Amazon is one of the most successful companies of all time. In 2021, the company reached a $1.7 trillion valuation, skyrocketing from "only" $172 billion 6 years earlier. Even though it closed out 2022 at $834 billion, less than half of its all-time high value, it is still one of the most profitable and successful companies in the world today.
Its e-commerce dominance and high quality customer experience has helped break many records, and set them up to become even more profitable during the pandemic.
The legendary company has resulted in many myths and facts about its employees and how they conduct business overall. From warehouse employee complaints to the famous salary cap limits for tech workers, Amazon has a lot of rumors swirling around them.
There are a lot of things to learn from them, and there is one thing that the organization does particularly good: FP&A. Here are 5 (sometimes unconventional) ways that Amazon conducts its budgeting, forecasting, and financial planning.
1) Shifting to External Orientation
The main difference between Amazon and the traditional way of budgeting is essentially what has made it so successful to begin with: focusing on the customer. Budgeting at Amazon is based on metrics showing the value for customers, or improving its customer reach in a more efficient way. This is based on external customer outcomes and costs.
The opposite is true of traditional budgeting which usually has an internal focus. This type of budgeting tends to spend far too much time on internal metrics and input-output relationships from a company standpoint. When broken down, this creates an individual focus on specific departments within the organization, instead of the ideal customer outcome.
2) Focus More on Planning Rather than Budgeting
The fine line between budgeting and planning is often not clearly defined, resulting in conflicting data. Amazon does something very unconventional in this scenario: Their planning process for customer impact is lengthy, costly, and detailed, and oftentimes results in many changes in comparison to previous policies.
As a result, the budgeting process is simple. It becomes the outcome of planning, as most of the difficult choices have already been made. Therefore, which things need to be funded becomes much more important than which unit gets how much.
In comparison, many companies spend minimal time assessing customer reach in the planning process, and focus far more energy on the budgeting process. This creates a lot of wasted time, as without proper planning, budgeting is unorganized and causes conflicts between the departments. As a result, the budget often stays similar to previous years, as without enough basis, not much will change.
Having hundreds of billions of dollars of revenue a year is definitely a big help in changing the budget mindset, but there are plenty of other profitable companies who don’t plan and budget this. Amazon’s forward thinking in the planning stage is what sets them apart from other organizations and keeps their customers coming back for more.
3) Real Time Updates
One of the most important planning and budgeting factors is real time updates. Thanks to the speed of change that exists in today’s world, many companies are following suit with real time updates, but few do it better than Amazon. The size and scale of their activity is unprecedented.
Weekly reviews on every activity is only the beginning. These reviews are based on customer metrics of individual activities- not sales units. Once again, customer experience is key and everyone from top to bottom follows this motto.
In comparison, traditional budgeting gets out of sync with customers rather easily when the metrics are not updated in real time. The more the differences build up, the more difficult it is to adjust the budget later on, which creates a backlog.
Depending on the product, quarterly reviews are usually not frequent enough, and this makes change harder on a practical level when the time comes. Top down reviews focus on units and not enough on customer experience. If a company the size of Amazon can conduct real time updates and weekly reviews, then there is no doubt that many others can learn from this as well.
4) Shaking up the Human Resources Connection
One of Amazon’s most famous differentiators is its corporate salary cap. For a long time, the salary limit was $160,000, much lower in comparison to what many employees could make working for competitors such as Google or Apple. The salary cap has created many questions and speculations. In fact it wasn’t until February, 2022 that Amazon increased the salary cap by more than double- to $350,000.
How did Amazon retain employees throughout the Great Resignation, with lower salaries and less incentives than competitors? Why did they have a salary cap to begin with? Why does Amazon avoid individual bonus structures? And most importantly, how does this connect to their budgeting and planning?
Jeff Bezos sums up the reasoning behind it: “What drives Amazon’s compensation strategy?... We pay very low cash compensation relative to most companies. We also have no incentive compensation of any kind. And the reason we don’t is because it is detrimental to teamwork. If you lose some people over this, you’re likely better off having it happen early”.
The company’s reasoning behind keeping relatively low salaries and individual bonus structures is because it is bad for teamwork. If goals are individual based, then it causes employees to focus on these metrics alone and not necessarily what is best for the company or customers.
Until recently, the only compensation or bonus in the company was stock grants. This encourages company wide goals to be the focal point instead of individual metrics or accomplishments. Stocks became less relevant due to Amazon’s relatively slow stock growth in late 2021, which caused the only bonus available to be worth less. Only then did the company introduce salary raises.
Salary cap is a very unconventional way of conducting business, and is especially risky in a time when retaining talent is difficult. However, there is still much to be learned from Amazon’s policy: Rethinking company incentives, team budgets, or future planning, could be exactly what the company needs in order to get ahead of the competition and increase efficiency.
5) Encouraging Budget Efficiency
Many companies have tried to come up with a solution for teams asking for inflated budgets in order to finish the year under the projected deadline without working too hard. Minimizing commitment tends to be a big problem, and creates a scenario where using all the funds unnecessarily in order to receive the same budget the following year is an all too common occurrence.
Amazon cuts this out by changing the budget process from company teams asking for higher budgets, to focusing on what each team brings in terms of customer impact, all while keeping cost and risk in mind. This means that spending money just to reach the "easy" budget would not be a good idea. The customer impact for this activity would be far more costly than it needs to be, and the justification for the funding wouldn't pass in the next valuation.
Usually the larger the organization, the easier it is for money to get lost in between the cracks, but Amazon is one of the biggest corporations that found a way to solve this. Although it is hard to measure the impact, there is no doubt that this is one of Amazon’s successes in budgeting. Companies big and small can follow suit and create far more efficient budgets by studying this system.
Amazon is a unique company and its size and often unconventional ways of doing things make it hard to learn from. However, one thing stands out and that is the way it conducts budgeting. Its unconventional ways of conducting the process creates business efficiency, and perhaps the open mindedness is one of the factors that contributed to creating Amazon Prime. One thing is certain. When creating an efficient budgeting and planning system that is individualized for each company, good things will happen.
Focus on the customer and what they want, not just sales and revenue metrics. It might take a bit longer, but the profit will come!
Spend more time on planning instead of budgeting. If you plan right, the budget allocation will come easily.
Use real time updates. In the fast moving world of today, action needs to be taken quickly and accurately to beat the competition. Use FP&A tools for access to real time updates and metrics.
Don’t be afraid to be different. Amazon’s corporate salary cap is a unique outlier. You don’t need to do the same, but being different sometimes helps, especially in regards to HR.
Reward budget efficiency. It’s too easy for money to go to waste during budget season. If a giant corporation like Amazon can focus on an efficient budget, so can you!