“I want to skate to where the puck is going, not where it has been.” – Wayne Gretzky
Disruption in business means the puck is no longer where it once was. That disruption can come from competitors and the market, as well as other internal and external events. The question is how can an organization – through the Office of Finance – manage the disruption and uncover greater business opportunities? How can the Office of Finance get the organization to where the puck is going?
The answer is activity-based planning – an ongoing process to determine activity and resource requirements (both financial and operational) based on the ongoing demand of our customers. Organizations have a near limitless opportunity to satisfy customer need, but very limited capacity to do so profitably. Leadership needs to aggregate all the data on these opportunities and decide where to invest. What activities will be the most profitable and offer the fastest/longest term growth for the group? Where can the organization slash expenses without damaging that goal of satisfying customer need?
Why is activity-based planning more powerful than historical planning?
People want a silver bullet for budgeting. Guess what – it doesn’t exist. What is clear, though, is that what we spend our time on has a deeper effect on business than anything else does. The lion’s share of success is completely within our control. Activity-based planning enables you to analyze where you are investing resources and how those resources are impacting the organization – either positively or negatively. Activity-based planning also allows you to compare resource requirements to resources available. You can identify capacity issues and capitalize on them.
When you perform historical planning, you analyze what happened and make assumptions that what happened in the past will continue to occur. Product line X has been profitable (or unprofitable) for the past Y number of years, so we plan for that to happen again. Given the last two years of business instability, it may not be wise to assume the status quo will continue.
A lot of planning is understanding where we put our time and focus on and finding out what’s had a positive effect – and then doubling or tripling down on that. It enables you to decide where to put resources and how many resources to use.
Dangers of Siloed Planning
This doesn’t work if departmental planning happens in siloes. When different departments work in siloes, it is problematic. Each department is trying to improve the historical trajectory, which is great, but if all sides are pulling in different directions you can’t expect positive movement. The departments must work in concert. There needs to be a strategic decision across the enterprise on where it will invest in.
For example, say your organization decides to invest in marketing because that’s what’s making a difference. That investment only works if other departments plan accordingly. Sales needs to invest in how it’s going to follow up on that marketing. Product needs to spend its R&D money in a way that’s more cost worthy. Everyone needs to work together to move the more profitable, faster growing portion of the business. What happened in the past is not necessarily the best way to plan for this type of growth. The way for hockey teams to win the game is to work together more effectively than the other team does – while focusing on scoring goals, preventing goals scored against us, and keeping our most effective players out of the penalty box. If the team isn’t working well together – not passing effectively, etc. – there’s less chance of winning the game.
Let’s go back to that old saw from Wayne Gretzky – do you want to be where the puck is going? Or where the puck was? Activity-based planning will take you there. Historical planning will not.