Well the end of the year is in sight. For most of us this means finding time to buy and wrap gifts, decorate our houses, bake cookies, and plan and attend parties. Against the soundtrack of ever-present holiday music, it is easy to understand why each year we need to be reminded of the lesson the Grinch taught us years ago – the real meaning of the holidays is something more important than presents, decorations and ‘roast beast’ – namely:  faith, family, friends and a celebration of one year ending and a new one beginning.

At many of our client companies, the year-end is also a flurry of activity – not gift-wrapping and hanging lights (although we do still hear stories of office holiday parties), but scrambling to meet year-end goals while reconciling and negotiating budgets for the upcoming year. Just like we busy consumers can forget “the true meaning of Christmas,” companies can lose sight of the fact that all this year-end work, while important and time-consuming, is not the reason for planning and by itself will not produce success. Solid business planning needs to be grounded in and solidly linked to the strategy – like any process, without good inputs, the outputs will be suspect. 

We were reminded of this recently when talking to a client whom we had worked with over a year ago to help develop their strategy. One of the key initiatives emerging from the strategy was growth through slightly modifying an existing product to create a new value proposition for an adjacent segment. The value proposition was compelling, but unproven; so, the first requirement was to develop some proof points with target customers in the new segment, even if this meant giving away a few prototypes of the modified product.

Unfortunately, with the strategy approved by the board, it largely sat on a shelf; and when budget season came around the goal to ‘develop proof points in target segment’ had become ‘target $x million in revenue in target segment.’ In addition, with product development budgets driven largely by inertia from the previous year, no dedicated funds were set aside to develop the necessary prototypes of the modified product. Like the children’s game of ‘telephone,’ the original intent of the strategy had been lost in translation.

The result was sadly predictable. Faced with a near term quota, the sales force focused on closing deals the only way they could – selling the products that already existed. With some serious discounting, they did manage to close one or two deals. But by the end of the year, they not only fell well short of the budgeted revenue number, they failed to learn anything about the new value proposition – only re-learning what they already knew – existing products were not a great value for this new segment.

From the perspective of the strategy, it was as if an entire year had been wasted. It might as well have been stolen from under the Christmas tree and “stuffed up the chimbley” by the Grinch before it was even unwrapped!

As we’ve said before, just having a strategy on paper is not enough – you have to translate your strategy into plans and actions that change the way people work. This point seems obvious but is too often missed given the massive inertia of the iterative and time-consuming budget processes at many companies. Some of the reasons for this disconnect are:

• Sometimes, strategies stop too short – ending with statements and reports, but not being fully translated into actions – often because producing a report for the board is seen as the goal of the strategy exercise. Without turning the strategy into clearly defined initiatives including resource needs, it is all but impossible to reconcile it with an annual plan and a budget.
• The starting point for the budget process is typically last year plus or minus a little, but strategic initiatives need to be properly funded. Unless those leading the budgeting process are fully versed and bought into the strategy, new initiatives can be overlooked and under-funded (or not funded at all!).
• As the above story illustrates, for all but the few who work closely on them, strategies can be forgotten; but budgets create incentives, and incentives define reality. At most companies, budgets set the constraints and the targets that feed directly into performance reviews, so it is no wonder budgets garner so much more attention than the important but easily overlooked work of defining the actions required to implement the strategy.
• Budget processes are largely about negotiation – stretch goals and the like. But negotiation reflects compromise – the enemy of strategy. If the strategy is not consciously funded outside of this often well-choreographed negotiation process, it will inevitably be twisted and/or whittled away as compromises and concessions are made to ‘make the numbers tie.’
• Lastly, budgets can be rolled up, reconciled and tied out to the penny. Strategies are rarely this neat. In fact, we have argued before that good strategies should be robust, NOT precise, focusing on validating key assumptions and confirming new markets are ‘big enough,’ not sizing new opportunities with budgetary accuracy.

It doesn’t have to be this way. Budgeting and annual planning can be completely reconciled with implementing a winning strategy. We have uncovered a few of the ingredients to make this integration successful:

• First, communicate the strategy broadly and frequently and make it part of the ongoing dialog and an introduction to most business decisions. Strategically guided companies never lose sight of the “why?” behind what they are doing, even when they are developing and documenting budgets.
• Second, acknowledge the limits of budgets – specifically your sales target is not a ‘budget,’ it is a forecast. And one thing we know about forecasts is that they are always wrong. In fact, given the pressure to grow revenue, sales forecasts are not only wrong, but very often biased to be too high. One wonders how much time is wasted discussing missed ‘sales quotas’ (and evaluating salespeople and managers by this metric), when the real issue is a sales forecast that was too high given the actual market conditions. The converse can be true also! If strategy isn’t guiding the discussion, budgets and targets may be too low, declaring success when in fact, ignoring growth opportunities in historically overlooked products or segments.
• While budgets should be used to manage spending, in many cases it can be destructive to turn budget numbers into what economists call ‘bright line incentives,’ e.g. “Make your number and you are a hero, miss it by a dollar and you get no bonus (or maybe a membership in the jelly of the month club?)” These types of incentives create unnecessary stress and often lead to unproductive behavior like stealing sales from another division, or excessive discounting to get wholesalers to stock up – destructive games that would make the Grinch proud!
• While most budgeting activity is around your current stable businesses, don’t forget to create discretionary budgets for strategic initiatives. There is no surer way to doom a strategy to failure than to have it be resourced only as something people can work on in their spare time.
• Lastly, once approved, these strategic initiative budgets should come with reasonably few strings attached. Accountability should be managed with separate tracking mechanisms for strategic projects. Often this includes a separate meeting cadence devoted just to progress against the strategy and necessary adjustments. This may be necessary to stay focused on what are we learning and prevent every leadership team meeting from devolving into ‘what are we doing to make this quarter (or month!)?’

As you read this, we hope that your budgets are set for the new year and that you can enjoy some well-earned time away from work.  In the process, we also hope that you have been able to incorporate some of the above lessons and have budgets that reinforce your strategy, not undermine it. As you get ready to enjoy your chosen holiday celebrations with family and friends, we can do no better than to paraphrase the Grinch:

“Maybe strategy, he thought, doesn’t come from a budget. Maybe strategy, perhaps, means a little bit more”

Grinch Photo Credit: Lisa Zins on Flickr