The link between a company’s strategy and the long-range planning process, which culminates in their annual budget, has always been, to put it nicely, a very loose one. For those of us close to the planning process, this has been a well-known problem for a long time. Yet we continue to be surprised when we find that companies cannot seem to execute on their long-term aspirations. A research study featured in the March 2012 McKinsey Quarterly titled, How to Put Your Money Where Your Strategy Is quantifies the impact of the strategy and execution gap and concludes that closing the gap requires more than corporate determination — it requires the application of analytical insight necessary to make the right decisions.
The problem can be easily summarized. All companies create strategic goals but few companies use their long-range planning process to translate these strategic goals into actionable departmental based budgets. When it comes time to create an annual budget, most companies allocate their resources in roughly the same way they did in the previous year. Over time, this process virtually assures that the company will never meet its strategic aspirations.
This problem is not a secret. I can recall a recent, specific conversation the Planview team held with a prominent analyst who covers software applications used by finance departments. He highlighted this strategy-budgeting gap as one of the major issues facing companies today. I asked him how to go about quantifying the market for solution-based approaches. He started his answer by saying, “Well, just assume that almost every company of a certain size has this problem…” — a recognition of how truly common this problem is.
The new McKinsey study has quantified the problem and the impact. The authors noted in their summary, “Most companies allocate the same resources to the same business units year after year. That makes it difficult to realize strategic goals and undermines performance” (2012, p.1). The authors found a few companies that did reallocate their budgets, and then compared the results of those companies with the results of companies who made minor tweaks to their budgets. They found that over time, the companies who made the budget reallocations “earned, on average, 30 percent higher total returns to shareholders (TRS) annually” than those who did not (2012, p.3).
How can a company link its corporate strategies to execution? What can a company do to make more significant and appropriate changes in its annual budgeting process? I found it interesting that the authors recommend that a company should use all available resource reallocation tools (Hall, Lovallo & Musters, 2012). They make the assumption in the article that a company has resource allocation tools available in the first place. And in my experience, most companies do not.
To allocate resources appropriately in an annual budgeting process, the feature required is called “optimization.” Finding a tool that performs optimizations of resources according to a firm’s strategic objectives is using the right tool for the job. Selecting a tool that enables budget optimization will help a company develop annual departmental budgets that allow a company to execute on its corporate aspirations and realize significantly higher shareholder returns. For further information on this topic read The 15 Pitfalls of Long-Range Planning.
Part II of this series examines the “Optimization” feature in detail, and discusses how to use optimization in your planning process. I’d like to hear from you. How are you closing the gap between strategy and execution? What methods are working and which ones are not? Share your experiences by leaving a comment below.
Hall, S., Lovallo, D., & Musters , R. (2012). How to put your money where your strategy is. McKinsey Quarterly