Annual plans can---and should---change

By William C. Copacino -- Logistics Management, 9/1/1999

Most businesses today operate on a defined planning cycle. Annual plans and budgets--which often are based on historical performance--are debated and determined up to seven months before the start of the next fiscal year. Subsequently, annual performance assessments of individual managers are heavily influenced by how they performed relative to these budgets. Two commonly asked questions in this regard are:

1. Did the manager exceed his or her revenue estimates?

2. Were costs greater than or less than those specified in the plan?

We can clearly understand the importance of and the need for an annual plan. It provides a context to guide management decision-making as well as a control parameter for measuring success.

I have found, however, that many companies manage their plans too rigidly. By that I mean that company executives do not understand that a plan is a view of the future at one point in time. An annual plan needs to be dynamic and flexibly interpreted, particularly when it is used to evaluate performance.

Many circumstances change and therefore can alter the appropriateness of a plan. For example:

- Environmental factors can change. The competitive environment can change as competitors enter new markets, manage for market share, or manage for profitability. Exchange rates fluctuate. The economy can boom (or shrink) beyond expectations, making the initial plan quite irrelevant. Should a manager be rewarded for just making his or her revenue target if economic growth was 50 percent above plan assumptions? I don't think so.

- Key cost drivers can change. If fuel prices increase by 25 percent, should we hold a logistics manager to his or her original transportation cost budget? I think we should instead evaluate that manager on how he or she managed under the changed circumstances.

- The planning process is often a negotiated one. Some managers are inherently straightforward and/or more (or less) effective in negotiating budgets than others. The notorious "sandbaggers," by contrast, negotiate a budget that is filled with contingencies, hidden surpluses, or even fat. Should a "sandbagger" be disproportionately rewarded?

It is easier to raise these questions than to answer them. I think, however, there are several principles or guidelines that can be helpful to managers. Here are my recommendations:

- Treat the plan as a goal or estimate of the future as it will look at one point in time. Understand that you are operating in a dynamic environment and that things will change. That's why it's wise to evaluate performance in light of the latest information. Some companies periodically adjust their plans through a formal process. Others take into consideration recent economic and industry developments and adjust their expectations accordingly.

- Document your key assumptions clearly. Consider and adjust for these assumptions, particularly during the evaluation process.

- Consider the intangibles--not just the quantitative but also the qualitative aspects of individual performance--as part of the review process.

Corporate annual plans will always be a central part of our management system. To be viable in today's markets, companies need to meet their growth and earnings commitments, which are reflected in their plans. Enlightened managers, however, will adjust those plans to incorporate the latest knowledge or new circumstances.

William C. Copacino is managing partner of Andersen Consulting's Strategic Services Practice for the Americas. A frequent speaker before business and professional groups, Mr. Copacino has a number of publications to his credit, including the book Supply Chain Management: The Basics and Beyond (The St. Lucie Press, 1997). He is based in Andersen Consulting's Boston office, 100 William St., Wellesley, MA 02181. Phone (617) 454-4480.