In the previous two posts of this series, I had introduced the concept of 5 Ps (5 Ps for a Business Plan – Part 1) and the 5 steps for implementing this in practice (5 Ps for a Business Plan – Part 2). A business plan prepared around the 5 Ps of Product, Patron, People, Profile and Profit will enable a qualitatively improved budgeting process instead of it being just a number crunching exercise. In this case study, I will explore how the concept of 5 Ps can be implemented in an advertising agency.

Product Benchmarking

Parameters and Measures

For an ad agency, Product is its creative work. The parameters to benchmark for its work can be - (a) creative awards won in domestic and international festivals, (b) client feedback, (c) internal rating system etc. The measures for these will be (a) no. and type of metals (gold, silver or bronze) won at each festival, (b) client satisfaction rating in, say, a 10 point scale and (c) internal scores and/or internal awards.

Long Term Targets

Once the parameters and the measures are defined, the next task will be to set the benchmark values. For example, you can set targets to be achieved in 3 years time, in this manner – (a) 3 to 5 golds in Cannes, (b) client rating of 8 on 10 on all major campaigns, (c) internal scores of 7 or above for all released work.

Shorter Term Milestones

The third step will be to break down the final target into shorter 6-monthly or annual ones – these will be the milestones to cross on your way to the final benchmark targets. For example, you may set yourself a milestone that at the end of year 1 you will get at least one metal at Cannes. In year 2, the milestone perhaps will be to get to 3 metals of which at least one must be gold; and finally in the third year you will be striving for 3 to 5 golds.

Process Review

Once you have set your targets and milestones and decided how you will measure progress, the real issue will now need to be addressed – how do we get there? This is where the real benefits of budgeting will be realised. You will need to carry out a thorough review of existing processes and of the people involved and perhaps do brainstorming internally (sometimes with external help) of what changes you need to do, in order to improve these, which in turn will put you on your way to your desired target in time. This 4th step of process review is the most crucial of the 5 steps for implementation.

To improve quality of creative work, you may decide to (a) hire new creative talent and (b) revamp the creative briefing process, (c) carry out creative training workshops, (d) set up an internal review committee to evaluate all campaign work, prior to presenting to client, and agree that any work below 6 points (out of 10) will not be presented, and so on. These are the typical decisions coming out of the process review exercise.

Progress Monitoring

The 5th and the final step will require the lead measures to be agreed upon and targets set for implementing the agreed processes. As explained before, lead measures are frequent and quick checks on progress, while the ultimate benchmark or milestone targets can be measured only after elapse of some time and thus not convenient for day to day monitoring. 

The lead measures for creative work improvement process can be (a) whether the hiring of new talent is on schedule, (b) how many briefings are following the new briefing process, (c) the no. of people attending creative training workshops, (d) how many items of work are obtaining internal scores below the agree cut off of 6 on 10.

Other P elements

Similarly, we can now take up the second P element of Patron. The benchmarking parameters for a client could be (a) client satisfaction level, (b) percentage share of client’s business or growth of business from the client, (c) client retention period, (d) new business wins etc. The corresponding measures will be (a) a rating given by the client through a feedback form after appraising the performance of the agency, (b) percentage of business handled by us in relation the entire business from the client and/or growth in business volume over previous year, (c) the duration of retention in terms of years and (d) no. and value of new wins.

You can then go on with the next steps of setting target, setting milestones, review and improve processes and set up lead measures and carry on likewise for all the other 3 P elements.

Real role of a business plan

An important point to note is that the value of a business plan rarely comes from the goals set therein – the goals keep changing every quarter. The real value of budgeting comes from the analysis of the situation and the thinking that goes behind the plans to overcome the bottlenecks and the knowledge thus gained, all of which help in better decision making on a day to day basis.

In my previous post “5Ps for a Business Plan – Part 1“, I had talked about the 5 Ps – the elements of Product, Patron, People, Profile and Profit – which, when used in preparing a business plan, will make the planning process qualitatively better and the plan will be a business plan rather than just a financial exercise. In this post I will elaborate how this concept can be applied in practice.

How do we use 5 Ps in practice?

For each of the 5 Ps, I will recommend a 5 step budgeting process to be followed as below.

i) First, define a set of benchmark parameters, say two or three, (more if necessary), for each P factor. The parameters will be those by which you will judge the performance of that particular P element against a target, which may be qualitative or quantitative or both.

For example, for Product you will need to decide on which parameters to use in order to benchmark ‘product quality’ and move up the scale from current level of quality to that benchmark – will it be perception of your product quality by the industry peers or will it be satisfaction levels of your clients or both?

ii) Second, (a) decide the measure to be used for evaluating performance and (b) determine the benchmark values for each of these parameters. Based on where the market or competition is or will be, you decide where you wish to be in 2 to 3 years time with reference to them.

Take the example of Patron (client) and lets say we have decided that client satisfaction level is a parameter to benchmark and we will need to (a) decide how to measure client satisfaction – will it be an annual review by the client and a rating form filled in by the client or some other method and (b) determine whether a client rating of 7 on 10 is the benchmark value to target or a higher value of 8.

The measures for the qualitative parameters are tricky - they need to be high in objectivity, as far as practical.

One of the problems that we often face with the evaluation measures is that they are often too late, in the sense that there is a time lag before the measure can be used, or they are too rigorous or expensive (e.g., market research) to be done frequently. These lag measures are still important and useful in that they are the final measure of the outcome of business performance in the area of each of the 5 Ps, but they are not so helpful in measuring day to day or month to month progress. We will need a second set of measures for overcoming this aspect, which I have dealt with below.

iii) Thirdly, decide on periodic (say, half-yearly or annual) milestones that the business needs to cross on way to achieving the benchmarks. In other words, the final target to reach will need to be broken up into shorter manageable steps. These milestones will form the basis of budgets and targets.

iv) A key step in planning or budgeting is where we review and modify the processes followed in the business, both inter-functional and intra-functional, relating to each of the 5 parameters. This process review step is one of the main purposes of the entire budgeting exercise, and the real benefits of budgeting are derived from this step. Review, modification as necessary and better implementation of the processes will quicken the pace of reaching the milestones and benchmarks.

v) Finally, establish a set of lead measures that will evaluate implementation of the processes as agreed. The lead measures are frequent and instant checks (unlike the lag measures) on whether the processes/modifications, as prescribed to reach the milestones, are being properly followed or not. They are quite useful and practical for monitoring purposes and taking corrective steps.

In the following part of this series, I will furthere elaborate the practice of 5 Ps through a case study, using an advertising agency as an example.

Marketing professionals use the 4 Ps of marketing mix – Product, Price, Placement and Promotion – as a tool for pursuing marketing objectives.

In a similar fashion, I advocate the use of the 5 Ps for a Business Plan – comprising Product, Patron, People, Profile and Profit – as a tool for pursuing business objectives.

This is a qualitative and value based approach towards a business plan, moving away from a mere number crunching exercise, which, as you know, is what most budgeting exercise degenerates into.

The concept of 5 Ps

This was developed while I was working in a marketing communications business, but these principles are equally applicable in any B2B service sector organisation and can, in fact, be modified to suit any industry segment. The 5 Ps are the five critical elements of business. These are -

1. Product 

In a service industry, the service offering to your clients is your Product. It is the most fundamental element of your business. In the planning or budgeting process, you will surely be evaluating your current status of “Product” and develop plans to improve the quality and the range of your Product/s.

2. Patron

Patron or Client – As we all know “customer is the king” and “we exist because of our clients”. Your business plan will not be complete without a review of your existing client base, how to retain and grow them, as well as how to expand your client base. (Here comes a second tier of P, P for Pitch for winning new clients).

3. People

Strength of your People resources, in terms of quality (not just headcount), will determine the growth potential of the business. Planning for Human Resources in terms of selection and training, performance management and remuneration will require a significant portion of the budget time – but more often than not we spend far less time on this aspect than necessary.

4. Profile

Another key element of the business which is often overlooked during the planning process especially in a service industry. The profile of your business, as perceived in the market place, and the respect it carries among peers will determine how the business will attract new clients, new talent etc. and will be a key factor in business growth.

5. Profit

This fifth element covers all the financial aspects of planning, not just profits. This element will cover revenues, costs, profits, working capital, capital expenditure and cash flow. Cash flow is another area that is often neglected during the planning process.

There are some second tier Ps (but not of secondary importance), which are necessary within each first tier P. For example, Pitching for new clients is part of the Patron element. P for Process is another second tier P within each of the 5 Ps above. Process review needs to be an integral part of the planning process for each of the 5 P elements.

The above 5 P elements will cover all the key parameters of the business and will help you to focus on the key elements on a qualitative basis, before moving on the number crunching part.

In the next post of this series I will talk about how to implement the 5 Ps of Planning in practice through a 5 step process.

“If you look after your cash flow, the profits will look after themselves.”

One of my bosses had given me this sermon when I was just a management trainee. Though I didn’t quite agree with him then, over the years I have realised the wisdom of those words. The unfortunate part is that the reverse is not true. If you try to look after just profits and neglect cash flow, the business will surely be destined for doomsday, like many we are seeing these days.

What is Profit?

It is said that “Profit is an agreed amount arrived at on the basis of considered opinions of senior accountants” – this is a quote from another of my ex-bosses, a marketing man, but of great financial wisdom. That’s true actually – profit in a Profit and Loss Account is just a matter of opinion, an accounting concept – it is not a hard real number. Of course, when senior accountants give their opinions, they follow some principles, parameters and GAAPs (no pun intended) – like consistency of accounting policies, going concern basis, reasonableness of estimates, assumptions etc etc. But in the end, it remains an opinion. You change the accounting method and profits will change. Many Indian firms following Indian GAAP (Generally Accepted Accounting Principles), will have their P&L and Balance Sheets completely rewritten, often becoming loss-making units instead of profitable ones or vice versa, when they change to a different accounting standard like IFRS or US GAAP.

Cash Flow

On the other hand, Cash flow is real. You can physically count the cash, if you wish to, at the end of every accounting period – or get your banker to vouch for the cash in your bank account. If you make large profits, but fail to realise that in cash – that is, fail to collect your dues from the customers – your profits will remain book profits only and the business will suffer from cash crunch, leading ultimately to decline, unless the situation is corrected in time.

You would also see easily that while it is possible to make quick adjustments to profit figures by accounting means at the year end, say by invoicing large quantities of goods on the last day, Operational Cash Flows are not susceptible to such accounting entries.

Cash Flow Based Decision Making

I would strongly advise everybody to go for cash flow based parameters (not just profit based) for all business planning, decision making, target setting and incentive plans.

All investment decisions must be based on operational cash surplus/deficit generated and the discounted net present value thereof. Whether you are valuing a business for acquisition or for disposal, whether you are making capital expenditure to increase capacity or to improve efficiencies, whether you are trading in the stock market – if you are not using cash flow methods, you are inviting trouble for yourself and your business.

Cash Flow Based Planning

While investment decisions based on NPV (Net Present Value) of cash flows are not uncommon, I have hardly seen any business plan or a system of budgeting, where cash flows are an integrated part of the planning process. Similarly it is very unusual to find a KRA (Key Result Areas) system where cash flows are made an integral part for deciding on targets and incentive system for rewarding performance. Unless you get the entire organisation to think “cash flow” rather than “profit”, Operational Cash Flow based management practice will remain ineffective.

Are we chasing the wrong targets ?

Are we chasing the wrong target when we go after profit growth? Isnt it just a red herring ? Doesnt it make more sense, especially in the current context of global economic down turn, to focus on cash generation and cash preservation and move towards a cash flow based management system rather than go after a theoretical concept like Profit ? 

If only the (in)famous investment bankers followed a simple cash flow approach to business, rather than sexy valuation models for accounting for derivatives, may be ….well, may be, we could have avoided this downturn itself.