CHAPTER EIGHTEEN

CREATING YOUR OPERATING PLAN AND SETTING GOALS

In my observation over the years, most companies explode when they try turning their strategic plans into operating plans. They have good ideas and capable workers, just no cohesive way to organize and contextualize the work. That is the purpose of the operating plan.

Just as my favorite framework for internal “business plans” is Ash Maurya's “Lean Canvas,” my favorite framework for “organizational goals” comes from Patrick Lencioni's book The Advantage. I introduced that framework when I described how to define an organization's mission, vision and values in Part One. The second part of the framework is more relevant to execution and goal setting. Lencioni divides it into three levels: “Thematic Goals,” “Defining Objectives,” and “Standard Operating Objectives.” Those are a little different from my presentation of the process in this chapter but the spirit is the same.

TURNING STRATEGIC PLANS INTO OPERATING PLANS

There are many different formats that operating plans can take and a variety of acronyms to go with them. No one of these formats is “right,” but I'll share the key process steps my own team and I go through to turn our strategic planning into action plans, synchronizing our activities across products and groups.

• Theme. Pick a theme for the year that encompasses the bulk of your strategic plan. A good place to start is your elevator pitch.
• Initiatives. Recognizing that lots of people on our team do lots of routine work, organize a small number of major cross-functional efforts into specific initiatives. These projects give nearly all employees direct ownership of a concrete piece of the strategic plan.
• Plans. Involve others in the process to gain the benefit of their ideas as well as their ownership over the outcome—this is the place for individual teams and divisions to play a significant role in laying out the long-term road map. Every initiative team and each department within your company (they will probably be different) should work together to produce a one- to three-page plan on a common template if possible. It should include a mission statement, a list of direct and indirect participants, important milestones, and key performance indicators and metrics. This is also the place to capture all the activities in your organization that aren't directly related to the theme—like accounting, legal, HR, and IT.
• Synchronization. However realistic the plans may be in themselves, they might require overlapping resources or have dependencies and sequencing requirements. It's up to you and your management team to make all of these plans work well together. Review all of the plans, making edits to both substance and timing. We have started posting these plans on Google Docs and creating an “open comment” period for all managers in the company to read, comment, respond, and reshape plans to make sure they all line up.
• Communication. Unveil the theme and initiatives at an all-hands meeting. This should be fairly high level. It's the rallying cry that will get everyone's head around the work to be done in the upcoming year. Keep communicating as you go into more and more detail as the theme soaks in.
• Scorecard. Build a simple scorecard for the year to reflect the grading on each initiative and visually display their most important metrics. (We use a “green/yellow/red” system but you can create your own.)
• Ongoing reporting. Every quarter, update each of the initiative plans for presentation to your board and your team (more frequently, if you're smaller and younger as a company). When you do so, publish it alongside the current scorecard for each initiative.

As I said, there's no single recipe for success here. This is a variant on what we have done consistently over the years at Return Path—and it seems to be working well for us.

FINANCIAL PLANNING

As I said earlier, the predictable uncertainty of startups is no excuse to avoid the work of making educated guesses—especially about the next quarter. This is particularly true in the realm of financial planning. An operating plan without rigorous financial predictions—on both income and expenses—is just another bit of storytelling. The financials start you on the journey into execution.

Your financials should be very detailed for the coming months but don't need the same degree of precision for one to three years out. You should be able to produce a full set of financials (income statement, balance sheet, cash flow) on a monthly basis for the first year and on an annual or quarterly basis for two years after that. Essentially, you need to answer three questions: How much is this going to cost? How and when is this investment going to pay itself back? What is the capital required to get there and what are your financing requirements from where your balance sheet sits today?

The costs are easier to forecast, especially if you carefully articulated your resource requirements. As everybody in the startup world knows, ROI is trickier. You're not leading an enterprise that has extremely detailed historical performance metrics to rely on in their forecasting. When Schick or Gillette introduces a new razor into the marketplace, they can very accurately forecast how much it's going to cost them and what their return will be. If you're creating a new product in a new marketplace, that isn't the case.

While monthly burn and revenue projections will inevitably change, capital expenditures can be more predictable, though you need to make sure you understand the cash flow mechanics of capital expenditure. Sometimes vendors will provide financing, sometimes they won't. Usually, you pay cash out up front, so it's a balance sheet event. You depreciate the expense over many years, so the impact on the income statement is very different.

BRINGING YOUR TEAM INTO ALIGNMENT WITH YOUR PLANS

If you're writing your first operating plan for a raw startup off of freshly validated hypotheses from your Lean Canvas, odds are that your team is pretty solidly in alignment to begin If your operating plan is for a business that's been running for a couple years or more—and assuming that plan isn't to do more of the same for the next three years, it will likely be somewhat disruptive. Your company is about to pursue a new or modified set of goals. You will either be ramping up on existing business lines, adding new ones or dropping products and services altogether in order to focus on your core business. There might be another round of investment coming, a merger or acquisition, a divestiture, or a public offering.

What impact will your new plan have on internal resource allocation? Answering this question requires considerable finesse. As startups don't have the enormous resources of major enterprises, almost every decision to pursue one direction requires a decision to abandon—or significantly cut back on—another. Are marketing dollars going to be increased or reassigned? Are some departments going to get significantly more funding in order to bring a new initiative to fruition? Are other initiatives being put on the back burner or cut altogether? Is Sally or John going to have to start doing a slightly different job tomorrow? A radically different one? Will you end up doing layoffs because the complexion of your staffing needs has changed?

Whatever your plan, it may have a real impact of the day-to-day lives of your employees. The first question you'll need to answer is: “What is that impact going be on every stakeholder? Answer that question explicitly. In particular, you need to set clear guidelines for each of your functional departments, including:

• Strategic goals. What is each department's specific role in securing your company-wide goal? Work with your executive team to break your overall strategic plan down into a series of department-specific goals and help them communicate those goals to their teams.
• Business goals. What kinds of operating changes will departments need to make to reach the company's goal? Will there be new hires? Promotions? Reassignments? Will resources be moved from one department to another? This is where you explain the impact of your goal on your team's day-to-day operations. Be very clear about what's going to happen.
• Milestones and metrics. The ultimate measure of your success is whether you achieve the business goals—revenue, sign-ups and so on—laid out in your strategic plan. How are you going to measure each department's progress? What specific milestones do they have to reach to support the overall goal? What metrics are you going to use to measure their success? These metrics should be appropriate to specific departments but everybody should be clear that their efforts ultimately serve the company's success as a whole. (For more on this topic, see Chapter 26, “Driving Alignment.”)

Everybody in your company can and should feel included in the new direction. The solution often lies in savvy reallocation. The fact that somebody's project is being cut doesn't mean their contribution has to come to an end. They'll simply need to contribute elsewhere. Tell them where that will be. More important, a well-communicated strategic plan should make it clear that the new direction is going to benefit the company as a whole. If a particular employee or department's incentives don't align with your overall company's health—you have a bigger problem.

The primary emotion associated with your plan should be excitement about what's coming next for your company. That can only happen if you overcome anxiety about what's coming next for your individual employees. Doing so requires a high degree of clarity about short-term changes. Provide it—then move on to the big picture.

GUIDELINES FOR SETTING GOALS

There are no general guidelines for what goals you should set: companies and industries are simply too varied for that. There are guidelines for how you set goals and how to work toward them.

• Underpromise and overdeliver. Being ambitious is what building a startup is all about but consistently missing goals quickly becomes a drag on productivity and morale. Set ambitious goals—big, hairy, audacious ones—but don't insist on setting goals that you will never meet.
• Meet commitments or renegotiate and communicate. This is especially true of individual goals: if you know in advance that you're not going to hit your goals, quickly communicate that to your team. Don't force people to scramble when it's too late. Give them time to adjust expectations, make new plans and communicate them.
• Get broad buy-in from multiple stakeholders up front. Rallying cries don't work if people are shouting different phrases over each other. Major stakeholders across a wide spectrum—including executives, board members and even some key junior people—should be ready to back you up when you make the big announcement.

This is much more likely to be a struggle in the life of a company. But as you mature, you will have a clearer sense of what you can achieve and what your company can rally behind. It's the same cycle you will go through in your forecasting and budgeting: Try, Learn, Adjust, and Try Again.