Strategic financial Alignment  

Achieving Strategic Alignment

The key to execution is that all the constituents of your business are aligned to your strategy, and are working in the same direction along with the same priorities. The constituents include monies, shareholders, people, processes and external partners.

Strategic financial Alignment

Financial alignment ensures that more resources are assigned to strategic priorities, while placing the business as usual agenda under the expense pressure. An organization needs to re-evaluate its on-going expense lines and work-in-progress initiatives, to ensure that money is well-invested.

Every organization has a limited pool of money to manage its operations and to drive new initiatives. The number of initiatives with great business case will always be more than the money which an organization can spend. In this typical scenario, an organization will need to prioritize based upon the enterprise level strategies and not as per functional priorities. We do expect the strategic priorities being driven by the goal-sheets of senior executives and their targets. However, many a times, the actual spending of money does not follow these focus areas. The reasons are many:

Financial Budgets are managed at functional head level:

A functional head is given an expense budget, and as long as he is within the budget and meeting his targets, its fine. Within the functional domain, head of the function allocated resources as per the functional priorities. This is done sometimes at the cost of enterprise priorities.

Budget allocation takes reference for previous year budget.

Every year, when a function is given an expense budget, one takes the reference of the previous year budget. Some reasons for this reference are business as usual expenses, and also on-going work-in-progress initiatives.

Lack of intent and band-width to re-evaluate the existing budgets and allocations

This is extension of previous point. We decided on next year's budget by taking a reference from the previous year budget. This is because there is a lack of band-width and intent with the management to do a zero based budgeting. Zero-based budgeting means that every business-as-usual or WIP expense line will be re-evaluated along with the new initiative.

For example, head of operations could be spending USD 10 million to provide home-delivery services to the existing customers. This is being done as this service was considered a key customer satisfaction factor few years back. A zero based budgeting could question this assumption in the changed times, when a customer could be more price-sensitive. Therefore one can re-look at this expense with the following proposal:

    • Ask for a minimal charge for home-delivery
    • Do home-delivery for a certain minimum order size
    • Do home delivery on for high value customers.

This is a kind of challenge with the organization to do away with an existing service or process or a WIP initiative. One needs to build that culture over time.

Tips for financial alignment to the organizational strategy:

Build a business case process, which should provide a high weight to the strategic priorities

One can create a business case template, which ask the submitter to specify on which strategic priority it will support and how. Secondly, in the quantification of benefits, one should be able to quantify the benefits which will incur to your strategic priorities. For every initiative which is not linked to the strategic priorities, one can have a process of it being escalated to head of the function or CEO. A process of escalation itself will encourage functions to focus on the priorities.

As we say this, it does not mean that a business will spend money on only those initiatives which are linked to the priorities. Following initiatives may also be included:

    • Large initiatives which cannot be scrapped and exit costs will be huge.
    • Initiatives linked to the hygiene item's. Hygiene items are the ones which if done will not gain value, but if not done, will make you loose shareholder value. For example, quality initiatives, which ensure a minimal quality level to survive in the market.
    • Initiatives for risk avoidance and regulatory assurance.

Zero based budgeting

This will happen during the strategic planning phase itself. Zero based budgeting means re-evaluating the business as usual expenses and the WIP initiatives. This kind of budgeting requires perseverance and an appropriate culture to go with. In a zero based budgeting, on a periodic basis, the organization will look at its existing resource commitments. These commitments can be re-evaluated on the basis of:

  • Any changes in the strategic priorities.
  • Any tactical risk or opportunity
  • Any major funding need for a strategic initiative (like an acquisition of a company or intellectual property)
  • Any initiative which has not met its business objectives after phase I- For example a dedicated ATM network roll-out in a location did not increase the transaction value or customer retention. This may lead to cutting down on this initiative and look at having shared ATM network.

Zero based budgeting could lead to

  • A significant shift of funding across the functions- For example, IT could loose half of its new IT initiatives budget in favor of marketing, when the strategic focus is to build brand and acquire new customers.
  • Scrapping or scaling down of initiatives which are not meeting the phase review criteria.
  • Existing processes and teams scrapped or scaled down

NOTE- Zero-based budgeting is more of a spirit than the letter itself. An organization generally does not go into detailed re-evaluation of all its commitments. The idea is that it does re-visit many components. It is a matter of choice, and an organization will make the list of items it needs to re-evaluate. For example, can organization can re-evaluate number of non-sales offices it is operating from, while it continues to maintain the number of manufacturing facilities it has.

TIP- Planning phase is the best time to do this re-evaluation. An organization should ideally be decided on key major investments and expense allocation at an enterprise level. One smart way is to re-evaluate top10-15 business as usual expenses and also to look at top 10-15 initiatives in progress. For the new initiatives one should review the investments at an enterprise level. The whole perspective of strategy should be ideally cross-functional.

Place the cost pressure on business as usual

An organization always needs to question the expenses and try to minimize the cost while maintaining the output. An organization which wants to focus more of its resources on key strategic priorities, can also drive the costs down on business as usual items.

For example- Let us say tha for next year, the strategy is not to launch new products or features, but to get the maximum out of the existing products. This means shipping more numbers of existing products. A financially aligned organization will focus on minimizing manufacturing cost, as it is not making changes in the product design. This essentially means that every function in an organization will be supporting the strategy either in investment or cost savings or both. This releases more investment on strategic growth areas.

NOTE- This does not mean that strategic focus area will not be under cost pressure. Cost-cutting can be a strategic focus in itself.