Updated: Nov 1
It's that time of year when business line leaders are calculating what they need to spend quickly before the end of the year so they don't lose it in next year's budget. It's also that time when executives start currying favor and jockeying for position by letting their bosses know how much more worthy their business unit is for additional funding compared to their peers.
As silly as it sounds, it's all pretty rational behavior, really.
Much of the strategic planning process, especially the budgeting aspects of it, are pretty much a zero-sum game. All of the bottom-up funding requests sent out to frontline leaders from the top of the organization (with varying degrees of sincerity) invariably tally up to far more in expenses and far less in current revenues than what the C-suite has already telegraphed to stakeholders.
The resulting negotiations, horse trading, and unsatisfying compromises usually end up with limited resources being spread across the organization like a thin layer of peanut butter. Starving no one, but providing the necessary energy to few.
A Better Approach
It is not just your imagination that strategic planning is getting harder. The world is changing faster, the pace of change is accelerating, and new forms of competition are popping up every day.
While the natural inclination might be to slow down and think harder about these complex issues with increasingly high stakes, that approach only creates a bigger gap to close. A better approach is to move faster by breaking down that list of huge high-stakes projects into smaller actionable pieces so you can get to market much faster.
The answers we need are not in our conference room or in our forecast models; they are outside our building, with our customers and our prospects. We just need a better way to incorporate them into our planning.
We have written before how our FIRE™ process (Fast, Iterative, Responsive Experiments) combines the best parts of modern agile business methods– like Agile, Scrum, Design Thinking, Lean Startup, and others– into an effective and repeatable process that focuses on the things that really matter. Best of all, it gets results fast.
Read more: FIRE™ Up Your Innovation Team
How can we incorporate those principals in our budgeting process?
Budgeting Lessons from Las Vegas?
Las Vegas would seem to provide few practical budgeting lessons for risk-adverse bankers, but if you're really serious about reaching a new level of performance, this should be the time for doubling down on a small number of bets that show promise for outsized returns. That also means taking a few bets off the table if the odds don't look so good.
Spreading your money around the roulette table seems like a way to hedge your risk, but thanks to the house edge, your expected loss over the long run is a minimum of 5.26%, the same as betting it all on black. Or red.
Moving from House Edge to Player Edge
The only people in Las Vegas who can make money over the long run (besides the house) are blackjack players, but not just any blackjack players-- just those who:
Know the odds of every possible bet,
Understand when the odds have shifted in their favor, and
Vary their bets accordingly.
Learning the odds of every possible bet in blackjack is time consuming, but not incredibly difficult. Casinos sell wallet-sized basic strategy cards in their gift shops. But millions of gamblers will ignore them and bet on 'hunches', 'streaks', and 'strategies' more grounded in wishful thinking than in the mathematics of probabilities and statistics.
Understanding when the odds have shifted requires the ability to count cards, a practice made famous in Ben Mezrich's 2003 book "Bringing Down the House: The Inside Story of Six M.I.T. Students Who Took Vegas for Millions" (later made into the 2008 movie "21", starring Kevin Spacey).
Counting cards is a way of carefully tracking what happened in the past in order to better predict what might happen in the future. (Predictive analytics, anyone?) It is not illegal, but it is against casino rules, because it reveals when the house edge has temporarily become the player's edge.
Turning the Tables in the Boardroom
How can you translate the lessons from the blackjack table to the conference room table to stack the odds in your favor this strategic planning season?
Know the odds of your existing bets. Are there any slow-growing products or business lines where you know deep down that you are unlikely to grow any faster? Especially if they are not strategically important or do not represent a significant share of ongoing profits?
Understand where the odds have shifted. Are there emerging businesses, products, or services that you're not investing in today that you should be? Are there outside partners you should be working with to capitalize on new opportunities? Have changes to the competitive landscape exposed new weaknesses you should be shoring up?
Be brave in making your bets. One of your most important jobs as a leader is the allocation of resources. Don't be fooled by history, legacy, and sunk costs-- where is the best place to invest the next dollar? Where else should you take bets off the table so you have more to put where the odds are better?
The odds can always move against you in the short run, but integrating this flexible budgeting approach with Fast Iterative Responsive Experiments can help position you to have more wins, and to win more over the long run. Don't make these strategies against your house rules.