Annual planning in four minutes: put the choices before the budget
In annual planning, whatever gets decided first becomes the strategy. If budgets are set before the offsite, the budget makes the choices for you. Here is the order that lets the money follow the strategy, and the mid-year refresh that keeps it honest.
Transcript
Picture a coatings maker with $900 million in revenue. It is invented, but you have met it. At its October offsite, the executives make two real decisions: exit a low-margin segment, and invest in aerospace.
Neither survives the winter. The units submitted their budgets in September. The industrial budget assumes flat volume in the segment being exited. Aerospace has no money. By March, both decisions are back on the table.
The documents were all there, in the wrong order. Here is the whole argument. In annual planning, whatever gets decided first becomes the strategy. If the budget goes first, the budget is your strategy.
Michael Mankins and Richard Steele surveyed executives at 156 large companies. At 66% of them, planning was a periodic event, often a precursor to budgeting. Only 11% of the executives strongly believed planning was worth the effort.
Annual planning ties three documents together. The strategy: where to compete and how to win. The strategic plan: objectives, initiatives and investment over three to five years. The operating plan: next year's targets, budget and owners. Build them in that order, and the money follows the choices.
Why does the budget usually win? It is the only one with a hard deadline and a consequence. The board must approve it before January. Bonuses hang on it. The strategy has neither.
So fix the order. In this illustrative calendar, spring builds the fact base and the issue list. Briefing papers go out in May. The June offsite decides each issue. August sends units their guidance letter. Only then do they build budgets.
Mankins and Steele say unit-by-unit reviews often amount to little more than business tourism. So build the offsite around issues. Skip the presentations. Spend the time on debate. Write down each decision and its owner. Then close with what you will stop doing. If that list is empty, the offsite has not made strategy.
Next, the handoff. Inside a unit's budget, a strategic initiative competes with this quarter's needs, and this quarter almost always wins. Robert Kaplan and David Norton propose funding strategic initiatives as their own category. Then they no longer have to win that fight.
And once a year is too slow. Mankins and Steele found that companies on an annual calendar spent less than nine weeks a year on strategy development. Fewer than 10% of the companies had a disciplined way to respond to outside change.
So add a mid-year refresh with three questions. Are the assumptions still true? Should any funded initiative stop, by the kill criteria agreed when it was funded? Does the forecast change what we fund? If so, move the money now.
The fair objection: markets do not move on a fiscal calendar. True, but the fiscal year and board approval impose a yearly rhythm anyway. So split when decisions are made from when money is locked in. Textron spread its strategy dialogues through the year. The budget then funds decisions already made.
On Monday, find two dates: the day your strategy decisions are made, and the day budget guidance goes out. If the second comes first, you know which document runs your company. Swap them.
