Managing the short term/long term tension: how small changes to traditional strategic planning processes can make a big difference.

• Author: Dodd, Dominic
• Position: Strategic planning

Every organization faces an ever-present tension between short-term and long-term results. What promotes the one often hinders the other. Yet every manager must strive for both: performing well today and, at the same time, building for a strong future. As Peter Drucker put it, "He must ... keep his nose to the grindstone while lifting his eyes to the hills--which is quite an acrobatic feat." In most organizations, performing such a deft double act is the job of the annual planning cycle.

The process on paper looks something like this: The corporate center issues guidance to the business units on desired overall financial results and invites managers to develop multiyear plans. Managers are asked to submit plans with the highest net present value and to bid for the resources they need to implement them. Each business unit discusses its strategy with the corporate center, which then adds up all the resource requests and performance projections.

Inevitably, there is a gap: more resources requested and less performance promised than the top-down guidance requires. Managers are encouraged to revise their plans. Resources are prioritized according to payback rates and whether they are discretionary or not. Attention is given to the long term by developing multiyear plans and considering net present value. Pressure is put on the short term through upfront guidance, by using payback rates and isolating discretionary spending. The result is an accommodation between short-term results and long-term investment.

Well, that's how it's supposed to work. But for many companies, the reality is quite different. Perhaps the following will sound familiar. The center positions its upfront guidance as just that--guidance. Yet everyone knows that it is a top-down target that dare not speak its name.

The business units know what strategy they want to pursue from the outset, and so spend their "strategy development" time developing a case for their preferred plan. Managers make sure to add in extra resources to their investment requests because they know they will be cut back anyway. The "discussions" with the corporate center are presentations, not discussions.

Adding up the proposals yields an attractive longer-term performance that is apparently achievable only by accepting an embarrassing hit to near-term earnings. The center then cuts back the resource requests automatically because it knows that the business units have padded them.

A maneuver called "gap allocation" imposes targets on the business units that add up to the desired level of short-term and long-term performance in ways that cannot clearly be reconciled to the preceding discussions. This occurs mostly in the form of plans for near-term actions and rough forecasts for future performance, with no concrete plans for how they will be achieved. Everyone suspects that the most politically skillful get away with the lowest "stretch." As for the multiyear plans--they are never opened again.

This annual dance of "sandbagging" and gap allocation is a poor substitute for a genuine solution to the short term/long term tension.

Two Blind Spots

Most planning processes suffer from two critical blind spots.

Sustainable earnings. In the search for better performance today and tomorrow, companies must prioritize earnings with a future life over earnings that cannot last. But most planning exercises shed little light on the crucial distinction between sustainable and unsustainable earnings.

Earnings are unsustainable when they involve borrowing between timeframes--for example, when they come from skimping on...