I saw the movie “Moneyball” starring Brad Pitt (http://www.moneyball-movie.com/), within the first fifteen minutes I was seeing significant parallels between that story and the story of business management/business planning.
Early on in the movie, a group of scouts and managers for the Oakland A’s baseball team are sitting around a conference table trying to figure out how they can replace key players they lost because they could no longer afford them given the team’s budget constraints (budget constraints sound familiar?). The loss of these players left a huge hole in the A’s program. As you might expect, the meeting was a lot of “shoot from the hip” characterizations of existing players based on assumptions as varied as what the player’s wife looked like or what car they drive. In this meeting Billy Beane (Brad Pitt) and Peter Brand (Jonah Hill) suggest that the past just doesn’t matter, the only thing that truly matters is “on base percentage”. Their thinking was if they could get players on base, they will win. They proceeded to identify those undervalued players with the highest “on base percentage”.
Bingo! This line of thinking made me think of the Balanced Scorecard Methodology and the passionate belief in certain key metrics driving the business. To Jonah Hill’s character, it is all about getting on base, any way you can, it is about on base percentage (Key Metric). To Brad Pitt’s character, only one game mattered, winning the last game of the season…the World Series game (goal).
During the movie:
- There was a familiar problem; the coach (management) wasn’t following “the plan,” specifically not playing/developing the players with the high on base percentage that was previously agreed to. In the business environment this would be similar to business managers doing business as usual rather than making decisions that support the strategy. Brad Pitt (I.e. the CEO) took radical corrective action.
- It wasn’t just a matter of just hiring the right players with the right on base percentage, however. Jonah Hill’s character (I.e. business analyst) worked closely with the players and coached them on their current metrics and how they could increase their on-base percentages. Business translation: even though the importance of key metrics may be obvious to you, people need to be coached on their use and sub-metrics that support them. When ahhh moments happen, they get it.
Other observations that parallel business:
- Baseball has always had tons of metrics (known as saber metrics). I remember 30 years ago listening to the game and the announcer stating the batting average of the player at the plate on even dated Tuesdays against this pitcher (I exaggerate, but you get my point). It doesn’t matter what you measure, until you use them in day to day business for fact based decisions.
- The opening scene I mentioned above reminded me of business meetings I have been in discussing customer profitability. Everyone shoots from the hip because they haven’t looked up or don’t have a way to measure customer profitability but it is key for corporate profitability. I was reminded of a book I read titled “Time-Drive Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits” published by Harvard Business Press (April 4, 2007) by Robert S. Kaplan, Steven R. Anderson and what is referred to as the “whale curve of cumulative customer profitability”, which is typically never part of the discussion (shown below).
- Source: Page 246 of “Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits” by Robert S. Kaplan and Steven R. Anderson, published by Harvard Business Press, 2007.
- Based on the analysis in the book, many companies experience a minority of customers that create 150% – 300% of the total profits. As show in the graph when the line starts at zero and moves up to about 180% on the “y-axis”. The majority of customers often break even. The line on the graph is horizontal at the 180% and maintains current profitability but doesn’t add to it. The least profitable customers can lose 50% – 200% of total profits and hurt the overall profitability of the company as shown by the line going below the 100% line. (because the cost of serving the customer is greater than the revenue)”.
My main take away from the movie (as a declaimer, if it’s not obvious, I’m an analyst at heart) is let’s learn from the innovative leadership of this legendary A’s team, if better metrics-driven management with proper coaching of those metrics can have a positive impact on a baseball team — where individual split-second performance at the plate and in the field is what matters and we use averages to explain it — there’s no reason the same positive outcome shouldn’t come from better metrics-driven management and fact-based decisions in the business as well.
Speaking of major league baseball, huge congratulations to the 2011 World Champs, the St. Louis Cardinals!
Last week, we discussed financial planning and how it fits into the overall framework of integrated business planning. This week’s post focuses on project planning. Let’s first take a look at the three functions of managing a business: Running the day to day operations of the business; Transforming the business based on to the new demands of customers and changes in the economy; Growing the business; project planning focuses on the Transforming and Growing aspects of a business. Project planning monetizes the cost and benefits of Capital Expenditures (CapEx), and Strategic Expenditures (Stratex). Its objective is the efficient allocation of capital and resources to maximize shareholder/owner value consistent with the strategic plan. To achieve this objective, project plans need to be considered as separate entities with separate Income Statement, Balance Sheet and Cash Flow.
Project Planning
The diagram below shows the relationship between project planning and the financial and operational plans as well as scenario management using an Excel metaphor.
Project Planning Diagram
In the diagram above, project planning is shown in the center cylinder labeled “Capex and Stratex Projects.” Each spreadsheet in the center cylinder represents a separate project, with complete Income Statement, Balance Sheet and Cash Flow. Collectively the cylinder represents the complete portfolio of projects across the entire organization and divides the projects up into three categories:
- Potential projects – these are projects that have never been started but are “on the drawing board.” The level of detail in each of the plans may vary from a “back of the envelope” calculation to detailed timelines, resource requirements and financial statements.
- Approved projects – these are currently approved projects that are in implementation. While operational and financial plans mentioned in prior posts may be updated monthly or quarterly, these projects are continually updated.
- Projects on hold – these are projects that have been started and for some reason have been placed on hold.
The key thought being conveyed in the diagram is each project plan needs to be treated as an independent entity that impacts both operational and financial plans. The system must have the flexibility to move these projects in and out of different forecasts and “what-if” scenarios to measure the impact on required funding, operations and financial results.
Transparency and Flexibility
The combination of driver based planning, discussed in the previous two blog posts, along with project based planning and the ability to move projects in and out of a plan provide the “levers” integrated business planning requires creating a dynamic planning environment.
For a more detailed look at the templates and models behind project planning check out the white paper “Achieving superior financial flexibility through project budgeting and planning”.
The models above fit in the overall IBP framework of the post on July 25, 2011 (click here to review) as shown in the diagram below:
Project Planning within an Integrated Business Planning Framework
Project planning is typically an ongoing process. Initial projects may start with a “back of envelope” calculation and are refined and “tightened” as their feasibility and probability of execution become more certain. As mentioned above, project planning requires the ability manage a portfolio of potential projects and move them in and out of the plan depending on economic conditions, market conditions, competitor actions and the company’s strategic plan. Next week’s blog will focus on the strategic planning process and how it drives both Stratex projects as well as the financial and operational plan.
Just this past weekend I was at one of my oldest daughter’s softball tournaments. In a tight game, a key hitter for her team was asked to bunt rather than hit. The bunt resulted in moving the runners on base into scoring position which in turn resulted in runs when the following batter got a base hit. This is a common scenario in baseball/softball and other team sports where individual performers are asked to selflessly perform for the greater good of the team. It is the job of the coach to assess all the facts, quickly, and determine the right strategy and then it is back to the individual to execute on the strategy.
The same can be said for business. Many times individual people or business units are asked to do things for the greater good of the entire company. Like coaches, it’s up to management teams to assess the facts, quickly, and determine the right strategy. The difference is that unlike coaches who are right there on the field and can easily see most of the factors at play, management teams have to depend on information that might be coming from different geographies, different business types and, of course, from people who may have different interpretations.
That is why management teams need solutions that can help them gather and more importantly rationalize the facts in a quick and timely manner. If they can’t get all the facts quickly and in a format that makes sense, how can they be expected to pull together a winning strategy? It would be like a coach being asked to call the next play after it already happened.
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