New York, NY December 13, 2000

1. “HOT SERVICE OFFERING” DISCUSSION Strategically AlignedBusiness Model New York, NY December 13, 2000 This document is confidential and is intended solely for internal use

2. Whether you call it SABM, SAO, NBM or WEF, the core team closest to this concept believes we are on to something powerful • It is differentiated–others are saying some of these things, but we see no one else doing it all • It is CEO-relevant–impacting organization and strategy • It is timely–many visible companies struggle with these issues • It is naturally transformational (consistent with our aspirations) … • … Yet flexible • It can be applied successfully across many different client situations … • … And can enter through a number of different “doors” • It is a complete offering • We know how to do it • We have done it across clients/industries • We have adaptable marketing and selling materials • It complements and integrates thinking from our other I/C (e.g., WEF, Centerless Corporation, Shared Services)

3. It starts with the observation that, while a sound strategy is essential, in many industries it is no longer sufficient for success Strategy Is Not Enough • Strategies quickly become public and can be copied • Strategies must be dynamic as the environment changes • Strategies are often very similar; therefore, not a source of differentiation • In practice, many strategies are simply glorified aspiration statements that offer little real direction to individuals in the organization The occasional “breakout strategy” is responsible for some highly publicized successes. But sustained performance is much more frequently the (less publicized) result of strong execution of an otherwise unremarkable strategy A more complete picture of what drives organizational performance is required

4. This perspective focuses our efforts on helping clients build the environments that encourage and support the appropriate behaviors By providing a context which supports and guides individuals to make choices and tradeoffs that promote the overall goals, organization design fundamentally drives organization performance Strategy Organizational Performance Individual Actions • Information • Roles & Responsibilities • Conflict Resolution • Objectives • Coordination Organizational Environment • Mechanisms • Organization Structure • Boundaries • Decision Rights • Incentives • Measures

5. The key is decision rights and the organizational model to support them—organization structure is just the tip of the iceberg Leadership System How Are Key Business Trade-Offs Made? OrganizationStructure Roles &Responsibilities Objectives DECISIONS Coordination Mechanisms Conflict Resolution Boundaries Incentives Measures Information

6. Straightforward Economic Principles ... Individuals are by and large rational, and respond to incentives (financial and non-financial) Market-like mechanisms are effective ways of allocating scarce resources Clearer accountability and better information generally lead to better decisions Central planning tends to leave profit opportunities on the table Entrepreneurial environments are better than bureaucracies at exploiting untapped opportunities Like countries, large organizations need the rule of law ... Require Extremely Complex Application While individual human rationality is bounded, the problem is infinitely complex Thousands of design details Multiple interacting systems Elaborate feedback loops Only a few at the top see the big picture... Individuals’ perspectives are inherently biased by the particular piece of the puzzle they see Those in a position to see the big picture tend to be very senior, and hence very busy ...And there is an almost irresistible tendency to over-simplify With focus, any one aspect can be improved But without adequate system-level understanding, unintended consequences arise While the economic principles behind this concept are well known, very few companies get it right

7. Clients don’t naturally identify their issues “this way”—we need to stay flexible and leverage multiple entry doors Client Entry Door Where Applicable Transformation Coordination • In environments that are, or should be, decentralized • In environments where multiple factors are driving change Leadership Challenges • A new CEO trying to drive change and break down functional “silos” • Developing organizational leadership (WEF)—achieving alignment while maintaining/enhancing adaptability People Challenges • Demotivated workforce/high turnover • “Weak bench” syndrome • Required skill levels cannot be hired or retained Change In Industry Structure or Dynamics • Move towards a solutions business requiring complex, decentralized trade-offs • Restructuring value chain Profit Improvement • Overhead reduction that will “stick”—creating a bias against creeping cost increases • Shift to profit centers • Improving execution across a dispersed organization

8. The approach to this type of work is fundamentally different than much of the work done within Booz•Allen or by our competitors Less Of This ... … More Of This • Defining the right thing for the client to do (“process maps”) • Designing the organization that wants to do the right thing (“decision rights”) • One big idea (“solution”) • Lots of executional details involved in getting it right (“trade-offs”) • Designing to a static optimum (“central planning”) • Designing the organization to approximate dynamic optima (“market system”) • Optimizing one measure (e.g., cost or inventory level) • Optimizing the entire “system” to produce better results • Dictating specific actions from the center • Encouraging innovation throughout the organization • Measuring process adherence • Measuring results, using a common metric • Treating resistance as ignorance, and managing it primarily through education • Treating resistance as rational, and managing it through structure, measures, incentives and training (where required)

9. Our approach typically follows five steps Methodology 1. Understand the Organizational Context 5. Complete the Detailed Design and Implementation Plan 3. Assess Organizational Barriers to Performance 4. Create a High-Level Design for a New Business Model • Understand how the organization has evolved over time • Identify perceived flaws in the current organization 2. Translate the Strategy into Key Activities • Identify the root causes which are impeding organizational effectiveness • Build the case for changes • Identify resource requirements and potential gating factors • Develop roll-out plan • Develop a conceptual design for the new business model • Build senior management ownership for the design • Understand how the firm creates and captures value • Identify the key leverage points in the business and translate them into organizational imperatives Diagnostic Effort Typically 3-6 months 4-12 months

10. Process Staffing This approach differs from the “typical” consulting project in several ways • Managers are rational actors • Fixing the system is just as important as improving near-term performance • There is no silver bullet, many design levers must be worked in concert Key Assumptions • Seeks input from a broad cross-section of client staff – especially “front-line” employees • Encourages and values dissent – resistance to change is usually rational and must be understood • Shares findings and potential solutions are early and often – to test understandings, build support, and learn how to tell the story in the client’s language • Starts with a relatively senior team – which is versed in the underlying theory, able to calibrate the natural biases of the respondents, and has good instincts about likely key issues • Uses a small team to conduct most of the interviews – to stay integrated and avoid falling into the client’s functional silos • Expands the junior team during the blueprinting phase – when the high-level business model has largely been established

11. Finding the right organization model is inherently a highly custom, iterative process, but some “tricks of the trade” are emerging: • Wherever possible, make managers accountable for the impact of their decisions on both cost and revenue • Use multiple, overlapping views of profitability to eliminate potential “externalities” across organizational boundaries • Carefully craft management processes and decision rights to ensure all relevant stakeholders have a voice • Establish clear decision boundaries and then let the organization optimize within those constraints–focus on the short list of “thou shalt nots,” not the long list of “nice to haves” • Use market-like mechanisms to allocate scare resources–capital, management attention, etc. • Develop a planning process that is transparent–perceived fairness is more important than precision(different from many budgeting exercises) • For complex, data-intensive decisions, use centralized tools to support decentralized decision making, not supplant it (i.e., embed complexity in the institution, not the individual) • Establish executive forums that visibly reinforce the established principles

12. US Sugar Chrysler Volvo JCI Automotive Nestlé Canada JCI Controls Handleman S&B article (November 2000)–reprints available Leader to leader article–reprints available in January Industry- or application-specific mini-articles in process(Tier 1 supplier, customer teams, solutions provision) Multiple client-ready decks and letters Reflecting multiple “hooks” Tailored to specific industries (AAI, C&H, FSG) Longer internal and methodology decks Case studies A growing group of practitioners We have used these concepts successfully (usually transformationally) across a variety of clients and have many of the resources in place to take it to the next level Clients Where These Concepts Have Been Used Marketing/Selling Resources • ABB • Siemens • Snap-On • GE Aircraft Engine • Caterpillar • Bangkok Bank • United Airlines

13. . . . But we want to do more . . . • A core group of us are passionate about this concept, as it is • Exciting • Powerful • Differentiated • Fun • Those who have internalized this concept find these opportunities almost everywherethey look … • … And when we introduce this at a client the track record is very positive • Better answers • Extended relationships • Powerful transformations • But we can’t put it “in a bottle” • It is not (and may never be) a packaged product • We have not been successful selling “this” as “this”

14. Nestlé Canada Case Study: The Approach 7 Weeks 26 Weeks Phase I: Sizing The Opportunity Phase II: Developing The New Business Model • Identification of key cost drivers: • Management overhead • Warehousing • Order processing • IT • … • Identification of root causes • Extensive interview program (close to 40 executives) • Analysis of incentive program • Assessment of decision making process • Assessment of organizational alignment/ adaptability • Leadership survey • Detailing and hand-over of specific cost reduction opportunities • Outsourcing of warehousing • Consolidation of order processing center • … • Design of a New Business Model around three key principles: • Decentralized decision making • Defined decision rights • Common performance metric • Detailed definition of decision rights and coordination mechanisms for sales and marketing • Design of new incentive system based on adjusted contribution measures • Definition of new leadership approach and of role of executive committee 10-20% Of Effort 80-90% Of Effort

15. Nestlé Canada Case Study: The result, a New Business Model New Business Model — Coordination Mechanism—Example: Brand/Channel Coordination Yearly: • Agreement: • Sales • Promotion/trade-spend • SKU portfolio • PFME support • Level of sales focus on brand • ... • Review of sales • Corrective actions Brand Management Channel Management Profitability Maximize contribution of Focus: brand across all channels Trade-offs: Level of support of any channel in terms of: - Promotions/trade-spend - SKU portfolio - PFME - … Measurement: Profit contribution (Sales - (Trade-spending + standard product cost + advertising) Incentive: Yearly - fixed percentage of contribution Longer term - based on market share and growth Profitability Maximize contribution Focus: of channel across all brands Trade-offs: Level of support of any one brand category in terms of: - Attention of category account Measurement: Profit contribution (Channel sale - (Trade-spending + standard product cost + sales force cost) Incentive: Yearly - fixed percentage of contribution Longer term - based on share of wallet and growth Monthly: The Result: A Self Regulating Coordination Mechanism • Profit maximization objectives will focus attention on most profitable brand/channel intersection RPCL182_049_056F.ppt

16. For US Sugar, cost reductions and efficiency improvements were the only viable strategy for retaining profitability in a period of price volatility Actions Required Strategic Insights • Product is a commodity with prices dependent on trade policy and market dynamics • The intrinsic value of the business is driven by the quality of the land • The company failed to capture the full value ... • Too many resources spent trying to influence price • Had expanded beyond the very best land • … And appeared to be running a high cost business • 70 years of “cost center behavior” • Benchmarks confim operations are “gold-plated” relative to independent farmers • Reduce overhead and general administrative costs • Lower SG&A costs • Reduce Ag administrative expenses • Implement best practices across farms to reduce product costs • Reduce labor and machine costs by reducing frequency of farm activities • Improve harvester utilization and reliability • Reduce support activities and Ag support departments • Match Engineering shop performance to service requirements • Improve efficiency of support services • Implement new technology • Commercialize new planting techniques • Reduce losses by improving field logistics

17. Three initiatives were integral to strategically transforming them into a world-class competitor Three Initiatives In The Strategic-Based Transformation Process • Defines the farm manager as the business leader accountable for farm profitability • Defines fixed pricing and charging mechanisms for support services to encourage efficiency improvements • Allows reduction in overhead and supervisory costs • Performance accountability supported by incentive system Organizational Structure “FARMS AS BUSINESSES” • Defines the profitability and performance targets for farms and support services • Ensures farm profit targets are consistent with corporate profitability requirements • Provides fairness and transparency for the incentive system • Targets are based on best-practice activity levels and are unique for each farm and support service Performance Targets • Defines generous bonus structure for business unit performance that exceeds target levels • Ensures farm and support service managers make the correct cost/yield trade-offs to maximize profitability • Encourages managers to develop, support and implement new technologies and practices that improve profitability Incentive System

18. Performance targets and incentives with a high variable bonus component were integral to creating these “Farms as Businesses” Bonus Payount at Different Performance Levels and Sugar Prices Target Setting And Incentive System • The ratio of variable pay to fixed pay was increased significantly to roughly 67% of base • Total Farm Manager compensation was increased for 2 reasons: • The position’s level of responsibility was significantly increased • By changing the variable compensation percentage with sugar price, Farm Managers were taking on more risk in managing their farms as businesses • Target performance or profitability levels were set for each Farm Manager based on farm-specific workload drivers, e.g., : • Total acres planted • Availability of land • Farm Managers would be paid a bonus based on the actual profits earned by their farm, with increasing rates eared as targets were met or exceeded • Since profits are highly variable with sugar price, annual targets were adjusted as average annual realized sugar prices fluctuated $.22 $.21 $.20 $.19 Sugar Price $.18 $.17 $.16 $.15 PAYOUT Farm Profitability