Uncertainties in life are plentiful. We face stress, frustration, chaos and disappointment. To bring structure and stability in our lives and our corporations, we look to the predictable; things we can count on. What if it were possible to take the same sources causing corporate stress and instead, use them as agents to reduce chaos and actually improve enterprise business performance?
As business leaders, when we wake up in the morning there are two factors that we know are predictable that we can count on: continuous change and time. This is commonly referred to as the new norm. As we reflect on the global change we faced in the 90s, it was the first time we encountered an increased the rate of change around the world. Since the Great Recession, we have learned that the 90s were not a singular acceleration in the rate of change but rather the beginning of a new rate of continuous change due to an unpredictable global economic climate. Another constant factor is time. “Time and tide wait for no man” as they say. I have witnessed business leaders take these two constants, continuous change and time and instead of fighting the inevitable or using a crystal ball to predict the unpredictable, they have found a way to put this new norm to their competitive advantage.
For years, our most successful and largest global companies have operated with an Annual Operating Planning (AOP) cadence. The typical AOP process kicks off with planning when you are one-half to two-thirds of the way through the fiscal operating year. It starts at the very top where the corporate “C” team identifies three to five year financial targets. Next, these financial targets are turned over to the subsequent level of executive management to create the high level strategies and initiatives required to meet the financial targets. The AOP process then takes those agreed upon financials and business initiatives and proceeds through a cascading activity engaging many employees across all functions and business units, thus adding more levels of discussion, adjustment, debate, modification and input from those executing the plan.
The objective and purpose of engaging wide and deep during planning is simply alignment. Without alignment a corporation cannot execute the plan – alignment increases the ability to execute with success. To accomplish alignment, the AOP process requires a number of iterations, meetings and collaboration that occur over a three to four month period. More time is required for bigger companies with complex portfolios and less time for smaller companies with less complex portfolios. Once alignment is accomplished, the company locks down their innovation, product, M/A, distribution, cost and other enterprise initiatives required to accomplish financial and strategic targets. Budgets are also locked down and resources are assigned to the initiatives from which companies operate for the following nine months. So goes the cadence.
Today’s process does not work!
Recently, I was in a collaborative session with fifteen of our global customers (ranging from $2B to $30B in size) and asked how many were struggling with their AOP process. One hundred percent of the hands went up and 85% already had actions in place to change their AOP cadence process.
Why is the corporate enterprise AOP going through a fundamental shift?
On average, it takes a company 90 days to gather information and 90 days to assimilate, analyze and prepare for planning meetings. The executive team takes 30 days for decision making and to lock down plans. By the time plans go operational the market has already moved and changed. The company’s plans can often become irrelevant. By the time the enterprise reacts with counter plans it is too late and some other company has taken the first mover advantage position. In today’s continuously changing economic environment and under the constant pressure of time, today’s AOP process no longer serves the enterprise purpose.
A study by economists Diego Comin and Thomas Philippon showed that in 1980 a US company in the top fifth of its industry had only a 10% risk of falling out of that tier in five years; two decades later, that likelihood had risen to 25%1. Naim, author of the book The End of Power, says multinationals are also more likely to suffer brand disasters due to the fast pace of change. Another study found that the five-year risk of such a disaster for companies owning the most prestigious global brands has risen in the past two decades from 20% to 82%1. Fortunately, I have witnessed some companies apply a new AOP process that transitions the “new norm” from high risk to high reward. Fast moving enterprises are attacking and throwing out the old AOP cadence for a new one, a cadence that no longer stands alone as a planning process but rather is integrated with operational activity. This new AOP methodology is enabling these huge corporate tankers to move in dramatically less time and take advantage of new market conditions prior to the competition.
Don’t do the “same old, same old” this corporate planning season. Instead of being the victim of what we can count on (time will move and the economic environment will change), take that reality and assume them as the new norm and use them to your advantage for corporate success.
Previously, I mentioned a sea change that is happening around corporate survival and the ability to operate in our new norm environment of continuous change. I would like to share how some of the global companies with whom I work are making great progress to transform their Annual Operating Planning (AOP) process.
Today’s companies are truly global in many ways. That said, I am often shocked to learn our Enterprise Innovation Performance platform is often the first software to be deployed across the entire organization. It is normal for our customers to have multiple versions of ERP, CRM systems and multiple manufacturing supply chain systems, but I digress. Operationally and from an infrastructure standpoint most companies are wired globally. The basic capabilities are in place to use technology to dramatically reduce the time it takes for companies to go through their AOP process.
We have learned in working with our customers that it is possible to reduce AOP from 12 months to 90 days by enabling the AOP process with the proper technology. The technology, however, assumes some critical operating requirements: it must be the single source of truth for innovation strategy as well as initiatives planning and the single source of truth for operational projects. Our customers require a very sophisticated and smart application behind the scenes and a very easy to use, intuitive user interface. Think of it as SAP-like on the back and Facebook-like on the front but all of the inner workings have one singular purpose which is Enterprise Innovation Performance. With that singular purpose in mind, technology can jump start the AOP process by prepopulating plans with last year’s plans, improve the ease with which planners modify and edit existing plans and improve the collaboration, sharing and iteration of such plans.
The real beauty is in the sophisticated “smart” technology that relates the strategic plans and initiatives to the operational activities on the fly. This prevents anyone from reassigning operational resources off critical strategic initiatives and onto operational priorities without the visibility or knowledge. Speaking of knowledge, I have been working with companies for over 20 years on Knowledge Management (KM) principles and I get absolutely jazzed about seeing companies finally getting big wins because they are managing their knowledge to improve innovation in ways we have never done in the past.
For those looking to break your trend of poor execution against your innovation initiatives we should chat. Yes folks, KM is back but instead of companies expecting search engines to make KM a reality, they are transitioning to “smart” systems where KM is becoming a part of our daily operational activity. A passion of mine for years.
Recently, I wrote about the constantly changing economic environment as the new norm and how some leading companies are recognizing they can use this new norm to their business advantage by fundamentally changing the Annual Operating Planning (AOP) cadence and process. In most companies, the AOP is a business process that normally sits outside of the day-to-day business operating process. Often this can be a problem because strategic plans and initiatives created during the planning stage get stuffed in a drawer during the operating/execution portion of the year. A recent informal survey suggests 78% of global companies miss over 50% of their strategic initiatives. Given all the time, energy and expense that go into the AOP process, this is a massive failure.
What Are Three Causes of AOP Failure?
- Lack of visibility and understanding across the masses. Most employees have little idea what their company’s strategy is. If the employees don’t understand your strategy and initiatives, how can you have a chance of achieving them?
- Failure to track initiative performance with the same importance and priority as tracking quarterly financial performance. I participated in a recent forum with executives from a number of large global companies and we were discussing the topic of initiative management. I was shocked to learn that on average global corporations do not scorecard their initiative progress! A colleague in our forum stated, “If the company paid our initiative owners for executing the initiatives like the bonuses to achieve quarterly objectives, we would improve our batting average dramatically.”
- Initiatives become irrelevant. Market conditions are changing at a pace that rapidly makes initiatives irrelevant, resulting in precious resources wasted on products and innovations that are not relevant to the market.
Keep in mind, most of my perspective and business engagement comes from working with large global companies in the consumer goods, chemical and high tech industries and I respect that there are different cadence models that work better across different industries. However, I believe that corporations will fundamentally transform their AOP from an annual planning process to an ongoing iterative 90 day cadence and those who don’t will die. Some of our clients are even attempting to operate at a 30 day planning iterative cadence but question the real value.
1 Corporate Power Is Decaying. Get Used to It by Moisés Naím
Andy Michuda is president and CEO of Sopheon. He is an internationally recognized expert and speaker on the use of innovation management tools and best practices to improve critical business processes, such as new product development and innovation performance. A pioneer in the field, he began designing and guiding the implementation of knowledge management and new product development solutions for Fortune 500 companies and other large multi-nationals in the early 1990s. Connect with Andy on LinkedIn.