Annual budgetary planning is spreadsheet-based, laborious, highly iterative, and everybody hates it. Follow the money to improve visibility, dialog, and expectations.
Annual planning.
Annual budgetary planning.
Annual strategic budgetary planning.
Annual strategic budgetary planning and review.
For every word we add to the title, we add two months to the effort, right? Does it have to be this time-intensive? The decisions we make in this exercise are - without a doubt - critical to the business, but still… why does it often feel so inefficient (in the moment), and so ineffective (during the year)?
First, let’s acknowledge that it’s a difficult thing to do.
The challenge of bringing strategy and financial forecasting together, to drive investments and priorities for the coming fiscal year, demands exceptional domain knowledge, creativity, financial acumen, and bold courage. This is a lot to ask (or find) in one leader… so we tend to do it in groups and tap into the strengths across a full leadership team. It’s also a great way to bring in different perspectives and opinions to challenge existing beliefs.
But how can we attack this challenge, without getting consumed by it from May through December every year?
In a nutshell, we need to be clear about how strategic development feeds budgetary planning. Good strategy is an input to good planning, and when strategic choices are clear up front, less deliberation is required in the planning of budgets. Yes, it will need to be iterative, but they shouldn’t start at the same time, with two blank sheets of paper.
Let’s assume that a strategic exploration has already happened, and yielded some choices that chart a path or direction for investment in the coming fiscal year <link to other demo>.
With that as an input, here is one approach to building a coherent operating plan, to support performance management in the coming year.
If you are working to decentralize the planning, to empower teams and front-line leaders and reduce the overhead of the overall planning effort, then you’ll also want to review how you divide up decision authority (and budget authority) across your extended leadership team. Where are the boundaries? What are the responsibilities? Which teams serve (or support) which other teams?
In the book, “Beyond Budgeting”, authors Jeremy Hope and Robin Fraser outlined some principles that they saw in organizations that had improved their strategic budget planning activities:
Whether “teams” as referenced here are a classic “two-pizza”-sized product team, or small shared service group, these principles can drive the behaviors in the planning exercise, to drive higher engagement and a shorter cycle time.
While you hear a lot about “running the exercise as a project”, the real key is to define the effort in terms ot the decisions that need to be made. Let’s call it a “campaign” to heighten the significance of the decisions, and specify the exact timeline and scope of the organization that is involved. We should also create some structure around how we will have discussions around these decisions. Just putting meetings on the calendar is a recipe for trouble. Figure out how to combine asynchronous dialog with synchronous meetings to drive effective (and efficient) dialog. This is more than just good agendas.
The campaign is framed as a series of decisions-to-make for the organization(s). Decisions like:
Start with a retrospective look at the choices made in the previous year. Organize the budget and spending in categories that are meaningful to the finance team (i.e. let them create the spreadsheet template). How did the actual spending compare to the expected spending defined in the allocated budgets?
Organize this information in views that serve as a good baseline for the planning that will follow.
One of the principles cited above seeks to create a high-performance culture, by making the idea of success more visible at each level in the organization. This starts with a hard look at how success was defined in the previous year (if at all), and how it was measured (e.g. with key performance indicators or KPIs).
Key performance indicators can help keep the operations for the organization running successfully (i.e. KPIs staying steady, within control limits) while also tracking improvement from change efforts (i.e. KPIs trending to better values).
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KPIs can also help leaders tell the story of how their efforts at change will fuel other organizations’ need for change. That is, if one metric trends better, they will say, the other related metric should have a chance to improve as well.
Choosing KPIs is an art and a science, though, and the re-evaluation of these choices of metrics can be part of this annual review. Is the coupling between the measure, and our concept of success still strong? When goals are built with references to fixed targets, then dysfunction (e.g. “gaming the system”) can thwart performance management efforts. When KPIs are constructed as ratios (e.g. MAU, throughput, or cost-per-unit), goals can be more robust.
When performance can vary across your operating landscape, it can be useful to create a Performance Matrix to set different targets for different combinations of offers (i.e. products) and segments (ie. markets). This can apply to internal functions as well, who set different targets for their offers (as different services) to different segments (internal consumers or “customers”).
If you set targets last year, now is the time to review the performance towards that definition of success. Given the spending from the budget last year, what kind of “bang for the buck” did we get?
Good performance, at a good cost structure, is our aim. We study this baseline to identify where changes might be desired in either the cost structure (larger or smaller budget) or expected performance (larger or steady improvement).
Sometimes this is best done as a collection of questions raised by the baseline data. The answers are rarely due to a single cause or factor, and the dialog around the data is where the value lies (and insights will emerge). Pose a set of questions and ask front-line leaders to help explore answers (i.e. build a FAQ). This can serve as a resource for the work that follows, helping to build a shared understanding across the leadership team.
It’s also a good opportunity to reinforce principles around continuous improvement and waste reduction. In a culture of high-performance, leaders are continuously pursuing the removal of waste from their workflows and improvement in their operations. Prior baselines should show evidence of this. Do they?
In addition to local continuous improvement, there will be top-level mandate for strategic change. Sometimes these are funded mandates. Sometimes they are unfunded, and organizations are expected to drive the change efforts within their own budgetary constraints. Review the high-level strategic direction and goals, and explore the impact and needs.
These objectives, and the strategic intent behind them, should arrive as clearly-defined choices and serve as inputs to your campaign. Also recognize that you will already have some strategic initiatives in progress (carry-over from the prior year).
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Once you’ve determined that the strategic objectives will need to drive work in your organization, consider the magnitude. Will an unfunded mandate consume most of your expected change budget for the coming year? Will you need more resources? Will you need to cancel an existing (in-progress) initiative? Which upcoming quarter can/should work begin on the objective? Do these new objectives drive your KPIs to better values? Or threaten performance in some areas?
Generally, top-level strategic objectives will need to be prioritized over local initiatives. What might be the effect on your performance in the coming year?
Finally, it’s time to build a plan that brings together the strategic needs, the expectations around performance, and the resources needed to accomplish both. For the teams, product organizations, and shared services that you fund, respect their decision and budgetary authority by delegating this part of the exercise, then rolling it up.
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Encourage the identification of challenges that emerge with these new constraints. Strategic work is iterative, and just because the high-level strategic intent is clear will not mean that your organization’s strategy is complete. The hardest trade-off decisions come next. You’ll need to make local strategic choices to build your local strategic budgetary plans. Don’t expect others to do it for you.
Articulate the tradeoffs so that you can communicate clear narratives when there are significant “asks” (for more resources). Leave room for emergent opportunities, to support a principle of emergent strategy (i.e. in more uncertain contexts). You might want to explore multiple, parallel scenarios <link> in this campaign, evaluating the relative merits of scenarios built on different assumptions or beliefs.
Clarify how changes to the plan can be executed during the upcoming year. Can you pursue new opportunities and ask for more resources mid-year? Or will you be tracked and evaluated against the variance from this soon-to-be-baselined plan? How would a new “ask” work, after the campaign is finished?
Your proposal should be in a format that is “finance-team friendly”. If they provide the template, then seek to understand their terms, and how they are used to build financial plans and feed the balance sheet.
Building a budget requires tough trade-off decisions. Frame your exploration and analysis in this way to “show your work” and invite input to the decision-making, where desired. A strong decision architecture <link> can help here, so that all leaders understand where to draw the line between relying on conviction (going “from the gut”) and opening up a dialog (with more deliberation and analysis).
Example trade-off decisions include:
Some of these decisions will involve leaders outside your immediate leadership team. This is where the well-framed trade-off decision will be essential; the decision will sometimes need to be escalated to find the right level of authority.
Decisions will close with a communicated choice (from the options) and a commitment from stakeholders (identified up front). And yes, sometimes you need a meeting for that. Just make it a good one.
There will be others outside the meeting with an interest in the finalized budget plan. Circulate a presentation, in the style that it most desired by those consuming the information. That is, make it easy for them to understand the plan, and the choices made. Emphasize the relationships between the choices made, and the impact that might have on other organizations (since they are the likely audience).
These plans are taken by the finance team and loaded up in the financial systems-of-record, to drive accounting during the year. Recognize the commitments you and made, and the risks you are carrying. Build proactive mitigation plans, and hopefully, you’ve left some room in the budget to execute them.
If this feels like a big responsibility, well it is!
And there is a lot to stay on top of, more than you can do in your head. You’ll want to rely on strong information systems to close tight learning (or feedback) loops, and enlist your full extended leadership team in the work of governance. They say that the budgetary plan is usually out-of-date the moment it gets finalized, but the learning that happens during the campaign has value. And good operating plans can (and should) adjust to adaptive strategies, with the right policies and systems in place.
You won’t get there overnight, but you can start to improve your next campaign right now.
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