Rethinking Corporate Budgeting: Lessons from a CEO's Radical Experiment

0:00Yeah, I thought it was encouraging to read this because we've adopted a similar philosophy for years and years and years now. And what I've been told many times by people is, yeah, yeah, yeah, I guess that works for smaller, midsize companies, but it would never work for larger companies. And so it's nice to see that here you have a very, very large business that has implemented it. And they've found what I think should be obvious, which is that if you can improve your cycle times, if you can have faster cycle times, that in general, you're going to have more insight from that. You're going to be more agile.

0:40Hey, everybody. Welcome to a we almost didn't make it episode of Business Lunch with your hosts, Ryan Dice. Depending on where you are, whether you're watching or listening, he's coming through the microphone now. I'm just here. I'm effervescent. Yes. And me, Roland Frazier. I am, if you're watching this, I am poorly lit, but maybe it's like, you know, romantically lit because it's dark. It is romantic. The highlights isn't working. But that said, we wanted to talk about a couple of things that are kind of near and dear to our heart. And particularly as you're thinking about the first part of the year, there was an article in Business Insider where Bayer, the people that make the aspirins and such, CEO said that budgets represent the worst of corporate bureaucracy, and he decided to turn the process on its head.

1:33And so basically, he went in and overhauled their whole corporate budgeting system. So when we're thinking about how are we going to spend our money, what do we think is going to come in, what's going to go out? And instead of spending time on one year to three year budgets that pretty much never happened because so many things happen in business now, there's so many tops, you know, twists and turns along the way that thinking about what your actual budget's going to be like three years from now is really just, you know, spitting into the wind. It's just not, it doesn't make any sense. So he turned it into these 90 day cycles.

2:08And the goal there was to reduce bureaucracy. And, and I believe, and I'll, as we get into it, I'll, I'll, I'll give you the rest of it. But he basically said that this came out of a radical experiment at Genentech. And I think he was at Genentech before and they reorganized their teams also, which is new. So I don't really think that quarterly budgeting is necessarily new. I think that a focus on quarterly budgeting and cutting out one to three year budgeting is fairly new. And the twist that to me is the big twist is that they reorganize their teams every 90 days and in Bear, which is obviously a large company, they've cut 5 ,500 mostly mid-level manager positions.

2:56So they flattened the organization. They have better communication. They've reduced their costs. They're more focused and present on what's gonna actually happen over the next 90 days. It's let's do these things in 90 days, almost like a sprint, even though they don't describe it that way. And then let's put the teams together to make that happen. then let's basically reorganize every 90 days. That's a lot of work. And so Ryan, I know that we've got a process and we kind of have a similar philosophy on the outlook of the time horizon, but in our scalable operating system, we've got a process. You wanna, number one, I'd love to hear your thoughts or reaction to that, to what I just said about what he's doing there.

3:43And then number two, I'd like to kind of talk about it in the context of how we do planning. And, you know, maybe we should change some things up. Maybe we should change our, you know, team reorganization every 90 days or something like that. So your thoughts? Yeah, I thought it was encouraging to read this because we've adopted a similar philosophy for years and years and years now. And what I've been told many times by people is, yeah, yeah, yeah, I guess that works for smaller midsize companies, but it would never work for larger companies. And so it's nice to see that here you have a very, very large business that has implemented it.

4:18And they've found what I think should be obvious, which is that if you can improve your cycle times, if you can have faster cycle times, that in general, you're going to have more insight from that. You're going to be more agile. And that overall should be a good thing. Now, can it lead to more chaos if it's poorly managed? You know, of course it can. The idea of doing a comprehensive company reorganization every 90 days, I saw that and that even gave me a little bit of, you know, of pause. But yeah, this idea of treating the budgeting process as being a 90-day process as opposed to an annual process is something we've been on the record on for, again, for years and years and years.

5:03I believe that the annual plan is the worst unit of measurement that there is. I think the annum is a spork. It is too much time to be predictable. It's not enough time to do anything meaningful. So our planning process really starts with, let's begin with what is our three-year target? And the three-year target is pretty broad. I mean, the three-year target is just in general, where we want to be in terms of revenue, profitability, three years from today. revenue, profitability, and total enterprise value, right? We're not speaking to necessarily how we're going to get there, but just what do we believe is possible based on everything that we know today?

5:42What do we feel good about, clink champagne glasses about in three years? And the reason that we picked three years is because you really can do some pretty meaningful stuff in three years. And kind of the gold standard for that for our companies is for a business to go top line to bottom line in three years, meaning taking what is your current top line revenue and having that be your bottom line bankable distributable profit three years from then. But at a minimum, just about any business should expect to double in three years. Because if you can just increase 24 % compounded year over year, three years in a row, that's going to double.

6:19So that's where our planning begins. And then we break that into 12 90-day chunks, 12 90-day sprints, where that's when we get strategic and say, okay, what needs to be true in this 90-day period to stay on track with that three-year target? But similarly, at each of those 90 days, we have an opportunity to evaluate and say, how do we feel about that three-year target? It's not like we chisel this thing in stone because we acknowledge that every 90 days we have new information. Every 90 days, we've got the information on the work that we did and how the market responded to that. There's also macroeconomic changes that we can factor in.

6:55And so I liken it to if you're flying a plane across the United States, you're taking off in New York City, you want to land in Los Angeles. You wouldn't simply take off and say, OK, fly west. And like we'll check in in six hours and see if we're there. No, I mean, they're constantly checking in and vectoring. And so I love the idea that here's a big company doing something pretty disruptive, saying that, no, no, we're going to do these check-ins every 90 days. We're not going to just set a budget for 12 months, but we're going to force this company to look at its budget every 90 days because now what we have, and I love one of the quotes in here, every 90 days, people can flow between teams.

7:46Money can flow between teams. And you're working on the most important thing for the next 90 days. Execution in 90-day cycles we found works the best. Planning out broadly in three-year cycles. If you're doing that, you really don't need to do anything in a year. So that's my general thought, my general take. Now, I will say the idea of doing a comprehensive company reorganization every 90 days, that freaks me out a little bit. But I didn't get into the details on how they do that. So my guess is it's not that extreme. It's interesting on that because he didn't really say they do a comprehensive company reorganization as much as that they reorganize the teams.

8:34And so if we, like in our operating system, we basically say, here's our big initiative for the quarter. And here are, excuse me, here's our big three for the quarter. And then we're going to have our initiatives that support each of those things. Right. And, um, and so I guess it's, it's, um, in a big company cause they have a hundred thousand people. So in terms of like, what's the workforce reduction that they achieved from this, because this context wise, this all came out of bureaucracy is bad. Bureaucracy, you know, causes things to go slow. A lot of bureaucracy is a result of the, um, you know, as a symptom of having a bloated budgeting process because lots of people get together five months before a budget is to be released and work on it for that time.

9:27They're not doing, not focusing on the things they should be focusing on. They're focused on the budget and the budget isn't going to even be relevant after 90 days. So let's, let's kill that process, which should eliminate a lot of the bureaucrats that are in the middle of that, which would be middle management, which is what did happen, 5 ,500 people would only be 5.5 % of their workforce that they left. So if you have a team of say 50 people, you know, you might eliminate two and a half people, but you know, if they're 80 ,000, a hundred thousand dollars salaries, that money's going straight to profit, you know?

9:59And so it's not insignificant. And, you know, and as far as people who are saying, oh, but then you're going to fire a bunch of people, you know, well, if you can repurpose them, obviously we, you know, you prefer to do that, but if you can't, then, you know, if you're bloated, you're bloated. So, so it comes in that context and his company, it might be more applicable. Like if it may, you know, at some point, maybe if you're 50 to a hundred people in your company, it would make sense that you would be reorganizing these teams as effectively like committees. I mean, really, if you think about it, it's not any different than, you know, the popular bureaucratic thing is a committee.

10:37He wouldn't want to use the word committee because committee sounds bureaucratic, but the team that's doing this is, you know, a sprint team, uh, you know, a focus team, a committee, however, you know, you want to name the, the rows, it is what it is. But, but so let's talk about that though. In, is it possible? Would it make sense in, you know, what's scalable have 20, 20 employees issue. Yeah. So, so a lot of folks that are listening to this, you know, probably don't have a hundred, you know, most businesses don't have a hundred or more employees, certainly not a hundred thousand. So would it be applicable to us?

11:14Cause I think it definitely works for a big company because you you're, we're going to work on lowering the cost of distribution in Dubai, you know, of which we have distribution teams in 57 countries and, and, and, you know, okay, well that, yeah, the people that are working on that, you might pull in an expert from, you know, global distribution, one from logistics, one from product, and then get those people on a team. But most of us in smaller companies don't really have to worry about that. So let's talk about it. We got 20 people and we want to focus on, let's say, retention. We want to keep the people that buy from us buying from us longer and have them not go away.

11:55So the team that we would have for that with only 20 people, would that be different, do you think, than the team that we would have if, let's say, we solve that problem in the 90-day period and now we're like, we want to focus on acquisition? Would it make sense to... I also, I'm going to stop talking in a second, but trying to get all this out. I also think that it does make sense in terms of focus because if you focus on retention and acquisition, if you focus on two goals at the same time, you're likely to achieve neither of them well. Whereas devoting all of your resources to one makes sense.

12:34So in that context, you got 20 people, you've just solved retention. Do you just put that same team on acquisition or does this just fall apart here and only works for bigger companies? Yeah, I think it's as you describe this, what I'm realizing is this is something that we have actually done before. Yeah. Where we've moved people around. And so let's take that specific example there. So let's decide that as a company, perhaps in the previous quarter, we focused on new client, new customer acquisition. We succeeded. We checked that box. And now this created the new challenge, the new constraint of we've got all these people, but we're not keeping them as much as we would like to.

13:21right so now we need to solve for the new issue of retention right so that's and so that's going to be our focus you know for the next 90 days so the question that you would then need to ask as a leader is well what are the resources that we need to have in place like first what are what are the key initiatives that need to be completed that that we believe would improve those retention metrics so you're going to make certain guesses certain hypotheses on we believe that if we do these things, that these things will result in improvement in these metrics? Okay, great. Do we have the people resources needed to complete these?

13:56Either you do or you don't. But then the question to ask is, even if you have the people, are they organized in such a way that they can complete these projects efficiently? And I love this as an example, because it could very well make sense to say, let's take somebody from the product team. Let's take somebody from the services team and let's actually move them over for this for the next 90 days into the marketing organization. Because maybe what we decide that we need is a really significant comprehensive indoctrination campaign in series that's going to go out. And what we know is that the marketing team has a lot more writers and copywriters and things like that.

14:36They understand persuasion. And so we're going to need to leverage a lot of those resources there that frankly the program team, the services team doesn't have. And yet the marketing team doesn't necessarily have the product expertise to do all that stuff. Now, what you could say is, well, let's just make sure that these two teams collaborate. Well, that's an adorable assumption. They're just not, right? They're not. And so what it may make sense to do is say, hey, for the next 90 days, this particular person on the marketing, on the program's team, you're going to be shifting over to the marketing team.

15:12So you're going to be sitting in the marketing team meeting. You're going to be reporting to the head of marketing. Your role is on the org is going to fundamentally change. After the 90 days, we could very easily see you moving back. But for the next 90 days, for the purpose of this, it makes sense for you to sit with this team for the purpose of that. We've done those kinds of things before where we've had sales, you know, marketing sit under sales, sales sit under marketing, you know, for a season. And I think it's really a good thing to do because it also eliminates silos within organizations.

15:45It eliminates turf wars within organizations. It makes it clear that the outcome is the outcome. The outcome is not to create the perfect organizational structure. Because if there's one thing that we know to be true, there is no such thing. The organizational structure is just whatever that structure needs to be to support the goals of the company today. To the extent that those goals are changing, It makes all the sense in the world for the organizational structure to change as well. So long winded way of saying, yeah, I think that absolutely could be appropriate in a company of one. And I think if you're setting those expectations with your team of, hey, one of the questions that we're going to ask is, does it make sense to shift people around in the organization?

16:27And you just begin to bake this into the culture. Now people expect it. It doesn't come as this like shock to the system. Similar, and I'll say this and I'll kick it back over to you. In a similar way, when you're looking at compensation, like one of the things that we say to anybody who's on variable compensation, take sales teams, for example. We say to everybody in the sales team, just so you know, every single variable compensation plan is going to get evaluated quarterly to make sure that it aligns with the company's goals. It doesn't mean that it will get updated or amended every single quarter, but expect that it might if we determine that the comp needs to change to better align with the goals.

17:12And you can definitely expect that it's going to get changed every two or three quarters. Just know that that's going to happen. So if you set that expectation, nobody gets shocked. And they all understand that it's in pursuit of the greater goal and mission of the company. I think if it's good, if it makes sense to do that for compensation, why not do that for organizational structure as well? So for as far as the roles, like when we talk about moving people around, I think that they would occupy the same job title position that they have. It's just that there would be a formalized process for that team or committee or whatever you want to call it to get together and meet to talk about how are we going to solve the, how are we focusing on this challenge?

18:05I don't think it's, you're now reassigned from marketing to product or program or program to marketing. It's you guys need to talk and we know you're not going to do it if we just hope that you're going to talk or if we say that you're going to talk. We know that from all of our company experience, it just doesn't happen. So what do you think the process would be to encourage that? Is it, okay, you guys, we're doing this team allocation model thing on a quarterly basis now. We're solving for customer acquisition this quarter. The players that we believe will be, I guess that's the first question.

18:47How do we identify the team members? Is that something that would make sense to go to, if you're a small entrepreneur, you may be you know, everything. So you just decide it's these people are working together. But if you have a slightly more tiered organization, would you then say, Hey, head head of marketing, who's the appropriate person that you're going to nominate to be on this team? Like, like, how do we pick the people first? And then we can talk about meetings. My thinking is that, that if you're, if you're running in the whole show, you're going to pick them, that's easy. You're just going to say, you guys are on this team.

19:25We're going to solve this problem. Or maybe it would be better than dictating that from on high to say, who would like to be on that team and thinks they could make a contribution and pitch me on why you should be on that team. Because I can tell you that as we're looking at reviews and compensation and things at the end of the year, we're going to be looking at contribution, team participation, et cetera. So sell me on why you should be on the day. I kind of like that better. What do you think for the picking? Yeah. So the way that we typically do it is anytime a significant project or key initiative has been identified, right?

20:03This is a project. This is a key initiative that we're going to green light to say that this must be completed for the company to achieve its goals for the quarter. So it's not just whirlwind. It's not just people doing their job. This is a special project. Every single one of these projects is going to have a project lead. So that's kind of the first big, big role that needs to be established. Who is the project lead? And this project lead is the driver, right? They're the person who's ultimately responsible for the timely completion of the project. That project lead essentially gets to kind of pick their team, right?

20:36They get to say, if you're going to tell me that I got to get this thing done, this is who I need to get this done. And it is a bit of a negotiation because, you know, maybe they're saying, I need to pull this person from this other team. And maybe the other manager is then saying, Hey, you can't have that person because if you take that person. And so now, now it's up to the CEO to say, well, either to make a judgment call and say, well, we're going to give them that person. And so we're going to let you backfill somewhere else. Or in that case, what projects won't get done, but this happens in small businesses all the time.

21:12I like pitch me. I like, okay. Even in that situation, okay. Team lead and team lead, you know, pitch me, pitch me on. Yeah. It's make the business case, make the customer case. That's the pitch. What's the business case for doing this? And then what's the customer case for, you know, for doing this. Um, but kind of the, the, the roles are there's the project lead, there's their core team. And so the core team, to your point, that core team is probably going to have some set project meetings that they're going to need to do. I don't want to talk about the meetings yet though. I just still, I want to, still want to go, okay, here are options for picking.

21:50So everybody that's, that's, you know, in, in, uh, consuming what we're talking about here. Right. So the first thing is who is going to make the decision, who is going to be on the team? That's the first thing. Then who is going to be on the team? And then how is the team going to interact? And then how are we going to measure the team's success or non-success. So on the who is going to decide, I think it's small organization, flat management, most of the companies reporting to you as the head person. That's going to be easy. I think you're going to pick the team, right? You're the ultimate decision because you're all you got.

22:34Right. Now then the next step is you've got say 20 to 50 people that are in the company and you've got some hierarchization of the management and, you know, some people that have direct reports, you don't have all of them yourself. Now, one option would be you say, you still make the decision for them and say, this is what we're doing. This is probably not as good because you don't necessarily have buy-in. Um, and it doesn't teach your managers to grow and, and be better managers. Um, you also don't know what everybody's good at, you know, you don't have trenches like knowledge that they will about the individual team members.

23:11So then the second way to do that would be that you're still making the decision, but you're seeking input from the department heads that would be sending the people that you need to the team, right? And then the third way would be that you have the department heads make the choice and kind of pitch you on why these are the best people. And I guess then another level would be that the department heads have their people apply to be on the team and argue for why they should get to be that. Did that miss any? It's specifically the project lead. So the person who's been charged with the successful, you know, timely and successful completion of a project, that project lead, they get to say, and this, and it's important to say these discussions are had at the leadership level.

23:59Okay. You don't fight in front of the kids. Right. That's super important. So this discussion is had at the leadership level period. So CEO, top level executive team, that project lead is likely somebody who's on the executive team as well. And they're saying, OK, I'm going to own this project. It makes sense because it's going to be in my team. The bulk of the people who are responsible for this project are on my team. And obviously, if a project can be completed by and the entire project team, that core team is already reporting to that person, then it's kind of an on issue. But that's rarely.

24:33Yeah, that's rarely the case with these special projects. It's almost always cross-functional. And you would actually be missing out if you did that. Like even if it was a marketing thing and you're like, we want to, it's acquisition. So, you know, we have in marketing, we're the guys that pick all, you know, that do all the lead gen. But it would make sense that that would be, you would get a better lead gen product if you had somebody from product or program and somebody from, you know, like from customer service. because they would come over and tell you how to have better messaging and, you know, and, and they would feed on each other.

25:06So you're kind of cheating yourself if you're not going cross, you know, function, right? Yeah. We found the best way to do that is the project lead essentially gets to pick their team. And they say, these are the people that I want. And usually these projects, again, they're going to have a, I know we're not getting into the meeting, you know, cadence, because that can vary, but there is a general expectation that for the purposes of this project, anybody on this team is effectively direct reporting into that project lead. The project lead has the ability to reprioritize people on that team. That's a really important distinction, right?

25:39So they can say to somebody, stop working on that and start working on this instead. It's a really good distinction. And it's important that you understand that may stop another thing that's going on. But what you've decided is that for this quarter, you've prioritized solving this problem. So we're going to defer and, you know, we're not going to have an expectation that whoever was responsible for finishing that other thing still finishes it because we've superseded, you know, their ability to do that. So that I think that's important to think about. Right. Yeah, exactly. So ideally, the project lead picks their team in a perfect world.

26:16Everybody agrees that that's fine. And the other manager says, yep, you know what I can do without that person this this quarter. You're right. We've got some duplication that role. It's going to be tough, but we're going to buckle down and get it done. have at it. It only never works out that way, especially in small organizations. They freak out. They're like, but I can't do this. And then, you know, welcome to business. This is why if you're the CEO, if you're the owner, you know, you get to live in the big house and drive the fast car. If you get this stuff right, figuring out appropriate resource allocation is your job.