Over my many years of working with clients in the area of strategy development and business planning, I am frequently asked which approach to business planning is better, top down or bottom up? My response is that there are pros and cons to each and that they are not mutually exclusive.
Bottom up business planning certainly engages the people who are accountable for delivering results. However, if left totally to the ‘engine’ room, management are likely to find that:
- The past will generally be used as proxy for the future which may mean that a percentage (normally around 10%) is used as a measure for future growth; and
- Because most of us are risk averse and are scared of failing, targets are usually set too low.
On the other hand, when senior management exclusively sets top down business planning parameters, they tend to be too optimistic and demanding. If those responsible for achieving the results feel that:
- The objectives or goals are unrealistic; and/or
- The parameters are imposed upon them, …..
… they are unlikely to commit. In fact, they are more likely to push back and resist either overtly or covertly
Either approach used exclusively will generally result in a suboptimal outcome. Therefore, I recommend the following 4 Step Process:
Lose the Anchors
Our mind is the biggest factor in limiting our potential success. Firstly, we all want to feel safe. We subconsciously examine the trade-off between likely pain (downside) and gain (upside) of every decision we make. Most of us will opt for the easy path and not expose our potential vulnerabilities. Secondly, we tend to be ‘creatures of habit’, who find it difficult to ‘think outside the box’ and examine possibilities beyond our day-to-day realities.
For these reasons, we anchor our future in our past. We use our past experience of life and assume it will continue in a linear way. The truth is that we live in a non-linear dynamic and turbulent world where change has become a constant and the pace of change is accelerating. Applying linear thinking to this kind of environment is neither logical nor rational.
How do we lose these anchors that limit our beliefs? Prepare three questions on any global topic (not necessarily business specific) that have a number that contextualises the quantum of the question. For example, “Provide your best estimate of what you think the exchange rate between the Euro and the US Dollar will be in 2018 – above or below (insert a number)”. Agree a low and high number for each question. Put senior and middle management in a room and hand out the three questions at random to them so that half receive the low number and half the high number. Collate the results to demonstrate experientially how seeding a thought results in using that thought as an anchor for the future. This exercise assists people to understand how their thought processes inhibit their ability to achieve great things and open their minds to big hairy audacious goals (BHAGS).
Mutually Agree Key Planning Parameters
Because senior management want to look good and middle management wants to avoid looking bad, it is a good idea to have the two groups constructively debate and agree what is plausible and possible. Once agreed, the group can lock in key planning parameters around things like:
- Compound annual growth rates (CAGR);
- Gross Profit Margins (GP);
- Earnings before interest, tax, depreciation and amortisation (EBITDA);
- Return on capital invested (ROI or ROIC) etc.
Scenarios allow management to consider a range of potential possibilities and outcomes. At the very least, three potential business planning scenarios should be constructed.
- The key planning parameters are applied to develop the most probable or likely business-planning scenario. This is the level of activity that all parties are prepared to accept as reasonable.
- BHAGS are deployed to construct the most optimistic or aggressive business-planning scenario. Achieving this level of activity represents the stretch targets that all parties strive to achieve.
- Imputing potential impact of critical uncertainties and unintended consequences that could be negative game changers will deliver the pessimistic scenario. This is the downside that all parties want to avoid. Should this scenario materialise, everyone will be better positioned to respond quickly and aggressively to limit the downside and mitigate risks.
The trap that many organisations fall into is preparing a business plan that lands up in the bottom drawer. Once completed, the business plan should help the organisation navigate from its current reality to its preferred future reality. To do this, all parties need to use the three scenarios as a ‘living document’ that is referred to, reviewed and monitored regularly. By using the business plan as a benchmark for current and future performance, we are able to:
- Recalibrate the parameters to align with a changing operating environment; and/or;
- Agree tactics and actions to quickly bring actual performance back to the plan. Rapid acknowledgment of negative variances is imperative as it is easier to take action to rectify small variances than it is to bridge huge gaps.
The schematic is a positive closed iterative loop. This means that business planning is an integrated, dynamic process that should live in the hearts and minds of all participants. Business planning is not a once a year activity. It is a year round imperative.
By following the suggested 4 Step approach to business planning you will combine both the top down and bottom up approaches to achieve better engagement, commitment and more favourable sustainable outcomes.