Program Budgeting Balanced Scorecard

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Program Budgeting Balanced Scorecard Powered By Docstoc
					Balanced Scorecard Budgeting
Fusing the Link Between Strategy & Budgeting




                                      Lawrence Serven
                                    The Buttonwood Group
                                   www.ButtonwoodLLP.com
                                        203/328-3056
Outline



          –   A Tale of Two Companies


          –   3 Immutable Laws (and their implications)


          –   Balanced Scorecard Budgeting


          –   Keys to Success


          –   Q&A




                                                          2
A Tale of Two Companies


       Company snapshot: which company has been
       more successful?

                                  Company A       Company B
        Sales Growth                 8%               0%



        Gross Margin %               55%              35%



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



        EBITA as a % of Revenue      15%              3%



        RONA %                       20%              2%


                                                              3
A Tale of Two Companies




                   Why has “Company
                     A” been more
                      successful?




                                      4
A Tale of Two Companies


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

                                        Company A    Company B
      Customer Satisfaction Index          90           75

      # Defects per Thousand               5            20

      % On Time Delivery                   95%          70%

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

      Employee Satisfaction Index          90%          70%

      % of Sales Coming From Products
                                           20%          1%
      Introduced in the Last 2 Years

      % Product Returns                    1%           8%

                                                                  5
A Tale of Two Companies


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


    Customer Satisfaction Index            Sales Growth

    # Defects per Thousand
                                           Gross Margin %
    % On Time Delivery

    New Product Dev Cycle Time             SG&A as a % of Sales

    Employee Satisfaction Index
                                           EBITA as a % of Revenue
    % of Sales Coming From Products
    Introduced in the Last 2 Years
                                           RONA %
    % Product Returns

                                                                     6
A Tale of Two Companies



       Customer Satisfaction Index

       # Defects per Thousand

       % On Time Delivery                    Measures for
       New Product Dev Cycle Time            What Really
                                         =   Drives Success
       Employee Satisfaction Index
                                             in the Business
       % of Sales Coming From Products
       Introduced in the Last 2 Years

       % Product Returns




                                                               7
A Tale of Two Companies



   Set annual plan targets (numerical)      Set annual plan targets (numerical)

   Bake into the budget                     Bake into the budget

   Report on every month to sr. exec team   Report on every month to sr. exec team

   Analyze variances                        Analyze variances


    Customer Satisfaction Index                Sales Growth

    # Defects per Thousand
                                               Gross Margin %
    % On Time Delivery

    New Product Dev Cycle Time                 SG&A as a % of Sales

    Employee Satisfaction Index
                                               EBITA as a % of Revenue
    % of Sales Coming From Products
    Introduced in the Last 2 Years

                                               RONA %
    % Product Returns

                                                                                     8
A Tale of Two Companies


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

                                          Sales Growth



                                          Gross Margin %


        Customer Satisfaction Index
                                          SG&A as a % of Sales
        # Defects per Thousand

        % On Time Delivery

        New Product Dev Cycle Time
                                          EBITA as a % of Revenue
        Employee Satisfaction Index

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




                                                                    9
A Tale of Two Companies



  Highly successful companies manage to the real drivers of success…

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



  Customer Satisfaction Index              Sales Growth

  # Defects per Thousand
                                           Gross Margin %
  % On Time Delivery

  New Product Dev Cycle Time               SG&A as a % of Sales

  Employee Satisfaction Index
                                           EBITA as a % of Revenue
  % of Sales Coming From Products
  Introduced in the Last 2 Years

                                           RONA %
  % Product Returns



                                                                       10
A Tale of Two Companies



      Set annual plan targets (numerical)

      Bake into the budget

      Report on every month to sr. exec team

      Analyze variances


       Customer Satisfaction Index             Sales Growth

       # Defects per Thousand

                                               Gross Margin %
       % On Time Delivery

       Employee Turnover
                                               SG&A as a % of Sales

       Employee Satisfaction Index

                                               EBITA as a % of Revenue
       % of Sales Coming From Products
       Introduced in the Last 2 Years

       % Product Returns                       RONA %


                                                                         11
Outline



          –   A Tale of Two Companies


          –   3 Immutable Laws (and their implications)


          –   Balanced Scorecard Budgeting


          –   Keys to Success


          –   Q&A




                                                          12
3 Immutable Laws


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




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




                                                                       13
3 Immutable Laws



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




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




                                                                     14
3 Immutable Laws


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




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




                                                                    15
Outline



          –   A Tale of Two Companies


          –   3 Immutable Laws (and their implications)


          –   Balanced Scorecard Budgeting


          –   Keys to Success


          –   Q&A




                                                          16
        KPIs




Plan           Monitor



       Budget




                         17
                KPIs


Step 1: Identify Company KPIs




                                18
Step 1: Identify Company KPIs


               Best KPIs                    Worst KPIs

    Used to make better decisions   Shelfware



    Embraced by line managers       Seen as not really relevant to
                                    line managers


    Reflects what actually          Nothing but Financial Stats
    drives success in the
    business


    Cocktail Napkin                 Telephone Directory


                                                                     19
Step 1: Identify Company KPIs




                        The Value Driver Workshop


    Who: The Senior Management Team (or designates)


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

    How: A series of facilitated workshop exercises




                                                                        Next



                                                                               20
Step 1: Identify Company KPIs




                             Identification of KPIs


    Who: The project work team


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

    How: A series of facilitated brainstorming exercises




                                                                       21
Step 1: Identify Company KPIs


      Step 1 Deliverables: A Company Scorecard of KPIs


                       Customer Satisfaction Index

                       # Defects per Thousand

                       % On Time Delivery

                       New Product Dev Cycle Time

                       Employee Satisfaction Index

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

                       % Product Returns




                                                         22
       KPIs


          Step 2: Establish
          targets for the KPIs

Plan




                                 23
Step 2: Establish Targets for KPIs




                               KPI Target Setting


    Who: KPI Teams


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


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




                                                                                      24
Step 2: Establish Targets for KPIs


              Step 2 Deliverables: Targets for KPIs



                                          2005        2006   2007
        Customer Satisfaction Index        80         85     90

        # Defects per Thousand

        % On Time Delivery

        New Product Dev Cycle Time

        Employee Satisfaction Index

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

        % Product Returns


                                                                    25
       KPIs


          Step 2: Establish
          targets for the KPIs

Plan
          Step 3: Develop
          Strategy to Achieve
          Targets




                                 26
Step 3: Develop Strategy to Achieve Targets




                    Develop Strategy to Achieve Targets


    Who: KPI Teams & SMEs (subject matter experts)


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

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




                                                                                          27
Step 3: Develop Strategy to Achieve Targets


       Step 3 Deliverables: Strategic Initiative Summary
        KPI: Employee Satisfaction

        ‘05-’07 Targets
                               2005: 80                      2006: 85                       2007: 90



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




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



       Strategic Initiatives   “    Integrate the goal of developing employees into each manager’s bonus calculation
                               “    Develop a career rotation program
                               “    Set standards for hours of training per year for each job level and monitor
                               “    Create a job shadowing program
                               “    Launch an alumni network




                                                                                                                                                                                       28
       KPIs


          Step 2: Establish
          targets for the KPIs

          Step 3: Develop
Plan      Strategy to Achieve
          Targets

          Step 4: Develop Action
          Plans to Achieve Near
          Term Targets




                                   29
Step 4: Create Action Plans to Achieve Near Term Targets




                              Develop Action Plans


    Who: KPI Teams


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

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




                                                                                     30
Step 4: Create Action Plans to Achieve Near Term Targets




                              Develop Action Plans


    Who: KPI Teams


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

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




                                                                                     31
Step 4: Create Action Plans to Achieve Near Term Targets


                                      Step 4 Deliverables: Action Plans (Summary View)

     Career Rotation Program                                                                                                                                                                                                                   PROJECT LEADER            DEADLINE
 ACTION PLAN: Formalizing a Rotation Program
 LEADER: Margaret Cho
 LAST UPDATED: 11/15/02
                                                       Week Beginning Monday:
                                                                                                                                                                                                                                               Margaret Cho             December
                                                             APRIL                MAY               JUNE                   JULY                   AUG               SEPT                OCT                NOV                  DEC
                                                        7   14   21   28   5    12   19   26   2   9    16   23   7   14    21    28   35   4   11   18   25   1   8    15   22   6   13   20   27   3   10   17   24   1   8      15   22
 ORGANIZE A CROSS FUNCTIONAL TEAM
    Solicit input from sr. management
    Draft intro letter
    Formalize team roster
    Schedule kick off meeting
    Prep for kick off meeting


                                                                                                                                                                                                                                               BRIEF DESRIPTION
    Conduct kick off meeting

 DRAFT PROJECT CHARTER
    Organize sub team to draft charter
        Define objectives
        Define scope
        Define approach
        Document
    Review charter with team
    Present to senior management



                                                                                                                                                                                                                                                Enable employees to rotate through
    Modify charter as directed

 COMPLETE RFP PROCESS
    Draft RFP for consulting assistance
         Review project charter & use as cornerstone
    Solicit 3 - 6 bids
    Review bids
    Interview vendors
    Make team selection
    Present to senior management for approval

 DEVELOP PROGRAM BLUEPRINT
    Review best practices
                                                                                                                                                                                                                                                various business units/ functional
                                                                                                                                                                                                                                                areas to build their skills and
    Benchmark industry practices
    Brainstorm alternatives
    Select best alternative
    Complete details
    Draft program description document

 VALIDATE WITH SR. MANAGEMENT
    Present to sr. management for approval

 VALIDATE WITH BUSINESS UNITS
    Present to Business Unit for Approval

 INCORPORATE FEEDBACK
                                                                                                                                                                                                                                                understanding of the business.
 COMMUNICATE PROGRAM TO ORGANIZATION
                                                                                                                                                                                                                                        >>>>
 IMPLEMENT PROGRAM (2004)




 (HIGH LEVEL) RESOURCE REQUIREMENTS                                                                                                                                                    KEY MILESTONES
        INTERNAL                                                                                                                                                                        1) Organize a cross functional team – April ’05
        • 8 Person cross functional team (on                                                                                                                                            2) Draft a complete project charter (Objectives, Scope, Approach,
          average 2 hours a week for 9 months)                                                                                                                                              Structure) – May ’05
        • 1 Procurement specialist to help us                                                                                                                                           3) Complete RFP process for outside expert – July ’05
          through the RFP process                                                                                                                                                       4) Develop program blueprint – Oct ’05
        EXTERNAL                                                                                                                                                                        5) Validate program with Sr. Management – Nov ’05
        • HR Specialist (TBD)                                                                                                                                                           6) Implement program -- 2006




                                                                                                                                                                                                                                                                                     32
Step 4: Create Action Plans to Achieve Near Term Targets


                              Step 4 Deliverables: Action Plans (Gant Chart)


ACTION PLAN: Formalizing a Rotation Program
LEADER: Margaret Cho
LAST UPDATED: 11/15/02
                                                      Week Beginning Monday:
                                                            APRIL                MAY               JUNE                   JULY                   AUG               SEPT                OCT                NOV                  DEC
                                                       7   14   21   28   5    12   19   26   2   9    16   23   7   14    21    28   35   4   11   18   25   1   8    15   22   6   13   20   27   3   10   17   24   1   8      15   22
ORGANIZE A CROSS FUNCTIONAL TEAM
   Solicit input from sr. management
   Draft intro letter
   Formalize team roster
   Schedule kick off meeting
   Prep for kick off meeting
   Conduct kick off meeting

DRAFT PROJECT CHARTER
   Organize sub team to draft charter
       Define objectives
       Define scope
       Define approach
       Document
   Review charter with team
   Present to senior management
   Modify charter as directed

COMPLETE RFP PROCESS
   Draft RFP for consulting assistance
        Review project charter & use as cornerstone
   Solicit 3 - 6 bids
   Review bids
   Interview vendors
   Make team selection
   Present to senior management for approval

DEVELOP PROGRAM BLUEPRINT
   Review best practices
   Benchmark industry practices
   Brainstorm alternatives
   Select best alternative
   Complete details
   Draft program description document

VALIDATE WITH SR. MANAGEMENT
   Present to sr. management for approval

VALIDATE WITH BUSINESS UNITS
   Present to Business Unit for Approval

INCORPORATE FEEDBACK

COMMUNICATE PROGRAM TO ORGANIZATION
                                                                                                                                                                                                                                       >>>>
IMPLEMENT PROGRAM (2004)




                                                                                                                                                                                                                                            33
        KPIs


           Step 5: Develop Action
           Plan Budgets
Plan



       Budget




                                    34
Step 5: Develop Action Plan Budgets




                       Develop Action Plan Budgets


    Who: KPI Teams, working closely with Finance


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


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




                                                                                 35
Step 5: Develop Action Plan Budgets


          Step 4 Deliverables: Action Plans Budgets



                     ACTION PLAN   Formalize a Career Rotation Program

                     TEAM LEADER Margaret Cho




                                                       2005
                                                      TOTAL
                                   SOFTWARE              $0.1
                                   EQUIPMENT             $0.2
                                   CONSULTING            $0.1
                                   OTHER                 $0.1

                                   PROJECT TOTAL          $0.5




                                                                         36
        KPIs


           Step 5: Develop Action
           Plan Budgets
Plan
                    Step 6: Combine
                    with the Baseline
                    Budget
       Budget




                                        37
Step 6: Combine with the Baseline Budget




                          Create a Baseline Budget


    Who: Finance and budget managers


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

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




                                                                                   38
Step 6: Combine with the Baseline Budget


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


                                         TOTAL COMPANY
                                      2005 SHORT FORM P&L
                                         Dollars in Millions




                                                        IMPACT OF
                                                       ACTION PLANS
                                          BASELINE     Better/(Worse)     TOTAL
                Revenue                    $1,200.0              $1.0    $1,201.0

                COGS                          $780.0             $0.5     $780.5

                Contribution Margin           $420.0             $0.5     $420.5

                G&A Expenses                  $320.0             $2.0     $322.0

                Net Income                    $100.0            ($1.5)     $98.5




                                                                                    39
        KPIs




Plan           Monitor
                    Step 7: Establish
                    ongoing reporting
                    and review
       Budget




                                        40
Step 7: Establish Ongoing Reporting




                  Establish Ongoing Reporting & Review


    Who: Finance and IT work team.


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

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




                                                                                   41
Step 7: Establish Ongoing Reporting


  Step 7 Deliverables: Reporting and monitoring tools for KPI results


                                                   Progress on Value Drivers
                                                        June Year To Date
                                                (Partial View for Illustration Only)

                                                                                                       Significantly exceeds target
                                                                                                       Within target range
                                                                                                       Significantly below target




                                                                    Stoplight                   Reference Data
              Value Driver               Measure                     Rating            Target                 YTD Actual

         Operating Efficiency   Operating Expense Ratio                                         45%                           46%

         Quality Obsession      # of Defects per Thousand                                          5                                8

         Potent Workforce       Employee Turnover                                               20%                           25%

                                Employee Survey Index                                            95                             80




                                                                                                                                        42
Step 7: Establish Ongoing Reporting


     Step 7 Deliverables: Reporting and monitoring tools for progress of
                          Action Plans
      Career Rotation Program                                                                                                                                                                                                                   PROJECT LEADER                     DEADLINE
  ACTION PLAN: Formalizing a Rotation Program
  LEADER: Margaret Cho
  LAST UPDATED: 11/15/02
                                                        Week Beginning Monday:
                                                                                                                                                                                                                                                Margaret Cho                       December
                                                              APRIL                MAY               JUNE                   JULY                   AUG               SEPT                OCT                NOV                  DEC
                                                         7   14   21   28   5    12   19   26   2   9    16   23   7   14    21    28   35   4   11   18   25   1   8    15   22   6   13   20   27   3   10   17   24   1   8      15   22
  ORGANIZE A CROSS FUNCTIONAL TEAM
     Solicit input from sr. management
     Draft intro letter
     Formalize team roster
     Schedule kick off meeting
     Prep for kick off meeting


                                                                                                                                                                                                                                                BRIEF UPDATE
     Conduct kick off meeting

  DRAFT PROJECT CHARTER
     Organize sub team to draft charter
         Define objectives
         Define scope
         Define approach
         Document
     Review charter with team



                                                                                                                                                                                                                                                 We’ve slipped 60 days due to a delay in reaching a
     Present to senior management
     Modify charter as directed

  COMPLETE RFP PROCESS
     Draft RFP for consulting assistance
          Review project charter & use as cornerstone
     Solicit 3 - 6 bids
     Review bids
     Interview vendors
     Make team selection
                                                                                                                                                                                                                                                 decision on our RFP vendor, but we should be able
     Present to senior management for approval

  DEVELOP PROGRAM BLUEPRINT
     Review best practices
     Benchmark industry practices
                                                                                                                                                                                                                                                 to make up half that time.
     Brainstorm alternatives
     Select best alternative
     Complete details
     Draft program description document

  VALIDATE WITH SR. MANAGEMENT
     Present to sr. management for approval

  VALIDATE WITH BUSINESS UNITS
     Present to Business Unit for Approval

  INCORPORATE FEEDBACK

  COMMUNICATE PROGRAM TO ORGANIZATION
                                                                                                                                                                                                                                         >>>>
  IMPLEMENT PROGRAM (2004)




  KEY QUESTIONS                                                                                                                                                                         KEY MILESTONES
         Project on Schedule? NO                                                                                                                                                         1) Organize a cross functional team – April ’03
                                                                                                                                                                                         2) Draft a complete project charter (Objectives, Scope, Approach,
         # Days Delayed: 60
                                                                                                                                                                                             Structure) – May ’03
         Reasons?                                                                                                                                                                        3) Complete RFP process for outside expert – July ’03
         Senior management approval of                                                                                                                                                   4) Develop program blueprint – Oct ’03
         vendor by 60 days.                                                                                                                                                              5) Validate program with Sr. Management – Nov ’03
         Actions to get back on track?                                                                                                                                                   6) Implement program -- 2004
         Streamlining brainstorming and
         documentation should result in a
         savings of 30 days

                                                                                                                                                                                                                                                                                                      43
Outline



          –   A Tale of Two Companies


          –   3 Immutable Laws (and their implications)


          –   Balanced Scorecard Budgeting


          –   Keys to Success


          –   Q&A




                                                          44
Keys to Success


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


    •Do people know what the strategy is?

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

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

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

    •Do goals really cascade down through the organization?

    •Are we any different from national averages?




                                                                      45
Keys to Success


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



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

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




                                                                          46
Keys to Success


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


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

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




                                                                                  47
Keys to Success


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


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

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

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




                                                                                 48
Outline



          –   A Tale of Two Companies


          –   3 Immutable Laws (and their implications)


          –   Balanced Scorecard Budgeting


          –   Keys to Success


          –   Q&A




                                                          49
Q&A




      50

				
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