IBIS NEWSLETTER 2002- NUMBER 3 ----------------------------------------------------------------------------------------------------------------------CONTENTS: SHOULD A NON-PROFIT PLAN BE SUBSTANTIALLY DIFFERENT? HIGH TECHNOLOGY SMALL FIRMS CAN PROVIDE HIGHER RETURNS BUT.... FRAUD AND THE SME SAP SMALL BUSINESS PACKAGE – A DIFFERENT APPROACH TO SME INFORMATION MANAGEMENT TO ORACLE INVESTIBILITY INDEX MOVES POSITIVE FOR INTERNET AND SOFTWARE RISK ANALYSIS – ONLY 10 PER CENT OF START UPS -----------------------------------------------------------------------------------------------------------------------IBIS - SPECIALISTS IN BUSINESS PLANNING. 18 YEARS EXPERIENCE AND THE BEST SELLING BOOK, A BUSINESS PLAN (FINANCIAL TIMES PUBLISHED, NATIONAL WESTMINSTER BANK SPONSORED, TRANSLATED INTO 11 LANGUAGES), ISBN 0273 63562X. IBIS EMPHASISE A QUANTIFIED AND OBJECTIVE APPROACH TO THE ANALYSIS OF BUSINESS PLANS WITH A UNIQUE SCORING SYSTEM AVAILABLE FREE OF CHARGE AT THEIR WEB SITE. NOW AVAILABLE 8000 OPERATIONAL BENCHMARKS ACROSS INDUSTRY THROUGHOUT EUROPE - www.ibisassoc.co.uk The Ibis newsletter now has readers in 39 countries – some of whom have been suggested by colleagues or associates. Should you wish to be removed from the list, let us know. Should you know of anyone who should be added to the list, let us know. Suggestions (hopefully polite) always welcome. Contact: info@ibisassoc.co.uk SHOULD A NON-PROFIT PLAN BE SUBSTANTIALLY DIFFERENT? A common view is that the non-profit organisation has entirely separate planning requirements from the commercial operation and that the analytical framework developed for one has no applications in the other. Whilst there are elements of the non-profit plan which need to be modified, the basic framework and approach should remain the same. In both, the inter-action in the development of the plan between best practice, the stage of organisational development and the audience for which the plan is written, will need to be taken into account (for more details see the download article on the web site). Most non-profit organisations will have been established for a number of years (though where they are entering a period of rapid change they should consider looking at a start up analysis approach); the audience will be the stakeholders, and as much of best practice should be incorporated to ensure that the plan is effectively monitored and step by step improvements can be incorporated. Nonprofit organisations can relate each segment of their operation to the relevant benchmark, and incorporate action planning on a quarter by quarter basis as is best practice with the commercial plan. So, what is best practice? Taking the framework of the established business as the core approach to developing a non-profit plan should be the starting point. Key changes to the requirements of each section are identified in italics. Summary. Similar to the commercial plan – short comment on the structure of the plan.
Management overview. Similar to the commercial plan – containing a review of what the plan is trying to achieve, the key objectives and the resources required. Vision. Similar to the commercial plan – the non-profit organisation should include a clear statement of what the organisation is trying to achieve. Market analysis. The non-profit plan needs to identify in addition to key background information on trends and developments, the relationships with the important stakeholders which influence the direction of the operation. It is most sensible to establish joint plans with such stakeholders and list them in the document -what the stakeholder requires and what resources will be made available to the organisation to achieve these goals. This approach is similar to that of the trade development agreements or TDA's which are common in the commercial sector. Each stakeholder is involved in creating a joint plan where actions and resources are matched and expectations clarified. Successes and failures. The incorporation of success and failure factors and lessons learnt has equal value in the non-profit organisation. Segment contribution analysis. The important difference in the non-profit organisation is to identify what are the resources allocated to particular segments compared with overall activity. Many non-profit organisations have serious mismatches between resources and overall activity which should be identified and regularly reviewed. Product/ service contribution analysis. The important difference in the non-profit organisation is to identify what are the resources allocated to particular services compared with overall activity. Many non-profit organisations have serious mismatches between resources and overall activity which should be identified and regularly reviewed. Competitive analysis. The importance of competitive analysis will be lower than in traditional for profit organisation, but competitive analysis will remain important in defining the performance of other non-profit organisations operating in the same field (for example charities, schools) and whether they are gaining or losing share in key product/service areas. Assumptions. Similar to the commercial plan – the identification of assumptions, current trends and any mitigating factors remains vital to the non-profit operation. Customer satisfaction. Similar to the commercial plan - customer satisfaction reviews remain vital for both profit and non-profit based operations. Strategy. Strategy tends to be much more driven by the demands of the stakeholders which restrict the freedom of the typical non-profit organisation. This underlines the importance of establishing the requirements of the stakeholders as part of the initial market analysis. Objectives. The structure of the objectives remains the same, though the exact format will need to differ from sector to sector and in line with the strategic requirements of the stakeholders. There must be an added value component – what is the organisation providing which utilises its skills? There must be an asset utilisation component to ensure that the assets of the organisation are being effectively applied. Skills, new service development and customer satisfaction targets can all follow the commercial model. Information effectiveness. Similar to the commercial plan – as many non-profit organisations are labour intensive monitoring of this component is often more important. Management. Similar to the commercial plan – analysing management and reporting structures will be an important feature of the non-profit organisation. Personnel effectiveness. Similar to the commercial plan – reviewing personnel performance and benchmarks will greatly assist the effective management of the non-profit organisation. Premises. Similar to the commercial plan Production/ service delivery effectiveness. Similar to the commercial plan Marketing and sales effectiveness. The marketing and sales plan will need to be modified to the demands of the specific non-profit organisation. However, non-profit organisations have increasingly large areas in which sales and marketing concepts are becoming more and more vital. New product/ service effectiveness. Similar to the commercial plan Financial assumptions. Similar to the commercial plan Cash flow. Similar to the commercial plan
Sensitivity analysis. Similar to the commercial plan Profit and loss. Similar to the commercial plan, though the treatment of depreciation will have to be considered in detail. Balance sheet. Asset valuation will be a particular problem in many non-profit organisations, but should be attempted as it provides the required measure of asset utilisation in the creation of effective objectives. Contingency plan. Similar to the commercial plan Table 1 The components of the non-profit business plan and the main changes Component
Summary Management overview Vision Market analysis
Change required
Vital for all operations Vital for all operations Vital for all operations The vital change here is to define the relationships between the non-profit organisation and the stakeholders – creating a series of sub plans which create overall objectives Vital for all operations For most non-profit operations an important factor will be to understand the resource application ratio by segment For most non-profit operations an important factor will be to understand the resource application ratio by service delivery Continues to be valuable especially in evaluating operational performance Vital for all operations Vital for all operations Strategic development depends more on stakeholder drivers than classic commercial analysis The concepts remain, but the exact focus of the objectives needs to alter. Instead of GP% a relevant added value component(s) need to be created. Instead of ROCE, a measure of asset utilisation; customer satisfaction remains valid, as does skills and new product/ service development Vital for all operations Vital for all operations Vital for all operations Vital for all operations – premises management may be even more important for the non-profit operation as it may be a major cost component Vital for all operations Vital for all operations Vital for all operations Vital for all operations Vital for all operations Vital for all operations Vital for all operations Vital for all operations Vital for all operations
Successes and failures Segment contribution analysis Product/ service contribution analysis Competitive analysis Customer satisfaction Assumptions Strategy Objectives
Information effectiveness Management Personnel effectiveness Premises
Production/ logistics/ service delivery Marketing and sales effectiveness New product/ service development Financial assumptions Cash flow Sensitivity analysis Profit and loss Balance sheet Contingency plan
All these components are incorporated in the Ibis "model" plan for a non-profit organisation – which is at present focussed on a secondary school, but demonstrates the overall approach. • DB HIGH TECHNOLOGY SMALL FIRMS CAN PROVIDE HIGHER RETURNS BUT....
Research on 715 businesses separated into two groups - "high" and "low" technology in 12 European countries with initial turnovers between 2 and 10 million euros, showed that while high technology firms had higher growth expectations they required greater support than comparable "low" technology operations. While high technology companies had higher growth expectations, they did not have higher margins overall than their low technology counterparts. The impact of other differences - a more sophisticated customer and supplier base, a broader geographic base, little variation in sales and marketing expertise or overall skills base, and a greater investment in new product development, all had implications for the level of financial and non-financial support which the high technology group demanded. The research showed that performance could be greatly enhanced, and risk reduced, by improving the quality of the initial planning, the quality and quantity of operational monitoring, and raising investment in skills development. Another interesting relationship was strong relationship between the level of external mentoring and overall performance - emphasising the often narrow skills base of the typical high technology small firm. This research was completed for the high technology small firm (HTSF) conference in June 2002, by Ibis Associates. A full copy of the paper is available as a download at the Ibis website - www.ibisassoc.co.uk • AW FRAUD AND THE SME Recent research in the United States reveals a steady rise in the volume of fraud committed against SME operations. Part of this is seen as being caused by the impact of slowing economic growth forcing companies to review their operations and finding higher levels of fraud (described by JK Galbraith in a memorable article as the level of bezzle – discovered embezzlement – rising during periods of economic downturn). A larger proportion is made up from a greater willingness of employees to commit fraud – in the US this is claimed to now account for 25 per cent of the workforce, and the greater opportunities which are being presented. The new loopholes are caused by: Downsizing of workforces leading to more automation of accounting functions and less manual checking of financial data The unwillingness of companies to introduce effective security into computer operations The growth of Internet transactions creating new data management problems The continued expansion of on-line access to company computer systems which incorporates broadband and wireless systems. Small to medium enterprises are seen as particularly vulnerable to this changing fraud environment for a variety of reasons. They are more likely than larger companies to suffer from the range of fraud problems that face all organisations. This is because their supplier and customer base changes more radically; new employees are continually introduced; new computer systems are installed as the company grows. Each of these presents particular control problems. The survey found that the four most serious types of fraud involving the SME were: Bank transfer Supplier payments Customer payments
Asset misappropriation
Certain sectors were particularly likely to suffer fraud – retail, construction, and property based firms being the most acutely affected. Across the US economy the study estimated that 2.5 per cent of GDP was misappropriated. As the potential for fraud is so considerable within the average organisation, planning approaches to minimise rather than eradicate the problem are all that is realistic. A step by step approach to reduce the potential for fraud in key areas is recommended, with improvements in supplier and customer management, corporate governance and employee monitoring, combined with changes in physical, information technology and banking systems to reduce what is termed macro (or major fraud) coupled with more detailed operational monitoring of each area within the company to reduce the potential for micro (or minor fraud). This should be all part of the development of a Standard Operating Procedure (SOP) the creation of which has the advantage that as new systems, employees, customers and suppliers are incorporated they are all subject to the same discipline. Standard operating procedures developed by Ibis now number 27 – fraud has long been a standard item in the pack, but has been upgraded following the results of this research. • RR SAP SMALL BUSINESS PACKAGE – A DIFFERENT APPROACH TO SME INFORMATION MANAGEMENT TO ORACLE SAP have entered the small business sector with an accounting package which enable the growing SME to link with other SAP products – a "closed" systems approach rather than the "open" systems approach of Oracle which provides ASP links with existing software systems (Quick Books and Peachtree at present, though we are told that other links are being developed). The SAP system is easy to use and has considerable ability to swap information from one area to another – but so do many standard accounting systems such as KHK, Sage which are available in Germany. Our view is that the Oracle system has significant advantages over the SAP approach. Element
Use of existing systems Lock in Expandability Installed base E – commerce links Trial potential Cost
SAP
No, and data transfer problems Yes Yes Small Add-on Not realistic Moderate Yes No Yes Large Integrated Simple Low
Oracle
What this means for start up operations in Germany and elsewhere is that the choice of accounting system is important to enable them to take advantage of the clear leader – Oracle. • MK
INVESTIBILITY INDEX MOVES POSITIVE FOR INTERNET AND SOFTWARE For the first time in 38 months, the investibility index (produced by a combination of plan scores and investments made in the plans about which Ibis has full knowledge) has shown an increase in
acceptable risk for both software and Internet projects. Plans receiving investment are still scoring much more highly than their equivalents in 1999, especially in sales and marketing planning (with an emphasis on effective distribution channels for software), relative product advantage, and overall profitability. This may provide some indication that investor sentiment is now on the turn for these two sectors. Telecommunications and telecommunications equipment by contrast is still on a declining path. • RR RISK ANALYSIS – ONLY 10 PER CENT OF START UPS A review of a recent 150 start up operations requiring more than 500,000 euros revealed that only 18 companies included a formal analysis of project risk, by attempting to quantify the potential timing and budget outcomes using formal project analysis techniques. Ibis now completes such analyses using particular software systems which provide a superior understanding of the spread of risk in what are large scale investments. Investors and managers in our opinion take most project plans on trust without carrying out sufficient analysis. A worst case example was a project with an 18 month time span incorporated into the business plan where the most likely outcome on closer examination of the probabilities of each of the plan components was in excess of 5.5 years. A standard approach to managing risk in larger scale investments is now included in the model start up early stage plan. • AW AND OF COURSE, THE COMMERCIAL Ibis is involved in three main areas of activity: Business plan monitoring. Ibis creates an information system which provides at least 200 items of information on a monthly basis – customer, area, product sales, financial management efficiencies, manufacturing or service supply efficiencies, information systems, competitive analysis, personnel efficiencies, customer satisfaction, marketing efficiencies, and new product/ service development efficiencies. Wherever possible these performance charts are now benchmarked against European and sector best practice. This control system integrates the business plan with the continuing development of the business. This system reduces investor risk and improves corporate performance. Sample "best case" plans are now produced for each type of business operation Business plan analysis (including identifying stress issues in rapidly growing companies) Business plan creation to gain funding and improve profitability Ibis now monitors over 260 companies across Europe, and has a growing team of business plan advisors. What does the Ibis approach achieve?
It reduces the risk involved in investment – by creating a framework by which plans can
be evaluated and improved It emphasises the inclusion of monitoring material in the plan to ensure that it becomes a working document – setting performance targets against benchmarks for each key department or division The monitoring programme yields impressive improvements in operating efficiencies. The most immediate impacts are in personnel policies and new product development; but steady improvements are seen in all operational measures as the detailed analysis and identification of strengths and weaknesses within the organisation builds improvements. The book, A Business Plan, 3rd edition, Financial Times Management, ISBN 0273 63562X contains more detail on the Ibis approach. Tel: ++ 44 (0) 1256 429349 Fax: ++ 44 (0) 1256 429350 E mail: info@ibisassoc.co.uk Web site: www.ibisassoc.co.uk Written by: Alan West (AW) David Brinton (DB) Renuka Rajkumar (RR) Martin Khune (MK) – Ibis Germany