One day in June, Mary, the operations chief for GrandVision Inc., met the CEO to discuss the next year's annual plan and budget. The CEO had spoken to analysts in May and painted a bright future of double digit growth in revenues and profits. "Now, we must deliver," the CEO told Mary. "For GrandVision to succeed, you will have to be aggressive with headcount and costs. We all have to aim high!"

Mary spent most of June with her VP Finance figuring out just how much headcount and expense she could load into her budget and still be considered a team player by the CEO, and a heroine when her numbers came in better than plan. Mary wanted to aim high -- just not too high. She wasn't being cynical; for operations to contribute to the CEO's many strategic initiatives -- quality improvement, speed, reengineering, technology-based innovation, and strategic alliances -- she needed people and budget.

In July she asked a direct report into her office. "Dick," she said earnestly, "this year we must be aggressive with headcount and expenses. What can you do to help?" The next day Dick invited his direct report Tom to lunch. Dick repeated Mary's exhortations. Because there were only eight people in his department and little nonpersonnel related expenses, Tom didn't have much room to maneuver. He spent most of August working the numbers with his people. They spoke often about quality, speed, reengineering and the other challenges they faced, but gave little thought to how to measure success against those challenges. Instead, they focused on the numbers.

Over the next month, Tom, Dick, and Mary presented their initial plans to their respective bosses; each knew the numbers would be rejected, but viewed their proposals as an opening gambit. Each was told to go back with a sharper pencil.

Throughout October and November and on into December, Tom, Dick, and Mary retraced the ground already covered in June, July, August, and September. Each asked the other to aim high while personally aiming but not too low because each wanted to appear to be aiming high -- at least high enough. Lots of pencils got sharpened.

Everyone spoke fervently about the strategic initiatives ahead. But as the days grew shorter, Tom, Dick, and Mary worked harder and harder at the one objective all knew was top priority: submitting an annual plan and budget by mid-December that contained the right and best numbers.

And they did! The executives headed home for the holidays with relief. Each returned in January ready to focus on quality improvement, speed, reengineering, technology-based innovation, and strategic alliances. They had no goals to direct their efforts, but they knew the activities were important and budgeted for.

One cold morning shortly after returning to work, Mary was planning a meeting for January 15th on "Stepping Up to This Year's Challenges" when the phone rang. It was the CFO. "Mary," he groaned, "I've got bad news."

"Oh, no," cried Mary. "Not the budget?"

"No, the budget is fine. We need to go over last year's numbers. If we're going to meet the analysts' expectations, we have to take down some reserves in operations. Can you clear your calendar for the 15th?"

Financial Fictions

Afable? Not really. This story may simplify months of pointless activity. But it does not misrepresent them. The exercise in numerology that we call "annual planning and budgeting" does not occur just "once upon a time." It happens every year in every organization of any significant size and scope. Despite the time and effort we invest, this process falls for short for at least three reasons:

1. It fails to specify outcomes instead of activities. Performance begins with a focus on outcome-based goals, not activity-based goals. Outcome-based goals describe the results or impacts that directly answer the question "How would you know you succeeded at X?"

   For example, if you must improve customer service, then goals should describe outcomes in terms of speed, correct information, lack of errors, customer satisfaction, customer repurchases, and the like. By contrast, activity-based goals only restate the activities people plan to do. For customer service, activity-based goals might be: "improve customer service," "organize customer service representatives into teams," "train customer service representatives in how to handle upset customers." and "install new automated response system." Each of these might produce outcomes; each might be important to do. But activities, however significant, ought not be goals. Goals should be the outcomes we hope to achieve as a result of the activities we undertake.

   Effective goals are SMART -- specific, measurable, aggressive, relevant, and time-bound (see below). If financial yardsticks are the relevant metric for success, use them. But if time, speed, specifications, expectations, satisfaction, quality, new products, new services, trust based relationships, or any other metric better describes success, use that metric and not revenues, expenses, or headcount as the basis for SMART outcome goals.

2. It fails to measure success directly against key performance challenges. The CEO of GrandVision promised analysts "double digit growth in revenue and profits." How was GrandVision going to succeed? Through tackling such performance challenges as quality improvement, speed, reengineering, technology-based innovation, and strategic alliances. For most of these, however, revenue, expense and headcount are lagging and indirect indicators of success. And, because financial results lag everything an organization does, financial results often fail to explain the success or failure of any single thing an organization does. Tom, Dick, and Mary could meet their headcount and expense goals and still have no idea whether quality improvement, speed, reengineering, technology-based innovation, and strategic alliances had made any difference. To track success at each of these challenges, Tom, Dick and Mary would need to use metrics and goals that were relevant to the challenges themselves.

3. It fails to inspire people to excel. Goals should excite as well as reward. But few people come to work thrilled by the challenge of meeting headcount and expense targets. By contrast, when people set goals to shorten cycle times, dramatically reduce customer-defined defects, establish new service levels, or go after new customers or markets, their energy, focus, and sense of achievement all rise.

To be sure, organizations must be disciplined about choosing among too many opportunities in the face of too few resources. As Herbert Simon noted in his 1945 classic Administrative Behavior, budgetary and planning processes can help build this discipline: "The budget, first of all, forces a simultaneous consideration of all the competing claims for support. Second, the budget transports upward in the administrative hierarchy the decisions as to fund allocation to a point where competing values must be weighed, and where functional (self-interest) will not lead to a faulty weighting of values."

1. Time, talent, quality, and relationships are as critical as money in assessing strategic costs and benefits.

   Dollars are no longer the sole nor the best criteria for selecting among competing performance challenges. Financial results still measure the performance of the business as a whole. But they often fail to measure success against specific performance challenges such as speed, quality, customer satisfaction, reengineering, continuous improvement, innovation, diversity, partnering, alliances, and so on. Time, talent, quality, and relationships are as critical as money in evaluating the benefits and costs associated with such performance challenges.

   In a world like Simon's, where executive choice was limited to putting a scarce dollar into sales versus operations, valuing the return on that dollar in terms of operational efficiencies versus sales growth was straightforward. A dollar in sales got so many dollars of sales growth. A dollar in operations got so many dollars of efficiencies. Which dollars of benefit did the executives want more?

   The cost/benefit of reducing the cycle time of order generation through fulfillment might involve dollars, talent, time, defects, relationships, customer satisfaction and loyalty, and learning. Attempting to reduce these different yardsticks to dollars only confounds communication and decision making. When it comes time in Simon's logic for executives to compare cost/benefits across differing performance challenges (say, reengineering versus quality versus strategic alliances), the executives discuss and debate their choices in terms of highly theoretical and abstract "dollar equivalents" of impact. It all becomes nonsensical.

2. The sum of functional performance rarely explains total organization performance. Annual planning and budgeting, as practiced by organizations, assumes a purely functional, pyramidal view of organization structure and performance. Yet, every organization I know faces serious performance challenges that demand cross-functional and even cross-company coordination. Designating responsibilities for such challenges in the straight jacket of functional, budgetary buckets may gratify finance professionals. But such allocations have little to do with setting, monitoring or achieving outcome-based goals against the relevant performance challenges themselves.

3. Market requirements seldom conform to the 12-month cycle of annual budgets. In annual planning and budgeting, all effort and results are monitored by the month, quarter and year. But today's performance challenges have their own internal clocks for success. Few of us still rely on phases of the moon to plan our personal and professional lives. Why, then, do we persist in assessing progress against quality, strategic alliance building and other performance challenges in terms of months, quarters and years? Is it administratively convenient? Yes, for the administrators. But it is neither convenient nor constructive for people trying to measure and deliver success.

Not So Hidden Costs

Leaders ignore these new realities at their peril. Persisting in traditional planning and budgeting processes creates serious shortcomings:

Activity based goals proliferate instead of outcome based goals. Consider again Tom, Dick and Mary. When they returned in January, they had plenty of "activity-based goals." They would "train people in quality," "increase speed," "reengineer core processes," and "build strategic alliances" -- all within budgeted expense and headcount levels. But these goals only restate activities. Activity-based goals are self-fulfilling. We say we will "build, or train, or coordinate or implement." When asked, "Have we done so?," we say "yes" -- and point to the activities themselves.

Organizations across the globe are strewn with the wreckage of speed, quality, teaming, reengineering, partnering and other strategic initiatives that seemingly ask people to commit to a bunch of activities -- change for its own sake -- instead of demanding that they set and achieve outcome-based performance goals that matter.

Doing Performance Planning Right

Recently, Jennifer Dunlap, vice president of the American Red Cross, decided to enrich her budgeting process with an outcomes focus. As head of Corporate Services, responsible for human resources, marketing, communications, fundraising events, government relations, and international services, she asked her staff to prepare the usual budgets for the coming year -- but these budgets would simply provide a necessary appendix. She wanted the body of her plan to focus on the key performance challenges identified by leaders of Corporate Services as well as the outcome-based goals critical to succeeding at those challenges.

For each performance challenge, she asked leaders to specify one or more outcome-based goals as well as the major activities needed to achieve those goals. For example, she knew that marketing needed to build strategic partnerships with corporations. But instead of focusing on the budget and headcount required, she wanted marketing to articulate one or more outcome-based goals regarding the number of and timing with which such partnerships would be established, as well as the specific impacts each relationship would have.

In addition, rather than shoe-horning all goals and reviews into months, quarters and year end, people were asked to designate review points appropriate to the time frames for success. And they were to indicate how each performance challenge supported the mission of the organization.

Dunlap reminded everyone that Corporate Services and the larger organization confronted many more opportunities and performance challenges than they had resources to tackle. Choices would be made. But she insisted that they choose by comparing the relevant outcomes such as speed, skills, talents, quality, donor and alliance relationships and retention as well as dollars of donor contributions and expenses.

Instead of the drudgery and anxiety of budget discussions, people worked hard to understand and articulate the outcomes they hoped to produce and why those outcomes mattered to the beneficiaries, customers, staff, and donors. Many Corporate Service leaders realized they had to spend time talking with the people who had firsthand experience with key constituents. They discovered many performance challenges that demanded coordination across departments within their division as well as the organization. This, in turn, induced leaders to seek commitments to outcome-based goals from people beyond their own departments. It produced a more integrated set of challenges that would demand teamwork within Corporate Services instead of perpetuating the department-by-department view of work promoted by traditional planning and budgeting.

Getting Started

How can leaders tame the budget and planning beast? First, stop the charade. Make planning and budgeting just one part of a performance outcomes management system that, at any moment and every moment, shows a complete picture of: the performance challenges being pursued by your organization; the outcome-based goals that measure success against those challenges; the time frames within which that success is expected; the people (individually and in combinations) responsible for and committed to those outcomes.

To implement this system, you and your colleagues must:

Group the people responsible for each performance challenge in ways that make sense, and demand that they set and achieve outcome-based goals. Every organization comprises many "working arenas" -- the venues in which performance occurs. For many decades, performance always happened in simple, self-contained places: individual jobs, departments, divisions. Today performance usually occurs in much more complex and ephemeral settings: project teams, business processes, strategic alliances.

• What is the performance challenge at hand?
• What outcomes would indicate success at this challenge?
• What are the working arenas and people necessary to this challenge?
• To which of those working arenas do I or we contribute?
• What outcome-based goals should we set and pursue to make that contribution?

Annual planning and budgeting processes, however well intended, have mutated into mathematical and political exercises with little relevance to performance. Instead of making success measurable, they generate activity-based goals and cynical negotiating skills. Most companies could scrap the entire process, ask the finance function to provide the needed picture of costs and revenues, and do better in terms of overall business performance. Better still, every organization I know could implement a performance outcomes measurement system and provide superior, sustainable value to customers, shareholders or donors, and the people of the enterprise. By doing so, organizations would perform much "better than plan."