2021 Planning and Setting Board Expectations

If 2020 has taught us anything, it’s to expect the unexpected.  Between the unending pandemic and accompanying recession, this year has introduced a wide range of new, unpredictable variables to consider when planning for the future.  With all of this in mind, The Circle convened this week to discuss different planning approaches, general planning advice, and tactics for communicating these plans to the board.  

We were joined by our friends Rob Krolik, Lee Kirkpatrick, and Dave Faugno, all current and former CFOs of companies like Yelp, Twilio, and Qualtrics. They gave key advice on the planning process and helped facilitate discussion from their fellow Circle members.  To further stimulate conversation, our Circle Members split into smaller groups based on COVID’s impact on their businesses, and our VIPs led brainstorming sessions focused on specific scenario planning.  At the end of the Call, the full group reconvened to discuss best practices for communicating these future plans to the board.  Here are the key takeaways from our conversations:

General Planning Best Practices

CEO Alignment 

To kick off the conversation, each of our VIPs agreed that getting on the same page with the CEO is the most important step for a CFO in beginning the planning process, regardless of the relative uncertainty in a given year.  It was recommended CEO and CFO sit down together sometime in late-summer for public companies or early-fall for private companies to discuss projections for the upcoming year. This sit down includes the review of top-line, margins, expenses as a percent of revenue, bottom-line, and the assumptions behind it all; laying everything out together then allows for a unified position when consulting the rest of the peer group, which is the CXOs, and then the board.  Not to forget that the most critical and most significant discussion will likely be to align on “do we want to lose cash, or do we want to gain cash?” Our VIPs also recommended that CFOs stick with no more than two different versions of a plan, like an 80% confidence plan and a 50% confidence plan; indeed, you want to present other essential models, but more than two can create confusion for the Board.  

Building off the main point on the importance of CFO-CEO alignment, Dave suggested taking that alignment forward and incorporating longer-term planning into the annual planning process.  Gaining agreement on what the longer window looks like for the company allows management to map out the strategic priorities that a company then needs to hit each year to achieve its long-term goal.  It’s critical to take a broad look at the company and consider what you’re good at, how you’re looking at the competition, and what you should focus on going forward.

“Having that sort of North Star both from a longer-term perspective and then from an immediate perspective helps drive those conversations about what are the priorities.”

Finally, Lee stressed the importance of having a strategy session before the detailed planning session early on, discussing where you are and where you want to be in the long-term. This strategy session will align where the CEO and CFO want the company to go with the operating plan. When getting down to the operating plan, it’s important to fix as many of the variables as possible.  In particular, Lee recommends setting a clear revenue goal early and building the rest of the plan off of that goal.  In his experience, Lee described how he would sit down with the go-to-market team, consider current revenue and historical growth rates, and figure out a reasonable, set revenue goal for the upcoming year.  Fixing a revenue goal provides a solid foundation for building the rest of the plan around, thus stabilizing the planning process.  

CXO Alignment

To avoid a planning/budget tug of war type of situation with peer CXO, it’s essential to have the framing conversation aforementioned with the CEO and possibly have the Board’s buy-in as well. When sitting down with the entire executive team, you want to share what the team is going for and stress the importance of making it work and understand if there are any issues or struggles for them while not micromanaging their initiatives and details supporting the plan. Rob shared, “later in my career; I just ended the tug of war conversations by saying, ‘look, as a company we’re trying to achieve this. We’ve all sat in a room and agreed to that. This is the amount of money. Tell me what you can’t do because of this, but also tell me what you can.” Dave further emphasized the importance of a stress test when guiding their peer groups through the prioritization process for allocating resources based on plans. “Forcing the teams to talk about what they’re not going to do and why they’re going to do the things they are, I think, is an essential part of the process” in working through tough trade-off decisions.

Is the CFO the leader guiding the CEO, the CXOs, and ultimately the board? “The CFO owns the [operating] plan, absolutely.”

Top-Down vs. Bottom-Up 

Throughout the conversation, a strong preference for a top-down approach to planning became clear; however, throughout the discussion, both our VIPs and Circle members alike presented examples of how a hybrid approach could be most beneficial.  Indeed, having the CEO’s alignment conversation and articulating that framework to the CXOs allows each member of the executive team to prioritize their department-specific goals and figure out which of those goals they can spend on to achieve the larger annual goal.  Ultimately, the top-down approach to framing the annual operations plan helps keep the company aligned with what it believes is important. It further forces the executive team to consider the tough trade-off decisions necessary to achieve those important goals.  

As we moved into smaller groups, some conversation shifted to figuring out a hybrid between the top-down and bottom-up approaches.  Indeed, a few different members pointed out that a bottom-up approach, particularly when building OKR commitments, helps with buy-in and objectives from operators.  However, linking the operating plan and the specific OKRs of different operations can be unnecessarily confusing and potentially stifling. Instead of forcing operators to fit their views and plans for their team into a spreadsheet, a more hybrid approach to the planning process would involve building OKRs that deliver on the set operating plan and strategy defined in the CFO-CEO alignment conversation.    

Scenario Planning 

As the conversation moved on to discuss more specific scenario planning, Circle members split off into smaller groups designated by whether COVID has had a positive, negative, or neutral impact on business.  While a certain degree of disorder is expected when planning for the future, especially for those companies in the start-up space, members did agree that the pandemic has brought unpredictability to a new level.  

“You’ve got normal uncertainty and an entirely new layer of uncertainty due to COVID.  It makes it distinctly more difficult for planning.” –Tim Bixby, Lemonade      

One of the key recommendations that members brought up in the smaller groups was the importance of having a dynamic plan to begin with.  While it is somewhat common for companies to develop multiple distinct plans for different scenarios, the process of putting those detailed plans together is quite time-consuming, and a company might be better served by developing a base plan and then considering the different positive or negative factors that might affect directionality.  For example, there was some discussion about introducing the concept of stage gates into the annual plan. With stage gates, the company keeps track of a few key metrics related to performance, and different phases of the plan become unlocked as the company either achieves or fails to hit those triggers.  

Regardless of how many plans a given company develops, or how dynamic said company’s single plan is, there was near-universal agreement on the importance of reassessing the plan on a quarterly basis.  Indeed, having the single year “North Star” goal to orient the plan is extremely significant for strategic purposes, but being willing and able to adapt that plan throughout the year is necessary for survival in a rapidly changing world.  With the flexibility that quarterly reassessments provide, a company can feasibly allocate more resources if it’s ahead of plan for the year; the said company can also scale back its resource allocation if it appears behind schedule.

Dealing with the Tough Times

For those companies hit hard by COVID, planning for 2021 presents a particularly unfortunate set of challenges.  Again, the CFO and CEO must be on the same page about what needs to be done in terms of making cuts and RIFs; there will be pushback no matter what, and pre-emptive alignment on what exactly needs to be cut will help eliminate the chance that you have to ask for more concessions down the line.  Indeed, in the specific case of a Reduction in Force (RIF), the cuts need to sufficiently address the relative issue. More than one reduction will lead to a loss of confidence in the management team by the employees.  

While cuts are meant to address particular financial issues, there is still the possibility that a company will need to ask for more funding to stay on track.  If a company finds itself in this particular position, it needs to have a strong plan on how the additional capital will be deployed; without a compelling case as to how their money will help the company emerge stronger on the other side, VCs and other investors will not risk the opportunity cost.  Particularly with relation to planning for 2021, framing where the company would be without the negative effects of COVID is a good strategy for navigating the tradeoff of asking for more funds without having hit certain milestones. A pandemic is a “Black Swan event,” so most investors will be willing to ignore it if you can show them the pro forma.  

Board + Team Communications

First and foremost, there should be no surprises when communicating these plans and goals to the board.  In fact, by the time of the board meeting, the CFO should already have had discussions with each board member addressing any concerns and understanding the opportunities and challenges the company faces.  Further, developing a relationship with the independent audit committee chair and recruiting them into the planning process can help diffuse any potential conflicts during the meeting, as said audit committee chair will be your partner in bringing the decision points to the table.  

In terms of communicating these planning decisions internally, the strategy depends on whether a company is public or private.  In a private company, open communication is preferred, and the revenue goal communicated to the board needs to be the same goal that is communicated to the team.  However, as a company transitions from private to public, said company should wean off of open internal communication, and instead just communicate each group’s departmental goals rather than the larger goal.  

Finally, while there may be a temptation to introduce some gamesmanship about what numbers you tell the board versus the team, too many different plans or sets of numbers will cause too much confusion.  Communicating both baseline plan and a target plan to the board, while sharing the target plan to the company, seems to work best.