Improve Corporate Performance By Tracking Assumptions

The CEO described to me his company’s planning process with a tone of frustration. It sounded to me that the company’s managers saw the process as a chore and not a tool. The key, in this situation, was that managers were evaluated on the bottom line, but nobody asked how they matched their assumptions. Bottom-line focus sounds good, but it can mask profit opportunities that show up by looking at how planning assumptions turned out.

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Suppose that three managers each have submitted a plan calling for a ten percent increase in profits. They each anticipate a five percent gain in number of customers, and a five percent gain in unit sales per customer, with no change in profit margin. At year-end, they all met plan, but in different ways.

Ava had a ten percent gain in number of customers, but no change in unit sales per customer or margin.

Bob grew his unit sales per customer by ten percent, with a steady number of customers and margin.

Carol had no change in number of customers or sales per customer, but her market area enjoyed higher pricing due to a competitor’s departure, so her margin was higher by ten percent.

All three met plan, but all three underperformed in key dimensions. If the planning assumptions were right, Ava could have boosted profits even more by increasing unit sales per customer. Bob hit plan, but could have exceeded it by growing his number of customers. And Carol did nothing but ride a wave of margin improvement; she should have been increasing both number of customers and unit sales.

The CEO I spoke with runs a very strong company but fears his team members are missing opportunities. I’m a little more sympathetic toward his managers. Assumptions are often just an exercise on the road to a bottom-line target, so Ava might have known that her best opportunity was to grow number of customers, but she chose a simpler set of assumptions. In an environment where she is evaluated on profits, how she gets there is irrelevant. But managers can improve by watching metrics, and the planning assumptions are a great place to start.