I was at a Rally Software board meeting where we spent a chunk of time finalizing and approving the 2005 operating plan. A big part of the discussion — not surprisingly — was on the sales ramp and the corresponding expense base (and timing of opex growth throughout the year based on a prediction of sales growth and performance.)

Rally started shipping their product in mid-2004. So, 2005 was their first full year of product ship. They had a nice, active customer base that is growing as expected. The growth curve was ambitious (but achievable). However, their operating expense ramp (pre-board meeting discussion) assumed they would make the sales plan. The guys running Rally are responsible and know how to sandbag a plan, so they were confident that they wouldn’t pull the trigger on hiring if they didn’t see the sales ramp happening. The going-in proposal (and plan) that assumed they hit their numbers relied on management backing off hiring if they missed their numbers.

None of the companies I’ve been in involved with to-date have made their operating plan on their first year of product ship. Occasionally they outperform, but they almost always underperform for some reason. The reasons are often logical and non-fatal, but the dynamic that gets created is one where the business is always “behind plan.” This sucks.


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I was at a Rally Software board meeting where we spent a chunk of time finalizing and approving the 2005 operating plan. A big part of the discussion — not surprisingly — was on the sales ramp and the corresponding expense base (and timing of opex growth throughout the year based on a prediction of sales growth and performance.)

Rally started shipping their product in mid-2004. So, 2005 was their first full year of product ship. They had a nice, active customer base that is growing as expected. The growth curve was ambitious (but achievable). However, their operating expense ramp (pre-board meeting discussion) assumed they would make the sales plan. The guys running Rally are responsible and know how to sandbag a plan, so they were confident that they wouldn’t pull the trigger on hiring if they didn’t see the sales ramp happening. The going-in proposal (and plan) that assumed they hit their numbers relied on management backing off hiring if they missed their numbers.

None of the companies I’ve been in involved with to-date have made their operating plan on their first year of product ship. Occasionally they outperform, but they almost always underperform for some reason. The reasons are often logical and non-fatal, but the dynamic that gets created is one where the business is always “behind plan.” This sucks.

I made the strong point that I actually cared LESS about “making our 2005 revenue plan” then I did about learning why people are interested in what we do, why they turn into real prospects, why they become customers, and why they buy more stuff from us. I knew, with certainty, that the 2005 revenue forecast was wrong — we just didn’t have enough data to have any precision on it. So I wanted to learn the “why” in 2005, not that “what.”

We had a sales force to comp, a team to motivate, and a plan to achieve. So the “what” was important. However, in my experience, the way to calibrate things is to set up the operating plan so you are in a position to increase opex as you are successful versus having to back off spending (or hiring) if you fall short of plan.

I’d rather go to a board meeting mid-year where the management team says “we’ve hit our revenue ramp so far this year so we want to pull some head count adds forward” vs. the meeting that says “we missed our revenue ramp so we’re holding off hiring folks in the plan.” The nuance is subtle but the dynamic is important — as you succeed, you get to apply more resources; if you don’t reach your goal, you haven’t assumed more resources (e.g. we can’t hit the goal because we need the resources.)

It also reinforces the focus on the “why.” If we fall short of plan, we’ll focus on “why.” If we exceed plan, we’ll rejoice, talk about “why”, and add more resources. However, we won’t spend a lot of time agonizing over “what we should do because we missed plan.” Financial planning is imprecise early in a business. A smart executive team understands this and sets the right expectations and parameters around it.

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