The 5 budget busters in play - Shelby style
‘The only thing that didn’t break was the brakes…’
The famous line from the Ford vs Ferrari film is deeply ironic, but when you are challenging boundaries, everything can be critical. Strategically Shelby was right - Ford had ol’ Enzo Ferrari worried. But he lived on the red line and loved it. Precisely what made Ford work was holding them back in Le Mans.
And that’s the budget challenge right there.
About this point in the process, the following issues will have been nailed:
the zero, incremental, value, envelope or whatever basis will be settled, and
nobody’s results work yet - the top line is too cautious and the cost loading too advanced or cautious.
And then there’s the Selby problem - the stop/go, make/buy, double/quit decisions. Only it no longer happens once a year predictably with a chequered flag. It can hit you any time (and will).
In the last month in the UK’s GRC market, for example, do you know who:
spent £235k, £10.5m, or £21m on AI projects, and why?
saw sales plunge and over £1m profits sink to over a £2m loss (and not because of what you think)?
found that adding more low-balling deals to their group hurts? There’s a real skill to a ‘rag-and-bone’ strategy play, and that’s not it.
is crying all the way to the bank as a buyer paid a strong price for their consulting team while underestimating the local competition by a factor of x5? (easily done, though);
got bitten by the two things that always pile on when times are toughest and you really need it least? (And who it’s toughest on right now.)
These are all real headaches for real firms in your market right now. None of this was in their budget - and those are the top five budget killers currently: tech spend, pricing, restructuring, competitive intensity, and volatility. These are Selby’s cornering, cooling, staying on the ground, drivers and paint issues.
Tuck
All budget finalisations end up in an arm wrestle about the ‘tuck’ on the ‘tuck’ covering the ‘tuck’. Trouble is - none of that covered any of the above issues' red flags.
The point is - annual binges don't work any more - things move too fast. As non-execs we help firms get beyond the Q1/Q3/H1/H2 mentality and manage these risks better. I used to watch a Global EMEA VP manage over 30 P&L’s with ease. But that was a stable industry across homogenous markets, full of good people following established rules.
I’m not sure that applies anywhere any more. But in GRC and legal services sectors especially it’s dangerously irrelevant now.
Budget disciplines are of course necessary, but they were often very out of date even by the time 1/1/xx rolled along. Restating every half or quarter and running LTM (last 12 month) YTDs etc helped to some degree. But none of that textbook discipline stopped any of the above disruptions from completely derailing some experienced and able teams.
If there is a solution it is certainly still to weed out the ‘tuck’ that creeps into every budget, and especially those refined over several tiers of management. But do it quickly. The issue that needs addressing is early warning, and the ability to avoid analysis paralysis that the annual binge on budgets typically generates.
But you have to collapse the decision-making process while escalating the accuracy of the intelligence (internally and externally). Your management information system has to be predictive - quantifying the shoe-leather hunch that you have within days, not months. And the external market data has to be much more subtle. Focus on the handful of firms in your Companies House or Google watch list and you’ll get hurt.
‘the people who kill you, don’t look like you’.
We coined that phrase. Why? Because you’re competing with insurance firms (and intermediaries), law firms, accountancy/advisory teams, software, consulting, training and affinity groups, as well as testing, certification, governmental and voluntary sector players. Some of these industries are ten times bigger than you, and many of their even smaller players have deep pockets.
This time around, you have to cope with ‘25-’30 PEST issues (Big ones); AI and a tech bubble that is already eclipsing Dotcom, global and local recessions and indeed some industry collapses altogether. To say it’s some sort of catastrophe or impossible is missing the point. If you don’t engage you’ll either get a slab with a tag for your toe or a future someone else designs for you. If you do engage, you can’t rely on managing ‘tuck’ to get you fit for the challenge.
So now is the time for a zero tolerance of ‘tuck’.
That’s extremely hard on the line and team leaders, but it also requires more flexibility strategically than ever before.
So the current big 5 untuckables?
You can achieve a lot with £350k in AI; a hell of a lot more with £17m too, but the ‘runway’ tolerances of seed and VCs crashed in the space of two quarters for 5 years to 3 months last year. As with any bubble, the costs are almost impossible to gauge accurately as greed piles in all the way through the development and delivery chain;
Major contract plays in GRC especially are increasingly volatile. Capita’s share price fell from 172p to 24p in less than 3 months and it’s stayed there for over 4 years, but several big-ticket specialists are seeing renewals not just hard, but downright fickle. Clients are spooked by this volatility as much as anyone. Even some erstwhile rock-solid industries, like TIC, are finding these challenges ‘existential’.
A devil-take-the-hindmost flavour in M&A currently is feeding both silly prices at the high end and the low end of deal multiples. Integrating low multiple deals is tough and needs careful targeting upstream, as well as a rigid and proven playbook. Bumping big prices into PE fund achievement is also causing major headaches already. Very often divestors can find a realistic buyer market now of only one, especially at the top end.
Private Equity ownership is dominant now in most GRC sectors, especially technology-focused ones. But they all use the same playbooks and there is little to no differentiation between the LBS, Insead, Cranfield or Said currently. These are the equivalent of the Big Blue IBM easy money players of old, but they are already wearing thin. The issue is not the old cliche that M&A fails half the time, but rather that the integrators are failing more than half the time and the visions are not strong enough to compensate.
Actuaries and project-based revenue streams always kick you when you are down, and there will continue to be ‘downs’ aplenty. At present the toughest challenge is among affinity groups who’ve seen property-based training business dwindle while legacy pensions soar. They’ve always been pilot-fish businesses, copycatting trends from private sector innovators, but sales are down and not coming back. The redevelopment options should have been started 5 years ago too. Everything claims to be SaaS or subscription nowadays, but there is a serious shortage of talent that knows how to manage these long-term cycles. SaaS cashflows used to be a platform for patient development; they’re now a hedge against stupidity.
Sounds fun, doesn’t it? Well, for Shelby it was. Enzo too ultimately.