Strategic Planning and Budgeting Guidelines for Independent Software Vendors

eBook from TBK Consult

Strategic Planning and
Budgeting Guidelines for
Independent Software
Vendors
Hans Peter Bech, MA (Econ.), Group CEO at TBK Consult.

A practical and lean approach to
strategic planning and budgeting for
Independent Software Vendors in “low
visibility situations.”

© Hans Peter Bech 2012

First edition

Unless otherwise indicated, all materials on these pages are
copyrighted by Hans Peter Bech. All rights reserved. No part of
these pages, either text or image may be used for any purpose other
than personal use. Therefore, reproduction, modification, storage in
a retrieval system or retransmission, in any form or by any means,
electronic, mechanical or otherwise, for reasons other than personal
use, is strictly prohibited without prior written permission.

First published by TBK Consult in 2012 in electronic format only:
TBK Consult ApS
Leerbjerg Lod 11
3400 Hillerød
Denmark
CVR: DK30485270

ISBN 978-87-995228-0-4

www.tbkconsult.com Strategic Planning and Budgeting Guidelines
3 for Independent Software Vendors

Targeted audience
This eBook has been written for the CEO and the board of
directors of Independent Software Vendors (ISV) who are already
working internationally or are about to embark on an international
endeavor.
Abstract
The eBook proposes a procedure for the annual planning and
budgeting in “low visibility” situations. Such situations occur when
new products are launched and/or new international markets are
approached.

The eBook addresses the issues associated with major uncertainty
on the top line of the budget. How much revenue will a new
activity generate? How soon? What do we do if reality differs
substantially from our expectations?

The content of the eBook was originally published as a series of
posts on the TBK Consult blog under the headline “Ready for
2012?” The objective of the posts was to outline a best practice
annual “preparation process” for Independent Software Vendors
leading to a plan and a budget, which is a stepping stone to a
position as the global market leader and where all stakeholders
are 100% aligned and committed to execute the plan and deliver
the numbers.
Acknowledgements
Design and lay-out: Flier Disainistuudio, Tallinn, Estonia,
www.flier.ee

Proof reading: Emma Crabtree, TBK Consult; Michele Rempel,
Mediavinemarketing


Table of contents:
Introduction 5
Ambition & Mission: #1 worldwide! 5
The preparation process 6
Alignment & Identification 7
Who should be involved? 8

Corporate Health 9
Why check alignment and identification? 9
Sandbagging 10

ValuePerform 11
The Questionnaire 12
Mapping the alignment 13
On the same page 14

The revenue challenge 15
The famous hockey stick 15

The revenue model 18
Improving the process 19

The Fundamentals 20
Customer Value Proposition 20
Value Chain 23
Ideal Customer Profile 23
The Go-To-Market plan 23
Partner Value Proposition 24
Partner Program 25
Conclusion on the fundamentals 25
The fast track 26

Mitigating risk and exploiting opportunity 28
The struggle with reality 28
The benefits of the 7-step process 30


Mission/Vision and the 3-5 year perspective 31
Next year - the next step 32

What comes first, the plan or the budget? 33
The Process Schedule 33
A. Budget and Planning Guidelines 34
Excel? - No! 35
B. This Year Forecast 36
C. Next Year Budget Key Targets 36
D. Submit Budget and Plan 1 (BP-1) 37
E. BP-1 Review 37
F. Submit Budget and Plan 2 (BP-2) 38
G. BP-2 Review 38
H. Submit Final Budget & Plan 38
I. Final Budget/Plan Release 39
J. Associated Frameworks 39
K. Kick-off 39

Your budget, your plan and the KPI’s 41
R&D 41
Sales 43
Organizational health 44
KPI's 44
Too much too fast 45

The people on the bus 46
The small versus the large organization 48
"Der Fisch stinkt vom Kopf" 49
Adizes Corporate Lifecycle 50
Manning the bus 51
Avoid 53

About the author 55


Introduction:
We are all spending considerable time with managing the annual
“preparation process.”

xx Do we apply a “same procedure as last year” type
exercise?
xx Or are we going to do it differently next time?
xx Do you want next year’s achievements to be very
different from your achievements last year?

In this eBook we will provide some best practice guidelines
for organizing and executing the budget and the business
planning process for a situation involving the penetration of new
international markets. The penetration of new markets is always
associated with considerable risk. The investments required and
the revenue flow is highly unpredictable. We say such situations
have "low visibility".

Ambition & Mission: #1 worldwide!
OK, these may not be best-practice hints for everybody.

The hints are meant for ISV’s (Independent Software Vendors) who
have ambitions of becoming the global leader in their field.

This may not happen this year. But if this year is not a step on
the path to global market leadership, the probability for “Mission
Accomplishment” will be smaller next year. Now is the time to get
started on the journey.


If you have already set your mind on a global leadership position,
you most likely also have substantial growth rates for next year in
mind. What are your ambitions? 25% - 50% - 75% - 100% - more?
What should grow? Profit, revenue, market share, gross margin,
cash in hand, number of customers, number of resellers, return on
assets, valuation, staff?

The preparation process
We are deliberately using the term “preparation process” to avoid
the terms strategy, plan, budget, KPI’s etc. at this stage. We will
get to that, but let’s keep the process open for now.

Preparing for the next fiscal year is an exercise undertaken by most
companies. However, if you are on the path to global leadership,
one issue is more crucial than any other:

Will all stakeholders be executing according to the final plan?

Achieving maximum thrust with the resources that you have
available requires all stakeholders are pulling and pushing in the
same direction. How can you orchestrate your preparation process
ensuring that, as of the first day of your fiscal year, all forces are
working towards the same objectives and that those objectives are
your objectives?

Achieving alignment and identification for your annual plan is
crucial for gaining maximum (revenue, gross margin, market
share, profit) impact for each € spent on the cost side.

It is not as difficult as you may think. There is a way and it is


fairly simple1.

Alignment & Identification
As stressed above, achieving alignment
and identification for your plan is crucial
for gaining maximum (revenue, gross
margin, market share, profit, number of
customers, number of resellers, valuation,
cash at hand or whatever metric you are
using) impact for each € spent on the cost
side.

Alignment is the assurance that all stakeholders have a common
interpretation of the plan. Yes, this is the plan!

Identification is the buy-in from each of the stakeholders to the
plan. Yes, this is my plan!

1
Are you running several lines of businesses? If you are, you must replicate the planning
process for each line of business. Each line of business needs its own mission, vision,
strategy, customer value proposition, value chain, ideal customer profile, Go-To-Market
approach, execution team, etc.
Are you operating in several geographies? If you are, you must replicate the planning
process for each geography. Each geography needs its own P&L and execution team.
In the situations described above you need a coordination team to set the directions, oversee
the process, review the outcome and consolidate the final plans.
This eBook on the annual planning process is primarily addressing the individual
business unit.


Who should be involved?
Alignment and identification requires
involvement in the planning process from
the very start. You can forget all about
the traditional approach of doing the
annual plan in the executive lounges and
present it to the staff at a 1-day kick-off
with an external keynote speaker 2
months into the fiscal year. Big companies
with high momentum may get away with
this approach (for some time), but not the small and mid-sized
ISV's with two digit growth rate ambitions.

Identify the key stakeholders in the execution of the plan and get
them involved from the very start.

Are you relying on resellers for revenue generation and market
share growth? How will you ensure their alignment and
identification? Get them involved from the very start.

But won't that make the group of people involved with the annual
planning process rather large?!

Yes, it will. But you are not going to beat the market without
all your key stakeholders pushing and pulling in the same
direction. Identify the key stakeholders and get them in the same
"room" before you start the planning process. Only through the
involvement of all key stakeholders can you achieve the alignment
and identification required for preparing and executing the annual
plan successfully.


Corporate Health
Alignment and identification is a key component of "corporate
health". When your ambition is to make it to global leadership,
corporate health is fundamental. You may perform well for a
couple of years focusing on financial performance only, but you are
not going to get the momentum required to make it to the top and
stay there.
"Health is the ability of an organization to align,
execute and renew itself faster than the competition
so that it can achieve and sustain exceptional
performance over time2".

Before you get started on the annual preparation process do a
health check on your planning team. Check the current degree of
alignment and identification. Are you already on the same page or
are you miles apart?

Why check alignment and identification?
Have you ever been involved in, or maybe even responsible for,
driving a planning and budgeting process? How much time did
you spend on defining and managing the process? How much time
did you spend on semantic discussions around fundamental issues
such as strategy, vision, mission, customer value proposition, Go-
To-Market strategy and who's-responsible-for-what? How often did
you have to cut through the red tape and dictate a final budget?
Did you deliver on that plan and that budget?

2
Quotation inspired by the book "Beyond Performance: How Great Organizations Build
Ultimate Competitive Advantage" by Scott Keller and Colin Price.


Sandbagging
Have you ever heard of sandbagging? This
is the common approach used by any
savvy business unit manager and senior
sales executive with a big enterprise
background. Sandbagging is the "noble
art" of fighting like crazy to get the
revenue objectives minimized while maintaining or increasing the
cost base. This is the fine art of sub-optimizing. Sandbagging is
pursuing personal objectives which are not aligned with company
objectives. Sandbagging is what happens when you are not
aligned.

Are you the CEO of an ambitious company and do you want to
be the global market leader within the next 5-10 years? Then you
must ensure that all your key stakeholders are on the same page
BEFORE you start the plan/budget exercise.

You cannot second-guess if they are on the same page; you must
verify that they are. We recommend using the ValuePerform
method for this verification.


ValuePerform
ValuePerform is a tool designed to do alignment & identification
checks in an organization. It doesn't require any specific
prerequisites. It can be accomplished within a week or two and
does not require the participants to be present at the same place
at the same time for more than 1 day.

Figure 1:
Customer Value Proposition

Through the ranking of 36 statements ValuePerform will map
your current and your future customer Value Proposition.
ValuePerform uses the generic 3 value creating types:
1. Product Leadership
2. perational Excellence
O
3. ustomer Intimacy
C
Whether you already have a well-defined Customer Value
Proposition or not, ValuePerform will identify the DNA of you
business.

Based on 6 questions, ValuePerform will identify your main
sources of future financial performance. Using 4 questions it will
determine your competitive situation.


The Questionnaire
A questionnaire is now generated for your specific situation and
submitted to all the stakeholders. Through 70 questions and
ratings, ValuePerform captures the stakeholders' scoring of
importance and performance on 15 management areas divided
into 5 perspectives:

The Financial Perspective
1. Financial performance

The Management Perspective
1. Setting objectives
2. Defining strategy
3. Taking action
4. Management skills and competencies

The Customer Perspective
1. The Product/service (Customer Value Proposition)
2. The customer relationship
3. The image

The Internal Processes Perspective
1. Operations
2. Regulatory & Environment
3. Customer Management
4. Innovation

The Learning/Growth Perspective
1. Organization Capital
2. Information Capital
3. Human Capital


Mapping the alignment
ValuePerform now produces a set of maps illustrating the degree
of alignment in your planning team. ValuePerform also shows
how well your current prioritization and performance corresponds
to your Value Proposition, your competitive environment and how
you expect to generate the financial performance.

Ideal curve Importance average
Figure 2:
Alignment Map


If you haven't performed an alignment check within the last 6
months, we can guarantee that in 98% of all cases the normalized
degree of misalignment will be larger than 50%. This means that
there are more areas where the team disagrees than where they
agree. There will also be more than a 50% difference in what the
team finds important and how they rate actual performance.

On the same page
Performing a ValuePerform alignment & identification check
before embarking on the annual planning process will bring the
planning team onto the same page. It will enable management
to ensure alignment and make potential adjustments to the team
and the strategy. ValuePerform also facilitates the definition of
the most important strategic enablers, which must be covered in
the plan.

A ValuePerform alignment & identification check can be completed
within one or two calendar weeks.


The revenue challenge
If you have done the alignment & identification check recommended
above, you have also ranked these 6 sources of economic growth:

A. Revenue growth in new markets

B. Revenue growth from new customers

C. Revenue growth from new products

D. Revenue growths from existing customers

E. Optimize asset utilization

F. Reduce the cost base

Few growing software companies are concerned about E and
F (they should be! more about that later). Most are working
in a scenario where the lion’s share of the revenue is coming
from a combination of A and B, which also implies C; if you are
taking your current product to new customers in a new market
(internationalization), these customers will consider you and your
product new as well.

The famous hockey stick
Let's imagine that a really big portion of next year ’s revenue is
going to come from A, B and "C". How are you going to make an
ambitious yet realistic revenue budget?


Let's also assume that you need some of the gross margin earned
in 1H to fund the revenue generation in 2H. How exposed are you
now?

Figure 3:
The Revenue Hockey Stick

Let's assume you expect to make revenue of 2,000 this year and
this is 100% more than in the previous year. You want to make
4,000 next year. You will probably come out of Q4/this year with
875 so you are a little cautious for Q1/next year. Q1 is always
slower than Q4. Q2 is usually picking up before the holidays. Q3 is
a nightmare (in Europe). From the end of June to mid-September
people are on holiday (those who are not have plenty of time =
good time for prospecting!). Q4 is hectic, but short (December is
Christmas time).

Your revenue budget will look something like this (the famous
hockey stick).


You risk being exposed to the illusion of the perspective: The
challenges look smaller when they are far away!

Is the main portion of the Q4 target supposed to come from the
A-B-C combination?


The revenue model
Before you make the final "save" to a budget with a hockey stick
revenue profile, you must verify the feasibility against a revenue
model. A revenue model is a realistic replication of the sales and
implementation processes portions of your value chain - typically
in a spreadsheet. It is based on the fundamental metrics of how
much time (man and calendar) each step of the marketing/sales/
implementation process requires, the size of the average order and
your hit rate. The revenue model will calculate the order entry
and cash you can "produce" with the resources you have available
- provided the new markets and the new customers behave like
your current customers!

Figure 4:
Sample Value Chain

Do not forget to add the learning curve if some of the
revenue is going to be produced by people you have not
hired or signed up yet.

You may also want to be more conservative with your revenue
model if you are applying it to A-B-C situations, where your
knowledge about the new market and the new customers is limited
or non-existent.


Improving the process
Now let's assume that we want market penetration next year to
be more productive, thus improving the probability of achieving
the 2,000 in Q4. What should we change to make this happen?
Order size? Volume of leads? Sharper market segmentation?
Sales tools? Shorter sales cycles (how?)? Sales skills? Changes in
implementation? Changes in the products?

In order to justify that we can produce more with less, we must
be able to explain the cause-effect relationships and how we will
implement the changes, the investment required, the critical
success factors of the undertaking and KPI's telling us if we are on
the right track to achieving the improvements we expected.

Be careful with changing the revenue budget spreadsheet
anticipating that things will improve by themselves! Doing so is
playing on the "Luck" factor. It's like playing the lottery. You may
win, but the probability is very, very small.


The Fundamentals
We have written this eBook with the ambitious software company
in mind. The software companies with the aspirations of becoming
global market leaders in their respective segments.

Such a journey requires a tremendous amount of energy and
dedication on a road which is winding, bumpy, steep and
unmapped. We have explained how you could achieve alignment
and ensure that all energy is focused on pushing and pulling in the
same direction. Alignment directs the energy of the organization
in the one and same direction.

Describing the direction, the playing field and "the way we do
things" in your company (so that everybody is on the same page)
requires 4-6 fundamental frameworks to be in place:
1. Customer Value Proposition
2. Value Chain
3. Ideal Customer Profile
4. Go-To-Market plan

If you are operating a major portion of your value chain though
"partners" you will also need:
1. Partner Value Proposition
2. Partner Program

Customer Value Proposition
The concept of a Customer Value Proposition is not new. But how
do we define, test, maintain and document the Customer Value


Proposition?

We recommend using the NABC approach3.

The NABC approach provides a pragmatic definition framework
and a process.

3
The NABC approach was developed by Stanford Research Institute and is well documented
in the book "Innovation: The Five Disciplines for Creating What Customers Want “by Curtis
Carlson & William Wilmot.

Needs Approach
An attractive Customer Value Proposition A Customer Value Proposition must
must address compelling and critical define the solution components
customer pains for which the customer addressing the “whole product”
is prepared to allocate resources. challenge as well as two major parts
Identifying needs involves industry and/ of the value chain: the sales process
or domain segmentation, understanding and the delivery process. Thus the
the purchasing process and buying center definition of the Value Chain is a part
identification, where such needs are of the approach definition. When the
easily related to the value proposition. Value Chain involves third parties
Because these needs differ significantly participating in the sales or the
depending on customer characteristics, implementation process we must also
this framework element also assists with develop a distinct Value Proposition for
market segmentation. An important these players.
component of the needs definition is the
identification of the “Ideal Customer
Profile”.

Competition Benefits
The Customer Value Proposition must A Customer Value Proposition must
explain why and how the solution is explain how the benefits of the solution
superior to competitive alternatives delivered exceed the total cost involved
available to the customers. with migrating to and/or utilizing the
solution. The more tangible and specific
Keep in mind that most customers the benefit/cost ratio is defined, the
will rate the risk associated with your more impact it will have on the market.
"newness" higher that the technical If we are bringing a new product to
superiority of your solution. Focus on the market and/or if we ourselves are
how you can minimize the risk for your a new player in the market, we must
potential customers. consider the risk mitigation issue. The
customer will consider our “newness”
Prepare to compete with the "0 option." an additional risk = additional cost, for
The "0 option" is when the customer which we must compensate if we are to
decides to do nothing. If you are providing win the deal.
something new for which there is no
budget, the "0 option" is your toughest
competitor.


Value Chain
The Value Chain is a "by-product" of the NABC. However, we
recommend being extremely precise about defining, testing and
documenting the steps required to find, win, make and keep happy
customers.

A sample Value Chain is illustrated in Figure 4: Sample Value
Chain4.

Ideal Customer Profile
The concept of the Ideal Customer Profile is applied to narrow
our marketing efforts to those customers where we can prove
maximum value of our offering. Applying the Ideal Customer
Profile concept is very painful for many software companies. At
first glance it appears as we are making our market smaller. How
can ignoring certain segments of the market work to our benefit?

Only the market leader can afford expanding outside his core
market! The rest of us must focus on achieving a recognized
leading position in a segment of the market first5.

The Go-To-Market plan
The Go-To-Market plan is your customer acquisition roadmap.
It explains the HOW. How you will find, win, make and keep
your customers happy. Your annual plan will be the practical

4
Download the TBK Value Chain FactSheet to learn more about the concept and how to
use it.
5
Read more about the Ideal Customer Profile concept and download the Ideal Customer
Profile FactSheet from the TBK Consult web site.


implementation of your Go-To-Market plan6.

Partner Value Proposition
Using a channel of independent companies to resell, implement
and/or service your customers has been a long tradition in the
history of the software industry. For some software companies
the channel has been a major contributor to global success, but
for most software companies making it work is a depressing and
constant struggle.

A channel partner has his own DNA. The DNA of a channel
partner is very different from the DNA of an Independent
Software Vendor. The channel partner is running a different type
of business, with a different Customer Value Proposition and a
different set of management priorities than the ISV7.

Working through a channel does not make market penetration easy
and fast! Working through a channel is an additional complicating
factor. Only by facing this fact can you master the channel. When
you master the channel you then have a formidable multiplication
capacity.

The Partner Value Proposition addresses the needs of the channel
partner. You can use the NABC approach only when you are
focusing on the partner. Your Customer Value Proposition now
serves as a subset of your Partner Value Proposition 8.

6
Read more about Go-To-Market planning in the whitepaper “Designing Successful
International Go-To-Market Strategies.”
7
You can read more about the partner/ISV challenge in the whitepaper "Designing
Successful International Go-To-Market Strategies.”
8
You can read more about the Partner Value Proposition in the TBK whitepaper "Growth
through partners."


Partner Program
The Partner Program is the headline for the tools and services you
provide your partners AND the corresponding requirements you
ask the partners to fulfill.

There are basically two approaches to channel development:

A: Recruit as many as you can and see who survives

B: Be very selective and invest in the partnerships

We would say that "B" works best when you are building a channel.
"A" may work when you are expanding your channel. However,
poor performing partners may be a drain on your resources and at
the same time damage your market reputation. Be careful with
this approach until you have consolidated your market position!9

Conclusion on the fundamentals
Is it really necessary with all these concepts and frameworks?

If you are a small company where you know each other very
well, you are located in the same building and you control all the
processes to/with your customers, then you can probably run a
business without any of these frameworks. You simply attend to
the issues as they appear. You make quick decisions and change
them when they prove wrong. We actually believe that most
businesses are taking this approach.

The issue is that such businesses are not scalable.

9
You can find more about building Partner Program in the FactSheet "Partner Channel
Recruitment" from the TBK Consult web site.


The fast track
If you have the ambition of growing your business and becoming
the global market leader in your segment, then you must have
the basic frameworks in place. So what do you do if you have the
growth ambitions, but none of the concepts are in place?

1. Start with the alignment & identification check! It can be
done in less than a week or two and ensures that you are
all looking in the same general direction.

2. Then build your Customer Value Proposition. Bring
together your key people and get something down on
paper. Spend 1-2 weeks on the effort - not more. Then go
and test it with your current and your potential customers.
All the other frameworks will automatically flow from the
Customer Value Proposition.

Getting in front of customers as soon as possible (and remain
there ever after) is probably the most important element of any
framework development. Defining the frameworks is not an
academic exercise. It is a process where we document how we are
doing things and test that it actually works. We do so for three
main reasons:

1. We all work according to the same concepts. We waste no
time discussing every single business issue all the time.
From time to time we meet and improve the frameworks.

2. We shorten the learning curve of new staff members and
new partners. We don't need to reinvent the wheel over
and over again and we ensure that every one is telling the
same story.


3. We stay aligned - all energy is moving us in the same
direction.

You can only manage what you can measure. You can
only measure what you can describe. You can only
describe what you can understand.


Mitigating risk and exploiting
opportunity
One of the major differences between academia and business is
that proving something wrong in academia can get you the Nobel
Prize. That is seldom the case in business.

If you are preparing for next year and you believe that your
business could grow 100%, what happens if it doesn’t? Knowing
what you know for sure and knowing what just are assumptions
is crucial to identify the critical success factors of your plan for
the next 12 months. It will help you identify the Key Performance
Indicators and early warning signals that will enable you to cut
back or accelerate as early as possible.

The struggle with reality
You can never be certain. You never have so much information
that decisions are making themselves. You can spend too much
time and too much money on trying to be certain. When spending
time and money on trying to be certain, the marginal benefit of
the additional insight may be lower than the insight from simply
trying. You derive maximum insight out of “trying” when you have
defined a set of cause-effect and correlation presumptions first.
This is an exercise where business can learn a lot from academia.

The 7-step process
At TBK Consult we recommend using a 7-step process to stay in
tune with reality, distinguish between genuine knowledge and
prejudices and learn from our experience (the trying).


The 7-step process is an iterative process that can be applied on
the micro level as well as the macro level. The process is illustrated
in fig. 6.

Figure 6:
The 7-step process

“Insight” is the raw data. In this step you document what you
know and gather more raw data.

“Analysis” is leading to conclusions based on the data and
presumptions, which are based on interpretation of data plus your
hunches.

“Objectives” are determining what you believe you can achieve
based on your conclusions including your presumptions.

“Strategy” is the overall approach for meeting the objectives.

“Plan” is the step where you define who should do what, and by
when, to achieve the objectives.

“Execution” is the step of doing what you planned.


“Measure” is where you compare the results with your conclusions
and presumptions. The “Measure” is adding to your pool of Insight
and you can repeat the 7-step process knowing more than you
knew before.

The benefits of the 7-step process
The 7-step process is not rocket science, but it helps you organize
team work by keeping all team members synchronized on where
you are in the decision-making or execution process. It also
helps distinguish between what you know and what you assume/
presume, decide if you know enough to set objectives, set objectives
based on a documented foundation, and execute and learn, learn,
learn.

Small companies should typically make a lot of small 7-step
processes. They cannot afford huge Insight projects. Learning by
doing is more effective.

Bigger companies can afford to have bigger processes. Launching
an iPhone or an iPad type product obviously cannot be a small
project.

Improvement of current processes can be managed with many
smaller 7-step processes. Disruptive innovation requires more
preparation before hitting reality.

We hope you will become more effective, have better results and
have more fun using the 7-step process as opposed to what you do
today.


Mission/Vision and the 3-5 year
perspective
Your company most likely has a Mission and a Vision. How does
next year fit into this picture? While the Mission and the Vision
help your people and stakeholders understand why they are
working for your company and where you are heading, it is often
very difficult to keep in mind that the plan/budget for the coming
year is the next logical step towards realizing your vision and
living your mission.

Most stakeholders have a hard time comprehending anything
beyond the 3-5 year perspective. If you are a small local player
today it may be tough for your stakeholders to comprehend your
vision of being a leading global player in the future. Being the
global player may mean that you will grow from your current
50 people to 5,000 people, from your current 100 customers to 2
million customers and from one office in one country to 25 offices
in 15 countries. As business leaders we find this exciting and
challenging. We are sitting on the "bridge" and are steering the
ship through the unchartered waters. The folks on and under the
deck see things differently. They want to know when we dock in
the next harbor, so that they can have some fun.

The 3-5 year perspective should be fairly precise in terms of market
position, market coverage, number of customers, people, offices,
revenue, profit and other tangible measures that are meaningful
for your business. Meeting the 3-5 year ambition should be a
logical tangible milestone in fulfilling your vision.


Next year - the next step

Although we need missions/visions, 3-5 year perspective execution
is done one day at a time. The budget and the positions we reach
by the end of next year is what we can expect people to relate to
here and now. The annual plan will spell out what each person
should do every day, week and month to make sure we all meet or
exceed the objectives by the end of next year.

There is a need for a 3-5 year perspective as a milestone towards
the grand vision.


What comes first, the plan or the
budget?
To make the budget come true, you need a plan. To execute the
plan you need resources, which are allocated through the budget.
Plan and budget go hand in hand.

That may not always be the case in real life. Have you ever
received a budget that says: 'Increase revenue with 15%, improve
the gross margin with 6% and reduce your operating expenses
with 5%.' Your job is to execute within this framework. You have
to make and execute a plan, but you cannot influence the budget
(accept it or quit).

As an Independent Software Vendor I assume you are controlling
the planning and budgeting process yourself. Some corporate
executives sitting 5,000 miles away and protected by layers of
corporate middle management do not dictate to you any budget
objectives and framework.

The Process Schedule
I assume you want the budget, the plan and all associated
frameworks (commission plans, marketing plans, hiring plans, etc.)
to be ready before the end of the current fiscal year. Depending on
the size of your organization this means that you will have to start
the planning process in FQ3.

The planning process is obviously an additional operational
burden on the organization at a time where the closing of year-end
is already a stress factor. Knowing the schedule well in advance
and having it integrated as a part of your operational framework


makes the process less stressful.

An annual budget/plan schedule could look like this:
ID What Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

A Prepare and publish 4
budget, planning
guidelines and schedule
B Publish 2011 forecast 1
C Publish 2012 budget 1
key targets (optional)
D Deliver budget and 2
plan 1
E Base budget and plan 1
1 review
F Deliver budget and 2
plan 2
G Base budget and plan 1
2 review
H Deliver final budget & 1
plan
I Final budget release 1
J Associated 2
frameworks
K Kick-off 1

If you follow this schedule you must announce the planning
guidelines and schedule no later than the end of FQ3. You will
then be able to run the Kick-off in the first week of FQ1.

A. Budget and Planning Guidelines
Depending on the size of your organization the budget and planning
effort will involve several people. There is no value in leaving the


format and the level of documentation to each participant. On
the other hand you must give the participants ample time and
information to learn how to operate within the given guidelines.

Your CFO will most likely assume the role as
“the budget engineer” and he will also provide
major portions of the data on cost of goods
sold (COGS) and operational expenses
(OPEX). There is no need to ask the P&L
(and cost center) managers for data that
already resides with the CFO.

I strongly recommend starting your next year planning process
defining the format and level of documentation you will require
from the parties involved. I also recommend being quite thorough
documenting all lines in your budget. It should be possible for
someone, who was not involved in the budgeting process, to
reconstruct each budget line. Ensure that each budget line is
assigned to an individual.

For some reasons it seems to be difficult for people to write down in
plain text why a number in a budget line is as it is. Be persistent.
Ask for plain text explanations.

Excel? - No!
Unless you are a very small company and one person has the
full overview, Excel is not the budgeting tool of choice. Find and
implement a genuine budgeting software framework.

You can find an en excellent review of the issues related to
budgeting in the IBM whitepaper “Best-practice Budgeting”.
The whitepaper is written for larger companies, but most of the
considerations apply to SMB companies as well.


B. This Year Forecast
In the next year budget and budget review process, you will want
to compare it with this year. I recommend making a “this year”
forecast, which is the one used during the budget and planning
process. Most of the operational expenses (OPEX) will be quite
easy to forecast while revenue (REV) and cost of goods sold (COGS)
may be more difficult. You always have the option of adjusting
your “this year” forecast during the planning period if the outlook
changes.

C. Next Year Budget Key Targets
There may be situations where you want to set the key targets for
next year before the detailed budgeting and planning commences.

Let’s assume you are operating in a market with an expected 6%
growth next year. You believe your value proposition is strong
enough to justify growing revenue 50% and you want the sales and
marketing staff working on initiatives and plans make it happen.
You want them to prepare the penetration of international markets
and you want to remain cash positive throughout the year.

It is tempting for any CEO to ask the staff to come back from
the budgeting and planning exercise with something matching
company ambitions. However, it is also dangerous.

Commitment and ownership to a budget and a plan is crucial.
Never give anybody the opportunity to claim that the budget and
the plan is not theirs. Over-achievement is seldom a major issue,
but under-achievement always requires an explanation. The first
excuse someone will look for is: “This is not my budget/plan”.


This doesn’t mean that you can only work bottom-up and that you
will have to accept anything which is being brought forward. But
it does mean that you will have to do your selling and take the
fights up front, when major differences occur.

D. Submit Budget and Plan 1 (BP-1)
BP-1 is the first iteration. P&L (and cost center) managers are
submitting their budgets and their plans. Management can
consolidate the budgets and review the plans. The documentation
delivered with BP-1 should be adequate for management to justify
if the budget/plan is sufficiently solid and balanced.

E. BP-1 Review
The budget and plan reviews are “workshops” where the consistency
and the alignment with overall objectives and guidelines are
verified. P&L managers are making their presentations and
executive management is giving them a “hard time”.

The term “review” certainly has a negative connotation for many
people. Although many consider a “review” a “hostile” type of
get-together, there is no way around it. Predicting and making
the future, as a market leader, requires a frank discussion of
ambitions, opportunities, approaches, resources and so on.

By the end of the review P&L managers as well as executive
management will go back and adjust the budget and plan
preparing for a second iteration10.

If you do not enjoy and see the benefit of the budget and plan reviews, you may be in the
10

wrong place. It is an integrated discipline in any management position.


F. Submit Budget and Plan 2 (BP-2)
BP-2 is the second iteration. P&L managers are submitting their
revised budgets and their plans. Management can consolidate
the adjusted budgets and review the adjusted plans. The
documentation delivered with BP-2 should be adequate for
management to finalize a preliminary budget/plan.

G. BP-2 Review
A new round of budget/plan workshops are performed.

By the end of the 2nd review, P&L managers as well as executive
management will go back and adjust the budget and plan the
preparation for the last iteration.

You may need several iterations before you can finalize the
budget, but be careful. Although the devil lies in the details, there
is no point in fighting over the peanuts. It’s better for executive
management to accept budgets and plans, which are “owned” by
the P&L managers, than to dictate the numbers. If too big a gap
exists by the end of iteration 2, something or someone is wrong,
and you are facing a fundamental management challenge which is
not related to the budget.

H. Submit Final Budget & Plan
The changes and adjustments agreed to during the BP-2 reviews
are submitted and consolidated. Final corrections are made and
agreed to.


I. Final Budget/Plan Release
I have performed consulting with many companies where there was
confusion about what the final budget actually was. This should
never be the case. Depending on the underlying IT platform the
budget will be uploaded to the reporting system and used for all
reporting of actuals versus budget. The associated documentation
is made available to the respective P&L managers and will serve
as a great support tool next time you need to revise the budget/
plan.

J. Associated Frameworks
There are a number of associated frameworks which cannot be
completed before the budget and the plan have been finalized. The
two most prominent are:
1. KPI’s
2. Compensation plans
KPI’s are defined to serve as early warning “traffic lights”.
Responding to actual versus budget figures makes your ability to
react much too slow. You must react when you can foresee that you
will not meet the budget or that you can outperform the budget.

Compensation plans should be tied to KPI’s as well as
performance.

K. Kick-off
Communicating the final budget and the final plans to the entire
organization is a must. The entire management team should make
their contributions, but again a warning:


Staff are normally not interested in the budget details. Presenting
slides with numbers make people disconnect.

PAINT THE BIG PICTURE AND FOCUS ON THOSE
ELEMENTS, WHICH AFFECT EVERYBODY.

Focus on the vision, the mission, the ambition, the 3-5 year
perspective and the implications for the entire organization.
Demonstrate a united management team passionately committed
to the course, the plan and the objectives. Make it a fun and
entertaining experience.

And a final note: Don’t bring in an external keynote speaker
to cheer up the crowd11. The kick-off is an internal event and
management must sell the messages and create the enthusiasm
and the winning spirit themselves.

11
You can use external help arranging and executing the event.


Your budget, your plan and
the KPI’s
If you are running a fast growing business and your ambition is
to become the global market leader in your market segment, you
need KPI’s. Having a budget and a plan is not enough.

Your budget is not your plan. The budget is all the results which
you expect to achieve as an outcome of your activities = executing
your plan. How big is the delay between your activities and the
numbers in your budget? In most software businesses they are
quite substantial.

Let’s pick a few examples.

R&D
You have a roadmap for your product development. According to
the roadmap, you must release 3 additional modules in Q2, release
integration to two third party systems in Q3 and release a new
version of your software in Q4 with improved performance, several
new features, an improved API and facilities for managing local
market and language requirements. According to the company
strategy, you will start penetrating the German market next year
and need a German version of your Q4 release. You must also
release services packs as required depending on the bugs reported
and patches on a case-by-case basis.

The critical path will provide the KPI's.

You have a plan in place for delivering. The plan calls for training
your current staff in various new tools, adding 5 new developers


in Q4, 5 in Q1 and 5 in Q2. You must engage a translation agency
and someone to assist with making the software platform capable
of supporting local market versions. You also have plans for
adding people in the 2H but they have no impact on next year's
roadmap. You currently have 3 open positions, which should have
been filled in Q3.
Q1 Q2 Q3 Q4
Module A
Module B
Module C
Integration to X
Integration to Y
Version 8.0
Version 8.0 German

I assume you have laid out the critical path for delivering on your
plan and commitments. However, reality already differs from your
plan. Some of you key people resign, you cannot hire the people
you have planned (lack of qualified candidates) and those you
eventually hire don’t have the skills you expected. The software to
manage your local versions doesn’t behave quite as you thought.

What can you do to compensate and still deliver according to your
roadmap? When do you know that your only option is to adjust the
roadmap?

We must assume that there is a relationship between the roadmap
and the revenue potential of your company12. The sales people
must do whatever they can to keep up sales compensating for
the delays, but it is hard to compensate 100% and you cannot
compensate forever. Expecting the sales department to keep up
100% may be unrealistic and even demotivating for morale.
12
This statement will come as a surprise to many software companies!


Delays in product roadmaps are critical to any company, but the
earlier you know the better chances management has for dealing
with the challenges.

Sales
The funnel/pipeline definitions will provide the KPI's.

Your current average sales cycle is 9
months, the average order size is €
200,000 and your hit rate is 25% of
qualified prospects. Average number of
debtor days is 45. In the next year budget/
plan you have initiated activities which
should reduce the sales cycle to 8 months
in Q1, 7 months in Q2-3, and 6 months is
Q4. You have also initiated activities
which will improve prospecting, ensuring
that you always have a pipeline value of 5
times that of your order entry budget. You have taken steps to
reduce debtor days to 30. You have only included 50% of the
improvements in your order entry, revenue and cash flow budget.

Your current customer satisfaction level is 85%, which you consider
too low. Your churn rate is 10%. You have started initiatives to
improve customer satisfaction to 90% and expect this will reduce
the churn rate to 5% through the coming year. You have also
initiated up- and cross sales initiatives, which should increase
order entry from the installed base with 15% next year compared
to this year.

How soon will you know if you are on or off track?


Organizational health
Your most recent internal employee satisfaction survey showed
low levels of satisfaction in the areas of Autonomy, Management
Style, Engagement and Life Balance. The YTD attrition rate is
>8%.

You have included activities in your next year budget/plan to
improve on the problem areas and expect to reduce attrition to
<5%. However, you also know that you must replace some of the
low performers who may not be able to adapt to some of the new
business approaches you will introduce.

KPI's
Without Key Performance Indicators you will either:

1. Miss the opportunity of accelerating when initiatives work
out better than expected

2. React too late when initiatives work slower/less than
expected

You need an intuitive presentation of the KPI's.

We shouldn’t start any initiatives
without having a cause-effect
relationship “theory” and an
expected outcome. We shouldn’t
wait until the money has been
spent or the revenue missed
before we react.


KPI’s help us to stay on top of the initiatives we have started.

Reality and plans never match; corrective actions are always
required.

Having the KPI's in place, we must implement a system which can
present the KPI's on a regular basis, in an intuitive way and on
demand. There are numerous platforms available for making the
presentation, but the data must be provided from your operational
systems.

Too much too fast
You may have gotten a little breathless reading through the
examples above. So many initiatives!

You don’t have forever. The market is changing, the technology
is changing, the hype is changing and the vibes are changing.
That being said, there is a limit to how much you should change
simultaneously. You can certainly start too much, and when you
do so the risk is high.

Rule of thumb is: Prioritize. Only start what you can
manage. Fill up as you release capacity. But keep a
high pace and maintain the sense of urgency. Go, go,
go.


The people on the bus
Did you ever get the opportunity to read “Good to Great” by Jim
Collins?

Jim Collins published his “Good to Great” bestseller in 2001.
Jim Collins spent the 5 years researching why some companies
suddenly broke out from their peer group and continued to perform
3 times better than their peers for 15 consecutive years.

He extracts 6 principles, or
“modes of operation,” which all
great-performing companies seem
to share and which good-
performing companies seem to
lack.

The first principle:

First who… Then what!

"We expected that good-to-great
leaders would be setting a new
vision and strategy. We found
instead that they first got the
right people on the bus, the wrong
Figure 7: people off the bus, and the right
Jim Collins: From good to great people in the right seats – and
then figured out where to drive
it. The old adage “People are your most important asset” turns out
to be wrong. People are not your most important asset. The right
people are13."

13
Page 13


Does the “people on the bus” principle also apply to Independent
Software Vendors?

Yes, I personally believe this principle is universal. My personal
"research14" reveals the exact same findings. Getting the wrong
people “off the bus” can release tremendous amounts of energy.
Getting the right people in the business makes a dramatic
difference.

14
Before making it into management consulting I worked for 2 government institutions,
taught at 2 Universities, worked as a salary man for 11 private companies of which 3
were start-ups and 2 were US multinationals, co-owned 3 companies and served as a non-
executive member on three boards of directors. As a management consultant, I have worked
for numerous companies. In each and all of these companies and institutions you could have
replaced 90-99% of the people with no negative impact on the performance. In fact you could
easily have dismissed some and experienced an immediate improvement in performance


The small versus the large organization
Jim Collins writes about “large” organizations. He is studying
established and listed companies. The bus he is referring to is the
“top executive bus.”

What about smaller organizations? The < 1,000 people
organizations?

As this eBook is targeted at the ISV (Independent Software
Vendor) with aspirations for becoming the new market leader, we
will focus on what the “people bus” principles mean to them.

The larger the organization the smaller is the percentage of people
who make a difference. Procedures, infrastructure and inertia take
over. It is easier to find replacements for routine jobs and there
is a large pool to source from. I am not saying that people don’t
matter in large organizations. I am just saying that you cannot
expect to have 100,000 “exceptional” people in a 100,000 people
organization. Large organizations need exceptional management
to organize and motivate ordinary people to deliver exceptional
results.

The smaller the organization the greater the percentage of people
who make a big difference:

1. The degree of specialization is smaller; you need people
who can cover multiple disciplines.

2. our installed customer base is still small, you need
Y
people who can sell to new accounts and compensate for
your lack of image and reputation.

3. ou need to manage the Value Chain much faster,
Y


adapting to the needs of your customers and defeating
your competitors.

4. he internal procedures are still being defined; you need
T
people who can think and act on their feet.

Lack of market share, procedures, infrastructure and inertia
requires leadership, initiative, social skills, courage and
out-of-the box thinking and behavior. It is difficult to find
replacements for such people and there is only a small pool to
source from.

"Der Fisch stinkt vom Kopf"
15
The “ultimate, #1 top challenge for most small organizations
is executive management. Executive management in small
organizations is mostly founders/owners. If executive management
shouldn't be on the bus, then we certainly have a challenge.
According to Jim Collins' findings, great companies all have level 5
leaders and level 5 leadership cultures:

1. Great top leaders are passionate and strong willed, but
they are not big egos, tyrannical or charismatic. They
listen well and have an integrating leadership style.

2. They are focused on the success of the company and the
team and not on their own success.

3. They understand how to attract the right people and
move/get rid of the wrong people.

4. The want and can face brutal facts.
15
“The fish smells from the head”


5. They are looking for a market/segment/concept where the
company can become a clear #1.

If you are a top executive by default because you are the owner of
the company, you must look yourself in the mirror and ask, "Do
I have these qualities?" If not, you may serve your own interests
better by stepping aside. Leave the bridge to one who has these
attributes.

Adizes Corporate Lifecycle16

This is one of the most difficult undertakings in the life of any
company. Adizes calls this issue the Founder or Family Trap.
If you are involved with startups and companies in the Infancy,
Go-Go and Adolescence stages you see this issue all the time. It is
hard to replace the passion of the founder, yet he/she is a bottleneck
for growth. You also see them in large organizations where a new
16
There may be more than one founder/owner working in the company. Let's just focus on
the top man/woman for now.


generation of family members lack the qualities required to lead
the organization.

The issue is two-sided:

1. You need the founder to step aside, take another seat on
the bus or leave the bus.

2. You must find a CEO who can work with the founder if he
remains on the bus.

Being a CEO in a company where the founder17 is still on the bus
requires that the CEO becomes co-owner. It is highly unlikely
that the day-to-day teamwork can survive a CEO as a mere salary
man. Finding a CEO who can replace a founder is a real challenge.
It's beyond the scope of this paper to dig into this issue, but we do
recommend getting help from executive search professionals.

Manning the bus
With the right CEO in place the rest of the bus can be organized.
How do you apply the "First who… Then what" principle in a small
and medium sized ISV company?

Following our recommendation described above you can perform
an alignment check. An alignment check will show to which
degree your current team share the same perception of the
fundamentals: the customer value proposition, the growth strategy
and importance of the 15 key management areas. The alignment

17
There may be more than one founder/owner working in the company. Let's just focus on
the top man/woman for now.


check18 will indicate if you all want to take the company in the
same direction. However, the alignment check will not reveal if
the individual team member has the profile for executing your
strategy and plans.

We recommend using the following priorities in reviewing your
current team members and in searching and selecting the "right"
people for your ISV bus19.

Specialists: You need people with outstanding technical skills
and people with outstanding domain knowledge. In addition they
need to develop management capabilities. Growing from your
current local position to global leadership requires an outstanding
product offering20.

Flexibility: Look for people who have the skills required, but who
are not afraid of covering all the other bases, when needed.

Energy level and adaptability: Look for people with drive
and passion. Maybe they will drive too fast at times, but you
can manage that. Maybe they will yell at each other, but you can
moderate that. Having a bunch of people being nice and polite to
each other doesn't get you moving. They must respect each other,
but they should be prepared to take a friendly fight now and then.

Social skills: Teamwork can create massive results. The
challenge is to find those who apply the social energy on company
18
How often should you perform an alignment check? We recommended performing an
alignment check no less than twice a year and no less than 100 days after adding new
people to your management team.
19
We are talking about the 5-10% of the staff including the management team. It is this
group who will drive the growth and development of the company.
20
We are talking about the whole product here. All parts of the whole product must be
outstanding and extremely competitive. Only the market leader may survive with a
mediocre product for some time. The challenger must be superior in several key areas.


issues rather than on everything else. These days teamwork can
be virtual!! People don't need to be in the same room all the time
to release social energy.

Growth opportunity: Look for someone to whom this challenge
represents an opportunity for personal growth. You cannot afford
green rookies, but choose ambition over experience.

Two-way assessment center: Don't rely on interviews only. Use
personality tests and preferably “the two-way assessment center 21”

Avoid
Avoid people from big companies who are
used to all types of support functions and
prestige artifacts. You may be impressed
with someone who has worked for a large
recognized company. Don't ever make that
mistake. You cannot transfer the brand
value of a great company to an individual
who worked there. You should in general
always disregard whom they worked for. Look at who they are,
what they have done and the results they have achieved.

21
To select and uncover who possesses the right, often holistic, qualities is particularly
difficult. General psychological tests, list of qualifications, scrutiny of CVs and references,
supplemented by interviews can reveal if the candidate has the potential to be an immediate
success in a well-described job. But whether personality, values, social skills, energy,
communication skills, shared chemistry and business acumen match the requirements
are best tested in a simulated reality. The two-way assessment center is a 3-hour session
where the candidate is asked to respond to a certain challenge (maybe provided in
advance). During his presentation he is confronted with a series of additional questions and
information, which represents the "brutal facts" of the state of the company. The two way
assessment center always changes the ranking of the candidates and often even (on paper)
top qualified candidates fail to act on their feet and simply disqualify themselves.


Avoid political creatures. They are difficult to spot. People who
have survived in the top of large organizations are often (but not
always) political creatures. You find them everywhere. They suck
the energy out of you and the organization. "Political ability 22" can
be a true asset in dealing with external stakeholders (customers,
vendors etc.), but never internally.

22
Political behavior is based on making rational calculations of other people's power and
acting accordingly.

Strategic Planning and Budgeting Guidelines for Independent Software Vendors

Strategic Planning and Budgeting Guidelines for Independent Software Vendors

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a Strategic Planning and Budgeting Guidelines for Independent Software Vendors

Semelhante a Strategic Planning and Budgeting Guidelines for Independent Software Vendors (20)

Strategic Planning and Budgeting Guidelines for Independent Software Vendors