Leo Burnett once wrote “When you reach for the stars you may not quite get one, but you won’t come up with a handful of mud either”. Early in my career as a ‘gopher’ in their London office, I recall being regularly inspired by this quote neatly embossed in copper on the wall behind reception.
Both senior management and country leadership would do well to heed Mr. Burnett’s words by as they work together on next year’s budgets. One of the big challenges at this time is to get the more conscientious country managers to set the best target they can achieve, whilst in the back of their minds lie fears of failure, low bonuses, and even missed promotions, should they not make or exceed their targets.
As much as a measure of prudence rather than deceit, the system often directs managers to lowball their forecasts with tales of woe built around faltering economies and slashed client budgets. When it comes time to pitch to the board, they will hope to distract their seniors with all manner of unfortunate circumstances peculiar to their country and their country alone.
An example of a common line is that although their country is starting to show some good year on year growth it’s export lead and with domestic demand still ‘soft’ there’s no hope any growth this year or next. Another is that the competition is cutting prices by over 20/30/40% (take your pick) and so don’t expect any growth from price increases, even though miraculously the same competition can still afford to offer higher salaries and that’s why we can’t keep the key staff we need to grow the topline. Then, of course, there’s the old chestnut “we have a national election sometime this year and so we’ll lose a month” (although a cursory glance at the numbers from four years back during the previous election showed no such impact).
Much of this unproductive performance could be avoided if country heads felt confident they could just miss a stiff target and still get rewarded for growth and not have to stand by empty handed when more persuasive colleagues get full bonuses for hitting clearly less demanding goals.
Our advice to those subjected to these annual rituals is two-fold. Study the economies of the markets in the countries you oversee and study the budgeting behaviour of the finance directors of each market. That way you’ll pick out those who are making an earnest go of it from the minority of spin-doctors and the sandbaggers. This will help to increase the chance of ending up setting ‘best case’ targets for everyone.
Good sources for the country economic and business environment are the back pages of the Economist along with their website. They present a whole range of economic data covering previous and forecast growth (which will be more reliable and generally higher than the country manager’s cautious guess), inflation, wage levels, trade balances, interest rates etc. Armed with this information gives a more objective assessment of the veracity of the business environments portrayed. Another good collaborative source for more detail, especially on the bigger markets, is the CIA World Factbook found in the library section of www.cia.gov
For the latter, rooting out those who, to put it politely, are being a little over-prudent, it’s worth looking at some historical data on where a given country was against budget in September of the last two years and where they actually finished up. Generally, budgets are set around October using the forecast from the September numbers on which to build the growth for next year. So, some finance directors might be tempted to dampen the outlook in September to try and get a lower target. But let’s not forget that they still want to win their bonuses, so after the budgets are set you have to ask questions if a stellar last quarter takes them over targets and lines up a good bonus (for hitting a target which itself was based on a weak outlook a year earlier). A very simple approach is to check your markets and see what percentage of revenue and profit is taken in the last month of the fiscal. Now you’d expect as each month is a twelfth of the year to take around 8.3% of your income and revenue in any given month. Clearly, in the last month you’ve got some bad debt accruals and contingencies you can release so you’d expect a bit more of each maybe 10-12% on revenue and a bit higher on income. When you see units consistently declaring 20+% of income in month 12, you have to think if they are really stretching themselves.
At the end of the day, the lost revenue opportunity, due to over-caution, is a competitor’s gain and the final result is a drop in share. This dilution is cumulative if allowed to continue year on year. But, given human nature, it’s almost inevitable when there are few incentives to follow Burnett’s words and ‘reach for the stars’. In the current environment, there’s even more need to inspire the countries to do their best and set a high target, which they may not quite make, but it won’t be just a ‘handful of mud’; they’ll still show impressive growth from the previous year.