Business Plans: Approach, Risks and Measures

You’ll find this phrase appearing in almost every section of the business plan, so let’s dissect it to aid in the planning process.

Approach is the term I use to describe the direction or strategy you will take for a particular component of your business.  For example, my partners and I define the approach for the Technology component of our business plan as follows:

We will use the PC-Intel platform, with widely used business software to ensure broad compatibility with potential clients’ and business partners’ technology.  We will purchase and maintain our own systems, and outsource any technology functions that are beyond our current or easily acquired expertise.

This approach allows us to purchase or build our own PCs, purchase group licenses for MS Office and other software, and choose from a wide range of free-ware or share-ware for special purposes such as screen sharing, conferencing, and content management.  We outsourced the development and hosting of our proprietary expectation alignment software since we do not have or wish to acquire the expertise to do that work ourselves.  The result is that we keep our technology investment low, easily “on-board” new business partners, and transfer the risks of product development to the experts.

That leads us to the idea of Risk.  Risks, if allowed to materialize, result in loss of resources, failure of processes to remain on track, and/or failure to attain your goals.  Any approach you choose will be subject to some kind of risk.  For example, with our technology approach we know that the PC platform and software are the most common targets for virus, worm, Trojan horse and other kinds of security breaches.  A Mac platform would be less risky, but less commonplace in the business and consulting worlds, and more expensive in general.

The virus and security risks are risks we are willing to accept within limits, so we pay for certain internal controls like antivirus software, router-based firewalls, encryption, and backup that will further reduce our risk to a level we are willing to accept.  Define your risks, determine what level of risk you are willing to accept, and pay for the necessary internal controls to reduce your risk to that acceptable level.  If you can’t reduce the risk enough, then transfer it through insurance with a deductable amount you believe you can afford should the risk materialize.

The last term in our title phrase for this post is Measures, also known as key performance indicators or KPIs.  What we want to decide, right up front, is how we will measure success for this part of our plan; how do we know things are working right and we are meeting our goals, and how would we know it if they stopped working right and we were falling short of our goals.

There are two big challenges with measures.  The first is reducing the activity to something that is measurable.  Many activities, like successful vendor or customer relationship management can be very subjective.  How do you measure the quality of the relationship?  You may need to resort to carefully crafted surveys with numeric responses such as “Exceeds Expectations (4), Meets Expectations (3), Comes Close (2), or Falls Short (1).”  Think carefully about what to measure and how to measure it.

The second big challenge with measures is useful timing.  Measures fall into two groups, leading indicators and lagging indicators.  Leading indicators tell you in advance of reaching a critical situation or result; they tell you that something is about to happen.  Lagging indicators tell you that something has already happened. Lagging measures are generally OK for reporting financial results to owners and shareholders, but not too helpful when you just produced a whole run of molded plastic parts that do not meet the customer’s specifications.  Processes generally need leading indicators so people know if they’re drifting off track or outside of acceptable boundaries.  In other words, we need to stop molding plastic parts immediately if measures indicate they are drifting too close to the limits of tolerance.

The lesson is this: within each component of your business plan define your approach, identify risks and the levels of risk you are willing to accept, and define carefully the measures that will indicate you are following your business plan and achieving your goals.

Next up, the long range plan.