Planning & Budgeting for Growth in the New Digital Reality

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February 25, 2013
Digital Strategy
David Atkins - david@digitaldnainfusion.com

Over the last few years my team and I have developed a set of leading edge, best practices that are perfectly suited for the digital reality we all face. Collectively, we spend a lot of time with the executives, stakeholders and owners of our brand, hotel, hospitality, travel, technology, agency, vendor and entertainment clients discussing their realities and how to apply these processes to achieve maximum results.

10 Best Practices Summarized:
  1. Understand the new reality as both a digital content publisher/aggregator and a hospitality company and/or technology vendor who now has this new duality as clientele.
  2. Find a neutral third-party strategic advisor and engage them to help the company and its clients in this process.
  3. Empower optimization and adaptation through flexible systems, processes and budgeting.
  4. Determine whether the company is investing for the short, medium or long term and develop a zero-basis budget and start from scratch.
  5. Conduct a brainstorming session (facilitated) before starting.
  6. Don’t pass out last year’s budgets (and don’t allow people to use them as the basis for this year’s budget).
  7. Create cross-functional, bottoms-up processes with no rules or limitations (the company can always cap items later).
  8. Empower teams to take risks and give them the room to experiment by assigning 20 percent to 25 percent of the budget to unknown items that optimization or the market requires.
  9. Don’t be wed to RevPar/EBITA or any other single metric during budgeting; use metrics and data to drive budgeting and hold people accountable to their core business and the digital publishing business.
  10. Be transparent with objectives, results and metrics and then hold managers accountable with clear metrics and crisp milestones.

 

Many companies struggle with how to accurately plan and budget for their businesses with all the changes in digital. Given the speed of change in digital and the need for flexibility in investments and spending to optimize people, processes, systems, programs, products and services, old budget processes and the systems that support them are getting in the way of innovation and must themselves become the focus of internal change.

New budgeting realities are a reflection of the new requirements digital proficiency places on the enterprise. In a digital world that is almost completely transparent and incredibly fluid, a challenge that everyone operating a business faces is how to appropriately plan and budget to maximize results.

Frequent readers of this column may be looking for the usual sampling of marketplace data or keen insight on the world of digital marketing or the OTAs. Instead, lets focus on how to apply marketplace data and trends to your evolution in the digital world.

Developing a budget that allows for long-term success in a fluid environment is often a challenge, so it is best to develop a strategic roadmap for when and how to focus and invest in the vast array of options including customer relationship management, content management systems, digital asset management, property management systems, websites, mobile, social, sales, marketing, distribution, booking engines, revenue management and people. Companies should envision what they hope to achieve or become on a 2 to 3-year time horizon and identify the gaps in people, systems and processes (in today’s digital reality, a 5-year plan is likely to be out of date the moment it is finished). Then they should go through a thorough buy, partner or build exercise to determine if the gaps can be filled in house or externally.

This is where many companies get bogged down. In businesses across many industry verticals, there are internal prejudices to either stick with outdated internal systems and processes or bolt on new capabilities to their core systems and ways of doing business. Whether it is a matter of cost (or pain), many C-suites tend not to believe they can make the radical change that is required and instead keep holding on to systems and processes that were developed to solve yesterday’s challenges, but are now creating today’s problems.
Companies must realize the need for radical change; the new digital reality is not a simple shift in marketing channels. It requires the ownership understanding and operating processes and systems for a completely new business model. If you want to be successful in the digital world, you must become a digital publisher. Then, companies must take the steps to implement that change. This means integrating the core business understanding, processes and systems with a completely foreign business model that requires distributing content, creating platforms that enable collaboration and creating processes that allow for optimizing pricing in real time, creating conversations with consumers and B2B customers, and investing in opportunities outside the normal constraints of the quarterly or annual budget process.

It is the duality of the business as a hospitality company or vendor and digital publisher that cause consternation for many as they attempt to assemble next year’s budget, priorities and areas of investment. As companies move into their budgeting seasons, this is the time to be certain that a flexible plan has been developed.

The concept of a flexible plan within a budget may sound like an oxymoron. As it is broken apart, it is fundamentally a set of sound business practices, and those who recognize this will be among the leaders. Think about the duality that is now the business and ask some key questions.

Start with your business objectives. If a company only focuses on a single metric like RevPAR or EBITA, it may be missing key components that will cause serious exposure in the marketplace. RevPAR has served hotels well, and as they move into this new duality, hoteliers must find a metric that accounts for the investments in being digital publishers. Think about the strategic implications of allowing others to drive prospects, customers or consumers in the research and planning phases, in the mobile environment or even while on property. While companies are not going to out Google Google or out OTA an OTA, they do have choices about how and where they place investments within the digital ecosystem. Some will yield long-term brand or asset value, others will drive heads in beds, and some will just be table stakes to remain relevant to customers.

A key to digital success in all formats is to focus on creating collaborative, cross-functional teams supported by flexible budgeting processes that enable rapid shifts in digital spending. Companies should also create a P&L line item for all digital initiatives that a member of the C-team either takes on, or the CEO should create a new C-level position to make sure there is accountability.

A best practice is to get external help to develop/review core business metrics and to apply those to the people, processes and systems. Have this evaluation done by a neutral third party as the budgeting process begins so that the company knows which people, processes and systems are the ones it wants to invest in and what outcomes the company wants to see from its investments.

If a company finds itself in the role of an agency, partner or vendor in this situation, it has a two-fold responsibility. Assuming it believes in its value proposition, the company must run this process on its own business so that it learns where the challenges arise and how to overcome them. Then, it should encourage its clients and customers to run this process. Budgeting may not be the company’s core service, but it can help better plan for spending on digital initiatives and systems, and make the company’s long-term relationship stronger, more transparent and more valuable.

For business owners and operators, if they choose to manage the process internally they could run the risk of being perceived by their peers as politicking, realm building or providing softened analysis when it comes to their own initiatives.

An earlier column explained how to select a technology or strategy vendor and discussed how a process should be followed so that a company ends up with the right set of critical eyes analyzing its efforts and supporting its overall results.

In this new duality that the company is operating, it needs to create a zero basis budgeting process for its technology, systems, people, training, marketing, sales and operational objectives and investments. Many of the new imperatives may require capital investments and may need to be staged in such a way as to recognize economic realities. However, a company should not overlook the true needs and costs it will take to support a successful digital content/publisher effort that complements its core business.

As a company moves into this budgeting reality, part of its efforts must also be flexible expenditures around the core objectives. This is not a blank check, flexible expenditures means that a business and its teams are empowered to continue to invest in systems, people, programs or channels so long as a specific metric is being measured and achieved. This is still often an overlooked part of the process that challenges many finance leaders. Market pressures are now moving much faster than any budgeting process. The digital business winners are already adopting flexible investment strategies, clearly in direct response to marketing programs like Google’s search engine marketing. However, this needs to cross over to content, technology, systems, people and other programs to secure future success.

A corollary to this budgeting process is that a business and its leadership teams must align around core objectives, key metrics and milestones, and develop a culture that encourages risk taking and innovation versus revenue protection. To do this, it is critical that the company maintains maximum transparency around its core business objectives and metrics with its various stakeholders, leaders and business partners/vendors.
If a business is really ahead of its budgeting process, it should kick this off with a true no holds barred brainstorming of its various stakeholders and partners. Vendors, agencies and third parties should be included. If these partners are crucial to the company’s success, they should have a seat at the table when the business is going through its budgeting process so they can better understand the trade-offs and priorities the business must make. Companies should reach deep into their organizations to find people, regardless of title, level, responsibilities or compensation who are free thinking, outspoken subject matter experts, as they will bring new ideas to the table and champion initiatives that are out of favor or were voted down previously. After the company has the brainstorming session, it should use its neutral third party to conduct a facilitated and deep discussion with its cross-functional leadership to review the marketplace and its objectives/aspirations and metrics.

Once the business has documented what it wants to achieve and how it will measure its progress, it can move toward a more classical budgeting process. Don’t pass out last year’s budget to anyone or ask people to fit to last year’s budget. Every line item should be rebuilt or asked for by the stakeholder who owns it; otherwise the company is giving people permission to re-invest in old, out-of-date or non-optimized programs because they always have.

Regarding the current product and business roadmap, apply critical thinking and results. Score each item on these roadmaps, absent the dependencies and realities of implementation or switching costs. Then, come back and factor in complexity to build and maintain any core business metrics. Proper development and maintenance of product and business roadmaps could be an entire exercise of its own. If a company doesn’t already have a team that understands how to do this and how to provide transparent access to it, the company should use its third-party strategic advisors to coach and review its processes.

Be sure to properly account for known capital expenditures that may be required either by a brand, municipality or ownership. Don’t be afraid to challenge these investments when they don’t align with the core business objectives and metrics. Properly accounting for these outlier initiatives is central to a sound plan for the next year.

A common mistake is immediately deciding on and implementing a staff realignment or reorganization as a result of competitive insights, budgeting and strategic work. Even if it seems apparent, companies know the pain that can result if they do everything at once. Identify this as a need and develop a plan to get there, just like switching IT systems has hidden costs, switching reporting relationships and organizational responsibilities often has hidden costs.

Given the flexibility that the market requires at a macro level, companies should assign a minimum of 20 percent of their overall budgets (and this includes resources time) to fluid/unknown/innovation items. This doesn’t mean that they are creating an open use slush fund. This flexible spending line item recognizes the need for a business to continue to invest and innovate in ways that it can’t foresee during an annual budgeting process. A digital officer, finance lead or the head of lines of business or operations can be the gatekeeper on the dispensing of funds or allocating people’s time. Every line of business, department or P&L owner should have a 20 percent buffer for innovation (within IT, this should be around 25 percent).

Don’t get stuck being married to the Excel spreadsheets that make up budgets even when finalized. Too many paper tigers have won at budget time and lost to the marketplace because the line managers got stuck to hitting the budget and missed the marketplace as it changed. Empower managers to appropriately identify change, then give them the tools and the process to modify their budgets to reflect the marketplace and document the rationale. This requires new processes, training and controls.

Hire a neutral third party as a strategic advisor to help in this process and engage them for the year with quarterly meetings. The independent viewpoint is irreplaceable.

Companies should start with a zero basis and evaluate everything that is currently being done to align for where they want to go.

DAVID ATKINS is a digital strategist with Digital DNA Infusion, LLC, and can be reached at david@digitaldnainfusion.com.

©2013 Hospitality Upgrade
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