With the start of school and the cooling temperatures of autumn in the northern hemisphere comes another milestone: the commencement of annual business planning and budgeting.
This year, rather than double down on fortunetelling, some companies are starting to consider a different approach. Even as companies deploy generative artificial intelligence tools to improve forecasting, the world remains uncertain, and assumptions about the next 12 to 15 months are likely to require updating, if not summary revision.
At the height of the pandemic, when only a clairvoyant could have made an accurate 12-month business plan, my Bain & Company colleagues Darrell Rigby, Joost Spits, and Steve Berez wrote an article for Harvard Business Review offering a more agile approach. While we are no longer in the grips of a global health crisis, long-established processes feel increasingly outdated, cumbersome, and ill-suited to the more dynamic environment around us. In a world in flux, agility feels more needed today than ever.
Companies can fundamentally reimagine and improve their planning and budgeting processes by doing three things:
1. Change the purpose of the planning and budgeting exercise.
Rather than try to more perfectly smooth earnings—something Bain research finds has relatively little impact on shareholder returns—companies should plan for better performance.
They can do this in three ways. First, by defining success as improving outcomes for customers, employees, investors, and communities—not just hitting budgets. Then, by focusing on learning, adapting, and growing rather than trying to predict the unpredictable. And, finally, by telling the truth about forecasts and exposing honest uncertainties as opposed to pretending they are unthinkable.
Consider the shift in planning launched this year by a major consumer products company. Instead of the usual present-forward thinking that traditionally went into its annual and three-year planning processes, the company now asks a much more challenging question: “What could be the full potential of our business in 2030 or 2040, even?” This encourages the team to raise its ambition, to think future-back, and to focus on performance, including how to better serve customers, drive breakthrough innovation, and stay ahead of the competition. The purpose of their regular planning and budgeting exercise is now much different.
2. Shift the focus away from financial precision and toward strategic success.
This turns the targeted outcomes developed in step one into strategic portfolio guidelines for determining budgets and adaptation.
These guidelines force discussions that ground the allocation of resources in strategy, rather than individual projects. Questions this process might raise include: Which outcomes will be most important for strategic success? And, in light of those priorities, where should resources go? By properly aligning resources with strategic priorities, companies can more clearly see the tough tradeoffs that should be made.
Amazon has famously reinvented its budget process to make it more strategic by putting customer priorities at its center. The company allocates funding to activities, not business units, with each activity evaluated on how it affects customers. The owner of each new activity creates a six-page planning document that contains a future press release describing the benefits to customers. Unlike traditional management reviews that focus on financial metrics, Amazon’s focus on real-time customer metrics.
3. Plan faster and more frequently.
Japanese companies are particularly well-known for their rigid and detailed three-year plans, but they are not alone. In today’s rapidly changing world, such plans can quickly become out-of-date, no matter your country.
When you can adjust a long-term forecast every quarter, or every month, it becomes more accurate in less time and with less effort. By setting bold, challenging objectives, and then adjusting plans to incorporate valuable lessons learned along the way, companies can more quickly pivot when business conditions change. There’s an art and science to balancing the need for long-term strategic investment with the flexibility to adjust along the way.
In my own industry of professional services, there is a certain degree of volatility built into the business model. Project-based work can be up and down. At the same time, recruiting and other decisions about investing in people usually must be made before we can have full visibility into customer demand. In such situations, it’s helpful to think about swim lanes. In the Olympics, swimmers must stay in their lane. There is only so much latitude to move right or left. Similarly, if short- to medium-term business momentum argues for dialing up or dialing down capacity, there is some room for adjustment, but only within the parameters designed to keep the business true to its multi-year strategy and objectives. This discipline reduces the risk of reacting too aggressively by going out of the established strategic swim lanes and introducing longer-term problems for the business.
For most companies, traditional planning and budgeting has a comfortable certainty that can be hard to give up, but there is a better way. Companies like Toyota and Maersk are taking the leap, embracing alternatives to traditional annual budgeting that build more dynamic financial plans. The flexibility of these plans helps companies focus on what truly creates value, and that’s key to changing an annual ritual into something that works in today’s world of environmental, geopolitical, supply chain, and technological challenges.