The Case Against Budgets, Forecasts, and Performance Targets

BudgetsForecasts

By Geoff Roberts

Forecasts, budgets, and performance targets; these activities have long been seen by business people as critical activities in the operation of companies of almost any size. They provide a necessary compass for the business, an accepted and understood path towards a business achieving its goals. They are also critical activities in driving accountability within an organization - performance will ultimately be measured against the budgets, forecasts, and performance targets that were agreed upon by the CFO, the Board of Directors, the company’s investors.

We’ve all been there - this is simply how businesses are run.

But a growing number of businesses - particularly those who are embracing self management principles - are beginning to flip the script. Simply put, activities like budgeting and forecasting are not compatible with self management. You can’t have a top down budget created by an executive team and approved by the board, while also having self managed teams that are empowered to make decisions by sensing and responding to what the market and the business is telling them. The case for doing away with these activities becomes pretty straightforward - not only can these activities be a big waste of time, but they can actually be detrimental to a company’s performance.

My start-up, Outseta, has decided to pass on these activities. We’re a start-up without a forecast of where we’ll be in one year, let alone five. We don’t have any agreed upon budgets, or any sales reps with quotas. But before we start to build the case of why we think this makes sense for a lot of companies, let’s start with a couple of stories that will likely sound awfully familiar.

Sales quotas and forecasts can hurt your business… and we’ve all seen it 

Let me start by saying that I live in the same world that you do, one where it’s nearly impossible to avoid being beaten over the head with messaging citing the importance of goal setting. If you write your goals down you have a better chance of achieving them. If you share them publicly, even better. I’ve heard countless talks on the importance of setting S.M.A.R.T. goals - those that are Specific, Measurable, Achievable, Relevant, and Time bound. I believe in all of the above - the point of this article is not to reject goal setting altogether. But as I’ve witnessed a growing number of businesses work through the process of setting budgets, forecasts, and performance targets I began to see these processes start to break down. And when I began to learn how self-managed organizations view these activities, I couldn’t help but find myself nodding my head in agreement.

Let’s start with probably the most familiar scenario - I was working at a tech company, with top tier venture capital investors. Each year the company’s revenue targets were set, rather arbitrarily, at the beginning of the year. Where do we want to end up come year’s end? What sort of revenue growth will our investors be happy with?

Come the end of each quarter, I would inevitably find myself sitting in a room full of sales reps. They’d work two or three 10-12 hour days in a row, trying to bring in as much business as possible before the quarter’s end. Stress levels were high. Huge discounts were offered. Some prospects that were in our sales pipeline would get 3-4 calls per day as we tried to get them across the finish line. This scenario is in no way unique - it happens four times per year at businesses all around the globe.

What happened next wasn’t unique either, though. I’d see my friends in sales get really burnt out. The pipeline that they would be relying on to hit their quota the next quarter would have all but disappeared. Perhaps worst of all, those last few accounts that they had so desperately tried to close would cancel, churning at a much higher rate than the business they closed earlier in the quarter. The buyers hadn’t truly been ready for our product - we had forced the issue.

The second scenario is equally as common. In this case I was consulting with an early stage tech start-up. I had a front row seat as the CEO, the CFO, and several other member of the executive team spent countless hours putting together a 5-year revenue plan that would take the company from $0 to $50mm+ in revenue. The plan included budgets for each department, each year. It had customer acquisition and revenue targets for existing products, and new lines of business that did not yet exist. It was a perfectly detailed path to the promised land.

The executive team needed this plan to drive alignment. They needed this plan to share with investors, to show the awesome return their business would provide in just 5 years. But the problem in this scenario was maybe even more troubling. The activity took literally hundreds of hours of the company’s most valuable employees’ time. I found myself wondering, why would you spend that much time figuring out a path to $50mm+ in revenue when you haven’t yet figured out your path to $500,000?

Self management’s perspective on budgets, forecasts, and performance targets

It’s worth noting that as I started working on my own start-up, my Co-founders and I made a deliberate decision to embrace self management principles. We’ve derived significant inspiration for Fredric Laloux’s Reinventing Organizations, as well as companies like Zappos that have recently made the transition to self management. While that’s the case, we are by no means strictly adhering to self management principles - whenever we’re making an organizational decision, we carefully consider whether self management’s philosophies on any one topic resonate with us and are applicable to our business. In lieu of the stories that I shared above, much of what I read about self management’s take on forecasting, budgeting, and performance targets started to make sense to me. 

Let’s start by acknowledging that self management does not advocate completely scrapping all budgeting, forecasting, and goal setting activities. What is does advocate for is making these quick and dirty, back-of-the-envelope type of activities as opposed to hunkering down with your executive team for an offsite session, followed by several weeks of revisions to your plan.

The basic premise self management shares is that these activities are most often a shot in the dark, can be confining, and can drive behavior that’s not in the best long term interest of the business. Let’s start by unpacking a few key themes.

Sense and respond rather than predict and control

I think few people would argue that most forecasting and budgeting processes are an attempt to predict and control aspects of your business. It makes sense that this is something that we try to do - for most of us, our livelihood depends on our performance at work. We take some degree of comfort in knowing that there’s a plan, that we have some sense of control in terms of what the future looks like. 

But to what extent can we actually predict the future? In any company or market, how much control can we ever really have… or do these activities simply give us an illusion of control? Jason Fried and David Heinemeier Hansson, Co-founders of project management software company Basecamp, weighed in on this exact topic in their 2010 book Rework.

“Planning is guessing. Unless you’re a fortune-teller, long-term business planning is a fantasy. There are just too many factors that are out of your hands: market conditions, competitors, customers, the economy, etc. Writing a plan makes you feel in control of things you can’t actually control. Why don’t we just call plans what they really are: guesses. Start referring to your business plans as business guesses, your financial plans as financial guesses, and your strategic plans as strategic guesses. Now you can stop worrying about them as much. They just aren’t worth the stress.”

Frederic Laloux’s book gives a great example further illustrating this point. Imagine two companies tasked with having an employee ride a bike from Point A to Point B. The first company huddles up and puts together a detailed plan on the path that their rider is to take. They carefully calibrate the angle of the handlebars, measure the slope of the ground, and consider the speed of the rider. A team of product managers carefully roadmaps the rider’s course.

The second company asks their rider simply to be an active participant in the ride. They ask him to sense and respond to the terrain as he sees fit during the course of the ride. 

When the riders take off, the rider from company one rigidly sticks to the plan - the “optimal” plan - that his team has put together for him. He doesn’t change course when an unexpected wind arises, and as he veers off course his team of product managers demands that he stick to the original, optimal plan. Later, when the rider has failed to reach point B, the product managers begin pointing fingers at one another. Someone must have made an error during the planning process.

Meanwhile, the rider from the second company simply senses the wind and makes adjustments on the fly, arriving at Point B safely.

Fried and Hansson take this point even a step further, noting that, “The timing of long-range plans is screwed up too. You have the most information when you’re doing something, not before you’ve done it. Yet when do you write a plan? Usually it’s before you’ve even begun. That’s the worst time to make a big decision.”

You have the most information when you’re doing something, not before you’ve done it. Yet when do you write a plan?
— Jason Fried, CEO Basecamp

Ultimately, this comes down to improved agility. Self managed companies value workable solutions and fast iterations rather than focusing on finding the best possible solution. A “workable” solution in this case is simply one that no one thinks will make things worse - decisions can always be reviewed or changed if new data or a better idea are presented. The key here is that time is never wasted or decisions postponed because someone thinks more data or analysis could lead to a more optimal path.

It’s interesting that many companies, across industries, buy into the importance of agility in other areas of their business - but not when it comes to budgets, forecasts, or performance targets. For whatever reason, these items remain fairly rigid. The tech companies that I cited in my examples above all practiced agile software development, for example. The basic premise of agile software development is that fast iterations rather than a few larger leaps will help products progress faster. This same concept is also at the heart of lean manufacturing practices. 

A final benefit of this approach is that by favoring agility as opposed to the “optimal” plan, we become less attached to the decisions that we make. We become more comfortable adjusting to reality and changing our plans as needed, rather than stubbornly sticking to the carefully plotted course we spent so much time and energy defining.

Arbitrary performance targets drive shortsighted behaviors

Agility aside, most performance targets are at least to some extent arbitrary numbers. Sure, in established businesses benchmarking and historical performance can set some precedence. But really, how useful and specific can that really be? You needn’t look any further than the stock markets to realize how little capacity we have to predict or control - and in a start-up company any performance targets are almost completely arbitrarily pulled out of thin air.

More often than not these targets will fairly quickly become seen as too easy, in which case their value is eroded, or too difficult, in which case shortcuts must be taken to reach them. We’ve all heard of sales reps that reach their quota and stop selling early, either to pad their pipeline for the next quarter or for fear that their quota will be seen as too easy and will be updated to be more aggressive in the following quarter. Similarly, it’s all too common for excess budget to be spent on non-critical items to avoid budget cuts in the future. So what’s the solution?

The first is simply accepting that there’s so much outside of your control, that the best thing you can do is focus on getting everyone to work hard and do the best job they possibly can, across the organization. If you truly focus on doing this, and on optimizing for the long term rather than to meet an arbitrarily set performance target, then the numbers will fall where they will and that’s OK. If you did your best, you did your best - isn’t that what we should all be trying to achieve?

To bring it back to the example of sales reps, simply because it’s an easy example, in the absence of quotas you’ll still have some reps do better than others. Some will need additional coaching. Some who consistently underperform will need to be exited - none of that changes. All that changes is that you’re measured on the reality of the best you can do, rather than against an arbitrarily set performance target. 

Secondarily, goals and performance targets can still be incredibly useful as you strive to do your very best and optimize for the long term. For example, think of joggers who time their average pace per mile when they are exercising. Most of us are not Olympic athletes and are not out to break any specific records - instead, we do this simply to better ourselves and see if we can do a little bit better than we did previously. This is a self prescribed tool that we leverage to help us get better at an individual level.

Companies with new approaches to budgets, forecasts, and performance targets

It’s worth noting that there are already thousands of organizations that have begun putting the practices we’re advocating for in this article into practice - and no, these practices are not just applicable to start-ups. 

Take for example Charles Towers-Clark, CEO of POD Group, a maker of mobile connectivity solutions with offices in England, the US, and Spain. Founded in 1999, POD Group only recently began embracing self management after Towers-Clark realized, “Everything was being held up by me.”

“What would happen is one of the development guys would come to me and say ‘We need more cloud hosting servers, I think we should use these, can we do it?’ and I’d ask, ‘Do we need to get more servers?’ to which they would say ‘yes’, so I said ‘yes’. They wasted their time asking me a question they knew the answer to before, I had to say yes, otherwise the business would stop and the responsibility was passed from them to me. If everybody in the company knew the financial situation of the company then the expert would make the decision - not a clueless CEO. Now anyone can make any budgetary decision they want, regardless of the amount, as long as they seek relevant advice. The only fireable offense is not seeking advice, and if it’s a budgetary situation they should check the company financials on the intranet." 

At POD Group this included making all employees’ salary information available as well - a process that was not taken lightly and that included quite a bit of feedback from the company’s employees. “One thing we found is that people valued their salary more so than income from profit sharing or bonuses,” said Towers-Clark. “I came to the conclusion that the only way to motivate people properly is the let people choose their own salary. People now feel like they’re valued according to their worth, because they are setting their own worth - and if they don’t feel valued on their next salary review they can change it.” POD Group now has a salary review process that occurs every four months, and even had several of the company’s managers lower their salaries after embracing the change.

People now feel like they’re valued according to their worth, because they are setting their own worth.
— Charles Towers-Clark, CEO POD Group

Ricardo Semler, CEO of Semco, offers an additional perspective on how his organization handles the budgeting process. 

“We do budgets on a small scale at Semco. Each group of six to ten people, once every six months, puts together the numbers for their unit. If they need help, they easily get it from the financial office. We believe that any company, even a Boeing, GM, or the U.S. Postal Service, should allow their workers to organize themselves, even when tens of thousands of employees are involved. It could be done the same way we do it at Semco. It’s not a question of size. Rather, it’s a question of relinquishing control, trusting workers to pursue their own best interests, sitting back and letting nature take its course. This isn’t an academic exercise for us.”

It’s worth noting that Semler’s company is doing this at scale - the business has thousands of employees, and has grown revenues from $4mm in 1984 to $212mm in 2003 - all the while pioneering self management practices like their approach to budgeting.

Dimitris Georgakopoulos, Co-founder of software companies Outseta and Buildium, offered this perspective on the forecasting process used at Buildium. “I think it is important as a company to have a streamlined mechanism to know how recent results affect the outlook for the business over the long term,” says Georgakopoulos. “What we’ve done at Buildium is build an automated model that projects out the future performance of the company based on the last few quarters’ performance. As a board member I rely on this to see if we’ve directionally changed the trajectory of the company - this is a lot more useful to me than assessing the businesses performance against a top down forecast based on biased predictions and individual assessments.”

Conclusion

This article and the concepts shared within it will be unpopular with many, no doubt. But rather than discrediting self management’s approaches to budgeting, forecasting, and performance targets as the latest management fad or academic theory, it’s worth reflecting on why self managed organizations are embracing these practices in the first place.

“Management is a lot easier if you make people responsible for managing themselves,” said Towers-Clark. “I decided to embrace self management for three reasons. First, it was simply easier for me. Second, I realized we needed to use everyone’s brain and not just mine - that’s how you create value. Last but not least, this has helped us with attracting and retaining employees - we’ve never lost anybody.”

For those struggling to give up “control,” I leave you to contemplate a few questions - how much control do you really have? And what’s your concern with simply asking everybody to work hard and do their very best?

Perhaps the most fundamental tenet of self management is that people are fundamentally good and can be trusted to do the right thing. If you believe that, then the answers to these questions will reveal themselves pretty readily.