It’s budget time and you’re about to allocate the resources for next year. How do you allocate them? Probably more or less the same way as last year, right? Let’s take it up a level. Now it’s capital allocation time. You’re about to allocate the resources for the next five years—how do you do it? Probably not much differently from how you did it five years ago—or at least the change only happens in years three through five.
“Now you’re being unfair! We’re just doing what the strategy dictates us to do!”
It’s true that conversations in the strategy room don’t help much. And there is a game that’s played to ensure all executives get pretty much what they ask for to fund their own units. Rarely doesn’t any real reallocation of funds take place—and that’s a problem. Still, why shouldn’t FP&A be the ones spearheading this? Let’s explore how we can bust the peanut-butter process and drive the right strategic choices in the company.
Picking the winner is not the problem
So if choosing a winner isn’t the problem, what is? It’s weeding out the losers because no one wants to see their unit lose funding. Yet, this is what must happen to achieve strategic success.
Through research done as part of the book Strategy Beyond the Hockey Stick, we know that even in top-performing companies, the top performance comes from only a few units. That is because management reallocated significant resources to these winners, which gave them enough of a chance to make their own hockey sticks come true (as described in the 2018 McKinsey book Strategy Beyond the Hockey Stick).
This shouldn’t come as a surprise to FP&A—we’ve always known that 20 percent of the products make 80 percent of the profit. The rest are just marginal gains or losses. So how can we design a process where we pick the winners and then bet hard on them?
- Work with the incentive structure to ensure everybody wins if the few that get the investments are successful.
- Pick where to play and how to win—perhaps even by having executives vote with the restriction that they can’t vote on their own projects.
- Look at your resource allocation from a portfolio level and target some higher opportunity (not necessarily probability) bets.
- Play to win by allocating enough resources to the winners you picked, giving them a fighting chance to succeed.
FP&A can both facilitate this discussion and challenge the management team on its approach. Call “peanut butter” whenever hard-core prioritization toward the winners is abandoned. This will not be easy but must be done for the long-term success of the company.
Is your company playing to win?
It doesn’t mean you should bet it all on red, but you should certainly bet more on red than black if you think red is the winner. If you place it evenly on red and black, you won’t win—and occasionally might lose it all.
Only FP&A together with the CFO can take the portfolio view. No single executive can have that overview. That’s a lot of power in your hands and you need to use it to ensure you’re playing to win. You must pick the 1-in-10 that’s going to take off like a rocket and show a true hockey stick. The problem isn’t picking which initiative or business unit is going to be the 1-in-10. It’s making sure that the other 9 initiatives get fewer resources so that the 1-in-10 gets the needed investments.
Now the spotlight is on you. What will you do to ensure your company is playing to win? Will you take charge of the strategy conversation and drive proper resource reallocation, or will you let the management team get away by doing more of the same?
Next time you create a strategy for your company, make sure you take a good bite of it. If it tastes of peanut butter, I guarantee you it’s much less likely to succeed. So, tell me: How does your strategy taste, and are you putting on the apron to take charge of the kitchen and change the flavor?