Strategic Planning and Budgeting Guidelines

Strategic Planning and Budgeting Guidelines for Independent Software Vendors

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

eBook from TBK Consult

Hans Peter Bech, MA (Econ.), Group CEO at TBK Consult.

© 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 ApSLeerbjerg Lod 113400 HillerødDenmarkCVR: DK30485270

ISBN 978-87-995228-0-4

3Strategic Planning and Budgeting Guidelines

for Independent Software Vendorsw

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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



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

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

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

The revenue challenge 15The famous hockey stick 15

The revenue model 18Improving the process 19

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

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

Table of contents:



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

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

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

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

About the author 55



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

Do we apply a “same procedure as last year” type x exercise?

Or are we going to do it differently next time? xDo you want next year’s achievements to be very x

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.



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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



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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.



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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.



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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.



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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.



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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:

Product Leadership1. Operational Excellence2. Customer Intimacy3.

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.



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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 PerspectiveFinancial performance1.

The Management PerspectiveSetting objectives1. Defining strategy2. Taking action3. Management skills and competencies4.

The Customer PerspectiveThe Product/service (Customer Value Proposition)1. The customer relationship2. The image3.

The Internal Processes PerspectiveOperations1. Regulatory & Environment2. Customer Management3. Innovation4.

The Learning/Growth PerspectiveOrganization Capital1. Information Capital2. Human Capital 3.



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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.

Figure 2: Alignment Map

Importance averageIdeal curve



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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.



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

Revenue growth in new markets

Revenue growth from new customers

Revenue growth from new products

Revenue growths from existing customers

Optimize asset utilization

Reduce the cost base

A.

B.

C.

D.

E.

F.

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?



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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).



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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?



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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.



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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.



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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:

Customer Value Proposition1.

Value Chain2.

Ideal Customer Profile3.

Go-To-Market plan4.

If you are operating a major portion of your value chain though "partners" you will also need:

Partner Value Proposition1.

Partner Program2.

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



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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.



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NeedsAn attractive Customer Value Proposition must address compelling and critical customer pains for which the customer is prepared to allocate resources. Identifying needs involves industry and/or domain segmentation, understanding the purchasing process and buying center identification, where such needs are easily related to the value proposition. Because these needs differ significantly depending on customer characteristics, this framework element also assists with market segmentation. An important component of the needs definition is the identification of the “Ideal Customer Profile”.

ApproachA Customer Value Proposition must

define the solution components addressing the “whole product”

challenge as well as two major parts of the value chain: the sales process

and the delivery process. Thus the definition of the Value Chain is a part

of the approach definition. When the Value Chain involves third parties

participating in the sales or the implementation process we must also

develop a distinct Value Proposition for these players.

CompetitionThe Customer Value Proposition must explain why and how the solution is superior to competitive alternatives available to the customers.

Keep in mind that most customers will rate the risk associated with your "newness" higher that the technical superiority of your solution. Focus on how you can minimize the risk for your potential customers.

Prepare to compete with the "0 option." The "0 option" is when the customer decides to do nothing. If you are providing something new for which there is no budget, the "0 option" is your toughest competitor.

BenefitsA Customer Value Proposition must

explain how the benefits of the solution delivered exceed the total cost involved

with migrating to and/or utilizing the solution. The more tangible and specific

the benefit/cost ratio is defined, the more impact it will have on the market.

If we are bringing a new product to the market and/or if we ourselves are a new player in the market, we must

consider the risk mitigation issue. The customer will consider our “newness”

an additional risk = additional cost, for which we must compensate if we are to

win the deal.



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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.



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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."



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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.



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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?

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

Then build your Customer Value Proposition. Bring 2. 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:

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

We shorten the learning curve of new staff members and 2. 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.



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



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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).



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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.



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“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.



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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.



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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.



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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



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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 budget, planning guidelines and schedule

4

B Publish 2011 forecast 1C Publish 2012 budget

key targets (optional)1

D Deliver budget and plan 1

2

E Base budget and plan 1 review

1

F Deliver budget and plan 2

2

G Base budget and plan 2 review

1

H Deliver final budget & plan

1

I Final budget release 1J Associated

frameworks2

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



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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.



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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”.



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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.

10 If you do not enjoy and see the benefit of the budget and plan reviews, you may be in the wrong place. It is an integrated discipline in any management position.



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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.



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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:

KPI’s1. Compensation plans2.

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:



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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.



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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



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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 AModule BModule CIntegration to XIntegration to YVersion 8.0Version 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!



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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?



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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.



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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.



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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.

Figure 7: Jim Collins: From good to great

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 people off the bus, and the right 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



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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



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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:

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

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

You need to manage the Value Chain much faster, 3.



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

The internal procedures are still being defined; you need 4. 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" 15The “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:

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

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

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

The want and can face brutal facts.4.

15 “The fish smells from the head”



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They are looking for a market/segment/concept where the 5. 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.



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

The issue is two-sided:

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

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



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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.



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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.



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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.



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Hans Peter Bech Hans Peter Bech has more than 25 years of experience with international sales & marketing of ITC products, services and solutions. Hans Peters’ core competencies are:

Enterprise B2B business process software solutions, ERP/ xERM/CRM solutions and software engineering (bespoke development).Go-to-market strategy/program development and ximplementation, including reference client recruitment, recruitment of reseller and distributor channels and setting up new subsidiaries.Extensive experience with and personal network in xScandinavia, Eastern and Western Europe, Russia, North America, Australasia and South Africa.

From 1998 to 2001 Hans Peter lived in Stuttgart, Germany and was responsible for building the partner channel for Damgaard/Navision (later acquired by Microsoft) in Germany, Austria and Switzerland.

Hans Peter speaks Danish, English and German.

Hans Peter holds a M.A. in macroeconomics and political science from the University of Copenhagen.

As a sales person Hans Peter qualified more than 15 times for 100% Clubs, Summit Conferences, Million $ Clubs and Top Performer events.

More about Hans Peter Bech: http://dk.linkedin.com/in/hpbech

ISBN 978-87-995228-0-4

Documents

Strategic Planning and Budgeting Guidelines