Annual Planning That Actually Works

Most annual planning processes are theater and don’t produce useful plans. Here is a process that does.

It’s annual planning time again, and most companies will go through the motions to produce an annual plan that they neither believe in nor follow. Why is it that annual plans are so dreaded and often so useless? There are a lot of reasons, but the most common is that the process used to create the plan is flawed. Many people learn a flawed planning process and then continue re-using it at future companies, perpetuating the bad habit. 

To help you break the bad habit, we’ll cover a good annual planning process that will produce a useful plan that you believe in!

First, let’s discuss what we mean by an “annual plan”. A good annual plan has:

• Goals. One or more metric targets for the year.

• Bets. All of the changes necessary to hit those targets (people, process, product).

• Risks. A list of risks to the plan, and mitigations for them.

Some plans are one page long, and others are dozens. How long and detailed your plan is depends on your leadership style and the complexity of the business, but the good news is that this process works for all of them.

All plans start with goals, so how do we set those goals?

Step 1. Setting Goals

The first, and most important, part of your plan are the goals you set. Your goals are typically target values for your key metrics, such as:

• Revenue

• Customers

• Retention

• Margins

Most companies struggle with goal setting because it’s so intimidating. If you have investors, board members or other partners you might think there are expectations on the goals you set - and you’d be right. At the same time, your team lives in fear of unrealistic goals which they have been subjected to at prior companies. All of these pressures can influence the goals you set, and not for the better. 

Let’s approach goal setting in a more rational way, starting with…

Forward-Looking Goal Setting

The most common way to set goals is to extrapolate from where you are today into the future. Forward-looking goals are the easiest to make since you control all of the variables. That also makes them the most conservative goals, since your nature is to resist too much change too quickly. Everyone likes to be comfortable and Forward-Looking goals are usually comfortable. 

Backward-Looking Goal Setting

Another way of setting goals is starting from the destination you need to reach in 3-5 years and working backwards. Backwards-looking goals are always aggressive, because the company that will reach that final goal is very different from the company you have today. So much needs to change that it’s very uncomfortable to think about, especially if things are going pretty well right now. 

If you use both goal setting approaches you end up with conservative (Forward-Looking) and aggressive (Backward-Looking) goals. In between the two is a range of potential goals. 

What goal you choose in that zone depends on your business, how much risk you want to take and how confident you are in your goal setting. Some companies like to set aggressive goals knowing there is no chance they will reach them, others set easy goals because they love the feeling of beating them by a lot. You will choose the right goals for your team, but now you have a framework to make it clear why they are the right ones. 

How many goals you set, for how many metrics, is a personal choice but in general you don’t want to have more than 3. If you have too many goals, it becomes too easy for the team to jump from goal to goal and not make progress towards any single goal. Even worse, too many goals means you have too many core metrics and that leads to data paralysis. 

Step 2. Making Bets

Once you have your goals, it’s time to figure out what you’ll change in order to achieve them. The business that got you to where you are today is likely not the one that will get you to these new goals, so people, product and process all might need to change. Everything you change in your business is a bet, and you need to make the right bets to achieve your goals.

Examples of bets include:

• Changing the organizational structure. 

• Hiring plans (or layoffs).

• Product roadmap focus. 

• Product pricing changes. 

• Sales/marketing strategy changes. 

One of the problems with most planning processes is that they are done as a group, and as a result they are uncontroversial. By writing the plan by committee you get the least offensive, most vanilla plan possible. Along the way, you threw away every innovative and ambitious idea anyone on your team has! That’s not how you win in any market. 

My approach to this is to have your leadership team all prepare their plans, but working alone. No collaboration allowed. If you want to capture the most innovative, ambitious ideas your team has, the best way to do it is to remove all constraints and let them create their own world. If you do this you will end up with many different plans, most of which are incompatible. But you know what you also have? A wealth of ambitious ideas to choose from. 

With all of these bets in hand, then you can start to reconcile them together into your master plan. That process can take days or weeks, but in the end you hopefully push yourself to consider many ideas that make the team very uncomfortable. These bets are risks, and you need to take them to succeed.

How many bets should you make? If every bet you place paid off you should beat your goals by a large margin, because many of them will not. You want to place enough bets to have a healthy safety margin to hit your goals, without trying to do too much or distract your team. It’s a fine line, one that you will have to judge for yourself. 

Step 3. Risks & Mitigations

With your goals and bets in place you have what most companies call their “annual plan”. However, and I’m sorry to tell you this, sometimes things go wrong. Just having more bets than you need isn’t enough to make your plan credible, you need to think through what can go wrong and plan for it. 

Most teams are not good at this (see The Downside of Optimism) so you’ll need to make it easy for them to learn and iterate. The easiest way is to simply require everyone on your leadership team to include a list of risks and mitigations as part of their proposed plans. By requiring them to provide a list of risks, and then review the risks cited by others, you start to build a habit of risk assessment. 

A better way is to treat the planning process as a red team vs blue team exercise. The blue team is your company, the one that everyone works at and who is building your plan. The red team is an external entity who wants to bring your company down. Have everyone on your leadership team switch from the blue team to the red team and ask them how they would cause the plan to fail? Make them omnipotent so that they can manipulate the market, regulations, etc. to cover the entire universe of challenges. Leadership teams have a lot of fun with this exercise, since it’s fun to play the bad guy sometimes, and they typically come up with really important risks that you can then suggest mitigations. 

The important part of the risks & mitigations is the thought that goes into identifying them. Often, they highlight deficiencies in your goals or your bets, and you need to make changes accordingly. Sometimes they will open your eyes and you realize you need to start the planning all over again. That’s good! Better to realize there is a flaw in your plan than find a flaw in your business in 6 months. 

Now what?

Congratulations, you put in a lot of work and have a strong annual plan! This process can be done in a few weeks or a few months, it depends on your working style and how much time you want to devote. 

The most important part of the process was the thought you put into the plan, not the plan itself. By thinking about your goals, deciding on your bets and considering the risks you have a deeper understanding of your business and how to grow in the future. 

And that, in the end, is the goal of every great annual plan.