The 10-15% rule

Hi Everyone,

Pull up your company's budget from last year and this year, and put them side by side.

How different do they actually look? For a lot of mid-market companies, the answer is "not much."

McKinsey studied 1,600 companies over 15 years and found that a third of them basically ran last year's budget again. The average company shifted just 8% of its total budget from one year to the next. The companies that did move money around returned 10% a year on average. The ones that didn't returned 6%.

Over 20 years, that 4-point gap compounds to roughly a doubling in company value.

Today we're breaking down a simple rule that can close the gap, along with a practical way to put it to work in your next planning cycle.

The 10-15% rule

Commit to reallocating 10-15% of your budget every year, whether things are going well or not.

10-15% doesn't sound like much until you sit down to hunt for it. That's when you notice that every line on your P&L has someone willing to defend it, usually with a version of "we can't work without it."

The point however is that you're not taking the money out entirely. It still stays in the business. It just moves from the places that have stopped producing into the two or three areas where another hire, initiative, or resource would positively impact the output.

How to move the money

1. Commit to the number before you look at anything else

Pick 10% or 15% of total spend and write it down first, before you look at last year's numbers. Once you've reviewed what was spent before, anchoring bias kicks in and those numbers become your baseline. End result? You just end up making small adjustments per area rather than actually moving money.

2. Ask what return each area generated last year

Some will be easy to answer, like a paid channel that brought in measurable pipeline or a hire who delivered the revenue number you built the plan around. Others will be harder, like functions with no measurable output or lines that have been in the budget long enough that nobody questions them.

Areas without a clear output are usually where the 10-15% comes from. If a team can't explain what they produced last year in terms that the business can measure, that's your starting point.

3. Take from the weak areas and give to the strong ones

For every cut, name the specific program or budget line it comes from and tell the team that runs it before the budget is finalized. Without a specific source, nothing actually moves.

4. Name owners and review dates for the new allocations

Teams gaining budget should leave with a number, a plan for how they'll use it, and a date when you'll check whether it worked.

For teams losing budget, agree on what they'll stop or delay as a result.

One thing to watch

In planning reviews, budgets get defended by comparing them to last year rather than by asking what the money would return somewhere else. A program that cost $800K and produced acceptable results will probably get $800K again, even if that money would return more in a different part of the business.

For each significant budget item, ask what that money would return if it went somewhere else in the business. If the answer is clearly more than where it sits today, you have a reallocation.

Try this today

The exercise takes about 60 minutes with your finance lead. List every area of spend, rate the return it produced, and propose a new number.

We made a worksheet to keep it organized – download it below if it helps.

Get your free Budget Reallocation Worksheet

Go deeper

👉 McKinsey: How Nimble Resource Allocation Can Double Your Company's Value – the research behind the 10% vs 6% returns gap, and why companies that reallocate outperform.

👉 Michael Mauboussin: Capital Allocation: Evidence, Analytical Methods, and Assessment Guidance (free PDF) – a clear framework for thinking about every dollar in your business and where it should go.

👉 HBR IdeaCast: How 8 Successful CEOs Allocated Capital to Build Durable Businesses – William Thorndike on the CEOs who outperformed the S&P 500 by 20x through allocation discipline.

👉 McKinsey: Keep Calm and Allocate Capital — Six Process Improvements – practical ways to build reallocation into your planning cycle rather than the annual budget scramble.

Coming up tomorrow

Tomorrow's issue covers a quick AI fluency test that shows where each person on your leadership team actually stands.

See you soon.

P.S. If your CFO hasn't seen this, forward it their way.