Long-range planning, or LRP, goes by many names: strategic planning, budgeting, capital planning, and annual allocation. Whatever you call it, most companies have a strategic planning process that should dictate where your company’s funds are budgeted over the next year, but very few are effective. Here, we discuss the 15 common pitfalls of long-range planning identified in the White Paper commissioned by Planview, including how they impact your organization and how to overcome them.
- Organization Usurpation. If your finance department is perceived as the final authority in the LRP process because they control the money, the goals of the business leaders may be undermined or even overlooked. This can lead to business leaders taking a back seat in the planning process, and financial decisions can become detached from strategic goals. The solution is tricky, because finance should be central to LRP, but they can emphasize collaboration, adding transparency and gaining support to avoid looking like a usurper.
- Information Overload. The most common pitfall is trying to collect too much data. This might be your problem if people are asking why you need all this information, or if they simply don’t provide what you’ve requested. Often, when finance doesn’t get the numbers they asked for from a certain department, they’ll use an estimate, leading to inaccuracies that the department will blame them for. This can be solved in one word: simplify. Request only truly relevant information so nobody will ever wonder why you need it.
- Objective Obsession. Lots of companies spend too much time creating and filling out numerical scoring guides, objectifying information that would be better addressed in a discussion. This drags down the LRP process, but worse, important decisions could be made based on scoring models that are not an accurate reflection of the business. In moderation, scoring can be helpful, but be selective and don’t fail to communicate why those metrics matter.
- Risk Homogenization. There are many types of business risk—demand risk, competitive risk, and technology risk, for example—and some organizations boil all of them down to a single risk score. In these cases, organizations might be too conservative across the board, leading to only short-term returns. Alternatively, their risk could be concentrated in a single area, like an Achilles heel. Instead, risks should be differentiated, each evaluated individually, and then calibrated with the others.
- Manual Manipulation. You might think it’s inevitable that your financial team will be drowning in spreadsheets, manually entering and manipulating data during the LRP process, but there’s a better way. To give your company more time to analyze data and thereby make better-informed decisions, you can implement a centralized database and automate the LRP process. While spreadsheets may still be necessary, everyone involved in the LRP will have access to everything in the database, and changes will automatically be saved in the database, streamlining the whole process.
- Tool Misapplication. In the LRP process, it might be tempting to use a tool you’ve already invested money in, like an ERP (enterprise resource planning) system, but it will lack key components, and trying to compensate will only create more work for yourself and increase the likelihood of error. While a manual process would be an improvement, the best practice would be to automate the LRP process using tools designed specifically for that task.
- Moving Target. When an organization has multiple business units or functions, each entity’s numbers often depend on the others. With this type of moving target, it can be a time-consuming cycle to coordinate and finalize numbers during the LRP process. To avoid excessive shuffling that can drag the LRP out indefinitely, set clear expectations with deadlines throughout the process. Implementing a centralized database will also cut down cycle time significantly.
- Premature Destination. Providing business leaders with a budget to fit into might keep your company running in the short-term, but it leaves no wiggle room for innovation, which gives your competitors a leg up and causes your business to slowly deteriorate. Instead, solicit business leaders’ opinions as if they were owners, encouraging them to explore different funding options. They might come up with some good ideas, but they will also develop a sense of ownership that will help drive the company.
- Self-fulfilling Prophecies. If your firm has decision-makers who define specific anticipated outcomes and planners who simply transpose those outcomes into a plan, your LRP cycle may be unreasonably short. Firms who fall victim to self-fulfilling prophecies may appear to function well enough, but they struggle to make long-term plans with growth targets that are viable. Business owners should be encouraged to think outside the box, analyzing ideal spending in a variety of scenarios that include funding for innovation and other opportunities for growth.
- Data Inequality. It is common for different groups in an organization to submit data that has been calculated in different ways, sometimes because they are intentionally trying to make their data look better. When data has not been calibrated correctly, funds will be doled out based on skewed numbers and plans will not play out as expected. To foster equal data, teams can share information about how they made calculations, or planners can create a scoring system or use a central repository to give more structured guidance. Whatever your solution, planners should always ask questions if data appears to be unequal.
- Class Warfare. Most companies are aware that they cannot compare unlike priorities, such as those associated with innovation versus operation priorities. However, they might analyze the separate categories using the same tools and metrics, basically pitting them against each other again. This can result in one priority appearing to be more important than another, so funds and resources may be distributed improperly. The solution is simple in theory, although perhaps requiring more work in practice: keep priorities correctly classified and use the most fitting ways to measure each.
- Forecast Folly. Many business leaders are expected to use current data to make long-range predictions with a level of confidence better suited for the short-term. As a result, projects may focus less on short-term goals, depending on the extra time allowed by the long-range forecast, but as the situation changes with time, the long-range goals and their associated earnings may be postponed indefinitely or lost altogether. Instead, uncertainty should be scored during the planning process and a tracking system adopted to keep tabs on the evolution of the LRP.
- Pragmatic Profiling. When firms choose projects to fund based only on a financial basis, they disregard other considerations such as risk profiles and portfolio balance. This can lead to a fixation on projects that are expected to yield quick returns, even if higher risk factors make it improbable for those projects to succeed. To avoid missing your projected marks, create a more balanced profile for each project by including the qualitative data that can affect those financial numbers.
- Goal Misalignment. Sometimes, long-range planners make decisions based only on what will bring the best financial return, without regard to their corporate goals. Some organizations may even alter their corporate goals to fit with where their financial decisions have taken them, but this doesn’t look good to the public and can often cost senior management their jobs. If your organization has lost sight of corporate goals, include them in presentations to help ingrain them in employees’ minds. Then, during the LRP process, require each resource request to be attached to a corporate goal and challenge a request when the relationship is not apparent.
- Accountability Decoupling. If your company is not tracking the progress of long-range plans, business leaders will likely give planners projections that only show real results in the far-off future, knowing there will be no real penalty when it doesn’t play out. When they are not held accountable for the data they provide, the data becomes unreliable and useless to planners. It is important not only to compare long-range forecasts with actual business results, but also to reward those who do, developing a culture in your company that always considers the long-term future.