Cost Management Oldco C&L Presentation, 1997

1. Cost Management Oldco C&L Presentation, 1997

2. Business Integration Strategy Financing Value Management Activity Based Management Cost Management Life Cycle Costing Processes and Systems Value Analysis Target Costing The New Agenda: Emerging Best Practices Cost Management CFO Role: Provide strategic cost information that provides insight to long run process improvement and sustainable cost management. Key issue: Developing tools a) to manage, not cut costs, and b) to manage costs relative to value.

3. 100 80 Real cost control cannot be achieved by focusing only on spend 60 40 $ Committed 20 0 $ Spent Marketing Delivery Conception Design Testing The New Agenda: Emerging Best Practices Cost Management — Life cycle costing requires the OCFO to be involved actively in the earliest stages of operations and marketing projects.

4. Resources Rationing Resources How efficient/effective are we in our operations? Cost Drivers Performance Measures Activities BPR How can we highlight improvement opportunities? • Internal Benchmarking • BPR • Performance Measurement Processes, Products and Customers Going to Market • What is cost of new or existing products or services? • Service or payor profitability? • Pricing • Life cycle costing The New Agenda: Emerging Best Practices Activity Based Management provides critical insights and information by focusing on the effort and related cost of the work that is being done.

5. Accounting Purchasing Engineering Distribution Operations Plant Operations Marketing / Sales Develop & Retain Business Procure Raw Materials Manufacture Products Focus on: Distribute Order Management & Distribution • Activities, not resources • Processes, not functions • Continuous Improvement, not variances • Operations, not finance • Direct Assignment, not allocations Provide Customer Service Manage & Support the Business Good cost management depends upon impacting “like” costs — and the work that they represent — wherever they appear in the organization. The New Agenda: Emerging Best Practices Standardizing an activity hierarchy results in an enterprise-wide horizontal process view of the company's work and costs.

6. The New Agenda: Emerging Best Practices Cost Management — Development of cost management information should be driven by the intended management action.

7. The New Agenda: Emerging Best Practices Cost Management — Improved information along several dimensions is essential for decision making.

8. Capitated/Managed Care Revenue Capitated/Managed Care Revenue Discounted Fee for Services Revenue Discounted Fee for Services Revenue Costs Costs Profit Profit Rigorous pursuit of process cost improvements combined with enhanced contract management analytics will be strategic imperatives shortly. The New Agenda: Emerging Best Practices An increasing percentage of managed care business necessitates a more rigorous and universal understanding of process and service costs. Now Near Future Known Known Must be able to proactively manage "It is what it is" • No appetite to influence • Little understanding of cost • Manage by rigorous budgeting and variance analysis process • Must rigorously attack • Need to understand cost drivers • Manage costs through strategic performance measures

9. The New Agenda: Emerging Best Practices Cost Management — Case example (Product Cost)

10. The New Agenda: Emerging Best Practices Cost Management — Case example (Customer Profitability)

11. The New Agenda: Emerging Best Practices Cost Management — Case example (Channel Profitability)

12. The New Agenda: Emerging Best Practices Cost Management — Case example (Pricing & Costing Process)

13. The New Agenda: Emerging Best Practices Cost Management — Case example (Resource Allocation)

14. Margin Margin Margin Target Margin Product Cost Product Cost Target Cost Target Cost Definition Component Breakdown The New Agenda: Emerging Best Practices Cost Management — Target costing provides a proactive process for managing costs.

15. The New Agenda: Emerging Best Practices Cost Management — Building a vision for the OCFO requires an understanding of emerging best practices. Cost Management— Emerging Best Practices • Use of an Activity Based Management (ABM) for management reporting and for processes traditionally considered overhead. • Organization overhead • Development • Logistics • Sales and marketing • Life cycle cost management for new product development, capital spending, endowment/gift decision making • Significant focus on account, customer or category (brand) profitability • Using activity analytics (part of BPR) to uncover non-value adding tasks • Improving segmentation analysis, of development and promotion portfolio • Regular benchmarking of manufacturing/production costs as part of on-going internal continuous improvement efforts and competitor analysis.

16. Chrysler H.J. Heinz Lever Cleveland Clinic The New Agenda: Emerging Best Practices Cost Management — Many finance organizations are proactively guiding cost management efforts. • Providing ongoing ABM information. • Actively involved in product development. • Driving cost reduction and process improvement with ABM. • Adopted cost based pricing philosophy. • Driving category management and menu pricing programs. • Managing service costs with ongoing activity analysis program.