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By the time Dave Brussin co-founded Monetate in 2008, he had experience running three other companies. One of his biggest lessons: Things change fast. Even faster than you might think. At the same time, in order to grow, you need to be able to set targets that make sense. In a lot of ways, these are opposing forces. So how can you plan effectively when your business is constantly evolving?

Most companies’ answer is to create an annual plan and then adjust accordingly as time passes. But, as Brussin puts it, this approach is broken and sub-optimal. Especially at a growing startup, there are too many variables you can’t predict. Having observed many different company trajectories, he’s developed a brand new approach to planning that allows companies to both keep their eyes fixed on the prize and remain intelligently agile in the present. In this exclusive interview, he shares this new system, what it’s made possible for Monetate, and how it can fundamentally change the way you run your company for the better —for years to come.

The Problem with Annual Planning

You make bad investment choices.

The majority of companies big and small spend some chunk of their fourth quarter hashing out what they want to accomplish over the next year and how they’ll get there. They litter the next 12 months with milestones and quotas, all tracking against the metrics they ultimately want to hit at the end.

The biggest issue with this strategy: It discourages you from making investments in people and resources that won’t pay off in the next year. If you’re all about hitting a number, you won’t make choices that might distract from that goal, or that won’t immediately help you achieve it, Brussin says. Especially if you work in the enterprise space where sales cycles can sometimes be very long, it’s tempting to make decisions that make sense within the span of one year but not in the broader context of your business.

“All these people sit down and say, ‘Okay, here’s the growth we want to undergo this year, so we’re going to need to make investments in headcount for marketing and sales. We need more people carrying the quota, so let’s get them in here fast,’” says Brussin. It’s common to see companies packing in marketing and sales hires in Q1 so that they’ll be trained up enough to impact revenue within their first year. “You get in this mindset that says, if we hire someone after the first quarter, they’re not going to be productive for us, and they’ll add expense. You don’t want to present something like that to your board, so you make silly decisions about hiring.”

This is what drives organizations to make front-loaded investments at the beginning of every year when they should be staggering headcount and other allocations. “If you don’t space these things out, your hiring and your growth begin to get really lumpy, and you leave yourself high and dry if you need to make a change at the end of the year.”

You fail to anticipate disaster.

“When you carry out most of your annual plan at the beginning of the year, all the risk is pushed to the end. You’re basically saying, 'I’m not expecting things to change in the immediate future,'” Brussin says.

“If you're wrong about anything in your annual plan, you're probably already too late to fix it.”

If you make a bad hire, bad assumptions about the market, or fail to advance your product to where it needs to be, you’ll find yourself in a tight spot fast. “You take away your ability to de-risk inexpensively,” Brussin says. “You can fix things, but it comes at a high cost that you didn’t necessarily have to pay. You’ve made it impossible to shorten your feedback cycle.”

You’re blind to cause and effect.

This is especially true when it comes to marketing. “Marketing is all about putting leads at the top of the funnel, and often these leads are very, very long. By definition, you’re probably doing a bunch of stuff that won’t affect the year that you’re in very much. By looking at only one year at a time, you weaken the link between marketing activities and the results you’re looking for in your business. It makes it really hard to make the connection.”

According to Brussin, this perspective on marketing can have a bunch of unintended, negative consequences. In particular, you may start focusing the bulk of your marketing programs on things that will only affect deals that are almost closed. You do this because you know it will impact the current year, and because it will be easier to measure. The danger is that your marketing team may not be generating enough new leads to carry you through the next year.

“Because marketing requires a long stretch to convert a lead into closed business, it needs to be more complex, and you need to be honest about which efforts caused what to happen. This makes it pretty incompatible with the typical annual plan approach.”

Your benchmarks are meaningless.

“When you work on an annual cycle, you need to finish the year first in order to understand how you’re doing versus any benchmarks that you have from the past,” says Brussin. “That means you don’t really have a way to understand whether your first quarter looks the way it should compared to the competition, or whether your second or third or fourth quarter look how they should. All you can do is reflect on the entire year. EOY becomes your one data point. You don’t hold things up to benchmarks as much as you should. This can also lead to some bad behavior.”

If a startup has an annual plan and things didn’t go the way they expected, they’ll usually spend the latter part of the year trying to make up for that delta and get back on track. Sometimes that works. “Sometimes you can shift around resources to get the growth you need, but most of the time you can’t. If you do catch up, it’s probably not sustainable. You go into the next year without the foundation to continue growing at the same rate you have been.” Team leaders are encouraged to push risk out further and further and don’t learn from their mistakes as a result.

Why is it so hard to change?

So, if annual planning really is counterproductive, why is it such a staple?

“When growth happens at a startup, it happens fast, and the default is to do what you see other companies doing,” says Brussin. Especially if your company has hired on some senior executives who are used to the annual cycle system, it can be all but impossible to propose something new. A lot of pressure comes from the outside too. “Investors who are trying to understand your business externally expect to see an annual budget, a plan, metrics you will hit. They want simple comparables.”

“Everyone wants to know about the year. It's become the basic unit of comparison across companies. But it shouldn't be.”

Even if this is true for your company, it doesn’t have to dictate how you actually operate internally, Brussin says. There’s another way that provides more flexibility and may make your investors even happier and more secure in their decision to back you.

David Brussin is currently the Founder and Executive Chairman of Monetate. He previously founded and grew three other enterprise companies.

The Argument for a Three-Year Plan

At first blush, planning three years in advance sounds even more broad and detached than staking out just one year, but Brussin’s system is more nuanced than that. It requires pulling in a great deal of data from other companies to set up strong benchmarks, and answers a very important question for any startup: “What does greatness ultimately look like for us?” (More on that later.)

Gathering as much relevant data as you can should be step one of any planning process. “Our first few years, we planned what we were going to do the next year based on what we thought was possible without looking at the experience of others,” he says. “This may sound like a good policy, but it only yields reasonable goals. You don’t account for step changes in your market or customer base or any opportunities that may take your business to the next level. You actually aim lower.”

“It's vital to know what great looks like for your company in the context of your field.”

To plan effectively, Monetate identified a cohort of companies in their industry that they defined as “great” — that they would aspire to be like in the future.

“We’re a marketing technology for enterprises, so we wanted to make sure we were comparing ourselves to SaaS businesses who had similar audiences,” says Brussin. “We looked at companies that had successfully gone public — not because that’s the goal so many startups think it is — but because it’s a milestone that says the company was understood from the outside by public market investors. That was what made them a great business to us.”

The other major reason Monetate chose public companies is because they all had had to file an S1 document, disclosing several prior years’ performance. “It gave us the chance to see what these companies looked like three to five years before they even filed for an IPO. That’s incredibly relevant for a company like ours that is trying to understand what performance should look like before you go public.”

The team filled in a spreadsheet lining up all the years based on the revenue of the businesses at the time. “Year one for everyone was basically their $20 million revenue year. Year two was $30 million, and year three was the $50 million year,” says Brussin. “Once we had it organized like this, we looked at the highs, the lows, the means, the medians and the standard deviations across their many different metrics.”

They asked the following questions:

1) What was the best performance we saw for any company? What was the worst? What was the average?

2) How far apart were companies on any given metric within the same year (metrics included departmental spends, bookings, and more)?

3) Which years were “great” for companies and what moves or outcomes made that possible for them?

“Once you have all this information and these basic answers, you have to figure out which metrics you care about the most — which are most relevant to your business right now? There are going to be some that are key drivers for you.”

One of the top things Monetate was looking at was how much they should be investing in sales and marketing. But they didn’t simply look at how much these other companies were spending as a percent of their revenue.

Knowing how sales and marketing can pay off far down the road for SaaS companies, they decided to focus instead on bookings and how much those bookings were worth. By looking at sales and marketing expenses as a percent of bookings, they were able to understand what a dollar of revenue truly cost each company. “That’s how we were able to understand how aggressively they were investing in their future growth,” says Brussin. “We wanted to know how much they invested in one year to fuel their growth the next year.”

The same data also let them suss out when the road got rocky for these companies, and how they handled it. “We highlighted those times when they started to spend more than you’d expect on sales and marketing and then fast forwarded a year to see that it didn’t pan out. In those instances, it’s likely that they ran into trouble and had to over-invest to solve problems.”

One thing Brussin and his team learned is that most of the companies they studied spent much more on sales and marketing as a percent of bookings than they would have guessed. At the time, Monetate was planning to spend much less. “We had to ask ourselves, ‘Do we really think we’re smarter than everybody else?’”

“If you think you're different from companies like yours, you better know why.”

“It’s okay to be different from the pack — you may very well be smarter or better in a specific area — but you better thoroughly understand why that is,” he says.

Another area where Monetate differed from the cohort was in general and administrative expenses. “It’s generally a place where everyone tries to spend as little as possible because it’s the least connected to revenue,” Brussin explains. “We were trying to keep that amount the same year over year or project something low, but when we looked at what happened with the companies that went public, we saw something different: All of their expenses jumped to be much higher than Monetate was budgeting for a similar type of year. We weren’t completely sure why, but we budgeted more just in case. We didn’t think we were special in this area.”

Several years later, it turns out their projection was correct. They did need to account for a rapid increase in general administrative expenses. “It turned out we did need more people and new systems — we just didn’t know it when we originally allocated the funds. If we had drafted a plan without looking at what had happened to similar companies, we would have been hit with some big surprises. Thankfully, we had a sense of what things should look like at our stage.”

Breaking It Down

Brussin isn’t suggesting that companies look at three years at a time. The crux of the three-year plan that makes it so effective is that you look at every quarter individually. He’s dubbed this strategy the “trailing 12 month plan.”

Three years contain 12 quarters. For each of these quarters, Monetate sets goals around gross bookings, new bookings, recurrent revenue, gross margins, sales expenses, marketing expenses, cash burn, and retention. Brussin and his team decided that these were the numbers that would keep them on track toward positive growth.

“We treat the end of every quarter like the end of a full 12-month year,” Brussin says. “That means we roll the last 12 months together and review all the metrics just like you would at the end of any year — we’re just constantly shifting the year by a quarter.” This allows Monetate to compare its results at every point to its definition of a great year, and to the experiences of other companies in its cohort. They look at the trailing 12 months’ growth rate and change rate from the previous quarter. “Essentially, we have the opportunity to look at annual change every single quarter.”

This approach has produced many benefits. Most importantly, it has encouraged steady, incremental quarterly investments in headcount and other resources. All of the investments are designed to achieve a specific result in a future quarter — not necessarily the next quarter. Because they have years of data from other companies showing them what their numbers should look like if they are on the right track, they’re constantly able to determine what actions to take to reap certain results in quarters that are months or even years away.

“We’re able to look at this matrix of companies and say, ‘Okay, this is how our bookings should grow through the next few years. We actually want smooth growth through the next three quarters.’ That way we’re not sinking a bunch of money into things just so they’ll pay off by the end of the actual year, and trying to do the same thing over and over again. We’ll even say things like, ‘If we want to hit that bookings number in Q3 2015, we’ll need to hire this number of people and create this number of leads by the end of this current quarter.’”

The trailing 12 month plan has given Monetate an incremental view of the present and the future. The planning that takes place quarterly in 2014 may bear fruit in 2016, and that’s okay. This is very different from the annual cycle where a company will get to the fourth quarter, do their planning, and force themselves to hire even more people to put up bigger numbers by the end of the next year whether it’s a good idea or not.

“The key to the trailing 12 month plan is that it makes every quarter stand on its own in a really tangible way,” Brussin says. “You have a really good sense of the work right in front of you and what needs to happen while also tracking against the future.”

Steady Investments for Steady Results

After implementing the three-year and trailing 12 month plans, Monetate has seen outcomes that are materially different than they were on the old annual cycle. The company now hires regularly throughout the year and invests evenly in sales and marketing, which has led to smooth growth. “Our focus has truly shifted from what we’re trying to achieve this year to what we want to achieve in 2015 and 2016,” says Brussin.

“Treating every quarter as the end of a year gives us the incentive and prompt we need to reflect, learn and adjust accordingly if things need to change. We can say, ‘This is what happened in Q1, does what we have planned for Q2 still make sense? Do we need to change any of our assumptions?’”

If the answer to that last question is yes, Monetate can use its models to flow changes through the next three years and see how that will alter their projections. They can also see how making changes will affect how the company stacks up next to the public companies they’ve studied.

“It’s important to have a lot of future quarters modeled. You don’t want to be making hard decisions looking only at the year in front of you. If you do, you’ll always try to make the most of that year, even if it leads you down the wrong path, if it’s not sustainable, etc.,” says Brussin. “The reality is, if you’re trying to sustain rapid growth, you need to make sure the numbers work out for several years into the future.”

The startups with the best shot at sustainable growth are the ones that do the best job of connecting present actions to future outcomes. While it’s important to look at trailing indicators, you need to keep your eyes fixed on leading indicators as well. Looking at what changed for businesses like yours will give you a taste of what’s coming up while you still have time to adjust. It also gives you the opportunity to think of doing something completely different, better, or faster. Being informed arms you for the future, but it doesn’t have to define it for you.

“There’s a definition of great for every business,” says Brussin. “Even if you’re doing something that nobody has done before — especially if that’s the case — you should be able to draw a picture of what greatness looks like for you and your team, and be able to explain why.”

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