A Tale of Two Companies 3 Immutable Laws (and their implications) Balanced Scorecard Budgeting

Balanced Scorecard BudgetingBalanced Scorecard BudgetingFusing the Link Between Strategy & BudgetingFusing the Link Between Strategy & Budgeting

Lawrence ServenThe Buttonwood Group

www.ButtonwoodLLP.com203/328-3056

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– A Tale of Two Companies

– 3 Immutable Laws (and their implications)

– Balanced Scorecard Budgeting

– Keys to Success

– Q&A

OutlineOutline

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Company A Company B

Sales Growth 8% 0%

Gross Margin % 55% 35%

SG&A as a % of Sales 5% 15%

EBITA as a % of Revenue 15% 3%

Company snapshot: which company has been more successful?

A Tale of Two Companies

RONA % 20% 2%

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Why has “Company A”

been more successful?

Why has “Company A”

been more successful?

A Tale of Two Companies

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Company A Company B

Customer Satisfaction Index 90 75

# Defects per Thousand 5 20

New Product Dev. Cycle Time 6 mos. 18 mos.

% On Time Delivery 95% 70%

Employee Satisfaction Index 90% 70%

% of Sales Coming From Products Introduced in the Last 2 Years

20% 1%

% Product Returns 1% 8%

Company snapshot (part 2): why has Company A been more successful?

A Tale of Two Companies

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Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Which way should the arrow go? Which set of measures drives the other?

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

A Tale of Two Companies

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Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

=Measures for What Really Drives Success in the Business

A Tale of Two Companies

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Set annual plan targets (numerical)

Report on every month to sr. exec team

Analyze variances

Bake into the budget

Set annual plan targets (numerical)

Report on every month to sr. exec team

Analyze variances

Bake into the budget

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

A Tale of Two Companies

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

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Most companies manage to the P&L while the actual drivers of business performance “fade into the background”.

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

A Tale of Two Companies

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

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Highly successful companies manage to the real drivers of success…

…and also understand how and why they impact the P&L

A Tale of Two Companies

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

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Customer Satisfaction Index

# Defects per Thousand

Employee Turnover

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Customer Satisfaction Index

# Defects per Thousand

Employee Turnover

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Customer Satisfaction Index

# Defects per Thousand

Employee Turnover

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Set annual plan targets (numerical)

Report on every month to sr. exec team

Analyze variances

Bake into the budget

A Tale of Two Companies

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

Sales Growth

Gross Margin %

SG&A as a % of Sales

EBITA as a % of Revenue

RONA %

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– A Tale of Two Companies

– 3 Immutable Laws (and their implications)

– Balanced Scorecard Budgeting

– Keys to Success

– Q&A

OutlineOutline

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3 Immutable Laws

Immutable Law #1: Strategy has no value on it’s own other than to achieve specific goals. Strategy for strategy’s sake is corporate make work.

Set corporate targets first, then build a strategy to meet them. That’s purpose built strategy.

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Immutable Law #2: It’s all about execution. A plan exists only in PowerPoint until it’s executed.

Build the ongoing monitoring and reporting mechanisms to ensure plans are being followed through on.

3 Immutable Laws

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Immutable Law #3: Any project, strategic or operational, will die unless resources are allocated to it.

The resources necessary to see a project though must be identified and included in the operating budget.

3 Immutable Laws

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– A Tale of Two Companies

– 3 Immutable Laws (and their implications)

– Balanced Scorecard Budgeting

– Keys to Success

– Q&A

OutlineOutline

17

PlanPlan

BudgetBudget

MonitorMonitor

KPIsKPIs

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KPIsKPIs

Step 1: Identify Company KPIs

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Best KPIsBest KPIs Worst KPIsWorst KPIs

Seen as not really relevant to line managers

Embraced by line managers

Used to make better decisions Shelfware

Reflects what actually drives success in the business

Nothing but Financial Stats

Step 1: Identify Company KPIs

Cocktail Napkin Telephone Directory

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The Value Driver Workshop

Who: The Senior Management Team (or designates)

What: A one day Workshop to identify what really drives success in the business (e.g, Innovation, being the Low Cost Producer, etc.)

How: A series of facilitated workshop exercises

Step 1: Identify Company KPIs

Next

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Identification of KPIs

Who: The project work team

What: A Workshop to translate what Senior Management has identified as driving the success of the business into Key Performance Indicators (KPIs)

How: A series of facilitated brainstorming exercises

Step 1: Identify Company KPIs

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Step 1 Deliverables: A Company Scorecard of KPIs

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

Step 1: Identify Company KPIs

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Step 2: Establish targets for the KPIs

PlanPlan

KPIsKPIs

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KPI Target Setting

Who: KPI Teams

What: Benchmarking and historical analysis to determine both long term (strategic) and short term targets for each KPI

How: After a kick off meeting led by the KPI team leader, the group conducts benchmarking and historical trend analysis to establish long term (i.e., 3 to 5 years) targets as well as targets for the upcoming year. Depending upon the circumstances, this may take a few days to a few weeks.

Step 2: Establish Targets for KPIs

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Step 2 Deliverables: Targets for KPIs

Customer Satisfaction Index

# Defects per Thousand

New Product Dev Cycle Time

% On Time Delivery

Employee Satisfaction Index

% of Sales Coming From Products Introduced in the Last 2 Years

% Product Returns

2005 2006 2007

80 85 90

Step 2: Establish Targets for KPIs

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PlanPlan

KPIsKPIs

Step 2: Establish targets for the KPIs

Step 3: Develop Strategy to Achieve Targets

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Develop Strategy to Achieve Targets

Who: KPI Teams & SMEs (subject matter experts)

What: Each KPI team develops a strategy that is designed to achieve the targets for their KPIs. This is a long term view that incorporates strategic initiatives.

How: Each KPI team, working with internal experts and other subject matter experts develops a strategy, including long term initiatives, that if executed will achieve the targets established for the KPIs.

Step 3: Develop Strategy to Achieve Targets

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Step 3 Deliverables: Strategic Initiative Summary

KPI: Employee SatisfactionKPI: Employee Satisfaction

Strategy Description

Through investments job rotation and other programs, we will make our employees the most sought after in the industry. Clearly this will be “a win” for our employees, but it will also be a “win” for the company. If, in fact, our employees are the most sought after in the industry, that will be a major selling point in recruiting new talent. It also serves as an acid test for us, for in fact our employees are the most sought after in the industry, they most sought after skills and know how. We will be known as the company that enables employees to build their marketable skills and understanding of the business.

• Integrate the goal of developing employees into each manager’s bonus calculation

• Develop a career rotation program• Set standards for hours of training per year for each job level and monitor• Create a job shadowing program• Launch an alumni network

Strategic Initiatives

Leader Hans Bergen [V.P., Career Development]

‘05-’07 Targets

2005: 80 2006: 85 2007: 90

Step 3: Develop Strategy to Achieve Targets

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PlanPlan

KPIsKPIs

Step 2: Establish targets for the KPIs

Step 3: Develop Strategy to Achieve Targets

Step 4: Develop Action Plans to Achieve Near Term Targets

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Develop Action Plans

Who: KPI Teams

What: Each KPI team develops Action Plans that are designed to achieve the targets for their KPIs. Particular attention is paid to what can be done in the first year.

How: Each KPI team, working with internal experts and other subject matter experts develop Action Plans; complete with Activities, Tasks, and Milestones.

Step 4: Create Action Plans to Achieve Near Term Targets

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Develop Action Plans

Who: KPI Teams

What: Each KPI team develops Action Plans that are designed to achieve the targets for their KPIs. Particular attention is paid to what can be done in the first year.

How: Each KPI team, working with internal experts and other subject matter experts develop Action Plans; complete with Activities, Tasks, and Milestones.

Step 4: Create Action Plans to Achieve Near Term Targets

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Step 4 Deliverables: Action Plans (Summary View)

Career Rotation Program

Margaret Cho

PROJECT LEADER

1) Organize a cross functional team – April ’052) Draft a complete project charter (Objectives, Scope, Approach,

Structure) – May ’053) Complete RFP process for outside expert – July ’054) Develop program blueprint – Oct ’055) Validate program with Sr. Management – Nov ’056) Implement program -- 2006

KEY MILESTONES

BRIEF DESRIPTION

December

DEADLINE

INTERNAL• 8 Person cross functional team (on

average 2 hours a week for 9 months)• 1 Procurement specialist to help us

through the RFP processEXTERNAL• HR Specialist (TBD)

(HIGH LEVEL) RESOURCE REQUIREMENTS

Enable employees to rotate through various business units/ functional areas to build their skills and understanding of the business.

ACTION PLAN: Formalizing a Rotation ProgramLEADER: Margaret ChoLAST UPDATED: 11/15/02

Week Beginning Monday:

7 14 21 28 5 12 19 26 2 9 16 23 7 14 21 28 35 4 11 18 25 1 8 15 22 6 13 20 27 3 10 17 24 1 8 15 22ORGANIZE A CROSS FUNCTIONAL TEAM

Solicit input from sr. managementDraft intro letterFormalize team rosterSchedule kick off meetingPrep for kick off meetingConduct kick off meeting

DRAFT PROJECT CHARTEROrganize sub team to draft charter

Define objectivesDefine scopeDefine approachDocument

Review charter with teamPresent to senior managementModify charter as directed

COMPLETE RFP PROCESSDraft RFP for consulting assistance

Review project charter & use as cornerstoneSolicit 3 - 6 bidsReview bidsInterview vendorsMake team selectionPresent to senior management for approval

DEVELOP PROGRAM BLUEPRINTReview best practicesBenchmark industry practicesBrainstorm alternativesSelect best alternativeComplete detailsDraft program description document

VALIDATE WITH SR. MANAGEMENTPresent to sr. management for approval

VALIDATE WITH BUSINESS UNITSPresent to Business Unit for Approval

INCORPORATE FEEDBACK

COMMUNICATE PROGRAM TO ORGANIZATION>>>>

IMPLEMENT PROGRAM (2004)

SEPT OCT NOV DECMAY JUNE JULY AUGAPRIL

Step 4: Create Action Plans to Achieve Near Term Targets

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Step 4 Deliverables: Action Plans (Gant Chart)

ACTION PLAN: Formalizing a Rotation ProgramLEADER: Margaret ChoLAST UPDATED: 11/15/02

Week Beginning Monday:

7 14 21 28 5 12 19 26 2 9 16 23 7 14 21 28 35 4 11 18 25 1 8 15 22 6 13 20 27 3 10 17 24 1 8 15 22ORGANIZE A CROSS FUNCTIONAL TEAM

Solicit input from sr. managementDraft intro letterFormalize team rosterSchedule kick off meetingPrep for kick off meetingConduct kick off meeting

DRAFT PROJECT CHARTEROrganize sub team to draft charter

Define objectivesDefine scopeDefine approachDocument

Review charter with teamPresent to senior managementModify charter as directed

COMPLETE RFP PROCESSDraft RFP for consulting assistance

Review project charter & use as cornerstoneSolicit 3 - 6 bidsReview bidsInterview vendorsMake team selectionPresent to senior management for approval

DEVELOP PROGRAM BLUEPRINTReview best practicesBenchmark industry practicesBrainstorm alternativesSelect best alternativeComplete detailsDraft program description document

VALIDATE WITH SR. MANAGEMENTPresent to sr. management for approval

VALIDATE WITH BUSINESS UNITSPresent to Business Unit for Approval

INCORPORATE FEEDBACK

COMMUNICATE PROGRAM TO ORGANIZATION>>>>

IMPLEMENT PROGRAM (2004)

SEPT OCT NOV DECMAY JUNE JULY AUGAPRIL

Step 4: Create Action Plans to Achieve Near Term Targets

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PlanPlan

BudgetBudget

KPIsKPIs

Step 5: Develop Action Plan Budgets

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Develop Action Plan Budgets

Who: KPI Teams, working closely with Finance

What: Each KPI team works with the Finance build budgets for their Action Plans

How: Each KPI team, working with Finance, identifies the resources they need to execute their Action Plans. Finance then translates these resource requirements into SG&A line item detail and CAPEX requests for budget purposes.

Step 5: Develop Action Plan Budgets

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Step 4 Deliverables: Action Plans Budgets

Step 5: Develop Action Plan Budgets

ACTION PLAN Formalize a Career Rotation Program

TEAM LEADER Margaret Cho

2005TOTAL

SOFTWARE $0.1EQUIPMENT $0.2CONSULTING $0.1OTHER $0.1

PROJECT TOTAL $0.5

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Step 6: Combine with the Baseline Budget

PlanPlan

BudgetBudget

KPIsKPIs

Step 5: Develop Action Plan Budgets

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Create a Baseline Budget

Who: Finance and budget managers

What: The Finance area facilitates the development of a baseline budget (“keep the lights turned on”) that can then be combined with the Action Plan budgets to produce a total company plan

How: Working with managers, the Finance area develops a baseline budget, that incorporates all elements of the annual plan P&L, that is then combined with the Action Plan budgets.

Step 6: Combine with the Baseline Budget

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Step 6 Deliverables: A Combined Budget (Incorporating both Action Plan Budgets and the Baseline Budget

Step 6: Combine with the Baseline Budget

IMPACT OFACTION PLANS

BASELINE Better/(Worse) TOTALRevenue $1,200.0 $1.0 $1,201.0

COGS $780.0 $0.5 $780.5

Contribution Margin $420.0 $0.5 $420.5

G&A Expenses $320.0 $2.0 $322.0

Net Income $100.0 ($1.5) $98.5

TOTAL COMPANY2005 SHORT FORM P&L

Dollars in Millions

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PlanPlan

BudgetBudget

MonitorMonitor

KPIsKPIs

Step 7: Establish ongoing reporting and review

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Establish Ongoing Reporting & Review

Who: Finance and IT work team.

What: Finance and IT work together to build an ongoing reporting mechanism for: Financial Results, KPIs and the progress of the Action Plans.

How: A combined Finance and IT work team identify requirements and select the tools that will enable monthly monitoring of results (both financial and KPIs). In addition, the work team will develop a process for the monthly review of progress of Action Plans alongside of the financial results.

Step 7: Establish Ongoing Reporting

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Step 7 Deliverables: Reporting and monitoring tools for KPI results

Step 7: Establish Ongoing Reporting

Significantly exceeds target

Within target range

Significantly below target

StoplightValue Driver Measure Rating Target YTD Actual

Operating Efficiency Operating Expense Ratio 45% 46%

Quality Obsession # of Defects per Thousand 5 8

Potent Workforce Employee Turnover 20% 25%

Employee Survey Index 95 80

Reference Data

Progress on Value DriversJune Year To Date

(Partial View for Illustration Only)

Significantly exceeds target

Within target range

Significantly below target

StoplightValue Driver Measure Rating Target YTD Actual

Operating Efficiency Operating Expense Ratio 45% 46%

Quality Obsession # of Defects per Thousand 5 8

Potent Workforce Employee Turnover 20% 25%

Employee Survey Index 95 80

Reference Data

Progress on Value DriversJune Year To Date

(Partial View for Illustration Only)

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Step 7 Deliverables: Reporting and monitoring tools for progress of Action Plans

Step 7: Establish Ongoing Reporting

Career Rotation Program

Margaret Cho

PROJECT LEADER

1) Organize a cross functional team – April ’032) Draft a complete project charter (Objectives, Scope, Approach,

Structure) – May ’033) Complete RFP process for outside expert – July ’034) Develop program blueprint – Oct ’035) Validate program with Sr. Management – Nov ’036) Implement program -- 2004

KEY MILESTONES

BRIEF UPDATE

December

DEADLINE

KEY QUESTIONS

We’ve slipped 60 days due to a delay in reaching a decision on our RFP vendor, but we should be able to make up half that time.

ACTION PLAN: Formalizing a Rotation ProgramLEADER: Margaret ChoLAST UPDATED: 11/15/02

Week Beginning Monday:

7 14 21 28 5 12 19 26 2 9 16 23 7 14 21 28 35 4 11 18 25 1 8 15 22 6 13 20 27 3 10 17 24 1 8 15 22ORGANIZE A CROSS FUNCTIONAL TEAM

Solicit input from sr. managementDraft intro letterFormalize team rosterSchedule kick off meetingPrep for kick off meetingConduct kick off meeting

DRAFT PROJECT CHARTEROrganize sub team to draft charter

Define objectivesDefine scopeDefine approachDocument

Review charter with teamPresent to senior managementModify charter as directed

COMPLETE RFP PROCESSDraft RFP for consulting assistance

Review project charter & use as cornerstoneSolicit 3 - 6 bidsReview bidsInterview vendorsMake team selectionPresent to senior management for approval

DEVELOP PROGRAM BLUEPRINTReview best practicesBenchmark industry practicesBrainstorm alternativesSelect best alternativeComplete detailsDraft program description document

VALIDATE WITH SR. MANAGEMENTPresent to sr. management for approval

VALIDATE WITH BUSINESS UNITSPresent to Business Unit for Approval

INCORPORATE FEEDBACK

COMMUNICATE PROGRAM TO ORGANIZATION>>>>

IMPLEMENT PROGRAM (2004)

SEPT OCT NOV DECMAY JUNE JULY AUGAPRIL

Project on Schedule?

# Days Delayed:

Actions to get back on track?

Reasons?

NO

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Senior management approval of vendor by 60 days.

Streamlining brainstorming and documentation should result in a savings of 30 days

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– A Tale of Two Companies

– 3 Immutable Laws (and their implications)

– Balanced Scorecard Budgeting

– Keys to Success

– Q&A

OutlineOutline

45

Keys to Success

Keys to Success #1: Benchmark your company against national averages to quantify if your organization could benefit (or not):

•Do people know what the strategy is?

•Do they know how it links to the plan/budget?

•Do they know what the company’s key performance measures

are?

•Do they think they have anything to do with them?

•Do goals really cascade down through the organization?

•Are we any different from national averages?

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Keys to Success

Keys to Success #2: Don’t create a separate budget exercise; bring balanced scorecard budgeting into your current process

•Many companies make the mistake of creating a separate process for budgeting balanced scorecard initiatives.

•But the “real” budgeting process still dictates how resources are allocated.

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Keys to Success

Keys to Success #3: Know thyself. Customize Balanced Scorecard Budgeting to suit your culture & planning processes

•If you currently employ a rolling six quarter forecast, for example, then tailor the Balance Scorecard Budgeting approach to synch up with it.

•If your strategic planning process looks out five years, for example, then your KPI targets should go out five years.

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Keys to Success

Keys to Success #4: Pick the right technology tools to enable Balanced Scorecard Budgeting.

•After designing your Balanced Scorecard Budgeting process, develop a set of requirements for a planning/reporting system.

•Determine if your current set of tools can meet the requirements

•If the current set of tools will not adequately meet the needs, conduct a vendor selection process (with a minimum of three vendors).

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– A Tale of Two Companies

– 3 Immutable Laws (and their implications)

– Balanced Scorecard Budgeting

– Keys to Success

– Q&A

OutlineOutline

50

Q&A