Category Archives: Budgeting

Video of my Host Analytics World 2015 Keynote Presentantion

Thanks to the 700+ folks who attended my keynote address at last week’s Host Analytics World 2015 conference in San Francisco.  We were thrilled with the event and thank everyone — customers, partners, and staff — who made it all possible.

Below is a 76-minute video of the keynote presentation I gave at the event. Enjoy!  And please mark your calendars now for next year’s Host Analytics World — May 9 through May 12, 2016 — in San Francisco.

Host Analytics Rocks the New Ovum Decision Matrix for EPM

Every leading industry analyst firm has their own 2×2 matrix — Garter has the magic quadrant, Forrester has the wave, and Ovum has the decision matrix.

The intent of each of these graphical devices is the same:  to provide a simple picture that selects the top vendors in a category and positions them by (1) a rating on the quality of their strategy and (2) a rating on the quality of the execution of their strategy.

While the ratings are inherently subjective, each customers has his/her own unique requirements, and “your mileage may vary,” these matrices are useful tools in helping customers make IT supplier decisions.

To start with a brief word from our sponsor, I’m pleased to note that:

  • Host Analytics is the best-positioned cloud EPM vendor on Gartner’s magic quadrant for what they call CPM (corporate performance management.)
  • Host Analytics is the only cloud vendor in the leaders segment on Forrester’s wave for what they call FPM (financial performance management).

While the temptation is to immediately examine small positioning deltas of the charted vendors (as I just did above), I’d note that one of the best uses of these diagrams is to instead look at who’s not there.  For example,

  • Anaplan is omitted from Gartner’s MQ, Forrester’s Wave, and Ovum’s DM.  I believe this is because they come to market with a value proposition more around platform than app, and that most analysts and customers define EPM as an applications market.  In plain English:  there is a difference between saying “you can build an X using our stuff” and “we have built an X and can sell you one.”
  • Tidemark is present on Forrester’s wave, but omitted from both the Gartner MQ and the Ovum DM.  I believe this is because of I what I’d characterize as “strategic schizophrenia” on Tidemark’s part with an initial message (back in the Proferi era) around EPM/GRC convergence, followed by an enterprise analytics message (e.g., infographics, visualization) with a strong dose of SoLoMo, which bowed to Sand Hill Road sexiness if not actual financial customer demand.  Lost in the shuffle for many years was EPM (and along with it, much of their Workday partnership).

I’m pleased to announce that Host Analytics has once again received an excellent rating on one of these matrices, the Ovum Decision Matrix for EPM 2014-15.

dm14

  • The only cloud vendors on the matrix are Host Analytics and Adaptive Insights (fka, Adaptive Planning).
  • Host Analytics is shown edging out Adaptive Insights on overall technology assessment.
  • Adaptive Insights is shown edging out Host Analytics on execution, which is quite ironic given that Adaptive recently ousted its CEO, something, shall we say, that typically doesn’t happen when execution is going well.

Why, as CEO, I Love Driver-Based Planning

While driver-based planning is a bit of an old buzzword (the first two Google hits date to 2009 and 2011 respectively), I am nevertheless a huge fan of driver-based planning not because the concept was sexy back in the day, but because it’s incredibly useful.  In this post, I’ll explain why.

When I talk to finance people, I tend to see two different definitions of driver-based planning:

  • Heavy in detail, one where you build a pretty complete bottom-up budget for an organization and play around with certain drivers, typically with a strong bias towards what they have historically been.  I would call this driver-based budgeting.
  • Light in detail where you struggle to find the minimum set of key drivers around which you can pretty accurately model the business and where drivers tend to be figures you can benchmark in the industry.  I call this driver-based modeling.

While driver-based budgeting can be an important step in building an operating plan, I am actually bigger fan of driver-based modeling.  Budgets are very important, no doubt.  We need them to run plan our business, align our team, hold ourselves accountable for spending, drive compensation, and make our targets for the year.  Yes, a good CEO cares about that as a sine qua non.

But a great CEO is really all about two things:

  • Financial outcomes (and how they create shareholder value)
  • The future (and not just next year, but the next few)

The ultimate purpose of driver-based models is to be able answer questions like what happens to key financial outcomes like revenue growth, operating margins, and cashflow given set of driver values.

I believe some CEOs are disappointed with driver-based planning because their finance team have been showing them driver-based budgets when they should have been showing them driver-based models.

The fun part of driver-based modeling is trying to figure out the minimum set of drivers you need to successfully build a complete P&L for a business.  As a concrete example I can build a complete, useful model of a SaaS software company off the following minimum set of drivers

  • Number and type of salesreps
  • Quota/productivity for each type
  • Hiring plans for each type
  • Deal bookings mix for each (e.g., duration, prepayments, services)
  • Intra-quarter bookings linearity
  • Services margins
  • Subscription margins
  • Sales employee types and ratios (e.g., 1 SE per 2 salesreps)
  • Marketing as % of sales or via a set of funnel conversion assumptions (e.g., responses, MQLs, oppties, win rate, ASP)
  • R&D as % of sales
  • G&A as % of sales
  • Renewal rate
  • AR and AP terms

With just those drivers, I believe I can model almost any SaaS company.  In fact, without the more detailed assumptions (rep types, marketing funnel), I can pretty accurately model most.

Finance types sometimes forget that the point of driver-based modeling is not to build a budget, so it doesn’t have to be perfect.  In fact, the more perfect you make it, the heavier and more complex it gets.  For example, intra-quarter bookings linearity (i.e., % of quarterly bookings by month) makes a model more accurate in terms of cash collections and monthly cash balances, but it also makes it heavier and more complex.

Like each link in Marley’s chains, each driver adds to the weight of the model, making it less suited to its ultimate purpose.  Thus, with the additional of each driver, you need to ask yourself — for the purposes of this model, does it add value?  If not, throw it out.

One of the most useful models I ever built assumed that all orders came in on the last day of quarter.  That made building the model much simpler and any sales before the last day of the quarter — of which we hope there are many — become upside to the conservative model.

Often you don’t know in advance how much impact a given driver will make.  For example, sticking with intra-quarter bookings linearity, it doesn’t actually change much when you’re looking at quarter granularity a few years out.  However, if your company has a low cash balance and you need to model months, then you should probably keep it in.  If not, throw it out.

This process makes model-building highly iterative.  Because the quest is not to build the most accurate model but the simplest, you should start out with a broad set of drivers, build the model, and then play with it.  If the financial outcomes with which you’re concerned (and it’s always a good idea to check with the CEO on which these are — you can be surprised) are relatively insensitive to a given driver, throw it out.

Finance people often hate this both because they tend to have “precision DNA” which runs counter to simplicity, and because they have to first write and then discard pieces of their model, which feels wasteful.  But if you remember the point — to find the minimum set of drivers that matter and to build the simplest possible model to show how those key drivers affect financial outcomes — then you should discard pieces of the model with joy, not regret.

The best driver-based models end up with drivers that are easily benchmarked in the industry.  Thus, the exercise becomes:  if we can converge to a value of X on industry benchmark Y over the next 3 years, what will it do to growth and margins?  And then you need to think about how realistic converging to X is — what about your specific business means you should converge to a value above or below the benchmark?

At Host Analytics we do a lot of driver-based modeling and planning internally.  I can say it helps me enormously as CEO think about industry benchmarks, future scenarios, and how we create value for the shareholders.  In fact, all my models don’t stop at P&L, they go onto implied valuation given growth/profit and ultimately calculate a range of share prices on the bottom line.

The other reason I love driver-based planning is more subtle.  Much as number theory helps you understand the guts of numbers in mathematics, so does driver-based modeling help you understand the guts of your business — which levers really matter, and how much.

And that knowledge is invaluable.

Did You Just Make a Plan or a Budget?

Congratulations!  If your company is like most, you’ve recently finished a (hopefully) solid 2013 and, from an EPM perspective, completed your 2014 annual planning process. 

Before we get too excited, however, let’s ask one quick question:  did you just make a plan or a budget?  In business, we tend to use the terms “plan” and “budget” as synonyms. But are they?  Methinks strongly no.

A budget is a set of numbers that say how much each operating manager (above some level of seniority) is supposed to spend and/or sell in the coming fiscal year.  A budget is made by finance and owned by finance.  Budgets are often built by trending (i.e., if we want revenue to go up 30%, then to improve profitability, we want expenses to up by only 20%, so give every cost center 20% more than last year, spreading it across time periods in line with historical actuals).  Operating managers often perceive budgets as “falling from the sky” — i.e., targets are dropped on them without conversation which makes sense in some perverse way (if the whole thing is a giant trending exercise, then there really isn’t much to discuss anyway).  Because budgets are trended, they are often nothing more than “buckets of money” — i.e., marketing is going to spend 20% more than last year on analyst relations, but no one can tell you  — and the model certainly does not include — any line-items/details on how it is to be spent.  Finally, the seniority-line (mentioned above) is usually quite high in the organization with budgets; only the top functional managers may actually have budgets that they control.

Budgets aren’t evil.  We need them.  We need targets against which to hold people accountable.  We need to be able to forecast cashflows.  We need, if we’re public, to set revenue and EPS guidance for Wall Street.

But a budget is not a plan.

A plan is strategic.  It starts not with an expense trending exercise, but instead with the company’s position in the market and a strategy for improving it.  A high-level strategy is defined.  Concrete goals/objectives are identified that support the strategy (e.g., start a European operation and sign 3 distributors).  Revenue targets are negotiated, ideally rewarding managers not just for beating the targets (which encourages sand-bagging) but also against more objective and external measures (e.g., market share).  Expense targets are set not simply by trending, but also by challenging past expenses and adding the costs of new strategic projects (i.e., stop/continue/start analysis).  Budget ownership is pushed down the organization, ideally with every people-manager controlling his/her own budget.

Plans have linked-detail, not just buckets of money.  When planning, you say “what do we need to accomplish in analyst relations and what will that cost.”  When budgeting, you say “how would we spend an extra 20% in analyst relations.”

The biggest way to tell if you’ve made a plan or a budget is when it comes to cutting time.  Budgets are cut with broad, top-down, across-the-board cuts:  “look, everyone’s going to need to take 10% more expense out.”  Plans are cut by removing strategic objectives:  “it looks like we were premature in wanting to open Europe, so I want to see a version of the plan where everyone removes those costs.”

I’d argue that a good plan is more well thought out in every way.  Budgets just trend revenue.  Plans triangulate using multiple different models with sensitivity analysis.  Budgets have TBH1, TBH2, and TBH3 as new hires.  Plans have AE/NYC, AE/Boston, and AE/Denver.

In philosophy, budgets are done by pragmatists with a goal to get them done:  “it’s imperfect, but you can’t predict the future, and we need something finalized by 12/31.”  By contrast, plans are done by strategists in a true attempt to anticipate what can be anticipated about the future.

  • If you’re going to hire 3 sales teams, they are going to want leads.
  • If Q2 is usually a rough seasonal quarter, then it’s likely to be one again.
  • If you’re going to acquire 100 customers, you are going to need to grow your support team.
  • If you are going to launch a focus on pharma sales, then you will need to develop a pharma sales kit.
  • If you know a competitor’s strategy and the backgrounds of their executive team, you can anticipate many of their moves (e.g., when Oracle put bankers in charge of the company was it a big surprise that they moved heavily towards an M&A strategy).
  • If you know industry trends, you can anticipate competitor strategy (e.g., do you think Oracle and SAP will be investing big in cloud in 2014, how about Microsoft and mobile)

As John Naisbitt once said, “the most reliable way to predict the future is to try to understand the present.”

So, if you just made a budget, congratulations.  You are far better off than many companies who can’t even get that process completed.  But beware you’ve got an opportunity ahead of you to make a plan.  If you’ve made a plan, congratulations again.  While your plan may changes many times as you go forward, the process of planning itself has made your organization more ready than most to respond to those changes.  I’ll finish with my favorite quote on planning, by Dwight Eisenhower:

“In the process of preparing for battle I have always found that plans are useless, but planning is indispensable.”

And I don’t think Eisenhower would have considered trended buckets-of-money a plan.

5 Things Executives Should Say More About The Budget

I’m always struck by how often good business ideas, conceived with the best of intentions, get flipped upside-down when applied by some managers.  A favorite example is the 3x pipeline rule about which I’ve already blogged (see The Self-Fulfilling 3x Pipeline Coverage Fallacy).  Another might be the 50 calls/day rule for an SDR or a 100 lead goal for a marketing event.

Instead of using tools and metrics to intelligently guide us, we all too often become slaves to them.  We get 3x pipeline coverage because sales management will scream if we don’t.  We make 50 calls/day — even if they’re all “left voicemail” — because everyone else does.  We generate 100 leads, regardless of their quality, because that’s what the boss wanted.

As we approach annual planning season, I thought I’d take a moment to post on the corporate budget — a useful tool if there ever was one, but one all too often used as an instrument of oppression, rather than one of empowerment.

I won’t go into an analysis of the major problems in producing corporate budgets both because I’ve already done so (see The Great Dysfunctional Corporate Budgeting Process) and because the Wall Street Journal also recently featured an excellent op-ed piece describing the key problems (see Companies Get Budgets All Wrong).

Instead of talking about problems with the budget creation process, today I’m going to focus today on how executives communicate to their teams about budgets and budget-related issues.

All too often managers de-power themselves by saying things like:

  • “I know we’re dying for resource here in technical support and trust me, I’m fighting as hard I can for you, but ‘Dr. No the CFO’ just won’t give us any more resources.  I know it stinks, and that maybe it means we really don’t care about our customers, but perhaps next year it will get better and your job will suck less.”
  • “I’m sorry — that’s a great idea, but we just don’t have the budget for it.”
  • “I’d love to hire that amazing person, but they cost 108% of what we budgeted.   Go hire someone within budget.”
  • “Gosh, $15,000 for an experimental marketing program is a lot of money that we don’t have budgeted.  Let’s not try it.”

I’ve heard all of these statements myself, multiple times, in real life as I worked my way up the corporate ladder.  Each of them is a cop-out where the manager fails to show leadership, positions himself as a victim, de-powers himself in front of his team, and demotivates his team in the process.

I expect my executive team members to stay within budget (unless I’ve given them explicit approval otherwise) but it’s also very important to me that they not cop out and act like a prisoner of the budget, instead of its master, in so doing.

To make this philosophy actionable, I have come up with five things executives should say more when talking to their teams about the budget:

  • “We need to spend what we have before we gripe about needing more.”
  • “Show me a rockstar and I’ll hire them.”
  • “I always have $50K for a great idea.”
  • “$15K is a rounding error in my budget.”
  • “Great things often start with small investments.”

“We need to spend what we have before we gripe about needing more.”
The fast-track way out of most executive jobs is to give an impassioned speech to the operating committee about how much your team is struggling under an undue workload, how close everyone is to the breaking point, and how unsustainable the current situation is, only to have the following dialog ensue:

CEO: “I understand that calls per agent are up 30%. I understand that we struggling to hit our SLA targets. I understand the team is working hard. What I don’t understand is why you are making this speech. You are tracking to spend only 85% of your budget this quarter and have four open headcount.”

I saw this happen once in a management committee meeting. The speech was touching. The passion was real. But the logic was threadbare. The new head of customer service did not make a similar speech at the next meeting.

Executives need own their budgets both in the sense of not exceeding them, but also in the sense of spending them. The company has allocated resources to solve a problem. It is the executive’s job to deploy those resources. Particularly in high-growth companies, spending too little can be worse than spending too much.

Executives should also be transparent with their teams. If the team is behind on hiring, executives shouldn’t pretend that Darth CFO is the problem. “We’re the problem. So let’s go fix it.”

In the event the budget is fully deployed, executives still shouldn’t cop out. Instead of saying, “we’ve spent all that corporate gave us, and we’re still dying,” they need to reframe the situation as a challenge. “Either we need to find a way to meet the caseload with our current resources,” or “we need to do a better job at building a business case that convinces the company to give us more resources.”

We’re not victims. We either have an efficiency challenge or a better business case to make.

“Show me a rockstar and I’ll hire them.”
Hiring generates its own challenges. Headcount may open and close with the ups and downs of the sales forecast. At some companies, HR will foolishly not support a recruiting process 2-3 months before a headcount opens, thus building-in automatic delays. Sometimes we find people who cost more than what we’ve allocated in the budget.

Here is what I tell my team:

“I need to admit that I have a huge soft spot for talent. Show me a rockstar and I’ll hire them: budget-schmudget, headcount-schmedcount. We need to build a top-quality organization and I know that top-quality people don’t always come along at exactly the time and at exactly the cost that we have in our budget. So abuse me. Exploit my weakness. When it comes to talent, paraphrasing Rogers and Hammerstein, ‘I’m just a CEO who cain’t say no.’”

Why do I do this? First because it eliminates all possible excuses to not hiring great talent and second because I honestly believe it. Suppress your inner bureaucrat and don’t say “gosh, that guy’s a little too expensive” or “I think we’re going to have a headcount freeze, so let’s slow down on this one.”

Instead think: if after I hire this rockstar, if things got tight financially and I had to eliminate someone else to do so, would I? If the answer is yes, make the hire. Sports teams get stronger by recruiting players stronger the current line-up. Unlike sports, however, business isn’t zero-sum. We can take all the great players we can find. Once in a while if that means having to zero-sum things when the budget gets tight, so be it.

One convenient side-effect of this policy is that it lets you see who your executives think are rockstars. If someone uses the rockstar argument on me and the person in question is a dud, I’ve learned important information about my executive’s talent identification skills.

“I always have $50K for a great idea.”
I starting using this when I got my first marketing management job because I was so tired of hearing my bosses say, “that’s a great idea, too bad we can’t afford it.”

Let’s think for a second:

  • Either something is a great idea and management should figure out how to do it.
  • Or it’s not a great idea and management should tell its originator why.

But, please, don’t cop out and say, “it’s a great idea, but we can’t afford it.”

To flip this problem around I long ago adopted, “I always have $10K for a good idea” which I’ve title- and inflation-adjusted to $50K. Obviously, the number should scale according to your budget, but the point is first that you change your own reaction to new ideas and second that you don’t kill them at birth with, “before you tell me this, you should know I don’t have any money — so what’s your idea again?”

Instead say, “you’ve got an idea — let’s hear it — I always have $50K for a great idea.”

By the way, budgeting for this is highly recommended. I usually carry a cushion of 1-3x my “nut” each quarter to be sure that I can back up my words.

“$15K is a rounding error in my budget.”
Managers can get so focused on not exceeding budgets that I’ve literally been in meetings where people with $3M quarterly budgets take valuable executive team meeting time talking about $15K items. $15K is one-half of one-percent of a $3M budget. So, yes, while $15K is a lot of money and while money should never be wasted, I think executives need to remember what their 0.005 threshold is and remind their teams about it.

I don’t want to talk about items that either rounding errors or, more amazingly, completely invisible when rolled into the final quarterly numbers. Let’s, shall we, worry about the other 99.5% of our expenses?

The other way to say this is that executives should look holistically at their budgets. An excess focus on incremental expenses (often combined with a lack of planned cushion) is what leads people to lengthy discussions of rounding errors.

“Great things often start with small investments.”
A side effect of working at successful companies is that they grow. Teams get big. We have 100 engineers here and 200 engineers there. We’re spending $1M on this marketing event or that. People starting anchoring their idea of size relative to the core teams or programs that drive the company.

In so doing, they forget the critical principle that great ideas often start with small investments. Business Objects, which eventually sold for nearly $7B, was created on only $4M in venture capital. The entire Salesforce Social Enterprise vision, which helped catapult the company from $2B to $3B in revenues, was created on the back of a $70K outsourced Twitter connector, conceived by the amazing Service Cloud team.

Instead of starting with, “we need millions of dollars to build Chatter, integrate a feed-based paradigm into our entire CRM suite, and then become the social enterprise company,” the Service Cloud team started small. They said, “I bet companies would love to be able to find unhappy customers on Twitter, automatically create cases in response, and leverage their entire contact center infrastructure to provide support on social channels.”

They hired an outsourcer to build a Twitter connector, cases began flowing in, and the seeds of the Social Enterprise vision were born.

The moral of all this, of course, is that great ideas can start small. Instead of saying, “sorry, we can’t find $2M to fund your new idea,” executives needs to say, “how you can re-cast your idea to start small, so we can try it quickly, see if works, and then build from there?”

Sometimes it’s not possible. You can’t build a nuclear submarine or a 787 on incremental budget. But in information technology and consumer services, you can go a long way by starting small with a little money.