PUTTING YOUR MONEY WHERE YOUR STRATEGY IS BEST-IN-CLASS STRATEGY AND BUDGET PLANNING How do organizations overcome the common disconnect between strategic planning and budgeting decisions? Market Strategy Group wanted to learn from those who live it. We spoke with Executives from Strategy and Finance Functions to get real, best-in-class answers to this thorny question.
1
Money is firewalled up-front to ensure there are financial resources to fund new strategic priorities.
• “We compartmentalize. For example, if I have an R&D budget of $500M, I then ask myself what percentage of that budget should be pulled off to the side and firewalled?” • “We tend to overestimate here so that a portion is in fact available later in the budget cycle.”
3
Allocations vary considerably by industry and company size. Context matters. Range is from 5-15%.
• “Out of total R&D budget, this type of firewall is usually 5 - 10% for us and that’s about normal.” • “10 - 15% is set aside during strategic planning for new exploration. It reinforces the need for disciplined alignment.” • “For pure innovation bets, we set aside $15 – 20M . . . the equivalent of six new oil wells.”
5
Senior Executives must support firewalled amount up-front and enforce during the budgeting effort.
• “If you don’t have the CEO behind it, then you can bet the CFO won’t be.” • “Starts top-down and then we bottom-up about what we can actually afford to spend.”
2
Having a portfolio view, rather than BU/Functional view, ensures firewalled money is properly spent.
• “We used to give money to businesses and let them run with budgeting for it. Now we consider that Opex and Capex from a portfolio view.” • “The way you allocate is that you have to look at it as a portfolio.”
4
Alignment of Strat Plan & Finance leads is critical to ensure budget addresses strategic priorities.
• “Budgeting reports to the VP of Strategic Planning, not our CFO. That way there is one-stop accountability for realizing strategic investment.” • “My relationship as CFO with the Chief Strategy Officer is one of close collaboration on budget guidelines and funding approvals.”
Was does this mean for your business? Strat Planning and Capital Allocation Next Steps. Getting this right is critical to your bottom line. And it’s more than a technical challenge, it is often a leadership and alignment issue. We have helped organizations get to an answer custom to your unique situation. We should chat if this is an issue. Joel Krauss (joel.krauss@mktstrat.com) or Alex Kruzel (alex.kruzel@mkt-strat.com).
© Market Strategy Group, 2017
MSG Insights – February 2017 www. mkt-strat.com