Strategic Management Accounting for Value Creation P. Thiruvengadam Deloitte, India

1. THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIARegional Cost Convention30TH November, 2007 Strategic Management Accounting for Value CreationP. Thiruvengadam Deloitte, India

2. Strategic Management Accounting Strategic Management Accounting provides information and analysis for planning, control and decision making from a strategic perspective

3. Strategic Decisions and Value • Decisions create options • Good decisions create valuable future options • Poor decisions limit future options, • The more good decisions management makes, the more valuable options a company will have Management should seek to maximize the number of good decisions it makes each year

4. Superior Strategy Development + Superior Execution = Superior Performance Insights Decisions Performance Strategy Development Strategy Execution • Strategy Development – taking great information, ideas and insight and turning them into great strategy: • Where to compete? • How to compete? • Strategy Execution – taking great decisions and strategy and turning them into great performance: • What needs to be done? • How will it be accomplished? Which is the bigger challenge in driving superior performance – strategy development or strategy execution – and how should companies best meet this challenge?

5. The Strategy-to-Performance Gap What drives superior strategy execution? There is a significant gap between the performance most companies could deliver – were they to choose the right strategy and execute it in the right way – and the results they actually produce over time Two Underlying Causes Three Contributing Factors • Decision-making • Quality • Quantity • Magnitude • Execution • Information • Process • People • Agenda management is undisciplined and unfocused • Strategic planning produces too few good decisions • Strategy execution is poor

6. What Are Execution Processes? Two broad sets of processes are involved in turning strategy into performance – planning and performance monitoring Strategy Development Planning Performance Monitoring • Strategy development determines “where we intend to go” and describes (at a high level) “how we intend to get there” • Planning delineates the resources required to get us from here to there and the associated financial implications • Performance monitoring tracks actual performance relative to plan

7. Closing the Decision-making Gap • Deal with operations separately from strategy • Focus on decisions, not discussions • Measure the real value of every item on the agenda • Get issues off of the agenda as quickly as possible • Put real choices on the table • Adopt common decision-making processes and standards • Make decision-making consequential

8. Disciplined Strategic Management • Use value goals to create new ambition for strategy • Measure performance vs. peer set • Cascade value goals to each BU 1. Ambitious & Stretching Goals • Value-based compensation • Align with short and long term delivery • Instill enterprise-wide leadership • Develop clear line-of-sight into the sources and drivers of value • Create a single strategic agenda – priorities based on value-at-stake • Use common standards for participation and competitive strategies 6. Performance-based Rewards 2. Value-based Facts & Priorities Value = CommonCurrency 5. Effective Performance Management 3. Strategic Choices & Commitments • Establish performance dialogues • Simple value driver dashboards • Use financial, strategic and operating KPIs to trigger intervention • Work on quality of forecasting over the cycle & track performance over time • Formulation and evaluation of strategy alternatives to drive decision-making • Ensure strategies translated into concrete and synchronized action and operating plans 4. Targets & Resource Allocation • Communicate clear management guidance and/or constraints • Track resource deployment as a leading indicator • Link to team and individual targets and operating plans

9. Performance Measurement Performance Measurement is theprocess of collecting, analyzing,evaluating, and communicating informationrelative to an organization's performance and results. Effective Performance Measurement provides information for the planning and controlof organizations, and is a means of ensuring that the direction, efforts and results of an organization are in alignment.

10. Performance Management BUSINESS PLANNING S T R A T E G I C D I R E C T I O N INFORMATION FOR DECISION MAKING AND TAKING ACTION PERFORMANCE MANAGEMENT • Activity Based Management • Priority Setting • Impact Analysis PERFORMANCE MEASUREMENT Performance Management is the integration of the results of performance measurement into management processes so that the results can influence the decisions made by the organization.

11. Why Performance Management? TRADITIONAL MEASUREMENT SYSTEMS PROVIDE LITTLE SUPPORT TO MEET THESE NEEDS: • Too Detailed • Limited Scope • Tactical Information • Short-term • Bottom-Up • Financials not linked to operational data • Report only on the past MANAGEMENT NEEDS INFORMATION THAT IS: • High Level • Broad Scope • Strategic • Long-term • Top-Down 1- To improve the breath of performance reporting (continued)...

12. Why Performance Management? 2- Tocounter-act the phenomenon of “Strategy Dilution”: Strategy Dilution is the gradual erosion of understanding of strategy and direction the lower in an organization you go. Measures link process performance directly to strategy. Developing a measurement framework which cascades down through the organization and allows results to be pyramided-up builds organization understanding and reduces "dilution".

13. Why Performance Management? 3- To establish accountability for results throughout the organization - • At the Corporate level • At the Business line level • At the Product level • At the Process level • At the Functional level • At the Team level • At the Individual level • Linkages at all levels allow individuals to understand their role and expected contribution to the achievement of corporate objectives and goals.

14. Why Performance Management? 4- Used as a dashboard, the use of a Performance Management framework also allows management: • To assess strengths and weaknesses of business processes • To monitor performance of major improvements efforts • To better understand root cause performance • To make strategic decisions • To more effectively manage the business Management Dashboard

15. A new framework is required that encompasses three types of measures: Business Performance Measures, Management Accounting Measures, and Diagnostic and Control Measures New Performance Measurement Framework • Business Performance Measures • Management Accounting Measures • Diagnostic & Control Measures Business Model • Strategy • Investment • Operational Value Creation

16. Benefits : MAC and Customer / Product Profitability Consistent comparisons gives interesting results! High margin business is not always the most profitable! Sector contribution by business Compare individual customers % Only 30% of customers make a positive contribution!! Product profitability identifies it’s own challenges Product Profitability

17. Value added / Non-value added Benefits : MAC Process Analysis - Invaluable Management Information Comparison of process costs by business = Challenge The focus is on what an organisation does, not just £’s Benchmarking - Business cost profiles Supporting a review of overall customer value Review of Non Value Added activities can be fruitful Customer Lifetime Value Positive lifetime value Cost to sell & serve Revenue Cost Cost to Manufacture Cost to win and retain Time

18. Integrating with Performance Management • Performance Management is growing in importance as companies seek to align their reward systems with their strategic imperatives. The balanced scorecard is the most common vehicle for accomplishing this goal. This typically measures an organisation’s key strategies and core processes such as customer satisfaction, innovation, operations, employee satisfaction, financial performance andvalue. • The strategic nature of performance measures and related targets can focus ABM measures and analysis. Then ABM can be a powerful enabler to generate cost-based, process and/or profitability performance measures which are part of a scorecard. • For example, accurate activity costs can be computed using ABM techniques and rates can be input intothe Performance Management process to facilitate accurate reporting of performance measures at the operating level. Furthermore, costs and capital can be allocated directly to objects., which can then be included in value metrics. • Accountability for measures can be identified at the detailed activity level as well as the higher cost attachment point level (i.e., product, customer, channel, etc.). This is consistent with the need for measures to be cascaded throughout the organisation to be most effective. Integration Aspects Value Driver Modelling and Strategic Measurement Focus Cost Driver Definitions, Measures and Volumes (Actual & Budget) Performance Measures Management Cost and Profitability Goals Revenue, Cost and Profitability Results “What If” Scenarios for simulation

19. Integrating with Profit Improvement • The role of ABM is extended during the implementation and embedding process of improvement opportunities. Advanced Cost Management is viewed as a core competence to realise the benefits of Enterprise Wide Cost Reduction initiatives. • ABM and performance measurement becomes an integral part of the continuous process of valuing products, processes and services. • Strategic Profit Improvement efforts are strategically focused on improving cost structures to increase shareholder value. • Activity Based Management (ABM) plays a significant role in assessing the cost of both activities and processes in identifying those processes with high impact improvement opportunities. The ability to cost the effect of asset and technology utilisation can assist in the optimisation process of asset and technology usage. Embedding Improvements Opportunity Identification Shareholder Products & Services Shareholder Value Analysis Value Organisational Units Processes Performance Value Drivers Measures Portfolio Analysis ABM Process Costing

20. Mg. A/C Principles provide a solid foundation to support: Understanding Profitability • Understand product & customer profitability, what to focus on / manage? • Understand differing channel costs • Understand customer cost base, i.e. cost to serve and cost to retain • Profile the profitability of scare resource e.g. space utilisation, FTEs etc • Understand brand costs and profitability profiles • Underpin sales and marketing campaigns by providing customer segmental analysis e.g. socio-economic splits, method of payment etc Performance Management • Provide multidimensional views of the business giving improved ways of measuring and managing performance • Provide key KPIs to support performance reporting e.g. Balanced Score Card • Highlight best areas for investment e.g. brand support, internet strategy • Give transparency of costing and pricing mechanisms on a consistent basis to provide robust analysis to regulators • Provide internal benchmarking of processes and activities to measure performance gaps of similar areas Cost Reduction • Identify high cost, low value processes to focus cost reduction effort on • Provide insights into when businesses are able to work with suppliers and customers to share costs, mutually increase profits and share benefits • Understand causality and the variability of the cost base as business changes Shared Services / Outsourcing • Provide service menu pricing • Support process analysis and ongoing management through KPIs • Resource requirements planning through Activity Based Budgeting • Support decisions on process off-shoring / outsourcing

21. THANK YOU