Through hundreds of sessions like these across dozens of industries, we've identified four best practices to make your budgeting and planning process much more effective and less dependent on illusory projections.
First, set expectations in advance. These sessions should focus on answering some very specific questions in order to allocate resources appropriately. Using a common template will focus each discussion and should simplify apples-to-apples comparisons of both the resources required and the expected results across multiple business units. Make it clear that projections of all types, including the famous hockey stick, need to be supported by facts, and that any key assumptions behind the projections must be detailed. While most of the actual session should focus on the structured discussion, leave adequate time for dialogue and a question and answer period that could take the discussion in any direction.
A second best practice is to build the case for each business unit starting from market demand and working back to internal cost, capacity and capability measures. As simple as this may sound, many of these processes start from internal considerations and only briefly touch on external demand at the end. A really useful fact base about demand goes beyond the "whats" and provides insights into the "whys." Why is demand projected to increase or decrease? Why will we get more than our fair share of the available demand? Why are customers buying in the first place? Given customers' demands, why will our offers win with them instead of our competitors' offers?
This demand context is the starting point needed to ensure that each business unit has realistic projections for ongoing growth and profitability. These analyses should be completed prior to the actual budgeting and planning discussions and should be provided as pre-work in advance of the actual sessions. Once market demand and its key drivers have been established in detail, the discussion can pivot to your supply and its critical internal enablers such as cost position and capabilities. Bringing both the demand and supply elements of the equation together provides the input for more informed decisions while avoiding the pitfall of assuming demand is a "given" that requires little or no discussion.
Next, define the strategic role each business unit plays in the overall portfolio. One way to do this is to use a simple 2 X 3 "Portfolio Matrix" for which the horizontal axis is "Growth Potential" and the vertical axis is "Economics". On the growth potential axis we typically have the leadership team define one boundary between high and low growth potential. For example, the boundary might be above or below average industry or category growth. Or it might be the difference between growing above or below population growth, GDP or the inflation rate. For the economics axis, we usually have the leadership team define high, medium and low levels of performance. The economic assessment reflects the profitability of the business or brand both in terms of margin percentage and absolute dollars generated in order to factor in the scale of the business relative to other business units.
Ideally, each business unit would have the data it needs to plot itself within the six possible roles in the portfolio matrix prior to the budgeting and planning discussions. These roles range from "Growth Engine" to "Manage for Cash" to "Divest," among others. From this initial role assignment, the actual discussions of each business unit may result in reassigning some, all, or none of the business units to different roles within the portfolio matrix.
Regardless of how you decide to define the roles for each business unit, each should have a clear role, and these roles should be transparent to everyone in the budgeting and planning process. Importantly, everyone participating in the process should understand the role for each business unit, how that role was determined and how roles could be changed based on the inputs to and discussions during the budgeting and planning process.
Finally, the actual resource allocation decision should be done vertically rather than horizontally. Too many businesses take a horizontal approach in which resources are spread almost evenly across all of their business units like peanut butter. Before the budgeting and planning process begins, everyone involved should know that a vertical resource allocation approach will be used. That is, resources will NOT be spread evenly and will NOT simply reflect last year's budget plus inflation. Instead, a vertical approach means that those business units that are the top drivers of profits and growth as determined in the 2 x 3 matrix will be fully funded before moving down the list. Business units at the bottom of the list will receive what remains in the budget, if anything.
After the process is completed, all of the participants should know what resources were allocated to each business unit and why. The purpose is to drive understanding and alignment as to why resources were allocated as they were, what performance expectations are going forward, and how changes in performance can change resource allocations in the future.