Target Setting: A Useful Sporting Analogy
Business presentations are often spattered with sporting analogies. This can be for a good reason: sport provides useful stories of teamwork and long-term success that can help illustrate a point. We’re certainly not immune from including a few ourselves but, unfortunately, analogy often turns to annoying cliche (how many times have you ground your teeth when someone talks about “hitting a home run” or “stepping up to the plate,” rather than just “being successful” or “taking responsibility”?).
So it was a happy surprise to hear a senior European controller use a genuinely illuminating sporting analogy to describe how he helps his firm set its corporate and individual targets. He told me to think of Sir Alex Ferguson at the start of Manchester United‘s football season (or soccer season for U.S. readers).
Ferguson is invariably asked what his targets are for that season and, invariably, he will not answer that he wants his team to score a set number of points or a set number of goals because he knows that will count for nothing if his competitors score more of either. Instead he sets targets relative to others: he’ll say he wants Manchester United to finish in the top four of the Premier League or that he wants to make the semi-finals of the Champions League.
Now, compare that to how managers talk about their business goals. When asked what their goals are for the coming 12 months, they will invariably say they have to hit a certain revenue target or some other quantitative score. But this is baseless; it makes far more sense to ask a business unit to produce revenues that are in the top quartile of its industry group than to hit a certain number based on inaccurate forecasts made 12 months earlier. If the entire industry is boosted or harmed by, say, an unexpected spike in commodity prices, that target is useless for ensuring the firm outdoes its competitors.
Put simply, targets need to be isolated from other parts of the budgeting process, and they need to be relative.
Separating Targets from the Rest of the Budgeting Process
This confusion about targets and their consequent misuse all stems from a broader problem about managers being overly wedded to the annual budgeting process. We’ve written before about how annual budgets can ingrain bad habits: it is almost impossible to make accurate resource allocation decisions so long before the resources are required, and line managers will always play games with forecasts – as their ability to hit the resulting target determines how much they are paid.
It makes far more sense, therefore, to separate target setting from forecasting and resource allocation. Targets should be ambitious and relative where possible, but forecasts should be unbiased and based on limited, verifiable detail. There is no way to use the same number for a forecast and a target without human nature making both unworkable.
Making Targets Relative
The controller told me that his team uses internal and external benchmarking to set relative targets. For example, the doyenne of the “ban the budget” brigade, Swedish retail bank Svenska Handelsbanken sets all its business unit heads the target of being in the top third of business unit performance. To prevent ill feeling, the best-performing units are required to pass on knowledge and expertise to the worst-performing.
The controller also said that once senior targets are set, the firm cascades targets throughout the organization. This isn’t particularly novel, but what is interesting is that those targets don’t necessarily have to add up to a set number. Because each management tier is asked to perform relative to their internal or external peers, there is no need to sum all targets to produce a “magic number”. As Aristotle said (and as Sir Alex Ferguson knows):
“Our problem is not that we aim too high and miss but that we aim too low and hit.“
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