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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. Signs That Your Company Has Gone Too Far With Cost Cutting….

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activity based management information for business turnaround

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

signs that your company has gone too far with cost cutting
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

today s agenda
Today’s Agenda
  • What’s New?
  • Winning the New Cost Wars
  • Performance Management for the CFO Community
  • Actionable recommendations

Copyrignt, Schiff Consulting, 2001

dr gary hamel harvard business school futurist
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

how will we add value in this new economy
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

evidence of exponential change
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

how do we do it
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

what s needed
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

what questions should be asked
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

reality check
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

what financial leaders should do
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

what financial leaders should do1
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

winning the new cost wars
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

the brave new competitive world
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

winning the new cost wars1
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

winning the new cost wars2
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

the new cost wars
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

winning the new cost wars3
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

insights from the micrus case
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

micrus corporation case
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

micrus corporation
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

micrus corporation1
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

micrus corporation2
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

micrus case summary
MiCRUS Case Summary

Inclusive Incentive

Compensation

ABM

Information

MiCRUS

Corporation

Open Book

Management

On-going Leadership

Commitment

Copyrignt, Schiff Consulting, 2001

winning the new cost wars first steps
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

what about performance management for finance
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

rapid tech inc

Rapid Tech, Inc.

A CFO Organization Performance Management Case Study: Adapted from actual practice

background
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

business problem finance workforce not meeting the challenges of the new economy
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

underlying problems cost drivers
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

business solution
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

approach
Approach
  • Set a new standard for competence
  • Assess the current state of competence
  • “Retool” to close gaps

Copyrignt, Schiff Consulting, 2001

approach 1 set a new standard
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

approach 2 assess the status quo
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

slide36

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

approach 3 retool
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

slide38

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

slide39

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

results finance perspective
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

results customer perspective
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

financeachieve roi new skills for the new finance
FinanceAchieveROINew Skills for the New Finance

250%

150%

50%

Yr. 2

Yr. 4

Copyrignt, Schiff Consulting, 2001

thank you
Thank You!

Schiff Consulting Group

Solutions for Corporate Effectiveness