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The best managers are superb capital allocators. They take expensive investor money and assign it to the proper growth initiatives. Accountability for a team or a project means you have ownership over the money spent and are a capital allocator.
Budgeting and the Startup Leader
If you are a founder or leader at an early-stage startup, capital allocation (or budgeting as it is commonly known) may be a new muscle. Most approaches to budgeting fall into two broad categories. On one end, you run so leanly, you can’t think big picture investments. On the other extreme, having been long starved for resources, you overshoot and overspend.
You could be a PeopleOps leader trying to keep up with a growing company but decide to delay your hiring because you are used to making do with less. In reality, you must stay ahead of general hiring, for you are where new employees make first contact with the company’s culture. As the truism goes, first impressions last forever, which is your responsibility. In this case, being parsimonious will harm the mission of your team and your company’s culture.
You could be a CTO who wants to grow from 10 to 48 engineers in a year. A 5x increase in engineering headcount without regard to the support structures of hiring non-engineering talent like team leaders and scrum masters is overly optimistic. In this case, you’re ignoring the managerial challenges of this scale. Contrary to popular belief, throwing engineers at a problem is necessary but insufficient to ship good Product.
In both scenarios, you ignore the underlying operating system of the business.
Three Questions
Capital allocation is about identifying the best places to invest. It requires understanding the company’s growth levers. Three questions test your grasp of the business and your role in its success. They are financial questions that test your competence, influence, and competitiveness.
1. Do you know where to invest, and how quickly can you do it?
If given your dream budget, would you know where to spend it and how to measure the return on the spend?
This question is a test of competence. There exists a formula that shows the return for every dollar spent. Do you know this formula? The answer requires quantitative analysis, not uninformed gut instinct. Even if you’re working on a moon-shot, you have to know the early signals that the plan is working.
Finding the formula is a reductive exercise. Break down what your team or group does into the lowest common denominator. If you’re running a PeopleOps team and are requesting a budget for staffing, you need to know how big your team needs to be for a company of your size. If you’re running a customer support team, you need to know how many customer support managers you need to support your current and future book of business.
For standardized operations like People or Customer Support, you could rely on industry benchmarks for your answer. A pre-COVID measure for People Business Partner to Employee Count is 1:100. You need one dedicated People Business Partner for every 100 employees.
Try at all times to tie it to a top-line metric of business growth and not efficiency metrics. For PeopleOps, employee count is a top-level metric. For support, this means instead of using average open tickets, use Daily Active Users (DAU), Revenue Paying Users (RPUs), or something that directly measures growth. You can use average open tickets to measure efficiency, but you have to measure return on investment when it comes to budgeting. Pegging hiring to a top-level growth metric ensures an owner’s approach to spending.
The second part of the question asks how quickly you can spend your budget. If you want to hire 48 engineers, how fast can you fill those positions and onboard them? When will they be productive? Have you taken into account onboarding times?
It is one thing to know your unit of economics, but another to know how fast can you deploy the capital. The answer speaks to your team’s speed, agility, and adaptability. Above all, it speaks to your ability to execute.
What about budget cuts? Not all budgeting exercises are about expansion. It’s essential to know the growth areas and the areas of inefficiencies. Are you a vigilant fiduciary who knows how to cull waste? What if you have to cut your costs by 10%, 15%, 25%? Would you know where to start? Understanding the reductive formula for growth will help you answer these questions and have them in your back pocket when questioned.
2. Can you help your peers with investing their budget?
If your peer in another group/department/division came to you for help with their budgeting exercise, could you help them?
This question is a test of influence.
If you’re in Product, and the CTO asked for help in planning, would you know enough to help them? Some job functions, this is a requirement. A PeopleOps business partner needs to support a department with budgeting. But for adjacent departments, it’s less prevalent than it should be. Are Sales and Marketing talking? When requesting the 48 engineers, have you informed DevOps to adjust their plans accordingly?
Much of the redundancy and bloat that comes from growth is because departments have low trust, so you decide to do it yourself instead of working with your peer. Instead of working with Marketing on new employee materials, you hire someone new. Instead of borrowing developers from the CTO, you hire your own BI team.
If managers are appointed, leaders are elected. This question tests your reputation as a leader and speaks of your trustworthiness and impact across the organization. At an operational level, it assumes you have enough slack in your day-to-day to help others. And in that, it is a test of efficiency and trust.
3. Are you best in class?
If an expert in your field or industry came and saw how you operated, they would call you best in class. What does it mean to run best-in-class in Software, PeopleOps, or DevOps? How is this judged? Can you hang with the best?
This question is a test of competitiveness. This may sound like a vanity question, but it is about being the best. Lest we forget, we compete, and at its core, competition brings out the best in us.
Achieving this level of competence is order-of-magnitude harder than getting to the level where you can answer yes to the prior questions. It assumes that you are doing everything expected of you, are skilled at anticipating the company’s needs, and are an industry-recognized expert for doing so.
Finally
Budgeting is intense work. Having the ability to advocate for, receive, and report on money spent is a hard-earned skill. But before you battle the outside, you have to know yourself. Before you do the tactical work justifying your place in the org, ask yourself these questions. They not only clarify your views of the budget request but refine your skills as a capital allocator.
Finally, there is nothing facile about the scoring process, but more on that in the next post.