Why do so many organizations struggle to achieve an optimal alignment between strategy and forecasting? Join us as Ethan Carlson, CEO of Carlson Management Consulting, kicks off ASK ETHAN, our weekly podcast designed to supply answers to your most daunting questions as we explore the strategies and best practices that are now empowering finance to drive change.
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The Collective Disconnect
“It’s amazing how many companies have a disconnect between what those three or four key strategic objectives are for the new year, and how they are running their budget process. There is often no alignment between the two. … What needs to happen is that everyone inside an organization should understand how their actions, their budgets and their financial resources impact (strategy).”
The following is an edited abstract from CFO Thought Leader’s “Ask Ethan” podcast featuring Ethan Carlson, CEO, Carlson Management Consulting, and Jack Sweeney, cohost of CFO Thought Leader.
CFOTL: A number of our CFO guests have stated recently that aligning strategy and forecasting is top-of-mind for 2025. Why do you think this is?
Ethan Carlson: Well, first off, we’re just entering the New Year, and most people have finished their annual budgeting cycles. This is not a topic that anyone particularly enjoys unless you are in finance. I think that Jack Welsh has the famous quote around budgeting being one of the most inefficient processes at most companies, and it’s really true. It’s amazing how many companies have a disconnect between what those three or four key strategic objectives are for the new year and how they are running their budget process. There is often no alignment between the two. What needs to happen is that everyone inside an organization should understand how their actions, their budgets, and their financial resources impact strategy.
CFOTL: Please help us supply a reality check to finance leaders out there who would tell us, “Strategy and forecasting is already aligned. No problem. We’ve already done it.” What would be some criteria to help them determine whether this is so?
Ethan Carlson: For me, I think that there are maybe two things that I would look at when first engaging with any customer or in any organization in which I’ve worked.
Your first benchmark is how many people are participating in your process around generating a forecast or generating a budget. If the answer is a handful, it’s probably not correctly aligned. You need to have an inclusive process that is bringing more people into the process. These are people who are actually making the decisions on a day-to-day basis on how the company really runs.
If they’re not involved, you don’t have this alignment. So I don’t know that there’s a firm number that’s right, but look at your organization and say, “Well, are there a significant number of key decision-makers and key drivers participating in our forecasting process?” And the answer to that has to be yes, if you’ve got this working.
The second thing would be to now take one of these people who are participating in the process and take any incremental spend that they’re making and say, “All right, explain how this relates to our strategic objectives.”
If there are any net new head count, any new capital purchase, or any financial objectives within your numbers, you should be able to say, “Well, that change in this line item is related to this activity, which is part of our tactics, which are going to line up to achieve the strategic results we’re looking for.” So, if you have that inclusive process and can have that linkage between the spend and the desired outcome, this is what you’re looking for.
CFOTL: When it comes to aligning strategy in forecasting, how should we distinguish the laggards from the really world-class performers who are getting it right?
Ethan Carlson: From our experience, the mistakes that are still being made are by organizations that continue to control the forecast process very centrally and are not being inclusive. They have not created this culture of collaboration. I think that’s the number one thing that organizations get wrong. I think also that most of what we talk about is process and results. But organizations that are getting this right are investing in the technology.
They’re recognizing that to do forecasting well, to make it easy, you can’t rely on spreadsheets and sending out software that really wasn’t built for that purpose. So we see this as a real indication of someone who’s not yet come up that curve toward world-class. We see it as being a very focused exercise, almost in more of a linear fashion where you have your set milestones. You’re going to submit a budget on such a date. It’s going to be reviewed or rejected. It’s going to have cuts and then it gets published. It’s very focused on one year and really it’s very detailed, but it’s not necessarily thought through.
On the other side, what we consider world-class companies have a process where it’s a very inclusive in almost a cyclical nature. Where there’s real-time interaction between a large number of participants from outside of finance who provide input and get feedback in a constructive manner. Again, they’re usually leveraging technology and they’re usually looking three to five years into the future, along with just the current year.
CFOTL: Well, while it’s clear that many companies are advancing in terms of achieving the alignment, there still are a variety of companies that aren’t getting it right just yet. What do you see?
Ethan Carlson: Plenty of companies still don’t do this. Privately held companies where you’ve had maybe a single owner or not had to report externally, in the manner that larger companies may have had to, often don’t have that culture. Because it’s always been that there’s a single business leader, the owner or what have you, or a small group of executives that have really steered the company. But I think that the realities that we’re seeing today ... and this is totally outside of finance ... is that the speed of business is so much faster, as is the expectation of how middle management and lower will really react to customer service issues.
You see on Facebook or Twitter how companies deal with these issues that arise. The ones that do it well, I think they’ve empowered people down to make the right decisions. In organizations where that’s not been done, they struggle. It’s this change to go with the speed of business, as well, that I think is important. You don’t have the benefit of sitting back and analyzing results three and six months down the road and then making a decision to change in the future.
You have to really react very quickly. Opportunities are coming and going and being swallowed up by other organizations very quickly now. Big swings in the success of a company can happen within a few days now. If you don’t have a process that pushes that knowledge down to what are the right decisions and what are the key goals of your organization, you’re going to struggle.
Testing the Alignment: Ethan’s Reality Check
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ASK ETHAN is CFOTL’s brand new, weekly podcast that features an actual budgeting or forecasting question submitted from a busy finance executive like you! Ethan offers insights and answers to the challenges business leaders face as they seek to transform finance within their organizations.