Activity Based Management Information for Business Turnaround

1. Activity Based Management Information for Business Turnaround The Fifth Annual AICPA/CAM-I Cost & Performance Management Symposium May 9-12, 2001-Nashville Jonathan B. Schiff Schiff Consulting Group jschiff@schiffconsulting.com

2. Signs That Your Company Has Gone Too Far With Cost Cutting… • The head of purchasing goes to employees’ homes and steals back office supplies. • Water coolers are coin operated. • To get paid company life insurance, you have to sell ten policies to relatives. • You have to call in sick on a 900 number. • Company blood drives are now considered a profit center. Copyrignt, Schiff Consulting, 2001

3. Today’s Agenda • What’s New? • Winning the New Cost Wars • Performance Management for the CFO Community • Actionable recommendations Copyrignt, Schiff Consulting, 2001

4. Dr. Gary Hamel, Harvard Business School Futurist • Earnings pressure is here to stay. • Earnings management practices are running out of steam. • Diminishing returns from industry consolidation, typical efficiency programs, and share-buy backs. • M&A is the last breadth of traditional cost cutting! If recent trends of heightened M&A activity continue in 7 years, we will end up with one company! Copyrignt, Schiff Consulting, 2001

5. How will we add value in thisNew Economy? • From Stewardship to Entrepreneurship Nothing happened on my watch! • End of incrementalism • New search for value creation • Exponential (quantum) change • Role models: Enron, GE Capital, Virgin Atlantic, Shell Oil, Southwest, & Kohl’s. Copyrignt, Schiff Consulting, 2001

6. Evidence of Exponential Change • Spending on children has increased by 300% during the last 5 years. • Wireless messaging services are changing social patterns. • MN-based Kohl’s comes out of nowhere to revolutionize retail using counter-intuitive innovation. Copyrignt, Schiff Consulting, 2001

7. Old Capital Structural Capital Intellectual Capital Driven by incremental thinkers. New Capital Imagination Capital Entrepreneurial Capital Driven by seers, heretics, and activists. How do we do it? Copyrignt, Schiff Consulting, 2001

8. What’s Needed • From Best Practice to New Practice • From market share to share of wealth creation • From unbalanced incremental scorecards and low hurdle rate based EVA to measures that drive innovation • E.g. Company market value/Industry market value Copyrignt, Schiff Consulting, 2001

9. What questions should be asked? • What opportunities are being missed? • Where are we blind? • What are we missing? • e is not enough! • IT spending has doubled over that last year (’99-’00) with no new competitive advantage produced for most! • What we need is less follow and more differentiation for distinctive results! Copyrignt, Schiff Consulting, 2001

10. Reality Check • Most wealth comes from non-linear, discontinuous innovation. • Innovation and entrepreneurship needs to be a company-wide capability across the value chain. • …And we certainly don’t want to be TheWeakest Link! Copyrignt, Schiff Consulting, 2001

11. What Financial Leaders Should Do… • Begin to introduce wealth creation metrics • IT spending should challenged to create unique competitive advantage • Push for a portion of capital spending for “radical” project. Radical does not necessarily equal high risk. New portfolio of experimental capital projects are generally, under $100K each at Enron. Copyrignt, Schiff Consulting, 2001

12. What Financial Leaders Should Do… • Remove inhibiting business practices and activities that are toxic to innovation, reengineer processes between ideas and wealth creation. • At Shell Oil, experimental capital project approval takes just 5 days! • Keep the Good-Grow the Great! Copyrignt, Schiff Consulting, 2001

13. Are You Ready to Win the New Cost Wars? Replay or Fast Forward?

14. Winning the New Cost Wars… Impact of the Current Business Environment on the CFO • Increased expectation to do more with less. • CFO community and leaders are expected to deliver ideas, innovations, and solutions. • Traditional standards of integrity and technical acumen are a given. • CFO community is expected to align its skills set with the dynamic needs of the business. • Increased competition from within and… Copyrignt, Schiff Consulting, 2001

15. The Brave New Competitive World “Taxes. Internal Audit. Finance and Accounting. There must be a reason many of your competitors don’t do them anymore.” -Text of full page Arthur Andersen advertisement appearing in Fortune, Business Week, and Forbes magazines. Copyrignt, Schiff Consulting, 2001

16. Winning the New Cost Wars What has not worked... • Fragmented, piecemeal approach. • Finance and accounting technical focus. • Key elements of value-chain scoped out. • Top management strategic focus shift. • Not walking the talk. • Attitude: “The new system will fix everything.” Copyrignt, Schiff Consulting, 2001

17. Winning the New Cost Wars Symptoms that lead to failure... • Cost shifting • Don Quixote-type leader • New information system dependency • Consultant engagement model dysfunction • Disconnect with top management vision and strategy • Over intellectualization • Report production fixation, not results focused • Gratuitous complexity Copyrignt, Schiff Consulting, 2001

18. The New Cost Wars Where we fallen short... • Global computer maker/No learning legacy, limited to pockets of excellence. • Leading cell phone manufacturer/High-profile cheerleading, modest wins and low cross-functional interest. • Health insurance giant/Finance-driven initiative, great reports, but actions limited to very low-impact areas. Copyrignt, Schiff Consulting, 2001

19. Winning the New Cost Wars • New Harvard Business School Case: MiCRUS: Activity-Based Management for Business Turnaround, a collaboration between Bob Kaplan and Jonathan Schiff • The MiCRUS Case was published as Harvard Business Case # N9-101-070 on March 5, 2001 by Harvard Business School Publishing, Boston, MA. Copyrignt, Schiff Consulting, 2001

20. Insights from the MiCRUS Case Overview • Cross-functional, enterprise-wide application. • ABCM is a key element of an inclusive incentive compensation program to support an aggressive business strategy. • Industry is all about change. • Performance and Open-book management integration. Copyrignt, Schiff Consulting, 2001

21. MiCRUS Corporation Case Case background • Extremely competitive industry. • History of failed initiative sloganeering. • Leadership role. • The “burning platform” for change. • A unique holistic approach. Copyrignt, Schiff Consulting, 2001

22. MiCRUS Corporation The Problem • New joint venture initiative and new business model-the virtual fab. Expectations are great. • Legacy IBM management practices not in alignment with current needs-Selective amnesia required. • Global competition heating up, primarily from Taiwan and Korea. • Industry benchmarks for yield and cost readily available. You can run, but you can’t hide! Copyrignt, Schiff Consulting, 2001

23. MiCRUS Corporation The Solution • Establish “stretch” (non-incremental), but attainable cost and yield (quality) targets. • Initiate incentive compensation program for all employees tied to making the new numbers. • Train all employeeson development and use of activity accounting information for process improvement and costing—their power tool. • All functions and processes covered-12 teams • Monthly team progress briefings with the CEO. Copyrignt, Schiff Consulting, 2001

24. MiCRUS Corporation Results • MiCRUS won “Fab of the Year” industry award in 1999. • MiCRUS is now a global leader in low cost and high quality. • MiCRUS instituted a variety of process innovations resulting from this initiative. • MiCRUS associates have met and exceeded their stretch goals in 1997-2000! Show Me the Money! Copyrignt, Schiff Consulting, 2001

25. MiCRUS Case Summary Inclusive Incentive Compensation ABM Information MiCRUS Corporation Open Book Management On-going Leadership Commitment Copyrignt, Schiff Consulting, 2001

26. Winning the New Cost Wars—First Steps… • Need—Cross-functional, top-to-bottom cost leadership, skills, and information readiness assessment. • Reality—Most managers do not understand cost, beyond a very simplistic level, a result of the generational legacy of the RagingBull Market. • Goal—For cost leadership to take hold culturally, it needs a passionate and consistent leadership commitment similar to that often found in diversity, integrity, and in new product development. • Linkage-If not aligned to strategic goals it’s DOA! If you can’t demonstrate the WIIFMs, don’t start until you can! Copyrignt, Schiff Consulting, 2001

27. What About Performance Management for Finance? • “We chain our best people to their desks and watch their enthusiasm die.” • “I hire MBA/CPAs, throw them into the deep end of the pool and see if they can swim.” • “I have two ulcers to show for it and I’ll be damned if I help those young S.O.B.s learn any faster or better than I did.” Copyrignt, Schiff Consulting, 2001

28. Rapid Tech, Inc. A CFO Organization Performance Management Case Study: Adapted from actual practice

29. Background • $2 Billion global manufacturing company in the transportation industry • Industry consolidation heating up the competitive environment • New CFO from outside the company Copyrignt, Schiff Consulting, 2001

30. Business Problem:Finance Workforce Not Meeting the Challenges of the New Economy Chronic Symptoms: • Finance “not at the table” with business leaders during key decision making • Financial analysts known for finding reasons not to pursue new ideas • Finance working harder – not smarter • Financial analysts complain that it takes days to extract data that internal clients expect within hours. Copyrignt, Schiff Consulting, 2001

31. Underlying Problems & Cost Drivers • They spend to train and educate, but most often not on the skills required. • Fewer than half the new hires really “work out well.” • High-potential finance managers regularly leave the company. Copyrignt, Schiff Consulting, 2001

32. Business Solution • “Retool” finance workforce to meet the new challenges of industry consolidation • Target limited training & development resources using a competency model/skills management approach Copyrignt, Schiff Consulting, 2001

33. Approach • Set a new standard for competence • Assess the current state of competence • “Retool” to close gaps Copyrignt, Schiff Consulting, 2001

34. Approach1. Set a new standard Created a detailed Finance competency model: • Tops-down input to balance and align with vision of future • Bottoms-up input to supply job-level detail and create employee buy-in • Customer input to link to business strategy Copyrignt, Schiff Consulting, 2001

35. Approach2. Assess the status quo Captured employee self-assessments: • Launched a communication campaign to maximize employee participation • Used a software tool with friendly interfaces for employees • Provided clear definitions of competencies at four levels Copyrignt, Schiff Consulting, 2001

36. FinanceAchieve Personal Skills Profile for: John Q. Employee Gap C-R Current Level Required Level Assess Date Skill Financial Analysis Techniques Expert Advanced 13 Nov 00 Cost Mgmt. Knowledge Advanced Advanced 13 Nov 00 Spreadsheet Applications Expert Expert 20 Apr 01 Communication Skills Proficient Advanced 13 Nov 00 Management Competencies Proficient Advanced 13 Nov 00 Business/Industry Acumen Conceptual Proficient 05 Dec 99 Advanced Software Knowledge No Skill 13 Nov 00

37. Approach3. Retool Analyzed and acted on skill gaps: • Reached consensus on gaps and created buy-in for actions • Offered training quickly to close easy gaps and create early “wins” • Restructured hiring and promotion practices to address longer term gaps Copyrignt, Schiff Consulting, 2001

38. FinanceAchieve SKILL GAP ANALYSIS REPORT Rank Skill Name Total Gap # Employees w/ Gap 1 Industry Acumen -378 216 2 Company Info. Systems Knowledge -314 242 Selling Skills 3 -283 231 Presentation Skills 4 -277 229 Business Process Reengineering 5 -216 177 Internet/Intranet Skills 6 -199 145 7 Database/Data Query Applications -135 96 8 Change Management -112 94 9 Coaching and Teaching -101 82 Business Development Skills 10 -97 97

39. FinanceAchieve Individual Development Plan for: John Q. EmployeeThis plan is for the period from 14 Sept 2000 to 14 Sept 2001 Skills Skill Gap:Improve Software Knowledge from No Skill to Proficient Activity: Attend in Company Systems Seminars Series I & II  Skill Gap: Improve Communication Skills from Proficient to Advanced Activity: Join local Toastmasters chapter Skill Gap: Improve Industry Acumen from Conceptual to Proficient Activity: Read Transportation World newsletter weekly  Skill Gap: Improve Industry Acumen from Conceptual to Proficient Activity: Assign to Manufacturing Department mentor  Skill Gap: Improve Management Competency from Proficient to Adv. Activity: Attend Advanced Supervisory Skills Course 

40. Results:Finance Perspective • Identified critical training needs that had gone unrecognized • Got across the board buy-in on training & development priorities and funding • Created more career opportunities and better matches between people and jobs AND Copyrignt, Schiff Consulting, 2001

41. Results:Customer Perspective • Finance gained industry acumen and customer respect • Finance recognized and eliminated outdated “silo thinking” • Finance brought new value to the decision making table Copyrignt, Schiff Consulting, 2001

42. FinanceAchieveROINew Skills for the New Finance 250% 150% 50% Yr. 2 Yr. 4 Copyrignt, Schiff Consulting, 2001

43. Thank You! Schiff Consulting Group Solutions for Corporate Effectiveness