chapter 21

Negotiate budget and targets

Success is often defined by the results you achieve. Logically, this means that you should strive for the best results possible. But there is another way of defining success:

Success = Results minus Expectations

In practice, this is the formula against which you will be judged. This is the world of MBO (management by objectives) and KPIs (key performance indicators). These are grand and formal ways of talking about expectations. This means that you have to work on two items: delivering results and setting expectations.

Nearly all of the training and support you receive will be about achieving results. The other half of the equation, setting expectations, is more or less ignored. But it is vital to your ability to be seen to succeed. Naive managers often accept ‘challenging’ targets because it sounds macho to do so. In contrast, more experienced managers will set expectations low, which then makes it easy to beat the target.

Managing expectations

The importance of managing expectations can be seen in the following table. The naive manager accepts a challenging target and delivers results that are better than the more experienced manager. The crucial difference is that the experienced manager negotiates low expectations. At year-end, the naive manager finds missed targets lead to a poor review and plenty of remedial support, while the experienced manager enjoys a good bonus for slightly worse results, as shown in the table.

You may think this sort of game playing is unworthy of any serious leader, but all leaders do this. Watch what happens when a new CEO takes over. The first thing he (95% of CEOs of top firms are still male) does is to get all the skeletons out of the cupboard. He paints a picture of imminent disaster. There may be a profit warning, but fortunately he happens to be the hero who can turn things around. He has set expectations low and can then over-deliver, proving that he is the hero he claims to be.

If you are a leader, you will be aware of this game playing and you will have played it yourself. Inevitably, there are two sides to this game. If you are on the receiving end of targets, you want to set expectations low. If you are setting targets, you want to set them high. You will hear all sorts of reasons why your target is unreasonable. There are times when it pays to be unreasonable, and setting targets is one of those times. If you set low targets, you can be sure that you will achieve low results – targets tend to be self-fulfilling prophecies.

When it comes to budgets, the same principles apply but in reverse. If you are setting budgets, you want to set them low to make scarce resources go as far as possible. If you are receiving a budget, you want as much as possible so that you have the resources to support your goals. The difference can be seen in the next table.

Essentially, budgets and targets are a negotiation. Treat them that way. The leader is like the customer, wanting as much as possible for the least expense. The manager is like the provider, wanting as much money (budget) for the least effort. If you accept the orthodoxy of the annual budget cycle, you will find all the cards are stacked against you. By the time your part of the budget is reviewed, expectations will have been set already and you will have minimal opportunity to change those expectations.

So, how do you negotiate the right budget and targets? Here are four things you can do:

1. 1Strike early.
2. 2Tell a story.
3. 3Understand the process.
4. 4Manage this year’s performance.

Strike early

Expectations often arise by default. The best predictor of next year’s budget is this year’s budget, plus or minus a bit. That may or may not be helpful to you. Be proactive in setting expectations very early, before the formal budget cycle starts. Early in the cycle there is plenty of room to manoeuvre. As the process evolves, more and more decisions are being made and you will have less and less ability to influence the outcome. You have to be proactive. Instead of waiting for the formal process to reach you, use your informal network to influence the process from the first day.

Tell a story

And keep on telling it. You are the expert in your area; it takes time and effort for others to dig into your data and challenge you. Use this imbalance of knowledge to your advantage. Show that there are particular reasons why your unit next year will face unusual, even unprecedented, challenges that will require a low target and a high budget. Make sure you have assembled all your facts so that you cannot be challenged successfully. Then keep on pushing your story and pushing your facts relentlessly. If you stay quiet, any sort of budget and targets could be inflicted on you.

Understand the process

Know when the budget cycle starts, who is involved and when the broad framework is decided. Make sure you influence the broad framework by making your case to the right people at the right time. The right people may well be two levels above you, in which case you need a simple story for them that you can tell them in a 20-­second conversation when you meet them by chance in the ­corridor. Make sure your chance meeting in the corridor happens and be ready for it. Be ready for a more detailed discussion with key staffers who may be in finance or planning and will be driving the top-down process. Don’t wait for the top-down process to work its way down to you – by then it is too late and your fate will have largely been settled.

Manage this year’s performance

If you are having a great year, then top management will take this year’s results as the baseline for next year. If you worked minor miracles this year, next year you will have to work major miracles. When you realise this year is going to be outstanding, you might want to start massaging your numbers – bring expenses forward, delay recognising revenues. Create a baseline that is acceptable for next year.