The New Tech Career Reality – Measuring Success PMI

The New Tech Career Reality – Measuring Success PMI – Silicon Valley January 2005 James D Warren Jr CMC® Managing Partner San Francisco 415-982-9900 jwarren@jdwa.biz Overview I. II. III. IV. V. VI. Introductions / Objectives / Specific Goals The New Career Reality The View from the Corner Office The Language of Accounting New Approaches: Value-added Framework The Crystal Ball BIO – Jim Warren • • • • • • • 29 years consulting – Big 5 environment Partner / Managing Director responsibilities Successfully performed 150+ projects globally in career Focus is Strategic Business Improvement with strong process, information technology and people framework Certified Management Consultant (CMC®) A believer in excellence through innovation and execution The University of Michigan (Ann Arbor, MI) – – BSE – Industrial and Operations Engineering, cum laude BA – Music Literature and Organ Performance, with distinction MBA – Finance and Information Technology – SUGGESTED OBJECTIVE FOR TODAY To understand some new tool sets, or ways of looking at issues, that might allow you to stay ahead of the curve Perhaps, to take away one thing that will transform your career YOUR SPECIFIC OBJECTIVES / DESIRED BENEFITS / INTRODUCTIONS Let‟s introduce one another GROUND RULES • • • • If you are here, be here No cell phones. Turn them off. Go outside to use. When in doubt, ask questions then. This is interactive. No one person can possibly be the “expert” on everything. We are here to learn from each other (JW included) • Survival in today‟s times is about thinking new and acting SMART – seeing possibilities and doing things well • Let‟s have fun “ A journey of a thousand miles must begin with a single step.” Lao-tzu II. THE NEW CAREER REALITY • Over 104,000 IT jobs moved offshore between 2000 and 2003 (Info Tech Assoc of America) • 50% of Malaysia‟s 250,000 college students are in the sciences (Austin American-Statesman) • Singapore just opened a $300 million biotech research facility – BIOPOLIS (Austin AmericanStatesman) II. THE NEW CAREER REALITY • GE‟s largest research center outside of America is in Bangalore, India – 1,800 engineers doing cutting-edge research (IEEE) • In 2003, India produced 260,000 engineers. America produced 60,000 (Austin AmericanStatesman) • Off shoring cost the American economy 37,000 electrical engineering jobs in 2003 (IEEE) • Santa Clara county had 1,047,000 jobs in July, 2000. Presently, employment is around 850,000, a 19% drop (San Jose Mercury News) II. THE NEW CAREER REALITY • The job loss was the worst collapse of any metropolitan area‟s job base since the Great Depression, exceeding Detroit‟s 13% decline in the 1980‟s. (New York Times) • Venture capital is moving to Asia. Dixon Doll‟s Doll Capital Management has invested in China jobsite 51job and China‟s Apexone Microelectronics. Intel has invested $200 million in Chinese start-ups. (FastCompany) II. THE NEW CAREER REALITY • Mike Moritz of Sequoia Capital,” The raw energy among Indian companies is just unmistakable. The extraordinary, educated, talent-driven workforce that constantly gushes from Indian institutes. It is like the Silicon Valley. As the Silicon Valley developed over time, it attracted more skilled people and then more good things happened. And the same thing will happen in India. (India Economic Times) II. THE NEW CAREER REALITY • IT used to be a well-paid profession made up of hands-on problem solvers who were respected for their abilities. Anonymous data base expert: “If you want to be someone who is a doer, you pretty much have to be a contract worker. You can no longer be an employee. They‟re hiring employees to manage and supervise the process, not do the process. [Management] views the doers as a commodity.” (Computerworld, Nov 2004) [bolding emphasis added] II. THE NEW CAREER REALITY III. THE VIEW FROM THE CORNER OFFICE It‟s about strategy and execution • It‟s about what and why – not how – • “how” is just a “detail” • Success is taken seriously, but not in the same way as you might think • • • • • Golden parachutes Metrics Peer pressure Short term, not long term, especially in public companies At some point, who is the constituency? Shareholders, management? The CFO works for the CEO, but also has dotted lines to the Board and the SEC – life is getting VERY complicated now – more on that later III. THE VIEW FROM THE CORNER OFFICE A BRIEF LOOK AT STRATEGY – Michael Porter Source: Competitive Strategy, 1980, page 39 Uniqueness perceived by Customer Low-Cost Position Industrywide 2. DIFFERENTIATION 1.OVERALL COST LEADERSHIP Particular <<<<<<<< 3. FOCUS >>>>>>>>>>> Segment only III. THE VIEW FROM THE CORNER OFFICE A BRIEF LOOK AT STRATEGY – Michael Porter Source: Competitive Strategy, 1980, page 40 1. OVERALL COST LEADERSHIP • COMMONLY REQUIRED SKILLS AND RESOURCES • • • • • Substantial capital investment and access to capital Process engineering skills Intense supervision of labor Products designed for ease in manufacture Low-cost distribution system QUESTION? WHO HAS THIS NOW? • COMMON ORGANIZATIONAL REQUIREMENTS • • Tight cost control Frequent, detailed control reports • • Structured organization and responsibilities Incentives based on meeting strict quantitative targets III. THE VIEW FROM THE CORNER OFFICE A BRIEF LOOK AT STRATEGY – Michael Porter Source: Competitive Strategy, 1980, page 41 2. DIFFERENTIATION • COMMONLY REQUIRED SKILLS AND RESOURCES • • • • • QUESTION? Strong marketing abilities Product engineering Creative flair Strong capability in basic research Corporate reputation for quality or technological leadersip WHO HAS THIS NOW? • • Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels • COMMON ORGANIZATIONAL REQUIREMENTS • Strong coordination among functions in R&D, product development and marketing • • Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labor, scientists or creative people III. THE VIEW FROM THE CORNER OFFICE A BRIEF LOOK AT STRATEGY – Michael Porter Source: Competitive Strategy, 1980, page 41 3. FOCUS • COMMONLY REQUIRED SKILLS AND RESOURCES • Combination of the Differentiation strategy directed at the particular strategic target • COMMON ORGANIZATIONAL REQUIREMENTS • Combination of the Differentiation strategy directed at the particular strategic target QUESTION? WHO HAS THIS NOW? III. THE VIEW FROM THE CORNER OFFICE WHAT IS THE ROLE OF THE CFO? • • • Earnings projections – internal and external Cost reduction “Cop” for the CEO – • “CEOs are looking for a trusted partner in their CFO to deliver against performance commitments. Accounting and business partnering alone are not enough; the CFO needs to be an activist and help change the business.” Booz Allen Hamilton, Jan, 2005 • • • Sarbanes Oxley Financial reporting Life has gotten more complicated – maybe it‟s not as much fun as before III. THE VIEW FROM THE CORNER OFFICE THE FINANCIAL OVERSIGHT HAS CHANGED – CFOs HAVE TO BE MUCH MORE CAREFUL SEE THE HAND-OUT FROM THE WALL STREET JOURNAL III. THE VIEW FROM THE CORNER OFFICE SOME SARBANES OXLEY REQUIREMENTS: • Statements about internal controls • Personal attestations from CFO and CEO about the accuracy of the financial statements • Ensure independence is maintained while working with outside auditors, tax compliance and consultants III. THE VIEW FROM THE CORNER OFFICE SO – TO BE VALUED – PUT YOURSELF IN THE MINDSET OF FINANCIAL PEOPLE, AND SERVE THEM BUT WHERE, WHY, HOW AND WITH WHOM? WHAT IS THE WAY TO STAY AHEAD OF THE CURVE? WHAT CURVE? III. THE VIEW FROM THE CORNER OFFICE THE CURVE IS ALWAYS: ADD VALUE THAT CAN BE MEASURED IN FINANCIAL WAYS: • UNDERSTAND IMPLICITLY HOW YOUR ROLE AND TASKS GENERATE VALUE, AND SAY IT. • UNDERSTAND THE LANGUAGE OF BUSINESS AND FINANCIAL REPORTING AND ACCOUNTING, AND COMMUNICATE IN THOSE TERMS. III. THE VIEW FROM THE CORNER OFFICE OK GREAT WORDS – BLAH, BLAH, BLAH BUT HOW DO WE DO THAT? WELL, LET‟S EXAMINE THIS, SHALL WE? III. THE VIEW FROM THE CORNER OFFICE IV. THE LANGUAGE OF ACCOUNTING “ A little inaccuracy sometimes saves tons of explanation.” Anon. THE LANGUAGE OF ACCOUNTING A. Financial Accounting B. Managerial “Cost” Accounting C. Budgeting D. Break-Even Analysis E. Activity-Based Costing F. Non-Financial Data G. Project Discounted Cash Flow, NPV and IRR IV. THE LANGUAGE OF ACCOUNTING A. FINANCIAL ACCOUNTING What is our context for today? • What are the things we can do? • Increase revenue • Decrease costs • Increase comfort • Decrease pain • That‟s it! IV. THE LANGUAGE OF ACCOUNTING A. FINANCIAL ACCOUNTING The context is really: • What does the financial community look for, and why? • What do we look at, and not? • What are the root causes? • Is there anything we really can do? • Is it worth the effort? • So what? That is what today is really about. IV. THE LANGUAGE OF ACCOUNTING A. FINANCIAL ACCOUNTING In business, we can only look at: • Profits • • • Growth Cash flow Assets And, there are only three documents of data: • • Balance sheets (beginning and ending of the period) Profit and Loss accounts (for the period) • Cash flow statement (for the period) IV. THE LANGUAGE OF ACCOUNTING A. FINANCIAL ACCOUNTING Balance Sheet Assets Liabilities Owners‟ Equity Income Statement Revenue Expenses Net Income Cash Flow Statement Sources of funds Uses of funds IV. THE LANGUAGE OF ACCOUNTING A. FINANCIAL ACCOUNTING • This is not about “creative accounting” • It is about looking at the data of REVENUE, EXPENSE and CASH FLOWS for the purpose of changing the ways we do business, which will reduce these items in ABSOLUTE and RELATIVE terms, and improve the bottom-line. • Absolute – the net dollars are up in direct comparison, and that is good • Relative – the net dollars are up, and if something else changes, the net effect is good IV. THE LANGUAGE OF ACCOUNTING “ The important thing is to never stop questioning.” Albert Einstein B. MANAGERIAL ACCOUNTING What is managerial accounting? • Preparing data useful for decision-making • Planning • Controlling • In economic terms, “maximizing the expected value of choices” (JDW) IV. THE LANGUAGE OF ACCOUNTING B. MANAGERIAL ACCOUNTING Managerial accounting quickly can become “cost” accounting: • A “cost,” as it becomes attached to a business activity, quickly becomes a metaphor for a cash flow • Cash, and by using a detailed picture of how and where it goes, gives a very insightful picture into the future of the business. Cash is king today, and accountants are today much more focusing on the cash flow statement. • Cash flow analysis becomes a very useful tool to answer “why?” When in doubt, follow the cash. IV. THE LANGUAGE OF ACCOUNTING B. MANAGERIAL ACCOUNTING An exercise for us to contemplate: Price per unit = $5 Units produced Variable costs Fixed and step costs Cost of Production Regular schedule Accelerated 25,000 $25,000 $75,000 30,000 $40,000 $85,100 Total costs Cost per unit $100,000 $4.00 $125,100 $4.17 The decision was made to accept the accelerated orders. Do you agree or not? In what ways could you approach the decision? IV. THE LANGUAGE OF ACCOUNTING B. MANAGERIAL ACCOUNTING An exercise for us to contemplate: Price per unit = $5 Units produced Variable costs Fixed and step costs Cost of Production Regular schedule Accelerated 25,000 $25,000 $75,000 30,000 $40,000 $85,100 Total costs Cost per unit Revenue $100,000 $4.00 $125,000 $125,100 $4.17 $150,000 Does this analysis reflect ALL the factors? ----------------------------------------------------------------------------------- Less cost Profit <$100,000> $25,000 <$125,100> $24,900 IV. THE LANGUAGE OF ACCOUNTING “ I‟ve come loaded with statistics, for I‟ve noticed that a man can‟t prove anything without statistics.” Mark Twain C. BUDGETING “A significant waste of time and energy by people, processes and technology, necessary so that some accounting system can spit out a report called “actual to budget,‟ which is produced about one month too late to be meaningful for anything. This report is deemed necessary by someone(s) who have not a clue about future events and no vested interest in whether future events work or not. Most budgeting exercises are a blatant example of: Ready, Fire, Aim. Budgeting is considered mission critical.” (JDW) IV. THE LANGUAGE OF ACCOUNTING D. BREAK-EVEN ANALYSIS – AN EXAMPLE: Break-even point: Fixed costs / contribution margin Products Est sales (units) Sales price / unit Var cost / unit Contribution margin A 50,000 $50 $47 $3 B 40,000 $45 $43 $2 C 10,000 $6 $6 $0 Total fixed costs = $120,000 Avg contribution margin = .5(3) + .4(2) + .1(0) = $2.30 What is the break-even in units? What is the danger in this type of analysis? Are there other statistical techniques that might be considered? IV. THE LANGUAGE OF ACCOUNTING “Not all dishonest accounting is illegal.” Anon. IV. THE LANGUAGE OF ACCOUNTING E. ACTIVITY-BASED COSTING You and three friends go to a bistro. You have a toasted cheese sandwich and tap water, and they have patè, beef tartar and a Filet Mignon, with a lovely Bordeaux wine. They tell you that the group will split the check evenly. Is this accurate? Is this fair? Does it impact behavior? How else, and why, might you divide the check? IV. THE LANGUAGE OF ACCOUNTING F. NON-FINANCIAL DATA • Consider probability factors in decision-making NEW PLANT ANALYSIS Sales Net Income Probability Outcome 1 $1,000 100% $250 25% 30% ($250x.3) + Expected Value of Net Income: $180 Outcome 2 $833 100% $167 20% + 40% ($167x.4) Outcome 3 $666 100% $100 15% 30% ($100x.3) If the minimum required is $170, do you open the plant? If yes, what else should you do going-forward? IV. THE LANGUAGE OF ACCOUNTING G. DISCOUNTED CASH FLOW, NPV AND IRR • 60 + years academic and professional credibility • Used by all large organizations today • Takes into account the time-value of money • Accurately maps project returns (e.g. CASH flows) to a go / no go decision for all financial decisions “Nothing is of more importance to business health than having a reliable estimate of the results of our management choices.” (JDW) IV. THE LANGUAGE OF ACCOUNTING G. DISCOUNTED CASH FLOW, NPV AND IRR Payback method (non DCF) – Two projects, each costing $1,000 investment Company’s cost of capital = 10% Year 1 2 3 4 5 6 Total Return Payback $1300 2.33 years project 1 $500 $400 $300 $100 project 2 $100 $200 $300 $400 $500 $600 $2100 4.0 years WHCH PROJECT, IF ANY, WOULD YOU DO? IV. THE LANGUAGE OF ACCOUNTING G. DISCOUNTED CASH FLOW, NPV AND IRR Payback method (non DCF) – Two projects, each costing $ 300 investment Company’s cost of capital = 10% Year 1 2 3 Total Return Payback project 1 $200 $100 $100 $400 2 years project 2 $100 $200 $100 $400 2 years WHICH PROJECT, IF ANY, WOULD YOU DO? IV. THE LANGUAGE OF ACCOUNTING G. DISCOUNTED CASH FLOW, NPV AND IRR Two projects, each costing $1,000 investment; cost of capital = 10% Year 1 2 3 4 project 1 net cash flow int fct PV $500 $400 $300 $100 .91 .83 .75 .68 $455 $332 $225 $68 $100 $200 $300 $400 project 2 net cash flow int fct PV .91 .83 .75 .68 $91 $166 $225 $272 5 6 Totals less project cost $1080 <$1000> $500 $600 .62 .56 $310 $336 $1400 <$1000> NPV IRR IV. THE LANGUAGE OF ACCOUNTING $80 APPROX 15% $ 400 APPROX 20% “ It has been said that figures rule the world. Maybe. But I am sure that figures show us whether it is being ruled well or badly.” J. P. Eckermann “ How much easier it is to be critical than correct.” Benjamin Disraeli A. VALUE-ADDED PERSPECTIVE “You see what you look for, you know” (JDW) How do we look? Consider one framework: V. NEW APPROACHES: VALUE-ADDED FRAMEWORK A. VALUE-ADDED PERSPECTIVE Direct <<<<< Management >>>> Content Provide •It is important to know where you are on this continuum. •Ask why, not how first – “how” is just a detail V. NEW APPROACHES: VALUE-ADDED FRAMEWORK “ If you ask „why‟ five times, you will obtain the explanation to any question. Most American companies ask „how.‟ We ask „why‟?” Ancient Japanese proverb applied to manufacturing techniques in Japan A. VALUE-ADDED PERSPECTIVE • Do not ask “Content” questions too soon: “How should this process begin?” “How can we make this work?” “How can we produce more?” • Ask the “Management” questions first: “Why are we doing this?” “Why are we in trouble?” “Why are we not getting the desired results?” V. NEW APPROACHES: VALUE-ADDED FRAMEWORK A. VALUE ADDED PERSPECTIVE • Asking “why” five times will get you to the answer about anything (source – Demming) • • Why are the analysts being a problem? • • Because the projections are not dependable. Because the variances are not correct. Because we cannot manufacture consistently. Because …. Why are the projections not dependable? • • Why are the variances not correct? • • Why can’t we manufacture consistently? NOW WE ARE AT THE BEGINNING OF UNDERSTANDING THE ROOT CAUSE V. NEW APPROACHES: VALUE-ADDED FRAMEWORK “In action, be primitive; in foresight, a strategist” Rene Char B. LATERAL BUSINESS ANALYSIS What is our context for today? • What are the things we can do? • Increase revenue • Decrease costs • Increase comfort • Decrease pain • That‟s it! V. NEW APPROACHES- VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – SEEK VALUE-ADD BY LOOKING AT THE INCOME STATEMENT SYSTEMICALLY “When the family grows and needs a larger house, but likes the schools and the big trees in the existing yard. If we just renovate the house, we can stay and it will meet out objectives. And it will cost less. So, let’s figure out what we need goingforward and “why”?” (JDW) V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – FRAMEWORK • • • • • • • • • • • Ask what is not working well Ask what are the desired results Investigate financials - Perform analytical tests - Seek proven patterns – even in other industries - Find opportunities to improve Investigate structure for gaps Develop targeted areas for improvement Develop business case Discuss with management Implement V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – LOOK DIFFERENTLY ACCOUNTING VIEW REVENUE DRIVERS OCCUPANCY ROOM RATE ADJUSTMENTS CANCELLATIONS REPEATS LABOR SCHEDULING SPOILAGE DEBT SERVICE CASH FLOW OVERHEAD ACTIVITIES RESERVING WEBBING ADJUSTING MARKETING RESERVING PAYING OPERATING CHAIN CHARGING FINANCING DEPARTMENTAL VIEW RESERVATIONS INF SYSTEMS ACCOUNTING MARKETING RESERVATIONS ACCOUNTING OPERATIONS SG & A MARKETING PAYROLL UTILITIES FOOD ETC OTHER EXPENSES ACCOUNTING EXECUTIVE NET INCOME V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – BUSINESS DRIVERS • Identify the Key Metrics critical for profitability Occupancy% Revenue Parity Avg. Room Rate Flow Through Can you quantify it? How well? How often? What other metrics? Gross Operating Profit and Net Op Income • Identify patterns, trends, and missed opportunities – Optimizing room rate on more frequent basis – Renegotiating leases or other fixed costs – Integrating IT systems to replace or retool headcount • Build action items of how each can be addressed • Tie each item to how it will positively impact Net Oper Income V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS - EXAMPLE HOSPITALITY Analyzing a business begins with dissecting the P&L What to Look For? • Actuals, budgets, history • Patterns of spending • Ratios of income & expenses • Bottom-line trends • Ways to optimize costs Example – What was Found • Increase in sales did not fall to the bottom line • Adj. & Op. Exp % increased • Net income decreased • Next Step – drill down into each of the green boxesASK WHY? 2001 Income Rooms $14,650 50.9% % of Rev – 2002 % of Rev $13,650 46.7% Spa F&B Other Total Income 5,800 6,200 2,150 28,800 20.1% 21.5% 7.5% 6,600 6,400 2,550 29,200 22.6% 21.9% 8.7% Expenses Operating Exp. Fixed Exp. Adjustments Total $20,760 2,840 650 $24,250 72.1% 9.9% 2.3% 84.2% $21,000 2,900 1,000 $24,900 71.9% 9.9% 3.4% 85.3% Net Income $4,550 15.8% $4,300 14.7% V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – SAMPLE BUSINESS ISSUES People – • • • Employee‟s inability to understand business drivers No one can answer the CEO‟s questions Duplicate, redundant processes Processes – • • • • Delays in products and services to market – not fast enough Operating costs of technology is too high Little to no integration among systems “Computing a faster mess” Technology – V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – REDUCE ADJUSTMENTS Project cost - $100K cash out People – $20K • • • • • • Communicate importance of the issue Training in new procedures Inform guest of “add-on” processes Add process to check for adjustments prior to check-out Add different general ledger account structure for reconciliation Integrate non-room systems to main guest system Processes – $30K Technology – $50K V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – REDUCE ADJUSTMENTS Potential Savings - $285 K cash per year • • • Reduce spa and golf adjustments • • • $ 90 K per year $120K per year $75 K per year Bill customers for other non-room services Reconcile accounts sooner and better V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS 2. An IRR Model quantifies the PROBLEM and justifies the SOLUTION in dollars using Discounted Cash Flow analysis – the most reliable economic tool available. Assumptions Gross Sales 0% increase/year 12/31/04 12/31/05 $29,350 12/31/06 $29,350 12/31/07 $29,350 Current Adjustments Projected Adjust. ($285K per year) Savings in Adjustments Project Cost $100K) PV of savings at 5% 3.2% / Year 2.3% / Year $950 $665 $285 -$100 $776 $950 $665 $285 $950 $665 $285 Net Present Value (NPV) Internal Rate of Return (IRR) $676 280% V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS Benefits • Return on project is 280% per year over 3 years • Successful project results in real and tangible NPV cost reduction of $676K cash • Priority of project based upon financials rather than political or personal agendas Prospective Projects Fix Adjustments using PP&T IRR 280% Office Building Modernization Addition of Power Facilities Purchase of Affiliate Purchase of Sound System Renovate Lobby 44.1% 27.6% 19.4% 10.2% 2.3% FACT If (1) assumptions are valid and (2) IRR > cost of capital, Then the project should be strongly considered. V. NEW APPROACHES: VALUE-ADDED FRAMEWORK B. LATERAL BUSINESS ANALYSIS – • Look for “Patterns” – other industries, processes, markets, countries • Much of business is a “good enough” solution implemented well, and at the right time • Remember, it is about cash flows, which are created from multiple touch points of activities • Look at things SYSTEMICALLY – PEOPLE, PROCESS and TECHNOLOGY based on business drivers V. NEW APPROACHES: VALUE-ADDED FRAMEWORK “Logic is the art of going wrong with confidence.” Isaac Isamov. “Only marketing and innovation produce results. All the rest are costs.” “Only opportunities produce results and growth.” Peter F. Drucker “The best way to predict the future is to create it.” “We have the tools, and we will find the opportunities.” Jim Warren Go confidently in the direction of your dreams. Live the life you have imagined. Henry David Thoreau THANK YOU