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

This is apparently the only Giph of one of my biz heroes, Reid Hoffman, on the web

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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)

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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:

  1. 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.

  2. 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

The target of Mike’s stare down is Hurricane Peter McNeely, who attended the same high school as me 20 years earlier

What I’ve Been Reading Lately

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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