Docstoc

Constructing a Powerful Pricing Model for Your Shared Service

Document Sample
Constructing a Powerful Pricing Model for Your Shared Service Powered By Docstoc
					                           CGA Ontario 8th Annual
                            Controllers Congress

                   Creating Value with Measures


                                    Paul Sharman
                               Focused Management Inc.

Creating Value with Measures            Focused Management Inc   1
                      Paul A. Sharman, ACMA
                     •   Paul Sharman is President of Focused Management Inc., a company established in 1988 to help
                         manufacturing and service businesses to implement new cost management techniques. Paul has
                         extensive experience in industrial financial management, most recently as controller in several
                         divisions of Northern Telecom. He is a specialist in the field of activity-based management, activity-
                         based costing and aligned performance measurement. Integrating these tools into forecasting and
                         the management decision-making and control process is an important aspect of Paul's work. As a
                         consultant, his primary goal is to transfer technology and capability to his clients as rapidly as
                         possible using training and facilitation techniques. Implementation may involve the use of software
                         tools, when appropriate.

                     •   As one of North America's better known independent Activity Based Management consultants, Paul
                         has facilitated the implementation of ABM on behalf of many organizations including, Dupont,
                         Kellogg, Volkswagen Canada, William Neilson, L.A. Gear, AT&T, US Army, MCI WorldCom,
                         Hewlett Packard, Canada Trust, ESI and Bell Canada. Paul has trained thousands of people around
                         the world in many seminars, in association with the Institute for International Research, York
                         University and the Institute of Management Accountants (National Association of Accountants,
                         USA), as well as numerous in-house sessions for his clients.

                     •   During the past few years Paul has worked with the CAM-I, CMS project and Robin Cooper
                         (Harvard University). Past engagements involved Paul with Peter Turney (Portland State
                         University) on several projects, KPMG Peat Marwick in the U.S. and Canada as well as Ernst and
                         Young. He is well known as a conference speaker on Strategic Cost Management and Activity Based
                         Management/Costing in the U.S. and Canada. He has written many articles for CMA, The
                         Canadian Management Accounting Magazine as well as publications in the United States.

                     •   You can contact Paul as follows:
                           – Phone: 905 829 2658
                           – email: psharman@focusedmanagement.com
                           – Mail      2603 Addingham Crescent
                                       Oakville, Ontario  L6J 7K6 Canada

Creating Value with Measures                               Focused Management Inc                                                 2
                   What is Shareholder Value?
                A Technical/Financial Explanation
                                                                       Cash in
                                                                 Determined by:
                                                                    Revenue growth
 Shareholder value = Corporate value - Debt                         Cash profit margins

                                                                    Cash tax
                                                                    Fixed assets
                                                                    Working capital

                                    Future cash flows                  Cash out
 Corporate value               =
                                     Discounted at the
                                                                       WACC
                                   Weighted Average Cost
                                        of Capital                  Cost of equity
                                                                    Cost of debt
                                                                    Capital structure
                                                                    Risk Profile
Creating Value with Measures            Focused Management Inc                             3
                               What Drives Value?
                               Seven Value Drivers:
                                Sales growth rate
                                Operating profit margin
                                Cash income tax rate
                                Working capital
                                Fixed capital
                                Cost of capital - (WACC)
                                Growth duration period
             Thesis:
             • Value drivers largely represent financial measures of
               operational performance.
             • In order to achieve financial goals, we must link these
               high level measures to the things which operations
               people do.

Creating Value with Measures              Focused Management Inc         4
                               Value Based Management
                                     and Measures
          • Properly designed performance measures give managers
            at all levels an appropriate, fast and comprehensive view
            of the goals and performance of the business from a
            variety of different perspectives:

                1) How customers see us
                2) Things at which we must excel
                3) How to improve and create value
                4) How well we perform financially


                               Value Based Management depends on
                                performance measurement systems
Creating Value with Measures                Focused Management Inc      5
           If each person described what they saw, would it be the same description?


        Perspectives vary!




    The Fish Tank Syndrome
Creating Value with Measures             Focused Management Inc                        6
                               The Fish Tank Syndrome

          • A fish is both tangible, and distinct
                 – Readily observable
                 – Easily recognizable
                 – Easy to describe
          • A business is transitory and enigmatic
                 – Observations are highly subjective
                 – Difficult to understand
                 – Complex to describe

Creating Value with Measures          Focused Management Inc   7
                               Personal Construct Theory
                                  (PCT) George Kelly
          • Man looks at his world through transparent templates which he
            creates and then attempts to fit over the realities of which the
            world is composed
          • Observer Bias occurs when a diagnosticians’ frame of reference
            influences what they see, how they describe it, and what they
            prescribe
          • The same events can often be viewed in the light of two or more
            systems, yet the events do not belong to any system


    Implications of PCT to business people:
     We need a variety of perspectives and with which to obtain a balanced,
      disciplined and dynamic view of our businesses
     We need a constantly available set of reference points to which we can return


Creating Value with Measures             Focused Management Inc                       8
     The Business View - Why are we here?????
         “The three most important things you need to measure in a
         business are customer satisfaction, employee satisfaction and
         cash flow.

         If you are growing customer satisfaction, your global market
         share is sure to grow too.

         Employee satisfaction gets you productivity, quality, pride and
         creativity.

         Cash flow is the pulse - the vital sign of life in a company.”
                                                                  Jack Welch

Creating Value with Measures           Focused Management Inc                  9
                               Measurement


          • People behave as they are measured
          • The only purpose for measurement is to influence
            human behavior
          • To maximize performance, there must be a clear
            articulation of expectations (which are measured)


             Therefore the emphasis in measurement should be on:
                - New Conditions, Future State and
                - Desired Performance

Creating Value with Measures       Focused Management Inc          10
             Stakeholders Needs Define the Value
                    Creation Expectation

           • Value creation is achieved when stakeholder needs are
             met or exceeded
              – Cash creation is equal to or better than other
                investment opportunities for owners
              – Goods and services meet customer needs as well as
                or better than those of other suppliers
              – For employees, salaries, working conditions and
                opportunities for personal growth are satisfied
           • Value is created when all of the people in the
             organization are driven to achieve its goals


Creating Value with Measures       Focused Management Inc            11
            Value Based Management Framework & Tools

                                            Strategic
                                              Plan
                                            Organization
                                              • Goals
                                           Organization            Performance Measures
     Stakeholder Need/Values                  • Measures
                                           • Goals
                                       Organization
     • Customers                              •
                                                                         Scorecard
                                           • Measures
                                       • Goals Results
                                     Organization
     • Shareholders                        •
                                       • Measures
                                     • Goals Results
     • Employees                       • Results
                                     • Measures
     • etc.                                                         Organization Design
                                     • ResultsProcess
                                              • Goals
                                                                     and Compensation
                                           Process
     Process Management                       •
                                           • Goals
                                       Process Measures
                                           • •
                                       • Goals Results
                                     Process Measures
       IN                      OUT         •
                                       • Measures
                                     • Goals Results                   Best Practices
                                       • Results
                                     • Measures
                                              Activity
                                     • Results Goals
                                              •
                                           Activity
     Human Performance                        •
                                           • Goals
                                       Activity Measures
                                           • •
                                                                      Activity Based
     Roles &                           • Goals Results
                                     Activity Measures
     Responsibility                        •
                                       • Measures
                                     • Goals Results
                                                                         Costing
                                       • Results
                                     • Measures
                                     • Results

                                                                    Systems
                                                                    Facilitated
Creating Value with Measures              Focused Management Inc                          12
             Driving Performance in Organization

                     • Determine stakeholder needs
                     • Develop organization strategy
                     • Analyze activities, processes and measures
                     • Determine costs, current performance and
                       benchmark
                     • Establish performance standards
                     • Establish goals / budgets & action plans
                     • Deploy measures and knowledge repository
                       systems


Creating Value with Measures          Focused Management Inc        13
                    External Reality of Enterprise Performance
                           and the Role of Stakeholders




                                                            Process / Activity Perspective

                                                                                                                   c

                                                                                                                                                  Exhibit 1




                                                                                  BanCo Case Study
                                                                                Conventional Income Statement

                                               Large Branches     Med Large Branches   Med Branches     Small Branches    Small Retail Branches           Total


                               Net Revenue
                                                $ '000

                                                 24,125
                                                           %

                                                          100%
                                                                    $ '000

                                                                     12,443
                                                                                %

                                                                              100%
                                                                                       $ '000

                                                                                         8,768
                                                                                                 %

                                                                                                 100%
                                                                                                         $ '000

                                                                                                           5,675
                                                                                                                    %

                                                                                                                   100%
                                                                                                                            $ '000

                                                                                                                               4,989
                                                                                                                                          %

                                                                                                                                        100%
                                                                                                                                                     $ '000

                                                                                                                                                      56,000
                                                                                                                                                                   %

                                                                                                                                                                  100%    Investors / Owners
                               Branch Costs
                               Personnel          2,100 8.7%          1,800   14.5%      1,400 16.0%         750 13.2%           964    19.3%          7,014 12.5%
                               Facilities           140 0.6%             60   0.5%         160 1.8%          104 1.8%            220    4.4%             684 1.2%
                               Depreciation         180 0.7%            148   1.2%         130 1.5%           86 1.5%            160    3.2%             704 1.3%
                               Branch Margin     21,705 90.0%        10,435   83.9%      7,078 80.7%       4,735 83.4%         3,645    73.1%         47,599 85.0%

                               Head Office Assessments
                               Personnel          9,611 39.8%         4,957   39.8%      3,493 39.8%       2,261 39.8%         1,987    39.8%         22,308 39.8%
                               Administrative     4,282 17.7%         2,209   17.7%      1,556 17.7%       1,007 17.7%           886    17.7%          9,940 17.7%
                               Advertising        1,550 6.4%            799   6.4%         563 6.4%          365 6.4%            320    6.4%           3,597 6.4%
                               Facilities           241 1.0%            124   1.0%          88 1.0%           57 1.0%             50    1.0%             560 1.0%
                               Depreciation       1,338 5.5%            690   5.5%         486 5.5%          315 5.5%            277    5.5%           3,106 5.5%
                               Legal                617 2.6%            318   2.6%         224 2.6%          145 2.6%            128    2.6%           1,432 2.6%



          Suppliers
                                                 17,639               9,097              6,411             4,149               4,396                  40,943      73.1%

                               Net Income         4,066   16.9%       1,338   10.7%        667   7.6%       586 10.3%           (751)   -15.0%          6,656     11.9%




                                                                                                 The Enterprise
                                                                                                                                                                          Customers
                                               Financial Perspective
                                                                  Learning & Growth



Creating Value with Measures                                                                 Focused Management Inc                                                                            14
                                                 Describing Strategy
                           Strategy is a differentiated customer value proposition*


            Operational Excellence: Quality and selection in key categories with unbeatable prices
                                               Product/Service Attributes                            Relationship         Image

                                                                                                                           Smart
                                 Price        Quality            Time         Selection       √                     √
                                                                                                                          Shopper



          Customer Intimacy: Personal service tailored to produce results for customer and build long-
          term relationships
                                               Product/Service Attributes                         Relationship            Image

                                                                                                                          Trusted
                                  √              √                √              √         Service            Relations
                                                                                                                          Brand




            Product Leadership: Unique products and services that push the envelope
                                               Product/Service Attributes                            Relationship         Image

                                                                             Functionali                                   Best
                                  √              √               Time                         √                     √
                                                                                 ty                                       Product




* Treacy & Wiersema, The Discipline of Market Leaders, 1995

Creating Value with Measures                                                Focused Management Inc                                  15
                    How We Organize Ourselves
                  The Three Levels of Performance
                                                                          I. Organization Level



              III. Performer/Job Level
                                                      II. Process Level




                                                                           Products
     Needs    I    O    C                                                  Services    Market
                   F




                                          Suppliers


Creating Value with Measures             Focused Management Inc                             16
           Organizations Behave as Adaptive Systems
                                                                                      Goals/plans                                                  Corp. Gov.
           SUPPLIERS                            Strategic Planning                                          Planning & Control                                                     CUSTOMERS
                                                                           Performance reports                                 Price targets

                               purchase                                                                                                                         product requests
                               order      Procurement                                                       Product Development
                                                                                             Line
                                           Buy material               Store & issue          time           design       Build die          Test die           samples
                                                          Materials                                                                                            /specs.
                                            Requisition



                                                                                                Work order

                                                                                                       Order Generation                                   No     promotions
                                                                                                                                                    In
                                                                                                        promotion         Order entered           Stock
                                                                                                                                                                  orders
                                               Production                  New Dies
                                                                                                                      Sales order                      Yes
                                                      Product made
                                                                              product
                                                                                                    Order Fulfillment                                           extrusions

                                                                                                    Store        Pick, pack, ship         bill, collect          invoice

                                          Support processes

                                                          Human Resources / Systems / Maintenance / Facilities




          Alignment of jobs, activities and processes with total
          organization goals is critical to the success of the organization.
          Shared service organizations are an integral component.
Creating Value with Measures                                                               Focused Management Inc                                                                              17
                        Aligning Process Performance
                            With Values & Goals

            Material Acquisition Process

                  CSF                   Process                      D     Process
                                        Output / Input                     Measures

                  Manufacture product   JIT / Cycle                  T     # Hours from order placement
                  and ship within       time to order,
                  24 hours of order     material & receipt

                                        On time availability         Q     # Items with shortages
                                        of material s

                                        Capacity to handle x# of     Q
                                        inventory picks per day

                  Reduce cost by 10%    Cost of processing           F     Total cost
                                        incoming material            F     Unit cost




Creating Value with Measures                             Focused Management Inc
                           Developing Process Measures


                        Material Acquisition Process                                   P1
            Inputs                                                                          Outputs


                                                                                                      Customer


    Input Measures:                                                         Output Measures:
    • Goods received as ordered (accuracy /quantity)                        • Material supplied (quantity)
    • Faults (quality)                                                      • 100% Correct items (quality)
    • Availability (time)                                                   • Availability (time)
    • Competitive pricing (financial)                                       • Cost to supply / unit (financial)
                                                                            • Total Process Budget / Cost




Creating Value with Measures                       Focused Management Inc
                            Process Measures Worksheet
    Material Acquisition Process
    Process Measures                                                   Perspectives of Measurement

  Process        Dimension         Measure                  Current        Bench-      Short Term    Long Term     Actions
  Output                                                    Performance    marks       Goal          Goal          to be taken
 Distribute to    Time         1. # of Hrs. from order to    5 days        6 hours   3 days         2 hrs.       Appoint a process owner
 Production                    production
                               2. # of days of backlog       14 days       1 day     10 days        0 days       Move to a "pull system"


                  Quality      1. Material available         80%           90%       85%            100%         Develop long term relationship
                                                                                                                 w/ key suppliers
                               when needed
                               2. # of material shortages    90%           100%      90%            100%         See above

                               3. % of material issues       85%           100%      87%            100%         Better communication
                               which meet job specs
                                                                                                                 Appoint a process owner
                  Cost         1. Total process cost         $150,000      $60,000   $140,000       $200,000
                               2. Cost per transaction       $85           $75       $63            $40          Improve work flow

                               3. Inventory cost /month      $4.0 m        $3.8m     $3.5 m         $1.0 m       Install point of use inventory


                                                                                                                 Automation
                  Quantity     1. # of items moved/          400           900       600            1,000
                               employee
                               2. # of stock outs            50            0         50             0            Better supplier relations

                               3. % of time machines         15%           0%        10%            0%           Improve EDI, batch processing
                               are idle due to material
                               shortages

Creating Value with Measures                                  Focused Management Inc                                                              20
                                                                                                          "Is" Process Map
                          Service Delivery Process
                                      Call
                                                                                                                                                                       Customer                               Reference
                                    Transfer                                                                        Predictive call                                   informed of
                                                                                                 Transfer or        (electronical )                                                                             docs
                                                                                                   Reroute                                                              Solution




                                    Customer calls

                        Customer                                HW
                                    IVR Routing               Problem

                                                              No

                                                                                                                                       Yes
                                                         Identify                                  No
                                                         - Customer                                                                                        Qualified
                                                         - Product            Validation   Yes                 Yes Log Call                         No        by     Yes                               To
                                                         - SLA                Completed?         Hardware                              Re -repair          Knowledge                                Process
                                                         Verify Entitlement                                                                                  tools                                     5
                         Call
                        Center                                                 No                                                      No
                                                                                                                                                               No
                                                                                                                                                                    1st level No
                                                                                                                                Installation?                       product?                              Reroute

                                                                                                                                 Yes                                   Yes
                                               No

                                                                                                                                                                       Yes                No
                                            Solution      Yes                                                                                                                                                                                    Problem ID
                      First Level          Identified?          Validation                                                                                              Remote      No     HW         Yes Qualification     Yes                  Identify Part                Disp  No            Launches                       Logistic
                                                                                                                                                    Identify                             Problem?                                          Identity Delivery Method
                      Technical                                                                                                                                         solved?                             done?                            (order parts - some            needed?                Courier                       Process
                                                                                                                                                    Problem
                         Dep’t                                                                                                                                                                                                                    countries)
                                                                                                                                                                      Yes                                                                      Solution skill ID            Yes
                                                                                                                                                                                                               No


                                                                                                                                                                                                            Customer told         Yes
                                                                                                                                                                                                            2nd Line will
                                                                                                                                                                                                             call back
                        Second                                                                                                                                                                                                                  ID part                           No
                         Level                                                                                     Predictive                                                                                                     Remote or No ID DM                   Disp
                                                                                                                    Group                                                                                                          Problem                            needed                                Route to
                       Technical                                                                                                                                                                                                   solved?    Solution skill
                         Dep’t                                                                                                                                                                                 Identify                                                                                       P2
                                                                                                                                                                                                                                                                      Yes
                                                                                                                                                                                                               Preblem
                                                                                                                                                                                                                                        Yes

                                                                                                                                                                                                                                                                                                 Yes
                                                                                                                                                                                                                                                                                                                                  Technical
                                                                                                                                                                                                                                                                                                   Help                           Assistant    No
                                                                                                                                                                                                                                                                                                 required                        Researches/
                       Inventory
                                                                                                                                                                                                                                                                                                                                  Suggests
                      Management                                                                                                                                                                                                                                                                                                  Solution
                                                                                                                                                                                                                                                                                                  No                       Yes




                                                                                                                                                                                                                                                        Identify                           Assign Call
                                                                                                                                                                                                                                                         on-site            Order        (some Delivery
                                                                                                                                                                                                                                                       Resources            Parts            method
                      Scheduling
                                                                                                                                                                                                        To                                                                                 automated)
                                                                                                                                                                                                    Installation
                                                                                                                                                                                                     Process
                                                                                                                                                                                                                                                                                                            Tech’n
                                                                                                                                                                                                                                                                                                          dispatched




                                                                                                                                                                                                                                                                                            Parts
                        Logistics                                                                                                                                                                                                                                                          Process




                                                                                                                                                                                                                                                                                                                                   No
                                                                                                                                                                                                                                                                                                              CE goes to
                         Site                                                                                                                                                                                                                                                                                    site              Repair   Yes       Finish
                                                                                                                                                                                                                                                                                                               collects          completed?           Repair
                      Technician                                                                                                                                                                                                                                                                                parts




                                                                                                                                                                                                                                                                                                             Escalation
                                                                                                                                                                                                                                                                                                              Process
                       Escalation                                                                                                                                                                                                                                                                                                                            Process same as Div X




                                                                                                                                                                                                                                                                                                                                   R&D
                                                                                                                                                                                                                                                                                                                                  Process
                          R&D




                                                                               Off Line
                       Call Close                                                                                                                                                                                                 Close call
                                                                              Validation                                                                               Close call                                                                                                                                                                   Close call




Creating Value with Measures                                                                                                                                                        Focused Management Inc                                                                                                                                                                           21
                               Activity Measures Worksheet
    Material Acquisition Process
    Individual Activity Measures
                                                                                                                          Review     Data
  Activity     Dimension           Measure                  Current     Short Term   Long Term     Actions
                                                                                                                          Period     Source
  Output                                                    Performance Goal         Goal          to be taken
 Identify       Time           1. # of Hrs. from order to      3 days     1 days        1 hr.       Est. cross          Monthly     Manual
                                                                                                    functional
 Materials                     requirements established
                                                                                                    training
 Required


                Quality        1. # of ECN's that need to      40         40            5           Develop fixed       Monthly     ECN
                                                                                                    product range                   Book
                               be processed
                               2. % of times eng. Input        70%        30%           10%         see above           Quarterly   ENG
                                                                                                                                    reguests
                               needed
                                                                                                                                    log
                               3. % req's not in computer      15%        12%           2%          All orders          Daily       EDI
  Activity                                                                                          through EDI                     system
  Owner:                                                                                                                Quarterly   ABC
                                                                                                    Automation &
                Cost           1. Total activity cost          $80,000    $110,000      $100,000
 Logistics                                                                                          integration
                               2. Cost per order               $45        $50           $20         Improve work        Quarterly   ABC
 Manager                                                                                            flow
                               3. Support costs required       $40,000    $60,000       $10,000     Reduce time &       Quarterly   ABC
                                                                                                    effort to perform
                                                                                                    activity
                                                                                                                        Daily       MRP
                                                                                                    Improve EDI
                Quantity       1. # of orders processed        1,750      2,200         5,000
                               2. # of automatic matches       100        800           2,500       Tie EDI to BOM      Monthly     MRP/EDI
                                                                                                    system




Creating Value with Measures                                   Focused Management Inc                                                          22
             ABC Links Costs to Activities and Restates Costs
        According to the Way Resources Are Consumed by Activities

                 CHART OF ACCOUNTS VIEW                            ACTIVITY BASED COSTING VIEW

                    Customer Service Department                             Customer Service Department

                                                                   Enter Orders                      $177,000
         Salaries                         $600,000
                                                                   Enter Credit Notes                 121,000
         Travel Expenses                     60,000
                                                                   Update Price Lists                     32,500
         Supplies                            40,000
                                                                   Schedule Deliveries                101,500
         Systems                           150,000
                                                                   Process Special Orders                 83,000
         Occupancy                           30,000
                                          ________                 Invoice Shipments                      45,000
         Total                             $880,000
                                                                   Answer Customer Queries            149,000

                                                                   Train Employees                        43,000

                                                                   Administer Department             128,000
                                                                                                    ________
                                                                   Total                            $880,000
                      What is Spent                                        How Resources Are Utilized

Creating Value with Measures                          Focused Management Inc                                       23
                               Activity Cost Results

     Activity Driver                              Driver Qty        Activity Cost   $ / Unit

     # Credit Control Transactions                        1,893            36,414     19.24
     # 3 Piece Height & Dia Changeovers                       20          171,200   8,560.00
     # 3 Piece Height Changeovers                             59           43,850    743.22
     # Ink Mixes                                          6,401            68,276     10.67
     # Products Costed                                      115             5,550     48.26
     # Traded Sales Transactions                            866             7,162      8.27
     # Plant 7 Works Order Issues                        40,551            48,084      1.19
     # Hrs. Run 3 Pc. Good Products                      22,261         1,305,303     58.64
     # Hrs. Run DRD Good Products                        14,477         1,100,338     76.01
     # Hrs. Run Marq. Good Products                       9,078         1,205,748    132.82
     # Hrs. Run Rect. Line Good Products                  2,981           410,534    137.72


Creating Value with Measures               Focused Management Inc                              24
                                        Processes Costed

          Process:               Order Fulfillment Process:                   TOTAL COST

                                                                               $4,437,716

              Activities In Process:                        Driver                   Cost
                 Approve credits                          # Credits                 170,123
                   Collecting accounts                     # Orders                 499,689
                   Freight delivery cost                   # Orders                 167,546
                   Enter credit notes                     # Credits                 154,539
                   Enter customer orders                   # Orders                 661,389
                   Freight pallet miles cost               # Pallet X Miles       1,035,546
                   Pick loose cases                       # Loose Cases             843,869
                   Picking pallets                        # Pallets                 305,769
                   Pay promotional claims                  # Claims                 395,342
                   Shipping paperwork                      # Orders                 203,903


Creating Value with Measures                    Focused Management Inc
                                                                            "Is" Process Map with ABC
                                                                             Costed Activities Overlaid
        Service Delivery Process
                                 Call
                                                                                                                                                                      Customer                                Reference

                                                                                                                                                                                                                                                                                                           Total Process Cost = $9.5m
                               Transfer                                                                            Predictive call
                                                                                                                                                                     informed of                                docs
                                                                                              Transfer or           (electronical)
                                                                                                                                                                       Solution
                                                                                                Reroute



                               Customer calls
                                                             HW
                                                                          ABC ACTIVITY
                  Customer
                               IVR Routing
                                                           Problem            # 524
                                                           No             CALL RECEIPT
                                                                                                                                      Yes                                                            ABC ACTIVITY
                                                    Identify                                   No
                                                     - Customer                                                                                               Qualified
                                                                                                                                                                                                      To
                                                                                                                                                                                                         # 355
                                                     - Product             Validation   Yes                 Yes   Log Call                         No            by         Yes
                                                    - SLA                  Completed?
                                                                                              Hardware                                 Re-repair
                                                                                                                                                              Knowledge                                CUSTOMER
                                                                                                                                                                                                    Process
                                                    Verify Entitlement                                                                                          tools                                  5
                    Call
                                                                                                                                                                                                     QUALIFICATION
                   Center                                                   No                                                        No
                                                                                                                                                              No
                                                                                                                                                                   1st level No
                                                                                                                               Installation?                                                              Reroute


                                                                                 $0.2m
                                                                                                                                                                   product?

                                                                                                                                Yes                                   Yes
                                                                                                                                                                                                                                                                                         ABC ACTIVITY
                                          No                                                                                                                                                                                                                                                 # 274
                                                                                                                                                                      Yes                No                                                                                             DISPATCH PARTS
                                       Solution      Yes                                                                                                                                                                                                 Problem ID
                                      Identified?            Validation                                                                                                            No     HW         Yes Qualification        Yes                       Identify Part                        No
                 First Level                                                                                                                                           Remote                                                                                                      Disp                        Launches                       Logistic
                                                                                                                                                   Identify                             Problem?                                                 Identity Delivery Method
                 Technical                                                                                                                                             solved?                             done?                                                                  needed?                      Courier                        Process
                                                                                                                                                   Problem                                                                                          (order parts - some
                    Dep’t                                                                                                                                                                                                                                 countries)
                                                                                                                                                                     Yes                                                                             Solution skill ID            Yes
                                                                                                                                                                                                                  No


                                                                                                                                                                                                              Customer told         Yes
                                                                                                                                                                                                              2nd Line will

                   Second
                    Level
                  Technical
                    Dep’t
                                                                                                                  Predictive
                                                                                                                   Group
                                                                                                                                      $1.1m                                                                    call back



                                                                                                                                                                                                                  Identify
                                                                                                                                                                                                                                    Remote or
                                                                                                                                                                                                                                     Problem
                                                                                                                                                                                                                                     solved?
                                                                                                                                                                                                                                                   No
                                                                                                                                                                                                                                                          ID part
                                                                                                                                                                                                                                                          ID DM
                                                                                                                                                                                                                                                        Solution skill
                                                                                                                                                                                                                                                                              Disp
                                                                                                                                                                                                                                                                             needed
                                                                                                                                                                                                                                                                                        No

                                                                                                                                                                                                                                                                                                                     Route to
                                                                                                                                                                                                                                                                                                                       P2
                                                                                                                                                                                                                                                                            Yes
                                                                                                                                                                                                                  Preblem
                                                                                                                                                                                                                                          Yes


                                                                                                                                                                                                                                                                                                           Yes
                                                                                                                                                                                                                                                                                                                                                Technical
                                                                                                                                                                                                                                                                                                            Help                                Assistant    No
                                                                                                                                                                                                                                                                                                          required                             Researches/
                  Inventory


                                                                                                                                                                                                                                    $0.3m
                                                                                                                                                                                                                                                                                                                                                Suggests
                 Management                                                                                                                                                                                                                                                                                                                     Solution
                                                                                                                                                                                                                                                                                                           No                           Yes




                                                                                                                                                                                                                                                                Identify                           Assign Call
                                                                                                                                                                                                                                                                 on-site          Order           (some Delivery
                                                                                                                                                                                                                                                                Resources         Parts               method
                 Scheduling
                                                                                                                                                                                                       To                                                                                           automated)
                                                                                                                                                                                                   Installation
                                                                                                                                                                                                     Process
                                                                                                                                                                                                                                                                                                                       Tech’n
                                                                                                                                                                                                                                                                                                                     dispatched




                                                                                                                                                                                                                                                                                                      Parts
                   Logistics                                                                                                                                                                                                                                                                         Process

                                                                                                                                                                                                                                                                                                                                       ABC ACTIVITY
                                                                                                                                                                                                                                                                                                                                           #432
                                                                                                                                                                                                                                                                                                                                        ON-SITE FIX
                                                                                                                                                                                                                                                                                                                                           No
                                                                                                                                                                                                                                                                                                                          CE goes to
                                                                                                                                                                                                                                                                                                                             site                         Yes
                    Site                                                                                                                                                                                                                                                                                                                         Repair             Finish
                                                                                                                                                                                                                                                                                                                           collects
                 Technician                                                                                                                                                                                                                                                                                                                    completed?           Repair
                                                                                                                                                                                                                                                                                                                            parts




                  Escalation
                                                                                                                                                                                                                                                         $7.9m                                                         Escalation
                                                                                                                                                                                                                                                                                                                        Process
                                                                                                                                                                                                                                                                                                                                                                               Process same as Div X




                                                                                                                                                                                                                                                                                                                                                R&D
                                                                                                                                                                                                                                                                                                                                               Process
                     R&D




                                                                            Off Line
                  Call Close                                                                                                                                                                                                        Close call
                                                                           Validation                                                                                 Close call                                                                                                                                                                                  Close call




Creating Value with Measures                                                                                                                                                            Focused Management Inc                                                                                                                                                                                         26
                                                             Key Process Measures
                                                             Need to be Developed
                                                                               M1-I M1-E
                                        M2            M2           M2    M2
  FUNCTIO FUNCTIO FUNCTIO CUSTOM
                                   ER
                                   NA




                                                                                                 • Measures can be limited to M1
                                                                                                   (end of process) and M2 (sub-
                                                                                                   process) measures
                                   NB




                                                                                                 • M1-E (External) measures
                                                                                                   should be derived from goals
                                   NC




                                             M1-E External/Customer

                                             M1-I Measures

                                             M2   Internal/Business Measures
                                                  Subprocess Measures

Creating Value with Measures                                                   Focused Management Inc                              27
                               Linking Process to Job

                                                                                                                                                                         Measures
                                   “IS” PROCESS MAP                                                                                                                     Everywhere

                                                                                 “SHOULD” PROCESS MAP
                                                                    Customer

                                                                    Function A

                                                                    Function C

                                                                    Function D




                                                                                 CROSS-FUNCTIONAL ROLE/RESPONSIBILITY MATRIX
                                                                                                                      Functions and Outputs
                                                                                  “Should”
                                                                                 Macro Steps     Function A      Function B      Function C        Function D




                                                                                                  FUNCTIONAL ROLE/RESPONSIBILITY MATRIX
                                                                                                                                      Jobs and Outputs
                                                                                                 “Should”      Function B
                                                                                               Process Steps    Outputs       Job 1       Job 2      Job 3      Job 4



                                Input          Output

                                             Consequences

                                        Feedback
                                 Human Performance System



Creating Value with Measures                            Focused Management Inc                                                                                                       28
                   Activity Best Practice Comparisons


                                                                                             Market
  Examples Of Activities        # Of Minutes To:                    High     Low     Avg.     Price

  1 Decisioning Applications    Process 1 Application                11.94    2.68    6.81    7.00

  2 Enter Applications          Process 1 Application                13.35    1.04    6.55    3.50

  3 Call Collections            Handle 1 Delinq. Account              7.58    2.26    4.59    4.50

  4 Process ITS Pre Term List   Process 1 Full Term                 117.57   14.83   55.06   22.00

  5 Branch Receipt Processing   Process 1 Payment                     8.67    0.42    2.38    2.50
                                Received at the Branch




    We found significant diversity across all activities. How to price?
Creating Value with Measures               Focused Management Inc                                     29
                                              Activity Budgeting
    Department: Engineering
                  Activity Driver      Driver Quantity     Total Activity Cost Activity Cost / Unit Actions to Improve
    Activity          Name          This Year Next Year   This Year Next Year This Year Next Year      Productivity

                                                                                                     1. Simplify order form
   Identify     Number of
                                    250,000    290,000     $7.5m       $7.0m       $30.00   $24.14   2. Develop networked
   Materials    Orders processed                                                                         computer order
   Required
                                                                                                        process
                                                                                                     3. Work with upstream
                                                                                                         process partners to
                                                                                                         simplify process
                                                                                                     4. Eliminate quality
                                                                                                         errors
  Handle       Number of                                                                    $5.50    1. Install automated
                                     3,200     1,500      $4.1m        $1.65m      $6.67
  Customer     Calls processed                                                                          voice routing
  Calls                                                                                                 system
                                                                                                     2. Reorganize staff
                                                                                                        to provide special
                                                                                                        work areas for
                                                                                                        different inquiries
                                                                                                        that make it through
  Total                                                                                                 the new voice
                                                            $11.6m    $8.65m
                                                                                                        system
                                         Current Year                                Next Year
                                         Actual / Forecast                           Budget

Creating Value with Measures                              Focused Management Inc                                               30
                       VBM Information Portals for
                    Communicating with all Constituencies

         Distribution of consistent and appropriate
          measurement information to everyone in the
          organization is fundamental to execution of
          A/VBM.                                                              Sample Measurement
                                                                              Scorecard / Dashboard
         Use of computer technologies - data warehouse,
          OLAP and presentation layer software provide
          the “media” of distribution.

         It is the media that facilitates organization change.
          The marriage of management philosophy with
          technology and the imperative to create value.

         The media is represented by the presentation of
          current measures and performance information on
          computer screens to all accountable parties.

         The suite of tools includes software to perform
          simulation modeling of processes and economic
          performance.

Creating Value with Measures                         Focused Management Inc                           31
                               The ProCarta Solution

                                             Feedback
                                                                                    The
                                                                                Performance
                                                                                   Point
            processes


             knowledge



             training                             Web/intranet          Users      Customer

                       Business Repository
Subject Matter Experts Your corporate DNA

 Create/Gather                  Store/Deploy                      Use/Learn
                                Knowledge Repository
Creating Value with Measures             Focused Management Inc                               32
                               Conclusion

          • New solutions are difficult to identify because
            most people use existing/inappropriate mental
            models and, therefore, misunderstand the nature of
            the problem.
          • Take a different look at what problem we are
            trying to solve.
          • Create a measurement system premised on
            stakeholder needs, strategy, processes, activities
            and human performance expectations.

Creating Value with Measures      Focused Management Inc         33
                               Questions?


                  Thank you for your participation!

                  Good luck in your measures endeavors!

                  We can be contacted at:

                  www.focusedmanagement.com



Creating Value with Measures       Focused Management Inc   34
                               Support slides




Creating Value with Measures       Focused Management Inc   35
                                   Understanding current
                                  Shareholder Value position
                               Revenue                               927
                               minus Costs                         (829)
                               = PBIT                                                98
                               (Profit before interest and
                               tax)
                               minus Cash Taxes                                    (32)
                               = NOPAT                                                           66
                               (Net operating profit after tax)

                               Current assets                  322
                               (inventory, debtors and
                               creditors)
                               minus Current liabilities      (93)
                               = Working capital                                    230
                               Plus Fixed assets                                    267
                               = Net assets                                         497
                               x WACC                                           13.00%
                               = Capital Charge                                                   65
                               NOPAT minus Capital Charge = SVA                           66 -65 = 1

Creating Value with Measures                           Focused Management Inc                          36
                                Sensitivity Analysis
              Current SVA = 1   New SVA = 15           SVA change   Cash flow change

              Price             0.00%    1.00%
              Volume            0.00%    1.00%
              Var COS           0.00%   -1.00%
              Fix COS           25      -1.00%
              Var Exp%          5.04%   -1.00%
              Fix Expense       112     -1.00%
              RM days           0.00    -1.00%
              WIP days          0.00    -1.00%
              FG days           87.00   -1.00%
              Debtor days       64.00   -1.00%
              Creditor days     57.00    1.00%
              Prop,Plnt,Eqp     267     -1.00%

Creating Value with Measures             Focused Management Inc                        37
                                     Strategy Is Balancing
                                     Contradictory Forces
                                                             Improve Shareholder
                                                                    Value


                               Revenue Growth Strategy                                          Productivity Strategy




                       Build the                     Increase                           Improve Cost            Improve Asset
                       Franchise                  Customer Value                          Structure               Utilization



                 •   New sources              •    Improve                          •   New delivery           •   Existing assets
                     of revenue                    profitability of                     options                •   Incremental
                                                   existing                                                        investments
                                                   customers



                                              Long Term vs Short Term

                                              Growth vs Profitability
Source: The balanced Scorecard Collaborative Inc.
Creating Value with Measures                                          Focused Management Inc                                         38
                                           ?

              Good strategy answers the questions:
              •   What existing and new customers? (and NOT)
              •   What existing and new products/services? (and NOT)
              •   What criteria for new product or market opportunity?
              •   What current product and market focus?
              •   What future product and market focus?
              •   What is important to our customers?
              •   What is our competitive advantage?
              •   What goals, measures and time frame?
              •   What values guide us?
              •   What are our key assumptions?
              •   What are our key operational links (organization
                  systems, process and job)?

Creating Value with Measures           Focused Management Inc            39
                           Example Organization Level Measures


                              Strategic Themes                Strategic Objectives CSFs                Organization Measures
      Owners / financial




                           Financially Strong                  F1   Return on Capital Employed        ROCE
                                                               F2   Existing Asset Utilization        Cash Flow
                                                               F3   Profitability                     Net Margin Rank (vs. Competition)
                                                               F4   Industry Cost Leader              Full Cost per Gallon Delivered (vs.
                                                               F5   Profitable Growth                  Competition)
                                                                                                      Volume Growth Rate vs. Industry
                                                                                                      Premium Ratio
                                                                                                      Non-Gasoline Revenue and Margin




                           Delight the Customer                C1 Continually Delight the Targeted    Share of Segment in Selected
     Customer




                                                                  Consumer                             Key Markets
                                                                                                      Mystery Shopper Rating
                           Win-Win Dealer Relationships        C2 Build Win-Win in Relations with
                                                                  Dealer                              Dealer Gross Profit Growth
                                                                                                      Dealer Survey




Creating Value with Measures                    Source: D Norton         Focused Management Inc                                              40
                    Strategy Is A System Of Activities
                   Aligned With The Value Proposition*
                       Operational Excellence                                                                                     Product Leadership
          Customer Perspective                                                                                 Customer Perspective
                    Product/Service Attributes                   Relationship       Image                                 Product/Service Attributes                       Relationship       Image


                                                                                     Smart                                                                                                     Best
           Price    Quality          Time        Selection   √                  √                                √          √             Time         Functionality   √                  √
                                                                                    Shopper                                                                                                   Product




          Internal Perspective                                                                                 Internal Perspective

               Innovation                  Customer                Operations                                        Innovation                   Customer                   Operations
                Process                   Management               & Logistics                                        Process                    Management                  & Logistics

             Process                        Sales                Quality                                      Time to                      New                         Availability
              Redesign                        Produc-              On-time                                       Market                        Customer
                                              tivity               In-stock                                                                    Acquisition




                               Competitive advantage comes from the fit across activities
                               Sustainability comes from the system of activities
* Michael Porter, “What Is Strategy”, HBR, Nov-Dec ‘96

Creating Value with Measures                                                                  Focused Management Inc                                                                                    41
                           Example Process Level Measures
                    Strategic Themes               Strategic Objectives CSFs                  Process Measures

                  Build the Franchise               I1 Innovative products and            New Product ROI
                                                       services                           New Product Acceptance Rate

                  Increase Customer Value                                                 Dealer Quality Score
                                                    I2 Best-In-Class Franchise Teams
       Process




                  Operational Excellence                                                  Yield Gap
                                                    I3 Refinery Performance               Unplanned Downtime

                                                                                          Inventory Levels
                                                    I4 Inventory Management               Run-out Rate

                                                                                          Activity Cost vs. Competition
                                                    I5 Industry Cost Leader
                                                                                          Perfect Orders
                                                    I6 On Spec – On Time
                  Good Neighbor                                                           Number of Environmental
                                                    I7 Improve EHS                         Incidents
                                                                                          Days Away from Work Rate
   Capability /
    Capacity




                  Motivated and Prepared            L1 Climate for Action                 Employee Survey
                  Workforce                         L2 Core Competencies and Skills       Personal BSC (%)
                                                    L3 Access to Strategic Information    Strategic Competency Availability
                                                                                          Strategic Information Availability




Creating Value with Measures       Adapted from: D Norton    Focused Management Inc                                             42
                                             Process Measures
    Stakeholder needs:          Customer – complete, defect free order, accurate invoice ; Company – costs & cash
    Objectives:                 Data to assure that we maintain customer satisfaction, no dip in level of service
                                Continue normal cash receipts and collection activities


                          •% orders adjusted                                    •# disputed invoices (&$)   •days past due;
Quality                                            • % orders with                                          •write off as % sales
                                                   backorders
                          •% not entered                                        •% sent within 24hrs of
Time                      within 24hours                                        ship date                   •% current
                                                   • % shipped late

Productivity              •# orders/person         • costs per order            • costs per invoice



              ISC Process


                   Customer                    Product                  Invoice                       Payment
 Order
Request             Order                      Shipped                    Sent                        Collected               $
                    Taken

Creating Value with Measures                           Focused Management Inc                                                  43

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:7
posted:4/5/2010
language:English
pages:43