Market Based ManagementGetting Results From Your OrganizationQuentin Christensen

Quentin.Christensen@live.com

Agenda Vision

Owner goals Corporate vision

Virtues and Talents Corporate Principles ABC Process

Knowledge Process Profit centers Benchmarking

Decision rights Roles, responsibilities, & expectations Commitments Principled entrepreneurship

Incentives Maximizing value Personal property Perverse incentives

Vision

Example: Koch Industries Vision MBM: Vision, virtue and talents, knowledge processes, decision rights,

incentives, the guiding principles, MBM models Innovation: Creative destruction, disciplined freedom, discovery

process, R&D, technology, networks, benchmarking, acquisitions, marketing and branding, IP strategy

Operations Excellence: Compliance, EHS, performance and cost effectiveness, benchmarking, capturing value bets

Trading: Point of view, strategy development, buying and selling assets, optionality, risk management, execution

Transaction Excellence: Opportunity identification, origination network, Decision Making Framework, due diligence, portfolio optimization, structuring

Public Sector: Legal, communications, community relations, philanthropy and public policy

Corporate Vision What are the goals of our business? Where will the business be in 10 years?

20? What are each of our goals as owners

and managers?

Virtues and Talents

Example: Koch Industries Principles Integrity: Conduct all affairs lawfully and with integrity Compliance: Strive for 10,000% compliance, with 100% of employees fully complying 100%

of the time. Ensure excellence in environmental, safety, and all other areas of compliance. Stop, think, and ask.

Value creation: Create real, long-term value by the economic means. Understand, develop, and apply MBM to achieve superior results. Eliminate waste.

Principled entrepreneurship: Demonstrate the sense of urgency, discipline, accountability, judgment, initiative, economic and critical thinking skills, and the risk taking mentality necessary to generate the greatest contribution to the company and society.

Customer focus: Understand and develop relationships with customers to profitability anticipate and satisfy their needs.

Knowledge: Seek and use the best knowledge and proactively share your knowledge while embracing a challenge process. Measure profitability wherever practical.

Change: Embrace change. Envision what could be, challenge the status quo, and drive creative destruction.

Humility Practice humility and intellectual honesty. Constantly seek to understand and constructively deal with reality to create real value and achieve personal improvement.

Respect: Treat others with dignity, respect, honesty, and sensitivity. Appreciate the value of diversity. Encourage and practice teamwork.

Fulfillment: Produce results that create value to realize your full potential and find fulfillment in your work.

Example: Microsoft Success Factors Long-Term Approach: Takes long-term approach to business, technology, people, customers, geography;

thinks and acts strategically; defines, communicates, and stretches the scope of his or her contribution; aligns efforts with higher-level direction, strategies, commitments; keeps the "big picture" in mind; able to sort through the information flow and identify what is critical and what is not.

Results: Gets results; stays focused and driving for results; relentless in pursuit of great results; sets and communicates clear, compelling goals and priorities for his or her area of responsibility; monitors progress and makes timely corrections when necessary; stays on track when distractions or problems arise; stabilizes and focuses quickly when changes occur.

Passion for Products & Technology: Demonstrates passion for creating great software, putting technology to work for people, and driving technology and product innovation; understands Microsoft business and technology; understands and interprets implications of broader trends (for example, in the economy, markets, competition) and relevant technologies for his or her work; stays abreast of what is happening in the business and industry.

Customer Feedback: Builds and uses feedback loops with customers; asks, listens, learns, adapts in order to create customer value; committed to meeting customer needs; works to establish and maintain clear and open communication with customers; gives priority to activities that provide value to Microsoft customers.

Individual Excellence: Works hard; thinks, questions, challenges; learns new things quickly and puts them into action; works until it is right; is creative and imaginative; demonstrates a high level of expertise in his or her work; takes responsibility; learns quickly from mistakes; takes informed risks in order to learn and achieve more; seeks out tough challenges and learns from them.

Teamwork: Works hard to achieve group goals; works efficiently with others in his or her group and with other people and groups across the company; takes interests of other people and groups into consideration when making decisions or taking action; is respected and trusted by others; engages in constructive conflicts.

ABC ProcessA level: Top 15%

Employees whose performance and contribution in their current roles provide significant competitive advantage over those employees in similar roles at principal competitors and, therefore, are exceptional contributors to long-term profitability. These employees are usually among the top 15% of their peers throughout the industry in their current role. A business should ensure it doesn’t lose them. KII is constantly in the market for A-level employees and must continually improve its ability to identify and recruit these competitively advantaged individuals.

B Level: Top 15%-50%Employees whose performance and contribution in their current roles have proven to be at least as good as that of their peers at principal competitors. They tend to be between the top 15 th and 50th percent of performers throughout the industry in their current roles. B’s are solid contributors who consistently meet expectations and who may exceed expectations in many areas of performance. B-level employees are, collectively, critical to a company’s success. They are not an afterthought, living in the shadow of A performers. However, they should be challenged to grow and improve.

C level: Bottom 50%Employees whose performance and contribution in their current roles put us at a competitive disadvantage by being below-average relative to their peers at principal competitors. C-level employees are not meeting expectations. They may be in the wrong role, meaning they could contribute at a B or even an A level if they were in a role that better leveraged their comparative advantage. But if their performance cannot be improved to a B level, either by finding a suitable role or through development, they should not be retained. Inability to create value at one company does not mean the same will be true elsewhere. Employees may be much more successful in another organization that has needs or a culture better suited to their talents and values.

20/70/10 ProcessTop 20%, middle 70%, bottom 10%

Based on annual and mid year reviews Managers rate each of their directs Managers compare the performance of their

directs with peer managers Employees are ranked based on:

Performance against commitments Future potential

Top 20 get 200% bonus Middle 70 get 100% bonus Bottom 10 get 0 bonus

Knowledge Process

Profit Centers Created wherever there are identifiable

products, market prices, customers, suppliers, and assets such that financial statements can be prepared

Internal transfer prices should reflect market alternatives

Businesses that cannot be made profitable on their own should be sold or closed

Use benchmarking to track performance

Benchmarking Benchmarking: Identifying, understanding, and

adapting outstanding practices from anywhere in the world that help us improve.

Marginal analysis: Measure the benefits and associated costs with a specific change rather than at the average or at the whole. Before estimating the profitability of an investment to improve efficiency, the current waste should be eliminated from the base case.

Opportunity cost: The true cost of an activity is the highest valued activity forgone. Waste is eliminated by prioritizing and according to profitability, adjusted for risk and time.

Decision Rights

Decision Rights Employees earn the rights to take action Roles, responsibilities, and expectations

are clearly defined Decision rights are increased based

upon performance and achievement of specific goals

Roles, Responsibilities & Expectations Define the areas of responsibility and

accountability for employees. People should bear the consequences of

their decisions. Give employees honest and frequent

feedback.

Example: Microsoft Commitments

4-7 commitments Each includes goal, execution plan,

accountabilities Evaluated every 6 months Used to measure performance annually

and determine annual bonus and raise Meet with direct manager weekly, discuss

progress against commitments every 1 – 3 months

Example CommitmentShip High Quality FeaturesExecution Plan: Ensure that my feature teams ship features that balance quality, user experience, and functionality by

prioritizing changes and bug fixes. Feature areas include: I will monitor my team’s workload, adding and cutting as required to derive the optimum efficiency from

the team while also makings sure my team has appropriate challenges and work-life balance. I will coordinate interdependences with other teams. I will make the best decisions for SharePoint as a whole by considering quality aspects, design options,

and balancing costs with customer benefits. Maintain high churn and quick close time for bugs. I will aggressively triage bugs to ensure we spend as little time as possible on bugs that we will not take. I will identify important bugs and DCRs and raise awareness so that we fix bugs that would block

important scenarios. Accountabilities: Features interoperate with other related features on the team and with partner teams. My team will be assigned a fair and appropriate amount of work, the work will be sequenced correctly for

team efficiency, and will take into account cross-area or cross-team dependencies. Scenarios we have identified will be met and delivered upon. I will meet with my doc set feature crew at least once per week and all other features crews bi-weekly. Features will ship with a high level of quality for Beta2 and RTM. Dev and test feedback will reflect that I successfully drove issues to resolution. Always current on the status of my features. The number of active and resolved bugs is kept to a minimum and I maintain an average of less than 1

bug assigned to myself.

Principled Entrepreneurship1. Decisions rights are earned, not granted or

bestowed2. The lack of authority is not considered an

excuse for inaction in the face of a problem that needs to be corrected or an opportunity that should be pursued.

3. Employees need to raise awareness, propose solutions and find a way to address the problem or capture the opportunity.

Incentives

Maximizing Value Management must have a risk of loss as well as a share

of long-term gains in value Tie pay to value building performance – compensate unit

managers on EBITDA, but require servicing high levels of dept.

Discipline managers to control assets tightly, maximize returns and reduce debt.

Give management the opportunity for significant wealth on business unit exit

Executive compensation requires attention to three areas: Understanding the market for talent in key areas Ensuring a link to the business strategy Frequent monitoring of value

Personal Property People manage assets better when they

have an invested interest

Perverse Incentives An agency problem is created because

principals want what is in the best interest of the principal and the agent wants what is best for the agent.

Employees may be extremely risk averse because they are not rewarded for risk taking and they are penalized for mistakes.

The result is a play it safe culture. Value creation should be rewarded and losses penalized only when appropriate.