Posted by andreag

Sobering News

I recently had coffee with a CEO with whom I had worked for years completing strategic planning, board training, CEO evaluations, etc. The company had fallen on bad times prior to his moving on and upon reflection, it was his view that a vision that was too optimistic was, in part, the source of the problem. I have been reflecting on his comments and want to share some thoughts with you.

BHAG

Those of you who have gone through our Vision Navigation® strategic planning process know that we employ an HBR article by Collins and Porras, entitled, “Building Your Company’s Vision”. In it they prescribe that success depends on defining a “Big, Hairy, Audacious Goal” as your vision. That vision should be compelling, act as a focal point for action, have a clear finish line, etc.

Collins and Porras state that the BHAG should be just on the edge of real, that it should have “gulp factor”. That is, you are a bit scared to share it because you will be held accountable to accomplish it.

man explaining financials

Well, the BHAG in question met all those tests. I wasn’t there, but am told that the day after the BHAG (an aggressive growth target) was adopted, the subsidiary CEOs met and agreed that they had better get going if they were going to meet that goal. Such a call to action is the intended effect of a BHAG.

It may have been that those CEOs, in their heart of hearts, thought the call was unreal. I can’t really say. Regardless of their underlying commitment, however, their spoken agreement to the aggressive target was given. Everything seemed to be in place for a successful journey.

So what went wrong?

My view is that the call to action did not translate into strategic planning at the subsidiary level that had real integrity. Instead, the vision became a directive from the board that drove financial projections. There was never a process to either seriously question the assumptions underlying those financial projections on the one hand or to appropriately plan how to get there on the other. By the time it was understood through financial reporting that the goal was too aggressive, it was too late to turn around what became a serious cash crisis for the overall organization. Had upper management or the board challenged the basis for the original assumptions, then the changing trends and conditions in the markets might have been foreseen and some of the bleeding prevented.

How to avoid this in your organization

Trying to please the board by painting a rosy picture is rooted in human nature and survival instincts. It is hard to prevent. Hence, this tendency becomes a risk factor for any company. You have to assume that the tendency is built into the projections that make up a BHAG. You can counsel a team to “under promise and over deliver”, but it is hard to avoid.

In the end, financial projections and, for that matter, strategic plans are only as good as their underlying assumptions. My view is that, rather than question the numbers (it’s only math), challenge the assumptions. Specifically, ask:

  • What are the assumptions behind the financial projections based on?
  • What research was conducted to support the assumptions?
  • What expert opinion was utilized?
  • How much intelligence regarding shifts in competitor and customer behavior was gathered?
  • What range of assumptions was considered, and why was the particular number within those assumptions chosen and used?

If the answers satisfy you enough to move forward, begin gathering data to monitor and validate or revise those assumptions on an ongoing basis. You may well be able to spot a change in the underlying assumptions that were the drivers of your original financial predictions well before you see the actual numbers change on your financials. Those who spot those changes will survive.

Your thoughts?

I am interested in your thoughts. Drop me an e-mail to start a conversation.