balance towards incremental innovations and breakthroughs?
- How much to various customer segments?
- How much to distribution channels, sales, geographies, brands, business units, product lines?
- How much of technology resources is utilised towards keeping current systems running versus developing new features/ infrastructure?
- What hypothesis should be true to make this allocation work and how to test quickly and effectively?
When the decision-makers/ executives tag every investment with these strategic classifications, they may discover surprising patterns. By properly aligning with the resources with priorities, companies can see the tradeoffs that should be made. Executives responsible for outcomes should make resource trade-offs to achieve them. They should anticipate what can be cut without sacrificing objectives and how they should respond to unexpected results.
Plan faster and more frequently.
If budgets are inflexible and can't be adjusted, the person making it obsesses over its accuracy. But if we can adjust the forecast every quarter, month, or week we can improve the accuracy in less time and less effort. Setting bold targets and adjusting plans to incorporate valuable lessons is the best way to improve.
It should be understood that longterm - five-year business plans are hard to predict. However, business plans can describe an expected path, estimate uncertainty and a reasonable range of outcomes, clarify hypothesis behind predictions, check the validity of the hypothesis, change those that are wrong and adapt plans to achieve best possible results with the most accurate information.
For many, traditional planning and budgeting has a certain comfort factor built into it because of its familiarity and having used it before. it is hard to give it up. But precision is not accuracy and plans that are flexible enough to focus on what truly creates value are worth the discomfort.
An Agile Approach to Budgeting for Uncertain Times
by Darrell K. Rigby, Joost Spits and Steve Berez
HBR August 2020
Comments
Post a Comment