Many financial institutions regard their planning process as too broken to fix, but too valuable to discard.

That is the conclusion from an in-depth look at planning processes at 11 "best-practice" financial institutions by my firm, First Manhattan Consulting Group. These institutions were contrasted with a control group, and the conclusion was that excellent planning yields distinct advantages.

The best-practice institutions averaged market-to-book-value ratios 0.4 points higher than the control group, and their executives expressed much less frustration with the planning process.

The following comments illustrate just how demoralizing a bad planning process can be:

"We should be manufacturing sporting goods, our growth projections look so much like hockey sticks," said one disgruntled chief executive officer, speaking of the overly optimistic growth strategies he regularly receives from many businesses.

"We spent 500 man-hours planning a business, and then we were told all of us had 10% revenue growth and 3% cost growth bogeys," said a business manager.

"Here we go again," grumbled a controller when asked to supply information on 100 line items. "Who else but us would draft a three-year financial plan with such detailed budget-level information requirements?"

These executives recognize their companies' lack of vision regarding what results are possible and how to achieve them cost-effectively.

Simple recognition, however, is obviously not enough to ensure an effective fix. Companies must identify what is broken in their processes and instill a climate conducive to changing them.

Broken strategic planning processes have common characteristics, including a final "cram-down" stage that many will find familiar:

Step 1: Business unit managers are asked to develop plans with little guidance, interim review, challenge, or debate. These plans may be based on individual (not companywide or sanctioned) assessments of interest rates, credit, and other environmental factors. They often contain inappropriate pleas for investment dollars for pet projects.

Step 2: Late in the planning cycle, top executives see these inconsistent, business-centric, and poorly thought-out plans for the first time. They require the business managers to reformulate them quickly, in light of previously unannounced companywide goals.

Step 3: The business managers cobble together a cram-down budget to meet these lately announced, companywide goals.

There is surely a better way. We find that unless five essential steps are put in place, planning will probably remain inefficient and fail to produce effective results:

1. Executive management develops an initial top-down corporate plan, including broad expectations for each major line of business, at the start of the planning cycle.

2. Executives then provide guidance to each business as it begins to plan.

3. Each business develops its own strategies and its two- or three-year financial plan-ideally interacting with major support units, so they can plan in a coordinated fashion with the businesses.

4. Executives review and challenge each business and support unit plan, and through this process the initial top-down corporate plan as well.

5. After financial plans are approved by top management, they are expanded in detail to construct next year's budget.

These steps sound self-evident but few companies undertake all of them in proper sequence, and many of those surveyed said that it is difficult to correct a flawed planning process all at once.

Fortunately, there are three important changes that many institutions can make that will improve their planning processes-even now, as we enter the heart of the 1999 planning cycle.

First, provide for an early briefing process. Firms with the best planning processes frequently ask executives to brief each major business manager on the top-down corporate plan and its drivers. This helps business managers understand companywide expectations and concerns, and how their own individual businesses will probably fit into the bigger picture, before developing their own financial plans.

In turn, no financial institution reports much success in formulating its corporate plan in October or November by reacting to a collection of individual business plans.

Executive guidance should let each business manager know, generally speaking, and as soon as possible in the fall, what is expected of them (for example, high, stable future profit versus shrinking to a more profitable core). Each business can then plan the specifics accordingly or, if warranted, take exception to what top executives think their part in the top-down vision should be.

Second, subject business plans to a venture capitalist test. In the abstract, this means presenting the plan as if to a results-oriented investor being asked to buy it now.

In reality, few business managers face such rigors. But executives should simulate it in their reviews by demanding that the business plans answer questions typically important to a venture capitalist. What will the business achieve in terms of competitive positioning, financial performance, and risk taken to achieve these results? How will this be done, and where will the business compete to accomplish this?

Third, leave budgeting exercises to the end.

Creating budget-level detail is premature before the financial plan has been challenged, refined, and accepted. Once the financial plan has been completed, budget detail for its first year can easily be constructed. Doing it at this point is more efficient, as it is now less likely to need revision, and it adds value by further validating-or challenging-the near- term aspects of the financial plan.

What is the right level of budget detail? Is the cost center or line item material? Is the information necessary to increase planning accuracy or explain a material variance to plan? Is someone accountable at this budgetary level?

Answers of "no" normally mean budgeted details are unnecessary. A thoughtfully constructed companywide budget can have fewer than 500 cost centers and cover less than 25% of general ledger line items.

Ensuring that at least these three suggestions are in place will go a long way toward making a planning process more realistic and successful.

At best-practice institutions, the whole planning process is frequently so well honed that it can start a mere four months before the fiscal yearend. The best institutions often start in mid-August, with the initial top-down corporate plan developed in September and the individual business planning cycle running from mid-September to November.

Budgets come to their conclusion in mid-December. Boards are presented with and asked to approve strategic and financial plans late in December, and receive the final budget in January.

Does the "best practice" require more effort? Yes, but it does not feel this way to managers, because the productivity of the exercise is high and the risk of planning failure is lowered. Most people see it as a straightforward but thought-provoking exercise, rather than one that eventually leads to a cram-down result.

Ideally, the strategic planning process culminates in a three-year consensus view of high-level issues, accompanied by business-unit and coordinated support-unit plans. The result will contain enough financial information and "color" that shareholders would admire it as a thoughtful and aggressively realistic blueprint for the company's future.

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