How to build a good plan – and when to ignore it

The Basics

I believe planning serves three primary purposes:

  1. Establishes, builds consensus around, and communicates a set of goals for a company
  2. Creates accountability for the senior executive team around an agreed set of goals for the company
  3. Provides a framework from which to create a budget against which to operate the company

If you have a plan which represents the result of real examination of goals by the executive team and a budget that flows from that plan, you’re already in at least the 75th percentile of planning and budgeting.

My friend Dave Kellogg has a good blog post on budgeting that’s worth reading; I also like Chip Hazard’s thoughts on the topic (good that I like his approach because he’s on the board of 10gen).

Now that you have a good plan, when do you ignore it?

You need to periodically review results versus plan, and based on what you see, revise your objectives. If you’re running ahead of plan and believe you can productively deploy them, hire more people. If you’re running behind, sometimes you’ll want to cut some hires (but not always). Do this review frequently . Using this approach, I was able to take a (people-based) consulting organization which was planned for 30% growth and deliver 90% growth.

How frequently can you re-assess? If you get meaningful objective results monthly, I’d make small tweaks every month and take a hard look every quarter. If your meaningful results come in quarterly, I’d make small tweaks quarterly and make a significant mid-year plan revision.

How dynamic should you be? That’s a bit harder. There are a number of factors to consider:

  • How confident are you that incremental resource will yield incremental results
  • What’s the ramp time to see those results
  • What’s the financial impact of adding those resources, not just on top line but on margins and on cash? Of course for different businesses the relative importance will differ, but you should understand all 3 impacts before you make a major plan revision

One rule of thumb that I use is that I’ll typically spread my changes over two planning periods. If my business generates $2 million extra in a given quarter versus plan and I want to reinvest all of it in growth, I’ll add $1 million in incremental expense in each of the next 2 quarters.

Some of this is financial and quantitative; some involves more market and organizational judgement. There have been teams where I didn’t re-invest because I thought the leadership was at the breaking point and needed time to ramp the previous set of hires before adding more. There have been teams where I didn’t re-invest because I believed the success was a fluke and I wanted to see it sustained longer before I thought there was potential to profitably grow that market. Note in both these cases I delayed the change, but I didn’t kill it. If you start deciding that the market is tapped out and you can’t re-invest, how will you know if you’re wrong?

While I’ve talked here primarily about overperformance in companies oriented primarily towards growth, similar principles apply to other situations – but I’m hoping all your planning problems are over-performance related.

Good luck,

— Max

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