For Annual Planning, Investing Beats Budgeting
By using principles from venture investing, companies can make smarter resource allocation decisions and help their departments become more nimble, aligned, collaborative, and accountable.
Just like dental work or pulling weeds, annual planning is something we all know is painful yet necessary. Obviously, budgeting helps companies predict their cash needs. Less obviously, budgets, and even just the act of building them, are critically important for aligning internal teams on strategy, prioritizing various initiatives, attracting capital, and setting the right targets to measure and manage against.
Having spent the better part of a decade working in corporate financial planning, I can confidently say that the traditional budget process is a relic optimized for a world we no longer live in — I’ll explain.
A typical budget cycle involves department heads, corporate executives, and financial analysts. As a starting point, an analyst will often trend a department’s revenues and expenses forward based on their own assumptions of momentum and seasonality. They may assume that certain expenses will grow as the company grows (e.g., increasing hiring for customer support and related expenses as sales increase), and that others will remain mostly fixed (e.g., rent for the corporate headquarters staying roughly the same, even as the company grows a bit). Department heads and finance then play a game of tug-of-war over headcount increases, premium software subscriptions, revenue targets, and travel budgets before settling on something that is often a modest increase over their current sales and spending. After all, nobody gets laughed at and fired for approving a six percent year-over-year budget increase.
Traditional management structures and their procedural components emerged and excelled at a stage in our industrial evolution where market disruptions were gradual and the nature of work was more consistent and routine. Consequently, they struggle in today’s age of rapid innovation and extreme interconnectedness. For modern corporations, who are under incredible pressure to innovate and whose activities span across many different functional, industry, and geographic domains, traditional frameworks and processes inhibit their ability to stay nimble and solve complex problems¹.
Planning, and measuring against that plan, should stay, but the way we go about it needs an update.
Budgeting Like An Investor
Zero-based budgeting, beyond budgeting, better budgeting, and activity-based budgeting are just a handful of the more recent and popular methodologies that strive to move past the traditional process in favor of something more dynamic. While they have their differences, the core concept underlying each is that planning should resemble an investing process.
Venture investing is different than budgeting in that investors and portfolio companies start from first principles and evaluate teams, plans, markets, and risks to understand the whole of the future opportunity. When done properly, goals are defined such that they are clear and measurable, but not overly prescriptive and rigid. While an annual forecast is typically put in front of a board of directors, the startup isn’t tightly managed to each individual expense line. Instead, they are primarily evaluated on their ability to hit their targets on key performance indicators (KPIs) such as user growth, monthly active users, customer churn, top-line sales, gross margin, and cost per acquisition, while keeping their overall spending to appropriate levels to optimize return on investment (ROI). This way, startups know what their mandate is from their investors and they have considerable autonomy and flexibility to adjust their strategy and stay nimble as they evolve and conditions shift. On the other side, investors stay focused on only the most important measures of success and avoid micromanaging their portfolio.
Investment-based Budgeting In Action
Founded in 2013, ConsenSys is a multinational blockchain company building enterprise applications, developer tools, and more. In addition to developing innovative Ethereum tech, Joseph Lubin, the company’s founder, wants to develop innovative self-organizing managerial practices that embody blockchain’s decentralized principles. Accordingly, the company refers to itself as a “mesh” of interconnected, yet meaningfully autonomous teams and individuals.
In 2018, we designed and piloted “Mesh Fund” to arm ConsenSys with a modern budgeting process tailored to its unique org structure. Members of finance and other ConsenSys executives act as partners in this internal fund, and top-level teams petition to get access to budget, internal authority, rights to use the ConsenSys brand, and access to internal services. Those top-level teams then reallocate their resources into subordinate units through a similar, recursive process. Here how the whole thing works:
1| Petitioners prepare a presentation that covers their team’s: purpose and mission; realistic operating goals; execution plan; financial plan; key risks; team composition and governance structure (who’s on the team and how do they make decisions); and resource requests.
2| A panel of subject matter experts that cover a diverse range of functional areas is assembled to advise the petitioner in their preparation and to evaluate the final pitch.
3| In a video conference (open to the entire company whenever possible) the petitioning team presents for an hour then answers questions for an hour. Panel members may ask their questions first, followed by anyone else from ConsenSys in attendance (asked via Sli.do, in the order of most upvoted). The video from the meeting is recorded and shared with the company.
4| Feedback (required from panel members, but optional for others) is collected and synthesized into a summary that is shared with the CEO and the petitioners. Typically this feedback focuses on the pros and cons related to the market opportunity, business model, strategy, team qualifications, and risks to ConsenSys, as well as suggestions on follow up work and recommendations for next steps. The CEO considers the feedback before making a decision on how to proceed.
5| Mesh Fund works with the CEO and petitioners to draft a suitable mandate agreement that covers:
Scope: Outlining the high-level purpose of what the petitioning team exists to accomplish;
Financial commitments: Including revenue requirements, maximum burn amounts, and spending limits (e.g., max $40k/month for travel);
Operating commitments: Specifying various requirements specific to each petitioner (e.g., churn, customer satisfaction, and employee utilization requirements);
Cultural commitments: Clarifying how the petitioner must act within the company (e.g., participate in various company events, treat others with respect and kindness, operate with integrity, and provide exceptional customer service);
Reporting commitments: Laying out what regular reporting the petitioner must submit weekly, monthly, and quarterly (e.g., customer satisfaction, user growth, and site uptime metrics);
Internal authority & domain: Detailing what unique powers and rights the petitioner has internally (e.g., exclusive rights to contact external customers in the entertainment industry);
Support: Confirming service levels of support from various internal teams (e.g., SLAs detailing brand design, content creation, and online advertising support from the marketing team); and
Oversight: Detailing how the team is to be held accountable (more on this in #7).
To add flexibility and mitigate risk, any of these conditions may be adjusted at any time by the CEO. It’s not meant to be a binding legal agreement, even though it does feel like one. Rather, it’s intended to be a solid memorandum of understanding.
6| Once both parties agree to the conditions, the mandate agreement is signed and uploaded for anyone inside the company to see on the shared company drive. The petitioning team is now a Mesh Fund portfolio team.
7| The portfolio team is managed and evaluated per the oversight conditions set forth in the agreement. Similar to the way a venture fund checks-in with portfolio companies, this typically means that a Mesh Fund analyst is designated to consolidate all reporting materials, compile a scorecard that details how the team did in complying with all of their various commitments, and conduct a review with the team and other stakeholders to dig deeper into the subjective measures of performance. The outputs are shared with corporate executives and senior personnel inside of Mesh Fund who may decide that some type of intervention is necessary (e.g., adjustments to commitments, personnel changes, comp increases, and strategy tweaks).
The team comes back to Mesh Fund to pitch again and renew their mandate when they need additional resources, they desire to significantly change their strategy, or if their agreement requires them to do so at a given moment in time (i.e., the agreement may only be valid for a certain number of months). The CEO may also amend or extend their existing agreement if they deem it unnecessary to have the team go through another full round of petitioning.
So How’d It Go?
Mesh Fund is still in its early days at ConsenSys, but has proven many of its hypotheses and demonstrated usefulness.
First, by focusing intensely on the fundamental purpose of a team and the relevant KPIs, and establishing only the necessary, essential boundaries in a clear document, we’ve made the expectations for teams exceptionally clear. This allows teams to be nimble and autonomous, while still remaining highly aligned and accountable. It also makes the management of these teams simpler and more effective by keeping oversight focused on measuring the most relevant indicators of performance.
Second, by thinking of the resource allocation as an investment made to achieve some defined purpose, ConsenSys evaluates budgets from first principles. This prevents them from using a prior year’s annual financial performance as a basis and justification for the perpetuation of certain activities.
Third, by assembling a diverse panel of subject matter experts and inviting the entire company to view the presentation, ConsenSys has received higher quality questions and feedback, and has more meaningfully embodied it’s core value of “radical transparency”. Even after the mandate agreement has been signed, ConsenSys employees benefit from their thorough understanding of what various teams exist to do, how they do them, and why.
Nothing is perfect however, and we’ve noticed that this has been a slower, heavier process early on. Trade offs related to speed, transparency, and managerial control will need to be weighed and balanced. Since ConsenSys and its organizational structure are rapidly evolving, the Mesh Fund process will surely evolve as well. Regardless, the underlying principles will likely persist.
Mesh Fund as outlined above isn’t meant to be copied by every company. Instead, I encourage you to take inspiration from the design and iterate on a process that feels right for your organization. Please visit us at cone.network or email us at contact@cone.network to inquire about our solutions relating to self-organization and decentralized management.
¹Lee, Michael Y., and Amy C. Edmondson. “Self-Managing Organizations: Exploring the Limits of Less-Hierarchical Organizing.” Research in Organizational Behavior 37 (2017): 35–58.
Written by: Rob Solomon
I’m the founder of Cone, which builds solutions that enable decentralized organizations. My background is in corporate finance, operations, and organizational design for decentralized companies.
