Who has the Profit and Loss Responsibility in Your Company?

1. Who has the Profit and Loss Responsibility in Your Company? Presented by: Fletcher L. Groves, III Vice President SAI Consulting

2. What’s behind the Question? • The inescapable conclusion that a lot of what we do doesn’t work. • Business Performance Improvement initiatives as just one example. • What’s missing? • We are missing a context – a business context – in which everything we are trying to do makes more sense.

3. The Human Dimension “ . . . The human dimension of business – the wanting, the caring, the enthusiasm, the problem-solving, the initiative-taking – is where more and more of the competitive battles are being won and lost . . . the only way for a company to boost performance consistently over the long haul is to have employees who work enthusiastically and effectively, and . . . take responsibility for their own work.” - John Case, The Open-Book Experience

4. “What is the greatest managerial challenge facing your company today?”- SAI’s 1997 Reference Point survey Complexity, Financing, Government Regulation, Systems, Product Design, Competition Employee Selection, Training, and Motivation

5. “What is the greatest managerial challenge facing your company today?”- SAI’s 1996 and 1997 Reference Point survey

6. Managements’ Perspective • The only people that need to be concerned with financial performance are owners and senior managers. • Employees can perform their jobs without understanding the way they impact profitability and economic return. • Companies are the sum of their individual parts.

7. Employees’ Perspective “That’s your job. Don’t hold me accountable for ‘profitability’ – or anything related to ‘business performance’ – if you won’t . . . let me see the numbers, let me make decisions, and give me a stake in the outcome”

8. The Frustration and the Fear • Owners and senior managers are powerless to drive needed improvement in operating and financial performance. • Employees look out for their self-interests, but they don’t have the power to insure their own job – or financial – security. • The walls of mistrust and self-interest are built.

9. The Real Failure • We have failed to build a connection between better business performance, and the interests of those who must make it happen. • We have spent too much time on the what and the how-to, and ignored the why and the want-to.

10. Making the Case • Companies perform better when employees see themselves as the partners in the business, instead of its hired hands. • Everything else – the strategies, the performance initiatives, the decision-making – makes more sense within this new business context.

11. When you are a Company ofBusiness-people: • Everyone sees and learns to understand the operating and financial numbers. • Everyone has the responsibility and authority for moving the right numbers in the right direction. • Everyone has a financial stake in the outcome.

12. What does it do? • Teaching them the business and being transparent with the numbers makes your employees savvy. • Handing them responsibility and authority makes your employees mutually-accountable. • Giving them a stake in the outcome motivates your employees and gives them a future.

13. You probably don’t wantto go there if . . . . . . losing what you never had bothers you. . . . you don’t like living in a fish bowl. . . . you have all the answers. . . . you want to make all the decisions. . . . you are smarter than your employees. . . . you like carrying people on your back. . . . you really don’t like having fun.

14. When you are a Company ofBusiness-people: • Everyone sees and learns to understand the operating and financial numbers. • Everyone has the responsibility and authority for moving the right numbers in the right direction. • Everyone has a financial stake in the outcome.

15. Creating Transparency • Everyone has to see – and learntounderstand – the realoperating and financial numbers of the business. • Everyone has to be able to connecttheir day-to-day jobs and decision-making – to the company’s overallfinancialgoals.

16. “How often do you discuss the details of the company’s financial performance with your employees?”- SAI’s 1997 Reference Point survey

17. “Our employees understand how the work they perform relates to the company’s financial performance.”- SAI’s 1997 Reference Point survey

18. Understanding the Numbers • Generic to Industry-specific • Financial Statements • Income Statement • Balance Sheet • Cash Flow Statement • Business Plans and Budgets • Compensation • Learn by DOING and make it FUN!!

19. Connecting Operating Drivers to Financial Outcomes • Understanding – from an operational standpoint – what happens to money in a homebuilding company. • Understanding the impact the operational perspective of money has on financial measures, like Net Profit and Return on Investment.

20. What happens to money? • Throughput (T)= the rate at which a builder generatesmoney through sales. • Inventory (I) = all the money a builder invests in things it intends to sell. • Operating Expense (OE) = all the money a builder spends turning Inventory into Throughput.

21. The Impact on Profitability and Economic Return Productivity = Throughput ÷ Expense Inventory Turns = Throughput ÷ Inventory Net Profit = Throughput - Expense ROA = (Throughput - Expense) ÷ Inventory

22. Seeing the Real Numbers • The operating and financial numbers need to be presented and discussed: • Currently • Collaboratively and Collectively • Concisely and Comprehensively • Consistently • Format • Frequency • Conspicuously and Creatively

23. When you are Company ofBusiness-people: • Everyone sees and learns to understand the operating and financial numbers. • Everyone has the responsibility and authority for moving the right numbers in the right direction. • Everyone has a financial stake in the outcome.

24. Developing Accountabilityand Responsibility • Mutual AccountabilityandResponsibility. • Accountability and Responsibility cannot exist without Ownership. • Ownership requires Involvement(in the planning process) and Authority (to make decisions). • The will to get involved, to exercise Authority, and to assume Responsibility requires Transparency and Freedom.

25. “We expect a higher level of job performance (solutions and decision-making) from our senior managers . . .”- SAI’s 1997 Reference Point survey

26. “Our employees believe that their job security is based on individual job performance.”- SAI’s 1997 Reference Point survey

27. “Our employees view their job responsibilities in terms of their job descriptions.”- SAI’s 1997 Reference Point survey

28. Moving the Right Numbers in the Right Direction • Involvement starts with planning – employees won’t take ownership of OPB (Other People’s Budgets). • Sales and Marketing Plan • Operating Plan and Budget • Employees won’t take ownership of OPD (Other People’s Decisions).

29. There must be a structure for presenting, discussing, and challenging numbers that allows bottom-up decision-making to take place. • Employees won’t take ownership of OPN (Other People’s Numbers) – they have to have line-of-sight responsibility for their numbers. • The numbers that reflect expenses are important – but the numbers that drive the rate of revenue generation are critical.

30. When you are a Company ofBusiness-people: • Everyone sees and learns to understand the operating and financial numbers. • Everyone has the responsibility and authority for moving the right numbers in the right direction. • Everyone has a financial stake in the outcome.

31. “Performance-based compensation for all of our employees . . . exceeds 20% of total compensation.”- SAI’s 1997 Reference Point survey

32. “Our employees know . . . bonuses and profit-sharing before the numbers come in at the end of the year.”- SAI’s 1997 Reference Point survey

33. “We believe employee stock ownership is a relevant issue for our company.”- SAI’s 1997 Reference Point survey

34. Rewarding the Outcome • It must place a bounty on the financial performance you want to achieve. • It must be about compensation and equity, not just recognition and games. • It must define performance as the achievement of commonly-held goals. • It must change peoples’ behavior.

35. Eliminating Unproductive Compensation • Eliminating performance compensation paid regardless of performance. • Eliminating divisive and discriminatory compensation. • Compensation based on individual job performance. • Bonuses for specific positions. • Bonuses exclusive to management (the exceptions are equity or deferred comp).

36. Designing Bonus Plans • Focused (critical numbers). • Simple, straightforward, and equitable • Self-funding. • Uncompromising (100%). • Non-discretionary. • Visible. • Significant (10% - 20% of total comp). • Progressive (weighted payouts).

37. Real Ownership • Equity: Crossing the Rubicon. • Mentality (the end of short-term thinking). • Walls (the end of “us versus them”). • Equity: Is it important? • Stock ownership vehicles: • Employee Stock Ownership Plans (ESOP) • Stock Options • 401-K

38. Becoming a Company of Business-people • If you start now, 2003 is realistic. • In every company, the process starts somewhere – it might as well start with you. • Find out more. • Start asking others “What if . . .?” • Get a realistic picture of where you stand and the problems you will encounter.

39. Start teaching business. • Make it part of the landscape. • Formal doesn’t mean boring. • Mandatory doesn’t mean onerous. • Start simple and generic. • Move to detailed and industry-specific. • People learn by doing – use games. • Start sharing the real numbers. • Make it part of the landscape. • Focus on the critical numbers. • Connect the drivers to the outcomes.

40. Get rid of the constraints and problems. • Policies • Compensation • People • Push Involvement – put your freshly minted business-people in charge of producing the 2003 Business Plan. • Develop a regular, consistent structure for presenting, discussing, and challenging the numbers.

41. For 2003, find a new bonus plan. • My recommendation? Go with a pool plan in lieu of a fixed payment plan. • 6-8 gross profit buckets per year • funded 100% by the increase in net profit • progressive weighting • 100% participation • salary – no commissions • blended allocation (50-50) • paid within one week, not tied to the calendar

42. Did you get it? • RULE I • Everyone sees and understands the numbers. • RULE II • Everyone has the authority and responsibility for improving performance. • RULE III • Everyone has a stake in the outcome.

43. Questions and Information Fletcher Groves is a Vice President and Senior Consultant with SAI Consulting, LLC. He can be reached at (904) 273-9840, or by e-mail at flgroves@saiconsulting.com. A download version of this PowerPoint presentation will be available on the SAI website at www.saiconsulting.com.