Everyone has an Annual Operating Plan until they get punched in the face
Rules of thumb for nailing your annual planning cycle
“A good plan violently executed now is better than a perfect plan executed next week.”
General George S. Patton
I admit - it’s a bit cringe when we compare our cushy jobs in tech to wartime. We take stories of WWII heroics and apply the lessons to battles we wage with HRIS incumbents using SEO and Javascript as our weapons.
Nonetheless, the General had it right. In order to be successful in startup land, or really any fast moving industry, you need to be comfortable making decisions with 80% of the information you wish you had. Moving now and course correcting any foot-faults later is a better strategy than waiting for the stars to align, as they rarely do.
‘In order to move fast, I expect you’ll make some foot faults. I’m okay with an error rate of 10 to 20% if it means you can move fast.’
-Reid Hoffman, Masters of Scale Podcast
TL;DR:
The Planning Process is comprised of a tops down and bottom up forecasting process that’s sanity checked through interlocks and benchmarks
At the highest level, costs can be broken into two big buckets - Direct Costs (people related) and Indirect costs (non-people related)
Nailing your headcount forecast is the key to success - not only is it +70% of your costs; it’s also a driver for the majority of indirect costs (e.g., software licenses, office expenses, rent)
The Process
Top Down
CEO and CFO begin the process with three company targets in mind:
Revenue growth (y/y %): North Star you build up your sales capacity to exceed
Productivity (Rev / head): Cuts through all the noise to sanity check your return on company wide labor
Profitability / Burn (in absolute dollars and as a percent of revenue): Bottom line validation that what you put into the machine won’t break the bank
Overall, you want to see leverage in your model year-over-year, getting incrementally more out of each head with time
Bottom Up
Finance works with each department leader to create a budget envelope, comprised of direct and indirect costs
Direct costs are related to labor: # of heads x cost per head
Cost per head = OTE + Benefits
Leaders present a biz case for the:
New heads they need, phased by quarter, to achieve their priorities
New tools they need to be more productive
The flex capacity they’ll want to use for specialized work via contractors
Interlock
After completing templates with each leader, Finance rolls up the “asks” and compares to the three company targets we discussed:
Productive capacity: How much quota does this allow me to deploy compared to my sales target?
Total headcount asks: How does this compare to my productivity per head?
An estimated cost of resources: What am I burdening my P&L with?
Finance will also orchestrate interlocks between functions with dependent resources to compare asks
Product and Engineering: Staffing product and engineering pods for building
Sales and Marketing: Building pipeline to meet sales targets
Finance and Recruiting: Figuring out the capacity and cadence for hiring
Finance is there to ask the questions related to dependencies and point out blind spots
Finally, finance gives each department leader a max headcount per quarter
“Let’s work to stay at or below this max headcount figure per quarter”
Direct Cost Rules of Thumb
Max HC Phasing
Budgeting using “new” or “additional” headcount is always difficult to reconcile and report on. Why?
People transfer between departments and backfills create net new HC
People leave the org and sometimes the role that gets backfilled is different
Using a “max” per quarter contemplates both those onboard and those to be hired
It also gives the department leader freedom to operate more easily with a “max total” backstop in mind
Attrition
The industry annualized attrition rate in tech is ~20% (~30% for sales, ~15% for non sales)
You shouldn’t include attrition in your model because:
It’s unpredictable
You can use the time to fill a departing head as a buffer to hitting your OPEX spend target
Cost per Head
Cost per head is sanity checked throughout the quarter on an offer to offer basis by recruiting and the CFO
Any major deviations are pointed out in the quarterly budget to actuals and course corrected - you should trend this over time in your quarterly reporting package
2 for 1’s
Exchange one expensive head for multiple less-expensive heads rarely results in as “good” of savings as you think
The fringe benefits chew up lot’s of cost savings (e.g., Sweden is +40% benefits)
Your productivity per head gets thrown off
You’re usually hiring them in a different country, creating an administrative and legal burden to localize if you don’t already have a hub there
Indirect Cost Rules of Thumb
Software / Tooling
Start the process by pulling all the Subscriptions you’re currently paying for from your ERP
Give the baseline to the department leaders and ask them to cross off what they think will go away (Ha! Good one!)
Then ask them to fill out a template for the new tools they think they’ll need
Organize your tools into categories that tell you what they do:
Infrastructure - critical to serve your customers
Security - important to safeguard the firm
Development - necessary to build your product
Sales - helpful to sell your product and keep the sales team organized
Productivity - nice to have
The relative cost per license per person should match up to the importance of the use case
You should not be paying the same relative amount per head on Asana as you are on Crowdstrike
Make sure you ask leaders two questions:
What’s the System’s Target Go Live?: It’s very difficult for an organization to implement two major tools at once; you can usually do one major implementation per quarter.
Are there any One Time Costs?: Implementation and professional services can be up to 3x higher than the first year costs for some major systems.
Contractors / Prof Services
As a check I like to take the total amount I’m spending on third party services and divide by the average salary for the department they are “serving”
For example, if the engineering team is spending $120K / month on outsourced labor, and the average salary is $60K / person, I know they are essentially buying specialized flex capacity equivalent to 2 full time employees
Travel
Break it into Internal and External buckets
External travel is to generate sales, meet partners, attend conferences
Internal travel is to visit colleagues, strategize, drink IPAs (All Hands, Small Hands)
By looking at travel from these two end goals, you should be able to come up with an average number of trips for each type of activity by role type
More senior people travel more (they like to get in conference rooms and talk about what everyone else should be working on) and some departments travel more (hint: your Engineering team should have little to no external travel)
Training
Apply a per head per quarter assumption here; work with your people ops team
If I was a betting man, which I am, I’d bet you come in under budget at the end of the year
Learning and development budgets historically go under utilized - people either don’t know what to spend it on, don’t want to go through the reimbursement process, don’t know it exists, or reading makes them sleepy
Rent and Office Supplies
Laptops are a cash expense and then amortized on the balance sheet over time
This is the biggest cost for new hires, so make sure you budget for one laptop for every new person
Although it might not hit your P&L right away, it’s a scary sight when CDW wallops your bank account for 20 x $1,750 in Mac Books
You can add in an assumption for hardware refresh, say 20% of current employees, per year
You can allocate rent and office expenses to each department if you don’t want a massive glut in G&A
You usually think about allocating overhead once you exceed 100 employees
In terms of the other stuff, we work from home now, buy your own Lacroix
To put a bow and a ribbon on this jam session, perhaps my favorite quote about planning comes from that young knockout kid:
“Everyone has a plan until they get punched in the face.”
-Mike Tyson
What I’ve Been Reading Lately
What I've been reading: The Minimum Viable Project
Poor project execution costs money.
Lots of money. We see it at every monthly close.
But where do you even start? Strategy execution & project management is overwhelming for most SMBs. You need a framework, skills, and a plan to turn strategy into results.
That's where I turn to Jasper. He explains execution in plain English and helps you turn strategy into results.
Learn to make execution your unfair advantage and join 2,750 subscribers today for free!
Quote I’ve Been Pondering
“That’s what you get for giving a f**k when it wasn’t your turn to give a f**k.”
-Bunk Moreland to his Partner Detective McNulty in the Wire
Great writeup: I recently read Becoming Trader Joe, which has a similar quote to your opening salvo:
"In 1962, Barbara Tuchman published The Guns of August, an account of the first ninety days of World War I. It’s the best book on management—and, especially, mismanagement—I’ve ever read. The most basic conclusion I drew from her book was that, if you adopt a reasonable strategy, as opposed to waiting for an optimum strategy, and stick with it, you’ll probably succeed. Tenacity is as important as brilliance."
Great write up CJ!