The Leadership Problem with a Finance-Driven Annual Planning Process

Tis the season for getting 2023 business plans and corresponding budgets nailed down. There will be much wailing and gnashing of teeth as YOY comparisons and Excel macros are updated. Sometimes, more sophisticated planning and budgeting tools are available, but the process is largely the same. And almost always driven by the Finance team.

Nothing against my brothers and sisters in Finance. But they should be following, not leading, the annual planning process.

I appreciate that quantitative artifacts like budget spreadsheets and P&L projections are among the most concrete outputs and demonstrate completion of the “final mile” of annual planning. But what drives the process and what else is necessary and appropriate from an executive leadership perspective? How does the annual planning process reflect and build on executive capacity?

Annual planning should begin from a multi-year, forward-looking perspective. The 12 months in question need to be placed in the context of a medium-term (3-4 year) view of the organization’s growth and transformation. The mid-range time frame balances the significance of change that leadership is driving with the need for reasonably concrete, understandable progress. A one-year perspective – especially one that features only quantitative descriptions – cannot achieve this balance.

This multi-year perspective of executive leadership is captured in a Corporate Narrative.  The Narrative portrays the destination for the business within the time frame, emphasizing the “end state” as significantly different from the current mode of operating.   The Narrative should also identify four to seven strategic change initiatives that, taken together, will ensure arrival at the destination within the specified time frame. It is this portfolio of multi-year change initiatives that becomes the driver of the firm’s annual planning process.

This starting point allows the leadership team to assess the organization’s progress toward the destination and determine what “appropriate progress” looks like during the upcoming twelve-month period. These interim milestones become the basis for annual enterprise goals and for allocating resources to the strategic initiatives. In this way, annual planning becomes more about strategic change and looking forward, and less about incremental change and looking backward. All other programs, initiatives, and activities should be evaluated and budgeted according to their relationship to the strategic portfolio.

This orientation also allows the executive team members to align and unify around the Narrative rather then defend/expand funding on their functional “turf.”

Finance will, of course, play an important role in the “what” and the “how” of measuring and reporting progress. This should be done in as concrete a way as possible, while acknowledging that some aspects of change are more challenging to quantify than others. Part of the challenge is unseating Finance from its “position of privilege” in reporting performance from the earliest days of the business. Especially since the annual operating plan is translated into spreadsheets, financial statements and KPI dashboards, there is a natural tendency to allow Finance to drive the process. But this is a mistake of leadership.

I have been thinking a lot about left-brained thinkers (quantitative) and right-brained thinkers (qualitative), and whether to position this Narrative-centric approach way of annual planning as “whole-brained” or “balanced-brained” planning to engage both “types” of stakeholders. But the two are not co-equals. The Narrative approach has more power in

• Multi-year, transformational change perspective
• Forward-looking, future-oriented
• Enterprise/executive driven, unifying the voice of leadership

I’m pulling together some (informal, so far) research on annual planning practices and their relationship to strategy and leadership. If you’d be willing to share (anonymously) how this works in your organization, drop me a line. What do you do well? Where are the opportunities for improvement?