I’ve been doing a fair bit of planning and projection-ing lately, and it got me thinking about how much planning and projecting is really valuable and how much is just a complete crystal-ball-gazing, hai-i-can-has-mathematics waste of time.

So, the fine people at 37 Signals have noted that planning is guessing, and I generally agree. That said, there’s certainly value in considering questions like:

  • How much money could we make next year?
  • What initiatives should we work on and what might be the best use of my time?
  • Should I hire some XYZs and how many of them? Can we afford it?
  • What do you do if you’re in Space and nobody can hear you scream?

So how much planning is enough planning, and when should you stop? What value is there in working on projections 1 year ahead? Two years ahead? More?

I think the answer lies in the fact that longer term planning quickly becomes recursive guessing. Your “estimations” become built on the  assumed validity of the previous “estimations”. And that’s not a good thing. Because when you’re starting to make guesses based on other guesses, you’re getting farther and farther away from reality.

In other words, you should make one set of independant “guesses” and quit. I’m not saying you should stop considering potential futures and consulting the crystal ball. I am saying you should quit with the detailed planning and financial analysis.

Here’s an example. Let’s say I’m working on projections for the next two years. Here’s what you’d do.

  1. Take some known or assumed metrics and constants for the previous year
  2. Consider the planned initiatives for the next year
  3. Make some intelligent and reasonable estimations (aka good guesses) about the metrics in (1) and how they might change over the year
  4. Apply your growth assumptions (3) to your known metrics (1)
  5. Now you have some simple projections for year 1.

At this point, I’ve taken some solid data about last year. Now I’m making some educated guesses about next year.

But I said I wanted a two year plan. To do that, I’m going to take the projected results for the next year, then I’m going to feed the results into step 1) above…. and then the warning bells should go off – I’m making guesses on top of guesses… Abort!

In big companies, people love to make 2 and 5 year plans. Sometimes, the industry might be mature enough that they’re not really making too many guesses because there is enough data to feel confident about your projections.

General rule of thumb – your ability to project into the future is proportional to the maturity of your business.

But that practice isn’t driven by the desire for accuracy; it’s driven by the need to build a security blanket and a false belief that we’re smart enough to see into the future.

In reality, such long term plans and projections are not just a waste of time. They’re harmful. Two reasons:

  • They set false expectations. Employees, managers, board members, shareholders, all of these people build their expectations based on these long term projections. When their expectations are broken, the employees are disappointed, people don’t get their bonuses, share prices plummet. Whoopsie.
  • They create false inertia. Once a plan is in place, it’s like laying down psuedo-tracks for the train. Moving the tracks can be done, but there’ll be some resistance to the change – people will question the wisdom of the new direction versus the old, you need to get everybody on board just to change a direction that you never should have set in the first place.

I am a big fan of making plans and running up some projections – it helps give you clarity and the opportunity to think about the future. But detailed plans and projections that build guesses on top of guesses – that’s bad juju.

Advertisements