excellence in leadership june 2009

The right routeHighways Agency CFO Stephen Dauncey on keeping a complex portfolio on track

Perfect fitSainsbury’s group CFO Darren Shapland on integrating finance with operations

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Plus: McKinsey explain why Bi can be a vital investment in a downturn

Microsoft’s uK FD balances performance objectives

Performance Management

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Excellence in Leadership

Company insight 3

Welcome to the latest edition of the CIMA (Chartered Institute of Management Accountants) Excellence in Leadership portfolio. This issue is devoted to the topic of performance management and to ensure that we practise what we preach, we recently carried out a readership survey to gauge the performance of this series of publications.

Undoubtedly, the thought-provoking selection of articles in this issue will further improve our performance but the survey has shown that we’re already on the right track. Most respondents (88%) told us that they found Excellence in Leadership either useful or very useful and we received similar responses in relation to the presentation, design and quality of writing. This feedback was very helpful in developing future issues and I’d like to thank all those who completed the online questionnaire.

Almost a quarter of those who took part in the survey said they had taken action in response to a particular article and we very much hope that this issue will increase that fi gure. Our readers told us that performance management was one of the top three topics they were most interested in and the following pages feature a comprehensive overview of the current challenges and developments relating to this essential component of business life.

Stephen Dauncey, CFO of the Highways Agency, and Bernard Crump, CEO of the NHS Institute for Innovation and Improvement, provide insights into the performance management of two of the UK’s highest profi le public sector organisations (pps 20, 52). Louise Ross, a CIMA technical specialist, looks at new forms of business collaboration in the private sector and how these ‘virtual organisations’ require a specifi c kind of management to ensure that goals are reached (p 60). On a more individual level, CIMA past-president Claire Ighodaro reminds business

leaders that time constraints are no excuse for sidelining the development of their own performance. Currently an independent director and a council member of the Open University and the National Learning and Skills Council, Claire argues that top executives must continue to hone their skills and keep learning or they will fail to maximise the quality of their decision making and ultimately the overall performance of their company (p 72).

It has been argued that performance measurement is the most diffi cult challenge in the design of effective evaluation systems. As ever, the devil is in the detail. Fortune magazine has claimed that 70% of strategic failures are down to poor execution rather than lack of

vision. Wim Van der Stede, CIMA professor of accounting and fi nancial management at the London School of Economics and Political Science, looks at some of the key choices that fi rms should consider (p 8), while another of CIMA’s technical experts Alexa Michael studies the recent development of strategy mapping and how it can help organisations to realise their vision more effectively (p 12).

When it comes to designing systems and strategies to make the most of future risks and benefi ts, scenario planning has been used to great effect by companies as diverse as Shell and Eli Lilly. Jerome Andries, vice-president

of business development for the Middle East and North Africa at GlaxoSmithKline, has used scenario planning on many occasions during his time as Eli Lilly’s European CFO. Not to be confused with risk management or modelling, scenario planning offers an objective approach to uncertainty and, Jerome points out, CFOs are in a good position to play a key role (p 64).

With articles from the CFO of Sainsbury’s (p 24), the FD of Microsoft (p 28), the chairman of the Olympic Delivery Authority (p 16) and VP fi nance at Shell Gas and Power (p 56), we hope this issue will provide some useful guidance to help you take your business’ performance from strength to strength. ■

High performance

‘Fortune magazine has claimed that 70% of strategic failures are down to poor execution rather than lack of vision.’

EXCELLENCE IN LEADERSHIPPerformance ManagementForeword

Your feedback is important. If you have any thoughts about the articles covered in this issue or suggestions for features that we could address in future editions, please do not hesitate to contact the editor: [email protected]. To download selected articles published in Excellence in Leadership, please go to www.excellence-leadership.com



EXCELLENCE IN LEADERSHIP ISSUE 11 2009 £12

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Plus: McKinsey explain why BI can be a vital investment in a downturn

Microsoft’s UK FD balances performance objectives


Charles Tilley, CIMA chief executive

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16 A winning performanceOlympic Delivery Authority Chairman John Armitt on what it takes to bring the Games in on time and budget.

EXCELLENCE IN LEADERSHIPPerformance Management

Flying coloursToby Willson of Microsoft UK explains why, aligned with tactical and strategic needs, scorecards are taking off.

The learning curveClaire Ighodaro explains that, in competitive markets, it is the wise who understand that there is always more to learn.28 72

Contents

Perfect fi tSainsbury’s Darren Shapland on how making the right decisions depends on how well fi nance is integrated with operations. 24

CIM011_Contents.indd 4 23/6/09 16:39:56

Excellence in Leadership Issue 11 2009

Editor | Michael [email protected] Sub-Editor | Elliott AykroydProduction Manager | Dave StanfordArt Director | Roberto FilistadDesigner | Mehmet SemClient Services Team Leader | Derek DeschampsProject Director | Christopher [email protected] of Publishing Sales | Richard [email protected] Executive | Alessio RizzoPublisher | William CrockerEditor-in-Chief | John [email protected]

Excellence in Leadership is published by SPG Media Limited and is an official publication of the Chartered Institute of Management Accountants (CIMA).

SPG MediaBrunel House, 55–57 North Wharf Road, London, W2 1LA, UKT. +44 (0)20 7915 9600 F. +44 (0)20 7724 2089E. [email protected]. www.spgmedia.com www.excellence-leadership.com

Chartered Institute of Management Accountants (CIMA)26 Chapter Street, London SW1P 4NP, UKT. +44 (0)20 7663 5441Ana Barco, CIMA, Senior Product Specialist E. [email protected]

ISSN 2041-2444©2009 CIMA and SPG Media Limited

Every quarter Excellence in Leadership brings you the latest thinking from top industry practitioners and thought leaders. It is easy to subscribe: Email: [email protected] or call Kam Jannati: 020 7915 9660.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying or otherwise, without prior permission of the publisher and copyright owner.

The products and services advertised in Excellence in Leadership are not necessarily endorsed by or connected in any way with CIMA. The editorial opinions expressed in the publication are those of individual authors and not necessarily those of CIMA or SPG Media Limited. Whilst every effort has been made to ensure the accuracy of the information in this publication, neither SPG Media Limited nor CIMA accept responsibility for errors or omissions.

Further copies of Excellence in Leadership are available from SPG Media Limited at a cost of £12.00, €13.00 or $18.00 per copy.

Printed by Warners Midlands plc




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Plus: McKinsey explain why BI can be a vital investment in a downturn

Microsoft’s UK FD balances performance objectives


EXCELLENCE IN LEADERSHIPPerformance Management

3 Foreword Charles Tilley, Chief Executive, CIMA

7 Vital statistics

Performance measures

8 Value judgement Performance evaluation requires a strong

measurement function, but this is often fl awed. Wim Van der Stede believes a combination of existing alternatives could address the issue.

12 Putting strategy on the map While most organisations invest in developing

a good strategy, many are failing through poor execution. The solution lies in strategy mapping, writes CIMA’s Alexa Michael.

16 A winning performance Olympic Development Agency Chairman

John Armitt on what it takes to bring the Games in on time and budget.

19 Thinking beyond recession CODA

20 The right route CFO Stephen Dauncey explains how

the Highways Agency keeps its complex portfolio on track.

24 Perfect fi t Sainsbury’s Darren Shapland tells Jim Banks

that making the right decisions depends on how well fi nance is integrated with operations.

28 Flying colours Toby Willson of Microsoft UK tells Jim Banks

that, when they have been kept fi rmly in line with the tactical and strategic needs of a business, scorecards are rising to the challenge.

34 Greater intelligence, greater performance McKinsey’s Markus Löffl er explains why

business intelligence is a crucial investment, especially in an economic downturn.

38 Broaden your mind Mark Easterby-Smith, Lancaster University

Management School, and Shenxue Li, University of Strathclyde Business School, on overcoming ‘corporate rigidities’.

43 Turn adversity into advantage IBM Cognos

46 Blow the budget Steve Player of the Beyond Budgeting Round

Table explains why global companies are turning their backs on traditional budgeting in favour of ‘beyond budgeting’.

52 The right remedy For the UK’s National Health Service, change

has led to innovation, as Chief Executive of the NHS Insitutite for Innovation and Improvement Bernard Crump explains.

56 Ring the changes Radical transformations in pursuit of better

performance can pay off, as Royal Dutch Shell’s Andy Roberts explains to Steve Coomber

60 The buddy system CIMA’s Louise Ross looks at research that

shows how, instead of contracts and terms of engagement, trust and information sharing are the key factors for success.

64 One move ahead GlaxoSmithKline’s Jerome Andries offers a

valuable, current example of how focusing on possible futures creates a level of security in an uncertain world.

68 Reward system Ernst & Young’s Giles Capon on how fi rms can

secure the services of their best managers and still deliver value to shareholders.

71 How to deliver on the performance promise

ICit Business Intelligence

Business intelligenceAlso in this edition:

Lifelong learning

72 The learning curve CIMA past president Claire Ighodaro explains

to Jim Banks that, in competitive global markets, it is the wise who understand that there is always more to learn.

76 Take the long view M&A expert Danny A Davis on why, without

planning ahead for integration, an acquisition could turn out to be a white elephant.

80 Next issue

82 Directory

M&A and restructuring

Managing the performance of a megaproject

Programme and project management

Performance management and the credit crunch

Performance and scorecards

Performance and business transformation

Budgeting, planning and forecasting

Performing in emerging markets

People and performance

Collaborative performance

Remuneration and reward

Risk and performance

CIM011_Contents.indd 5 24/6/09 16:12:06


Head6

Put your house in order Indesit’s Andrea Giubboni on why risk management should start at home

Special deliveryPitney Bowes’ CFO Michael Monahan tells us how to manage risk effectively amid rapid change


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Plus: RSA’s Caroline Ramsay on the new carbon trading schemeBBC’s Zarin Patel on choosing the right outsourcing provider

Strategic Risk Management

March 2009

Look to the future CIMA’s Louise Ross plugs into the online business community to assess the Web 2.0 social networking revolution

Stolen identity Dow Chemical and Viacom address why the secure handling of sensitive information has never been more important


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Plus: Deloitte’s Margaret Ewing on the next generation of CFOs Corus’ Ian Cooper on the emerging emissions trading system Wolseley’s group treasurer on cashflow forecasting

Data Management in Finance

December 2008

Business continuity management 6

Editorial advisory board

Adam Hart

Adam Hart is managing director of equities – corporate finance at Fairfax IS plc, which offers a full range of investment banking services. He has a degree in law and qualified as a chartered accountant with Touche Ross & Co (now Deloitte). He was previously head of business development at KBC Peel Hunt, having joined them in 1993 from Lloyds Merchant Bank.

In his 14 years with KBC Peel Hunt, he was involved in a range of transactions by quoted companies, such as IPOs, M&A and secondary fundraisings, as well as private equity fundraisings. He is chairman of the London Stock Exchange’s AIM advisory group, which is made up of external practitioners who advise the exchange on all matters affecting the operation and regulation of AIM, and a past member of the corporate finance technical committee of the ICAEW.

David Blackwood

David Blackwood is the group finance director of Yule Catto & Co plc. Formerly he was the group treasurer at ICI. He qualified as an accountant with Deloitte before joining ICI in 1985. After a spell at EVC in Brussels, where he mainly focused on M&A transactions, he joined ICI Films as CFO in Brussels.

In 1996 he moved back to London as deputy group financial controller. He was appointed group financial controller in 1998 and group treasurer in 2001. He was also running the group’s global finance function restructuring and outsourcing project. He is a member of the board for actuarial standards, a member of the advisory panel supporting the review of FRS 17 and a member of the risk advisory board at the EDHEC business school in Nice, France.

Keith Luck

Keith Luck is director general of finance at the Foreign and Commonwealth Of-fice. His background is in telecommunications, consultancy and banking. He was finance director for two London boroughs before returning to the private sector in a business development role.

He was headhunted to the Metropolitan Police in 2000. As director of resources, he was responsible for all finance and resource functions, including property, procurement, transport and corporate services. In 2004 he was named CIMA’s Business Leader of the Year.

Kai Peters

Kai Peters is chief executive of Ashridge, the business school located in Berkhamsted, near London. Prior to joining Ashridge, Peters was director of MBA programmes and then dean of the Rotterdam School of Management (RSM) at Erasmus University in the Netherlands.

He serves on supervisory and advisory boards for a number of organisations in the technology and healthcare sectors, and in various capacities for educational associations such as AACSB, AMBA, EFMD and GMAC. He writes and lectures on strategy, leadership and management education for government, business and academic audiences.

Jeff van der Eems

Jeff van der Eems was appointed CFO of United Biscuits in 2005 and additionally became COO in 2006. Born in Canada, he joined United Biscuits from PepsiCo, where he worked for 12 years in a series of senior finance and strategy roles in EMEA and the US.

His last role before joining United Biscuits was CFO of PepsiCo UK and Ireland, where he was responsible for Walkers Snackfoods, Pepsi-Cola, Quaker Foods and Tropicana. Prior to PepsiCo, he specialised in M&A, working for several investment banks in New York.

ExcEllEncE in lEadErship

September 2008

Back to basics CIMA finds new routes to managing cash in the credit crunch

Change your tune Pret a Manger, Moss Bros and Paperchase’s FDs discuss a more harmonious approach to FSC


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Plus: National Grid’s Steve Lucas on people developmentThe Carbon Discloure Project on a responsible supply chain KPMG on talent pools

Financial Supply Chain

June 2008

Positive impact Georg Kell reveals why the UN Global Compact offers hope of a sustainable future for business

Get organised Barclays, BT and FTSE on why companies will suffer financial consequences if they fail to address CSR


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Responsible Business

Special Supplement: CIMA’s Managing Responsible Business 2008 Research Report

CIM011_Ed_VitalStats.indd 6 23/6/09 16:45:52


Head 7Vital stats 7

Vital statistics Performance Management

‘I do not believe the purpose of accounting is to get to the best technical definition of the ‘right answer’, if such perfection even exists. Accounts exist to fairly present a picture of performance, resources and risk which leads to a more efficient allocation of resources by investors into competing claims for capital.’ Douglas Flint, Group Finance Director of HSBC

‘A manager is responsible for the application and performance of knowledge.’Peter Drucker, writer and management consultant

The majority (81%) of the UK’s largest multinational firms are planning or considering moving at least one major business function overseas by 2015.

According to a May 2009 study, over half of companies have already moved or are considering moving support functions such as IT (68%), finance (58%) and HR (53%) overseas. Source: Roland Berger Strategy Consultants

Sound bites

84%

20%

say they are more inclined to defend existing products and services from competitive threats than prior to the recession

Yet only a fifth say that management is devoting more time than before to brand protection and corresponding budgets are coming under fire

Source: Marks & Clerk, May 2009

86%

of executives claim a strong brand is more important in an economic downturn than in favourable economic circumstances

Five top tips for CPM

1. Do map your strategyDon’t just populate existing strategy map templates without thinking about your unique strategic objectives and their causal relationships.

2. Do collect meaningful information by asking the right questionsDon’t just collect everything that is easy to measure.

3. Do ensure strategic alignmentDon’t run performance measurement, budgeting, project management and risk management in parallel to each other without tight alignment.

4. Do create a positive learning culture supported by analyticsDon’t spend all your time and efforts on collecting and reporting data and not enough on extracting valuable and actionable insights from it.

5. Do automate appropriatelyDon’t just buy a software solution without a clear understanding of how it will enable your CPM processes to drive better decision-making.

Source: Bernard Marr, Director of Research at the Advanced Performance Institute

UK firms pack up and go

69% of CIMA members who responded to the Excellence in Leadership survey said that performance management was the most popular issue affecting organisations that you wanted to see covered in the publication. The area was joint top of your list, tying with leading in a downturn. Other key issues that you wanted to see addressed in future editions included:

• Riskmanagement(64%)• Peoplemanagementanddevelopment(63%)• Reporting(45%)• OperationsManagement(40%)

Your feedback is important to us – an extra issue will be published in July, Leading in a downturn.

Bonusesplungeinauditandcompliancesince2008

source: GRS’ survey of 762 audit and compliance professionals, May 2009.

source: Excellence in Leadership reader survey report. Survey period: January 2009

Bonuses rising Same bonusesBonuses falling

And the survey said...

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Head 7Vital stats 7

Vital statistics Performance Management

‘I do not believe the purpose of accounting is to get to the best technical definition of the ‘right answer’, if such perfection even exists. Accounts exist to fairly present a picture of performance, resources and risk which leads to a more efficient allocation of resources by investors into competing claims for capital.’ Douglas Flint, Group Finance Director of HSBC

‘A manager is responsible for the application and performance of knowledge.’Peter Drucker, writer and management consultant

The majority (81%) of the UK’s largest multinational firms are planning or considering moving at least one major business function overseas by 2015.

According to a May 2009 study, over half of companies have already moved or are considering moving support functions such as IT (68%), finance (58%) and HR (53%) overseas. Source: Roland Berger Strategy Consultants

Sound bites

84%

20%

say they are more inclined to defend existing products and services from competitive threats than prior to the recession

Yet only a fifth say that management is devoting more time than before to brand protection and corresponding budgets are coming under fire

Source: Marks & Clerk, May 2009

86%

of executives claim a strong brand is more important in an economic downturn than in favourable economic circumstances

Five top tips for CPM

1. Do map your strategyDon’t just populate existing strategy map templates without thinking about your unique strategic objectives and their causal relationships.

2. Do collect meaningful information by asking the right questionsDon’t just collect everything that is easy to measure.

3. Do ensure strategic alignmentDon’t run performance measurement, budgeting, project management and risk management in parallel to each other without tight alignment.

4. Do create a positive learning culture supported by analyticsDon’t spend all your time and efforts on collecting and reporting data and not enough on extracting valuable and actionable insights from it.

5. Do automate appropriatelyDon’t just buy a software solution without a clear understanding of how it will enable your CPM processes to drive better decision-making.

Source: Bernard Marr, Director of Research at the Advanced Performance Institute

UK firms pack up and go

69% of CIMA members who responded to the Excellence in Leadership survey said that performance management was the most popular issue affecting organisations that you wanted to see covered in the publication. The area was joint top of your list, tying with leading in a downturn. Other key issues that you wanted to see addressed in future editions included:

• Riskmanagement(64%)• Peoplemanagementanddevelopment(63%)• Reporting(45%)• OperationsManagement(40%)

Your feedback is important to us – an extra issue will be published in July, Leading in a downturn.

Bonusesplungeinauditandcompliancesince2008

Source: GRS’ survey of 762 audit and compliance professionals, May 2009.

Source: Excellence in Leadership reader survey report. Survey period: January 2009

Bonuses rising Same bonusesBonuses falling

And the survey said...

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8 Performance measures

Value judgementA performance evaluation system requires a strong measurement function, but this is often a flawed aspect of the process. As Wim Van der Stedeof the London School of Economics and Political Science writes, a combination of existing measurement alternatives could address the issue.

A recent Wall Street Journal article pointed out that, ‘Banks almost unanimously agree that their compensation packages contributed to the global financial crisis but are still struggling to correct some of the flaws’. Performance measurement is perhaps the most difficult challenge in the design of effective performance evaluation systems and associated pay.

Because performance measures are often affected by factors outside the employees’ control, they impose risk on them. The firm

then often narrows the focus of evaluation to reduce risk, for instance by using short-term accounting measures instead of stock price or methods that incorporate long-term performance. That, however, often results in distorted incentives where employees are encouraged to chase short-term performance that entails significant long-term risk.

There are three main types of measurement. The first two – market and accounting measures – are summary measures of performance of the financial type. Market

measures reflect changes in equity value, a common proxy for firm value. Accounting measures typically derive from the practices underlying financial reporting. With respect to the third type – a mixture of measures – there are many combinations, the most common of which involves supplementing the summary financial measures with a number of non-financial measures.

Market measures of performanceFor firms whose stock is traded in capital markets, the market value of the firm

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Performance measures 9

is generally viewed as the most direct manifestation of the theoretical notion of firm value. Who is to complain if employees share rewards in line with those earned by the firm’s shareholders? Moreover, for publicly-traded firms, market values are readily available on a timely basis and are presumably difficult to manipulate by those whose performances are being evaluated.

Market measures present controllability problems, however. They can be influenced by those who have the power to make decisions of major importance – the top few managers in the firm – but they say little about the performances of most employees, except in a collective sense. Moreover, market measures are not always reflective of realised performance. Market values are heavily influenced by future expectations, but those expectations might not be realised.

The stock price fluctuations of most financial institutions between the highs of two years ago and recent lows provide a case in point. Expectations about future value did not reflect the risk that brought some of these firms to the brink of bankruptcy. A related problem is that markets are not always well informed about a firm’s prospects. For competitive reasons, firms often treat R&D and other information as confidential. If lucrative rewards are linked to market valuations, however, managers might be tempted to selectively disclose, or worse, strategically misrepresent this information.

The verdict on market measures of performance, therefore, is mixed. In theory, market measures provide perhaps the best indications that are available as to whether a firm has created or destroyed value in any given period, meaning that they should align well with the principal interest of one of the firm’s key stakeholders, its shareholders.

Market measures are also, in theory, future-oriented and long-term in nature. However, the expectations that market measures capture do not always materialise. The level of risk embedded in these expectations often seems to be poorly ‘guesstimated’. Worse still, future expectations can be manipulated, at least to some extent, by those whose performances are being evaluated through selective or strategic disclosures. Moreover, market measures are only available for publicly-traded firms. They are largely uncontrollable by the vast majority of employees except for a few key executives. But even for them the measures are buffeted by many other factors, making the market

measures noisy indicators of performance. These limitations of market measures cause firms to look for surrogate measures of performance. Accounting measures are the most common surrogates used.

Accounting measures of performanceAccounting measures of performance are typically derived from the rules defined by standard setters for financial reporting purposes. Summary accounting measures have several advantages: measures such as profits can be objectively and relatively precisely calculated on a timely basis and, based on established accounting rules, are verifiable by others, including auditors. Employees respond better to specific, short-range targets and prompt performance

feedback, such as when profit is up or down, than to vague exhortations such as ‘do your best’ and to feedback that is delayed. Moreover, research suggests that accounting profits are positively correlated with changes in stock prices, thereby making them a reasonable, but imperfect, proxy for firm value.

Accounting measures can also be designed to be largely controllable by managers whose performances are being evaluated. The measures can be tailored to match the authority limits of any level of manager, from the CEO down, by successively holding lower-level managers accountable for fewer of the income statements and balance sheet line items. Lower-level managers are therefore unlikely to be as severely affected by uncontrollable factors that make stock prices volatile. Accounting measures of performance are also inexpensive because firms have to measure and report financial results to outside users anyway.

However, accounting measures of performance are far from perfect indicators of the idealised notion of firm value. While research indicates that the correlations between annual accounting profits and stock price changes are positive, the correlations are small for several reasons. Accounting systems are transactions

oriented. Accounting profit is primarily a summation of the effects of the transactions that took place during a given period. But many changes in value do not result in a transaction. For example, when a firm receives a patent or regulatory approval for a new drug, value is created, but there is no transaction, no accounting entry, and no concurrent effect on accounting profit.

Accounting profit, and the various measures derived from it, is highly dependent on the choice of measurement method, and multiple methods are often available to account for identical events, such as depreciation accounting. Moreover, accounting profit is derived from measurement rules that are often

conservatively biased. For example, accounting rules define strict criteria that must be satisfied before revenue can be recognised, whereas expenditures on intangible assets (such as research in progress, human capital, information systems and customer goodwill) are to be expensed immediately. The omission of intangible assets occurs even though these types of assets are much more important for many firms than the old industrial-era assets related to plant and equipment. Finally, accounting profits focus on the past, exclude the cost of equity capital, and ignore risk.

It is important to understand these multiple reasons why accounting profit and firm value diverge because motivating managers to maximise accounting profits is no guarantee that long-term value is being created. Managers whose focus is on accounting profits measured in short periods tend to be highly concerned with increasing monthly, quarterly or annual profits. When managers’ orientations to the short-term become excessive – when they are more concerned with short-term profits rather than long-term value creation – they become ‘myopic’.

Holding managers accountable for short-term profits may induce them to reduce or postpone investments that promise

‘The central idea behind combination systems is that if the firm tracks the right set of leading indicators and gives them proper importance weightings, then profits will inevitably follow.’

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Performance measures10

payoffs in future measurement periods. This is ‘investment myopia’. Managers may also be tempted to boost short-term profits by destroying goodwill that has been built up with customers, employees or other stakeholders. One example of such ‘operating myopia’ is churning accounts in the financial services sector, used to generate business and fee income, even at the risk of customer disgruntlement.

Moreover, the quest for short-term profits sometimes induces managers to engage in earnings management by manipulating the accounting conventions. The effects of such measurement imperatives are perverse because managers who are motivated to produce accounting profits can do so in the short term by not making worthwhile investments; by treating employees or customers in an insensitive manner, or by manipulating the numbers. Such actions, however, are likely to harm future performance and firm value.

The major failure of accounting measures of performance is therefore the potential to promote myopic decision-making, because the measures do not adequately reflect changes in long-term value. One way to address this is to use combinations of measures.

Measure a set of value driversCombinations of measures can help address the myopia problem by supplementing the short-term, backward-looking, transaction-oriented accounting measures with other

performance measures that are more future oriented. Market valuations are future oriented, as markets presumably base their values on expectations of future performance. Similarly, some non-financial measures provide advance information about what is likely in the future.

Accomplishments in areas such as market share, R&D, product development, product quality and customer satisfaction are often value drivers and leading indicators of future financial performance. Supplementing accounting measures with either market or non-financial measures, or both, can be used to mitigate managers’ propensity to maximise short-term accounting profits at the expense of future performance.The first possibility involves the combination of market and accounting measures. For

example, as part of their annual bonus, managers could be granted equity shares which they earn only if accounting performance meets a certain threshold over the next fiscal years. This example also illustrates the use of long-term incentives, that is, where earning part of the compensation depends on performance in future periods.

A second combination involves supplementing accounting measures with non-financial measures, such as product quality, customer satisfaction and employee retention. These combinations can be as simple as including a second measure in the performance evaluation. A division manager’s bonus might be based, for example, 50% on divisional profit and 50% on customer satisfaction.

But measurement combinations can also be more complex. In the airline industry, important value drivers may include measures of ticket sales, on-time performance, baggage handling and in-flight service. The most widely-publicised approach is the balanced scorecard, which proposes a combination of short-term measures in the financial perspective with leading indicators capturing the customer, internal, and innovation and learning perspectives, respectively.

The central idea behind combination systems is that if the firm tracks the right set of indicators and gives them proper importance weightings, then profits will inevitably follow. Hence, holding managers accountable for some combination of leading indicators shifts

The major failure of accounting measures of performance is the potential to promote myopic decision-making, because the measures do not reflect changes in long-term value.

CIM011_010_Stede.indd 10 23/6/09 16:57:32



payoffs in future measurement periods. This is ‘investment myopia’. Managers may also be tempted to boost short-term profits by destroying goodwill that has been built up with customers, employees or other stakeholders. One example of such ‘operating myopia’ is churning accounts in the financial services sector, used to generate business and fee income, even at the risk of customer disgruntlement.

Moreover, the quest for short-term profits sometimes induces managers to engage in earnings management by manipulating the accounting conventions. The effects of such measurement imperatives are perverse because managers who are motivated to produce accounting profits can do so in the short term by not making worthwhile investments; by treating employees or customers in an insensitive manner, or by manipulating the numbers. Such actions, however, are likely to harm future performance and firm value.

The major failure of accounting measures of performance is therefore the potential to promote myopic decision-making, because the measures do not adequately reflect changes in long-term value. One way to address this is to use combinations of measures.

Measure a set of value driversCombinations of measures can help address the myopia problem by supplementing the short-term, backward-looking, transaction-oriented accounting measures with other

performance measures that are more future oriented. Market valuations are future oriented, as markets presumably base their values on expectations of future performance. Similarly, some non-financial measures provide advance information about what is likely in the future.

Accomplishments in areas such as market share, R&D, product development, product quality and customer satisfaction are often value drivers and leading indicators of future financial performance. Supplementing accounting measures with either market or non-financial measures, or both, can be used to mitigate managers’ propensity to maximise short-term accounting profits at the expense of future performance.The first possibility involves the combination of market and accounting measures. For

example, as part of their annual bonus, managers could be granted equity shares which they earn only if accounting performance meets a certain threshold over the next fiscal years. This example also illustrates the use of long-term incentives, that is, where earning part of the compensation depends on performance in future periods.

A second combination involves supplementing accounting measures with non-financial measures, such as product quality, customer satisfaction and employee retention. These combinations can be as simple as including a second measure in the performance evaluation. A division manager’s bonus might be based, for example, 50% on divisional profit and 50% on customer satisfaction.

But measurement combinations can also be more complex. In the airline industry, important value drivers may include measures of ticket sales, on-time performance, baggage handling and in-flight service. The most widely-publicised approach is the balanced scorecard, which proposes a combination of short-term measures in the financial perspective with leading indicators capturing the customer, internal, and innovation and learning perspectives, respectively.

The central idea behind combination systems is that if the firm tracks the right set of indicators and gives them proper importance weightings, then profits will inevitably follow. Hence, holding managers accountable for some combination of leading indicators shifts

‘The major failure of accounting measures of performance is the potential to promote myopic decision-making, because the measures do not reflect changes in long-term value.’

CIM011_010_Stede.indd 10 24/6/09 16:13:29



the balance of incentives toward longer-term concerns because it forces them to make trade-offs between short-term profi ts and the drivers of future profi ts.

But to make the value-driver sets effective, managers must carefully consider which leading indicators to use and how they should be weighted. The idea is that no single measure can refl ect organisational performance suffi ciently well to motivate optimal decision making. As such, multiple measures should provide a more complete refl ection of performance by capturing aspects of performance that are not refl ected in a single performance measure.

For example, profi ts may arise from revenue growth and/or cost containment, but each may require different emphasis depending on the strategy of the fi rm. Another version of the completeness argument refl ects a stakeholder view of the fi rm. That is, market and accounting measures refl ect only the interests of the fi rm’s fi nancial claimants – the shareholders. Hence, other measures are necessary to refl ect the interests of other stakeholders, such as employees and customers.

Moreover, combinations of measures give employees more direction than summary market or accounting measures. If the combination systems are well designed, they impart a better understanding of how to create value. The presumed causal linkages in a balanced scorecard, for example, provide employees with guidance as to what they must do to infl uence fi nancial performance, which comes at the end of the causal chain.

But do these combinations of measures work? In an abstract sense, it is diffi cult to argue against combination methods. They are infi nitely fl exible. If a summary measure has a weakness, such as being short-term oriented, fi rms can use other measures that mitigate that weakness, for example, measures that emphasise returns in the future, such as product development and market share. If the combination of those measures leaves out a concern for the environment, fi rms can add another measure that induces employees to have that concern, such as carbon footprint targets.

Combinations of measures are widespread, suggesting that fi rms have found them useful. However, some fi rms implement ‘boilerplate’ systems without much thought as to whether those systems fi t their specifi c needs. If there is no

reliable link between each of the chosen value drivers and fi rm value, then the system will be fl awed. There is also a diffi cult trade-off involved in deciding how many measures are needed to defi ne performance well enough.

For motivational purposes, too many measures may mean employees do not pay adequate attention to any of them. Moreover, because of the ease of working with accounting measures, fi nancial performance often continues to be weighted disproportionally, thereby skewing employees’ attention towards fi nancial results – the issue which combination systems were supposed to redress. Cost is also a concern as many of the non-fi nancial measures may be diffi cult to obtain or not readily available.

If well-designed, it is diffi cult to argue that performance evaluations based on a set of value drivers could not have several advantages. Combinations of measures provide short-term performance pressure, yet reduce the risk of myopia. They link performance measures at all levels of the organisation with the fi rm’s overall objectives and strategies, thereby enhancing the understandability, and potentially the controllability, of critical performance areas. However, implementing effective combinations of measures is challenging and often costly. If there are too many measures, some not be well chosen, then motivation can be weakened or misdirected, or both.

Redressing weaknessOverall, then, the primary limitation of market measures is controllability, even though they should score high on future orientation and lack of manipulation. But market measures are best suited for use at top management levels of publicly-traded fi rms only. Accounting measures of performance are in common use and they have some advantages over other measurement alternatives. In particular, at minimal incremental cost, they provide a useful summary of the results of the many actions that managers take, and the measures can be tailored to match their area of accountability. But accounting measures are only surrogate

indicators of changes in fi rm value, thereby creating a tendency to make managers short-term oriented, sometimes excessively so.

In theory, combinations of measures can redress several of the weaknesses associated with market and accounting measures. For example, with respect to controllability, the measures can be chosen so that there is a clear line of sight between managers’ decisions and the measures.

With respect to keeping a long-term focus, it would seem desirable to combine fi nancial measures, which are inherently short-term oriented, with some non-fi nancial, leading indicators of future performance. But the fl exibility to do so often adds complexity, where poorly-chosen non-fi nancial measures, their importance weighting, and/or their

sheer number sometimes undermine the very rationale for which these systems are introduced in the fi rst place.

The analysis presented above shows, perhaps not surprisingly, that none of the measurement alternatives is perfect. But it is important to understand where each of the alternatives falls short of perfection and how those shortfalls can be addressed. Choosing a measurement alternative wisely requires detailed analyses and complex judgments. ■

‘If well-designed, it is diffi cult to argue that performance evaluations based on a set of value drivers could not have advantages.’

Wim Van der Stede

Wim Van der Stede is the CIMA professor of accounting and financial management at the London School of Economics and Political Science. His research interests include the areas of budgeting, performance measurement and evaluation, and incentive compensation systems. Van der Stede’s publications have appeared in numerous academic and practitioner journals.

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12 Performance measures

Putting strategy on the map While most organisations invest in developing a good strategy, many are failing to maximise its performance through poor execution. The solution lies in strategy mapping, an illustrative method of communicating an organisation’s aims, writes CIMA’s Alexa Michael.

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The business world is facing a crisis in strategy. This is not because the majority of managers cannot produce a good strategy; most organisations develop their strategic plans well. The crisis has occurred because many businesses fail to execute their strategies effectively. Fortune magazine has repeatedly claimed that 70% of strategic failures are due to poor execution, not because of a lack of vision, and that only 10% of well formulated strategies are properly executed.

In 2006, the Balanced Scorecard Collaborative issued the following statistics on its website:

95% of a typical workforce does not •understand its organisation’s strategy90% of organisations do not execute •their strategy effectively86% of executive teams spend less than •one hour per month discussing strategy70% of organisations do not link middle •management incentives to strategy60% of organisations do not link •strategy to budgeting.

To achieve its objectives, an organisation must be able to turn its vision, mission and core strategies into action. In many organisations, there is a major disconnect between forming the strategy and executing it. An ill-executed strategy not only leads to shareholder and board frustration, but can also cause high executive turnover.

Strategy mapping is a recent development aimed at improving strategy implementation and execution. Pioneered by Robert Kaplan and David Norton, who also developed the Balanced Scorecard, strategy maps allow organisations to describe and communicate their strategies graphically.

CIMA’s Using Strategy Maps to Drive Performance Management Accounting Guideline (MAG) looks at how businesses can create a framework that can be used by employees at all levels of an organisation, including the professional accountant in business, to develop strategy maps so that company strategy can be executed more effectively.

The concept behind the strategy map is based on the adage that a picture is worth a thousand words. Strategy mapping is a visualisation process that helps an organisation to communicate and validate its strategy ‘story’ in a way that its stakeholders can understand.

Good strategy maps describe how an organisation plans to use employee, technological and business processes to meet customer expectations and shareholder demands. In short, strategy maps allow organisations to describe and communicate their strategies clearly. Literature on strategy mapping has tended

to concentrate on what strategy mapping is and why companies should adopt it. The MAG focuses heavily on how to implement a strategy mapping initiative, and on the difference between forming a good strategy and implementing it. The MAG also details a six-step process to guide private companies in creating their own strategy map. Case studies are taken from the hotel, automotive, retail and manufacturing industries to show how the six principles are executed. Only the key points are covered here, and readers should refer to the MAG for further detail.

Specify an overriding objective The first step is about linking the strategy map to the creation or reaffirmation of

the organisation’s mission, core values and vision. It must distinguish between the organisation’s overriding objective and its strategies. Business leaders often confuse objective and strategy, and believe that satisfied customers, excellent service or being a low-cost provider form the overriding objective.

However, for profit making organisations, the overriding objective must be the bottom line.

Here are some examples of an overriding objective:

Increase the return on capital employed •by 6% within three yearsIncrease profit margin from 8% to 12% •and net cashflow from £500,000 to £750,000 within five yearsIncrease the target share price by 20% •by the next reporting dateIncrease total shareholder return •relative to benchmark by 10% within two years.

‘Strategy mapping is a visualisation process that helps an organisation to communicate and validate its strategy ‘story’ in a way that its stakeholders can understand.’

Maximise organisational value

Revenue growth strategy

Add/retain high-value customers

Customer management

leadership

1) Human capital (staff competencies)

2) Information capital (technology infrastructure)

3) Organisational capital (climate for action)

Internal operations excellence

Effective governance &

control

Perception; public relations

Increase revenue per customer Reduce cost

per customer

Current Migrated NewNew

offeringsSolutions

focusScalability strategies

(eg. web)

Productivity strategy Asset utilisation

Completed generic strategy map

Fina

ncia

lC

usto

mer

Inte

rnal

Lear

ning

& g

row

th

What do w

e want to accom

plish?H

ow do w

e plan to accomplish this?

Innovation & commercialisation

supremacy

Generic strategy map taken from Using Strategy Maps to Drive Performance, a Management Accounting Guideline

CIM011_011_Michael1.indd 13 23/6/09 17:00:37



The value propositionIf an organisation wants to be a market leader, it must know what its customers value. Once it has this information, the organisation can re-focus its efforts to provide value drivers better than its rivals.

The organisation then chooses the value proposition to help it win market share. It should refer to the three value propositions put forward by Treacy and Wiersema in 1995 for competing in the market:

1. Operational excellence (also known as best total cost)

2. Product leadership3. Customer intimacy (also referred to as

customer solutions).

‘As employees at all levels learn to use the strategy map to guide the business, they will assist themselves and their company to execute strategy far more positively.’

Management Accounting Guides

Management Accounting Guides (MAGs) offer practical guidance on strategic management practices and concepts that can help senior CIMA members to improve their organisation’s performance.

Each MAG looks at a topic of interest to management accountant (examples include Outsourcing the Finance and Accounting Function and Identifying, Measuring and Managing Organisational Risk). They provide an introduction, detailed analysis, conclusion, and an executive summary.

CIMA collaborates with the American Institute of Public Accountants and the

Society of Management Accountants of Canada on these guides and associated infocasts. The MAGs are written by industry experts. Members of the three organisations review and quality control them.

The MAGs are arranged under four broad subject headings: governance, managerial and financial accounting, organisation management, and strategic management. CIMA members can find them in the CIMA Professional Development section on the My CIMA part of the website, where they appear in a drop-down menu. Member log-in details are required to access the individual MAGs.

CIM011_011_Michael1.indd 14 23/6/09 17:01:01



The purpose of the value proposition stage is to choose one dominant value proposition and provide breakthrough customer value in it.

The financial strategiesOrganisations need to determine their plans and strategies around revenues and costs. Financial strategies fall into three main areas:

1. Revenue growth2. Productivity3. Asset utilisation.

Every organisation must pay attention to each financial strategy area. However, the choice of value proposition in step 2 will decide which one will predominate in step 3.

The customer strategiesOnce the financial strategy has been determined, the organisation needs to make formal plans and strategies. The organisation must determine and articulate its customer strategies, which can be split into three main areas:1. Retaining and adding customers2. Increasing revenue per customer3. Reducing cost per customer

Execute through the internal perspective strategiesThe organisation must establish the actions that will realise its plans and strategies to win market share. The organisation must draft a plan to execute the ‘story’ that has been developed so far.

Plan the learning and growth strategiesOnce the financial and customer strategies are established and an execution plan devised, the organisation will almost certainly find some gaps in the knowledge, skills and abilities it needs. Companies develop appropriate learning and growth strategies to fill the gaps.

After it has produced a strategy map at a basic corporate level following the six steps, organisations can ‘cascade’ it into several lower level divisional or geographic maps. There are three different types of cascading maps that organisations can use.

The first type sees the corporate map cascaded into a series of lower level maps. The maps are usually based on geographical, product, service or

group differences. The second is a ‘within perspective’ type of map where employees are made to consider what developing customer strategies will really mean for the organisation. ‘Within perspective’ maps can point employees to specific actions and accountabilities to help execute the strategy.

The ‘across function’ is the third cascading type and involves drilling down to specific objectives on the strategy map. The cascading approach that is chosen will depend on the individual organisation, and may even vary between departments. What matters is that the cascading process results in a series of actionable steps that employees can follow to produce results.

Strategy maps can be integrated with other management initiatives, such as total quality management, just-in-time, customer relationship management and budgeting systems. Financial measures and tools such as profit, return on investment, cashflow statements and economic value added preferably should occur in all profit-making organisations.

Strategy mapping could play a big part in budgetary decision making because each budgetary measure can be seen in terms of its impact in achieving the strategy map components. Linking strategy mapping to budgeting can send an effective signal to employees as to where initiatives can be best deployed.

Three real-life case study examples are used to illustrate the use and benefits of strategy maps. They are RBC Dominion Securities’ Life Wealth Planners, a financial services firm; ATS Automation Tooling Systems, a global manufacturer; and the Master of Business, Entrepreneurship and Technology (MBET), a non-profit making education programme.

Each organisation used a strategy map to communicate its strategic themes to stakeholders following the six steps described above. All three produced corporate-level maps, with two using secondary ‘drill-down’ maps to provide more detail. They then used the maps to develop measures to monitor and validate strategic progress.

Key management processes, including the annual budget, monthly reviews,

recruitment policies and continuous improvement initiatives, were also incorporated into the maps.

Representatives from all three organisations found that strategy mapping has shown several positive results. The most important is the ability to describe, communicate, implement and monitor what needs to be accomplished, and what individuals can do to achieve this. All three plan to continue using strategy maps.

Strategy mapping is an effective tool that can help an organisation to maintain its competitiveness. As employees at all levels learn to use the strategy map to guide the business, they will assist themselves and their company to execute strategy far more positively. In doing so, the organisation will be able to generate the profitability and demonstrate the accountability demanded by customers, shareholders, employees and the world around them. ■

Further information

This article is based on Using Strategy Maps to Drive Performance, a Management Accounting Guideline written by Howard M Armitage and Cameron Scholey, and published by CIMA. CIMA members can access the full version at:

www.cimaglobal.com/cpdcentre

Alexa Michael


Alexa Michael is an information specialist within the CIMA Innovation and Development department. Her work includes writing and editing various outputs for CIMA publications, including articles, topic gateways and research executive summaries, as well as more traditional information and library work. She has an MA in Library and Information Studies from University College London.

CIM011_011_Michael1.indd 15 24/6/09 16:15:18


Managing the performance of a megaproject 16

A winning performanceThe Olympic Delivery Authority (ODA) is tasked with delivering the Olympic Park, Village, transport and other infrastructure, some time before 27 July, 2012, the opening day of the XXX Olympiad London. ODA Chairman John Armitt tells Steve Coomber what it takes to bring it in on time and budget.

You might think that a quick glance at the list of the ODA’s responsibilities and then the calendar would be enough to give John Armitt a few years of sleepless nights.

The list of projects that the ODA is charged with is formidable. It includes the Olympic stadium, two arenas, an aquatic centre and a velodrome, converting the Olympic Park for long-term use after the Games, the Olympic Village, planning and delivery of transport infrastructure and services to support the 2012 Games projects, and permanent works to existing sports venues.

True, there is a budget of £9.5 billion, up from the original £2.37 billion, but the clock is running and a project that will involve some 30,000 workers and over 800 companies sharing approximately 7,000 contracts has to be a major challenge.

Armitt appears relatively unruffled, however. To start with, he explains how managing information, and thereby expectations, is an important part of

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17Managing the performance of a megaproject

major project management, and his role as chairman of the ODA.

‘We have a very large number of stakeholders that have an active interest in the Olympics and its delivery. My role involves talking to those stakeholders, and making sure that they have all the information that they need to keep them regularly updated,’ says Armitt. ‘Political stakeholders, in particular, like to feel that they are not going to be surprised by the media ringing them up about something they know nothing about.’

Besides Armitt’s crucial outward-facing role, there is also an internal oversight function. ‘It is the normal role of the board – overseeing the executive team, and where necessary seeking assurances through the executive and the various committees, that the inevitable risks are being properly foreseen and managed, and that the overall strategic direction we are taking in delivering the venues is a sensible one.’

Given his experience, Armitt is well aware of those factors that are of critical importance when delivering an infrastructure project.

‘If you look at what makes a successful major project, or an unsuccessful one, the key responsibility lies with the client organisation. The client needs to be clear in their mind about what they are buying. A lot of projects go wrong because they set off too quickly, when the client has not properly thought through what they want, other than to see activity quickly,’ says Armitt.

‘And then you get into the change regime. Change costs money, change takes time, and that is when projects start to go wrong. So one of the key things is to have a very clear understanding of what you want, and to be able to specify that.’

That is why, with the Olympic development programme for example, a lot of attention has been focused on working out, in conjunction with the London Organising Committee of the Olympic Games and the various sports associations and federations, what exactly is needed on the ground, whether for a velodrome or a basketball arena.

‘A lot of discussions have to take place to identify the scope of works, so that when we outsource design and construction, there is a high level of certainty as to what we are buying, which then reduces the risk of change and consequent delay.’

Team talkAnother factor in ensuring a successful infrastructure project is getting the right management structures in place. Armitt says that with the Olympic development project the importance of buying in management support through a delivery partner was acknowledged at an early stage. In this case the delivery partner is CLM, a consortium comprised of CH2M HILL, Laing O’Rourke and Mace.

‘Fundamentally you have the ODA using CLM as its programme delivery manager, supervising the construction for us on a day-to-day basis, once we have placed contracts with the architects and the contractors. Each project is overseen by a team of people from CLM, who are in daily contact with what we call the tier 1 contractor. The tier 1 contractor then oversees the tier 2 subcontractors.’

The contracts are all design and build, says Armitt. So the main contractors are responsible for the design in terms of managing the architects and the engineers as well as actually delivering the construction. Most of the large contractors are contracted on a target price basis. ‘We start off by agreeing a target price, and then there is a pain and gain share approach to savings or overruns,’ says Armitt. ‘We are incentivising the Tier 1 contractors to deliver on time and within the budget.’

Monitoring metricsAs Armitt emphasises, the aim in any major infrastructure project is to eliminate unpleasant surprises by constantly looking forward, assessing the risks, and taking action well in advance that mitigates those risks. A large part of the constant monitoring and assessment of risk is done using a range of key performance metrics, as is the case with the ODA.

‘We have various metrics that we use,’ says Armitt. ‘They are indices that enable us to understand the value and the cost of what is being built. So there is the cost index and the programme index, for example. ‘We need to make sure that those two

indices are both in line. If, for example, you had a cost index which was looking very good, and a programme index that was not looking good, you would be unwise to assume that your cost index was right. Because it would almost certainly mean that, while you might be under spending, you are under spending because you have not been delivering completed value, which your programme would then show up.’

Other fundamental metrics are also required on each individual project, as part of standard reporting procedures put in place to ensure the senior management team and board get consistent reporting across all of the projects.

‘Primarily we are looking at the safety performance, that is of prime consideration to us, at quality reports, at whether sustainability targets that we have set are

being met. And we are looking at costs and programme,’ says Armitt.

‘So in a sense, we have a series of the normal sort of traffic lights of red, green, and orange, so we can see when things are on time, behind time, when things are within budget, or over budget.’

As Armitt points out ,a lot of information used to monitor the performance of large infrastructure projects is generated on the ground at the individual project level and so it is essential to have confidence that the records being kept are accurate.

Also, says Armitt, it is important to eliminate optimism bias, so that people are not underestimating the costs they are going to accrue in the future. ‘People who are involved in construction tend to be optimistic,’ he says. ‘So you have got to make sure that their optimism is being recognised, and that the information which is being fed through is properly understood.’

With the right performance and management structure, problems with contractors should be spotted early and rectified, without damaging the project delivery.

‘If you look at what makes a successful major project, or an unsuccessful one, the key responsibility lies with the client organisation.’



Managing the performance of a megaproject 18

John Armitt

John Armitt has worked on some of the largest infrastructure projects ever undertaken in the UK including the Sizewell B nuclear power station and the Channel Tunnel rail link. He has helped turn around the Costain Group, and for many years was CEO of Network Rail, the organisation responsible for the UK’s railway infrastructure.

He was appointed chairman of the Olympic Delivery Authority on 1 September 2007. Armitt was previously chief executive of Network Rail from October 2002 and chief executive of Railtrack from December 2001.

‘We will have completed probably 90% of our activity by the summer of 2011. So we expect to fi nish the year before the Games begin.’

Personal bestRunning a major construction programme, whether it is Sizewell B, the Channel Tunnel rail link or the London Olympics, all Armitt projects, requires an experienced team and great internal communications. At the ODA, Armitt and the board are regularly briefed on the project’s progress.

‘It happens on a monthly level, and we have it right way through, in the form of a monthly report which shows in some detail what is happening on every individual element of the Olympic Park, project by project,’ he says.

‘And then, on a quarterly basis, there will be a more thorough review undertaken, of the costs in particular. So we can make sure that costs are not blowing out, or equally if we have got genuine under spending, that the under spending is being released, and then we can put it back into our contingency pot. So we haven’t got people hoarding savings, which we might well need to offset areas elsewhere which have gone over cost.’

Armitt says he has an excellent relationship with David Higgins, his chief executive. Their offi ces are twenty paces apart and they operate an open-door approach.

‘It is about making sure that I have the latest information, and I just pick that up by talking to David,’ says Armitt. ‘Or, if I want a particular piece of information, I might go off and talk to one of the directors who report to David, from the fi nance function or elsewhere.’

Finishing in styleArmitt fully intends to deliver the construction equivalent of a major trophy, by bringing in the Olympic infrastructure project on time, if not before.

‘We are on target,’ he says. ‘At the moment we are within our budget, and we are on time. We will have the bulk of our delivery completed two years from now; we will have completed probably 90% of our activity by the summer of 2011. So we expect to fi nish the year before the Games begin.’ ■



Company insight 19

As the financial downturn continues to take hold, many believe that battening down the hatches and just waiting for recovery is the best way forward. But the world is changing despite the current climate, and the way to approach business and prepare organisations for the future is also changing. Interestingly, the pace of change has not diminished and the best business leaders are actively embracing new ways of working.

Proactive businesses are investing more time, energy and resources into their people, processes and systems to deal with today’s challenges but also prepare for the economic recovery. Many are now making the decisions that they put off when business was booming. But where should forward-looking organisations focus?

Importantly, best practices are not solely reserved for periods of downturn. Proactive organisations will implement these methodologies in healthy times as well as during recessions.

Finance leading the way The finance team is pivotal in this process because it ‘owns’ most of the key performance indicators used to analyse and evaluate the health of a business. Effective finance departments will turn times of recession and efficiency drives to their advantage, proving their worth to the business in a way which might not be so obvious in better times.

Doing more with the same seems obvious but most businesses admit to areas of waste. Look for opportunities to eliminate duplication and non value-add activities and automate manual processes. Working at optimal efficiency levels across the business is crucial for the survival and long-term profitability of an organisation.

Effective cost control requires visibility of the cost pipeline, measuring performance, identifying and resolving problems

early. Organisations can look at some simple measures such as implementing a centralised procurement strategy, and systems to reduce maverick buying and control spending.

It is a cliché, but people are generally the most valuable but also the most costly asset. The kneejerk reaction is to cut staff to reduce costs, often wiping out a valuable knowledge base. But forward thinking businesses take time to analyse the staff they have. Having a comprehensive understanding of the skills and expertise in the business, helping people work together more efficiently and effectively and harnessing their knowledge and creativity could help businesses survive now and ensure the right people are retained for when the upturn arrives. Customer focusIt’s another cliché, but keeping clients at the heart of the business is fundamental. Acquiring customers is costly, retaining

them less so. The competition will be aggressively targeting them so a systematic focus on retaining clients now will help secure customer loyalty.

Knowing clients well and understanding their buying behaviour helps to identify opportunities to deliver more value to them, driving potential cross- and up-selling opportunities as well as identifying potential payment problems early.

A swift response to such problems protects the business from risk and handled well could preserve the relationship for the future. With the right focus, maintaining high standards of support and customer service should create business opportunities as well as being crucial to client retention.

No one would dispute that we must work harder to maintain and win new business, evaluate and adapt skill sets and put more effort into keeping clients happy during these challenging times. Having the right systems and processes in place will drive efficiency and provide a transparent, accurate and comprehensive view of the business. That will go a long way in helping to build on past success, weather the recession and emerge stronger when the recovery arrives. ■

Thinking beyond recessionIn the midst of a global recession the need to grow revenues and improve efficiency is even more acute, explains David Turner, Group Marketing Director for CODA.

‘Effective finance departments will turn times of recession and efficiency drives to their advantage, proving their worth to the business in a way which might not be so obvious in better times.’

Further informationCODA GB LtdWebsite: www.coda-financials.co.uk

CIM011_003_Coda.indd 19 24/6/09 11:28:44

Programme and project management20


The right routeWith 4,500 miles of English motorway and trunk roads to maintain, performance management is very much a live issue for England’s Highways Agency (HA), an executive branch of the Department for Transport (DfT). CFO Stephen Dauncey explains how the HA keeps its complex portfolio on track and why it is always important to be measuring the right commodities.

CIM011_016_Dauncey.indd 20 24/6/09 09:19:08


Programme and project management 21

The Highways Agency (HA) is about a great deal more than simply managing its tarmac assets, explains CFO Stephen Dauncey. Performance is also measured in a range of other areas including the safety and reliability of journeys, the quality of roadside information and even the presence of deadly poisonous ragwort on country verges.

The diffi culty with any business, he says, is getting the right outcomes and measuring them while being clear about the linkage with inputs, an undertaking which in the highways industry is quite complicated.

‘It is very much about getting a grip on the outcomes and the inputs. But you need to take your time before deciding what you want to measure.’

Dauncey does not differentiate between the Key Performance Indicators (KPIs) for a public or a private business and he acknowledges the dictum that effectiveness counts more than mere effi ciency.

‘The HA is a very focused delivery organisation, which greatly contributes to the economic benefi ts of the nation, so it plays very heavily onto the government agenda. We’re trying to run it like a private sector business, so that we get the right measures at the right levels. If we then get asked a question, we’ve got confi dence that we can get the answer.

‘That is where I think we are different. We have got a very good track record at being able to turn around ad hoc questions from MPs. They tend to be very local issues, apart from the major reports that go up to the Parliamentary Accounts Committee, because of the measures of performance that are held at a local level.’

Unlike private business, government agencies need to retain data for long periods.

‘To anticipate where a minister or an MP is going to have an interest is almost impossible. So you just collect everything to be ready for those issues. You don’t have the luxury of saying: “We don’t have that information”.’

Dauncey is sympathetic, however, to the argument that a business can create too many KPIs, perhaps giving itself an excess of information, which, by its sheer preponderance, does not help with performance measurement. However,

for government organisations subject to parliamentary scrutiny, a slim set of KPIs is not an option. So he explains how the HA has layered its performance measurement structures to make them more manageable.

‘We have around 14 KPIs on contractual performance issues. There are a lot of other softer issues on motivating success and then there are the fi nancial measures. So each area is probably running into something like 30 KPIs. So we’re not necessarily talking about huge numbers. However, we are currently comparing the unit costs across our 14 areas. There are about 146 individual pieces of data but they are going to be made up of thousands of inputs. So as you spread it across the nation, it becomes a huge database. That’s all it is though, a huge database. In the end, I’ll bring that back

to one KPI, but there’s a huge amount of information behind it.

At the moment I would tend to say we have too many KPIs; not necessarily just KPIs but too many measures and too many actions.’

In Dauncey’s view the HA board has had too much on its agenda.

‘Too many measures were being challenged and were being fed up to it, which didn’t help them focus their efforts. So it is something I want to look at in the next 12 months, trying to get the right balance there, getting only the right measures reaching board level so that its interventions can actually add the most value. You’ve got to make it a pyramid as opposed to a fl at line with everything fl owing upwards. What we’re trying to do is get KPIs monitored at the right

Regional fi nance function embedding

Stephen Dauncey says that one difference between the private and public sectors is the ability to rotate fi nance function professionals between regions to undertake performance management. The HA has seven regions divided into a total of 14 different areas, each with integrated fi nance teams.

‘We have a change programme to move from the old-fashioned fi nance teams doing the statutory accounting through to actually getting into the business cases and improving the effi ciency which is the challenge.’

‘Where I was before in the nuclear industry, I’d be quite happy to say: “Let’s move somebody 200 miles and we’ll look after them”. To ask somebody in the public sector to go, for their next career move, from a fi nance role in Manchester to spend a couple of years in London is not so easy. Labour force fl exibility in the public sector is a challenge. We don’t need to co-locate everything but trying to get that fl uidity of roles is probably the next challenge for

us. We’ve got the local roles and clear value-added activities at a local level. I think we have also improved people’s enjoyment and motivation. Our challenge now is fl uidity that moves people even between major projects and network operations.’

‘Rotation is diffi cult because we split a couple of years ago to get integrated fi nance teams into operations, so their geographically diverse and that gives us a problem on rotation. So I have teams in Manchester, Leeds, Bedford; all our main offi ces who work very closely with the operational teams and their role is to improve their business cases and their effi ciency, as well as making sure we are delivering in a controlled and governed fashion. Delivering ten large projects on your patch is a completely different skill set to delivering a thousand small projects; not just a different skill set but it’s a different approach.’

‘It is very much about getting a grip on the outcomes and the inputs. But you need to take your time before deciding what you want to measure.’

local level. I think we have also improved people’s enjoyment and

CIM011_016_Dauncey.indd 21 24/6/09 09:20:26


Programme and project management22

level and understand what needs to escalate.’ Below the board, emphasis is now being put on what the operations units need to

see from the regions and what the seven regions need to know of what is happening in the 14 areas.

‘We are seeking to bring in exception reporting so performance measures only escalate where something is not necessarily going wrong, but where the mitigation and the correction isn’t working. Therefore, the whole approach, which is part of our partnership style, is to monitor KPIs and put corrective actions in place. If these are effective, that’s great. If they’re not, that becomes the issue.’

In the modern ‘customer-oriented’ thinking of government agencies, the issues that have to be monitored are not simply the state of the tarmac but delays caused by repairs and maintenance and even include roadside litter, which, says Dauncey is a major issue for the HA network. ‘We address any complaint and take it seriously.

If it becomes a large problem from a customer point of view, then it escalates. Why is that particular region having a

problem with that particular KPI? And litter is a big thing for us with our customers. But it is not something I think the board needs to worry about.’

Assurance processes take several forms. Routine independent reviews assess the performance of service providers which includes area providers. There are also customer feedback surveys.

‘We do these on a national and a regional level, which is a true measure of performance, even though sometimes you get frustrated because the feedback is coloured by things like the petrol price, which is actually nothing to do with us. But that’s very important for us in finding out how our network is operating.’

Highway big spender

In its 2009/10 business plan, the Highways Agency has combined operating costs and capital expenditure of £6.5 billion, of which Capex will be £2.1 billion. However, Dauncey explains: ‘That £6.5 billion is a headline figure. We are really looking at a cash spend in any year of £2.9 billion so next year £2.1 billion is capex. There is also a technical point because we’re now moving across to IFRS so, because of our renewals expenditure, which used to be deemed a resource expenditure, we can no longer get on to renewals accounting. So we are capitalising our renewals. As a result, it has moved about £500 million from resource into capital for next year.

‘We are seeking to bring in exception reporting so performance measures only escalate up where something is not necessarily going wrong, but where the mitigation and the correction isn’t working.’

CIM011_016_Dauncey.indd 22 24/6/09 09:22:50

Programme and project management 23

The HA also carries out routine surveys, measuring the condition of its assets.‘I am focusing on the major areas of spend, but we’ve got all sorts of KPIs on signal setting and the like, from the regional control centres.’

The feedback comes from the HA’s own staff as well as road users. ‘I can assure you that if a customer sees a roadside signal that isn’t set correctly, our director of operations knows about it quite quickly. So there are formal and informal feedback mechanisms’.

Sending the right signals is important to Dauncey. And, while the HA’s portfolio of operations remains intricate and widespread, the measurement procedures that it has established offer a smooth ride for the finance department. ■

The IT factor

The HA has a network of high capacity fi bre optic links to carry traffi c data to its control centres, which, says Dauncey, is very robust and has been delivered as part of a private fi nance initiative. The Agency’s business systems run on Oracle.

‘I want to capitalise on that and use it much more for performance rather than just fi nance. And that’s another challenge for us. It’s not a challenge about the IT, but about getting the right measures in there and getting the business to use them properly.’

Dauncey has not yet selected the suite of performance management tools that will bring enhanced monitoring of his KPIs. Oracle and outside providers are being talked to.

‘What I want is one single business intelligence answer so that we have all got the one ‘room’ to look at, so to speak.

We shouldn’t have to be a complicated business. However, as we’ve moved from being effectively an asset maintainer and builder to being a network operator, the amount of data that is fl ying about around traffi c data and the use of those data and the intelligence application of what this is telling us, has been exponential. So getting the right feed into a business intelligence tool is a challenge. We have data coming from everyone from traffi c economist to wildlife experts.’

The Highways Agency is an executive agency of the Department for Transport (DfT), and is responsible for operating, maintaining and improving the strategic road network in England on behalf of the secretary of state for transport. The Highways Agency plays a major role in delivering the Government’s ten-year plan for transport.

Stephen Dauncey

Stephen Dauncey is fi nance director for the Highways Agency. He is responsible for managing the successful delivery of the Agency’s operations within an annual combined operating cost and capital expenditure of £6.5 billion. He is a certifi ed accountant and has a wide range of operational experience. He has developed his fi nance, commercial and leadership skills through a number of key managerial and director roles. He was previously the Agency’s FD for network operations.

CIM011_016_Dauncey.indd 23 24/6/09 09:24:28


Performance management and the credit crunch24

Perfect fitThe economic downturn has put greater pressure on every business decision but, while some companies are cutting costs, others are still looking at opportunities for growth. Sainsbury’s Darren Shapland tells Jim Banks that making the right decisions depends on how well finance is integrated with operations.

CIM011_Sainsburys.indd 24 24/6/09 09:28:16


Performance management and the credit crunch 25

Managing the performance of any organisation always presents challenges, but the turnaround in the world’s economic fortunes has brought short-term issues to the fore in many firms. Yet for those organisations that have the right structures, metrics and processes in place, now is the time to look at long-term strategy.

In some ways the task at hand for CFOs at these companies is not vastly different to the norm. The nature of the challenges may be a little different, but managing performance is always about responding to changes in market dynamics or the competitive environment in order to achieve sustainable profitability.

For organisations that have found the way to align all of their constituent parts around a common set of financial metrics, there is not necessarily a need for any great overhaul of business structure or processes.

Sainsbury’s is one of those organisations that have been able to continue growing in a

downturn [see box, right], but what are the key ingredients in its approach to performance management that enable this bullish outlook?

For Darren Shapland, CFO and director of Sainsbury’s, the first important factor is for an organisation to stick to the long-term perspective as much as possible, so strategic thinking must look beyond the recession. The second factor is ensuring that finance has a pivotal role in deciding strategy and setting the course that will lead an organisation through these testing times.

‘The day-to-day micro-management of our stores may be more difficult, but in terms of managing the performance of the business as a whole then it is no different now, although the consumer environment has changed somewhat. We have 800 stores and this is a big business which runs like an oil tanker. You can only tweak it, you can’t make radical changes overnight,’ says Shapland.

‘From the finance perspective, you need to agree a top-down strategy at board

level and to translate that down through all levels of the organisation. We use financial processes to do that, in the form of budgeting, reporting and analysis to engage all our colleagues. We integrate the finance team into the business,’ says Shapland.

Of course, issues such as cutting expenditure will become more prominent for Sainsbury’s during the recession as they will for any other organisation, and the resulting policies will be rolled out from the finance department. But Shapland warns that this should not be allowed to distract finance from its role in helping the organisation to think beyond the current market.

Strategy is paramount, and finance must be in the vanguard.

‘Our job is to keep the business one step ahead of the market. We lay out a three to five-year vision to our top 1,000 managers, so that they know what strategic development is

‘You need to agree a top-down strategy at board level and to translate that down through all levels of the organisation.’

Sainsbury’s expansion in the downturn

Sainsbury’s pre-tax profit for 2008/9 •rose 11% year-on-year to £543 million

Same-store sales excluding fuel rose •4.5% in 2008-09

Current capacity of 500 supermarkets •and 275 convenience stores is to grow with 50 convenience stores added in 2009, plus 100 more in 2010/11

Growth strategy targets an increase •in selling space of 5% this year, compared to 4% in 2008-09

Selected non-food ranges will be •available for purchase via the internet by September 2009

On 17 June a £445 million share •placing and issue of convertible bonds due in 2014 was announced. The proceeds will accelerate Sainsbury’s ‘From recovery to growth’ strategy



Performance management and the credit crunch26

happening and how it affects them. Not much has changed in how we run the business, partly because the job of finance is to keep users ahead of the game,’ says Shapland.

The CFO at centre-stageThis forward-looking face is very different to the traditional perception of the role of the finance team. No longer is finance about just managing cash and keeping score. Similarly, the role of the finance director has evolved and Shapland has seen this evolution at first hand through his career.

He holds the reins of strategy for Sainsbury’s and is chairman of Sainsbury’s Bank, but he has also previously been group finance director of Carpetright, FD of Superdrug and has held various financial and operational management roles at Arcadia. His performance in those roles has been stellar, hence the Confederation of British Industry’s recent naming of him as finance director of the year for his skill, dynamism and commitment during the recession.

‘The CFO role has changed a lot. It is less about analysing historical numbers. It is less about managing cash or banking relationships. Now, finance is lumped with strategy, so the CFO needs a diversity of skills. In fact, the danger now is that people

do not have enough of the core finance skills that they need in the top job,’ says Shapland.

As CFO, he must balance financial skills with the ability to define and communicate strategy throughout a large and complex organisation. To ensure that he is able to fulfill both sides of the role he relies on the ability of the finance team to understand and influence the operational side of the company. This is facilitated by the structure of the finance team, which is firmly embedded in operations to enable the organisation to respond to feedback as the market changes.

‘It will be important, for instance, to understand how changes in unemployment affect people in some regions and how it will change what they spend on food. The company needs to stay ahead of trends and how they affect each of our stores. So, each zone has a dedicated finance team to help people understand what is going on in their region,’ Shapland explains.

‘Food stores are a part of people’s daily lives, so you need local understanding to manage their performance. The effectiveness of the finance function comes down to organisation. I advocate finance people sitting next to operators and becoming part of their tribe,’ he adds.

Such a structure yields greater transparency throughout the company. It creates a bridge between finance and operations across which insight flows both ways. The business understands how they can influence the company’s progress towards financial goals, and finance has a clearer view of the opportunities and constraints that the operational teams face. Decisions on how to manage corporate performance are, therefore, better informed.

‘The finance people become part of the team and translate the messages from the finance function. As a result you know why a business is performing well or badly. A lot depends on how finance is organised, but now there is more weight on the forward-looking side, not just the historical side. That makes a massive difference to the organisation,’ says Shapland.

The success of this approach can be seen clearly just by looking at how the perception of finance at Sainsbury’s differs from many other organisations.

‘Now, finance is welcomed into the fold by operators because it offers new insight, not just the historical marking of performance. The finance people have to earn their spurs by understanding where

‘Food stores are a part of people’s daily lives, so you need local understanding

to manage their performance.’



Performance management and the credit crunch 27

the big decisions are made in the company and how the fi nance function fi ts in with those decisions,’ Shapland adds.

The language in which that insight is revealed is embodied in the slim dictionary of metrics the organisation uses to manage performance.

Measure for measureAt board level, any large organisation should aim to track the fewest measures, while still

covering the essential indicators that inform strategic thinking. Yet these fi nancial measures will not be readily understood in the business at large. Making those metrics accessible is another key task for the fi nance team.

At Sainsbury’s, the core metrics number no more than a dozen. This gives strategic decision-makers the right information by which to evaluate overall performance and progression towards long-term performance goals. The fi nance teams embedded in the operational teams covering each region of the business will then take these metrics and convert them into measures that are relevant to day-to-day activities of each operational team.

‘You need to convert everything into metrics that people understand and make them as few as possible. Then you break them down into levels that people can exert infl uence on. You don’t need to explain the core fi nancial metrics to everyone in the organisation. I was at an organisation in the 1990s that tried to do that and I can say from experience that it does not work,’ says Shapland.

One key indicator for Shapland is return on capital employed (ROCE), which he sees as a better alternative to Total Shareholder Return. Explaining ROCE to store managers, however, would be a pointless exercise. They need to align their activities around ROCE by responding to a set of metrics that is relevant to their daily tasks.

Similarly, there is only one metric at board level covering the supply chain. Yet at the level of the supply chain is a need to measure a wider variety of performance criteria.

‘Metrics need to be accessible and instant. People must know how to respond whether those measures are rising or falling. There is a dashboard of metrics at board level, along with profi t measures for the market, and you can debate those metrics at the top level, but you can’t do that at the store level,’ Shapland observes.

Furthermore, Shapland warns that core metrics must be constantly refi ned. Sainsbury’s has a six-month review process.

‘We also have a ‘one-in-one-out’ policy when we review what we are measuring. Three years ago metrics on adding space were not as relevant, but now that adding new space is a key strategic ambition it is a very important area for metrics,’ explains Shapland.

Whatever the core metrics, there is on over-riding goal that Shapland feels the fi nance team should strive to attain, and that is to keep the organisation fl exible.

‘We have a plan and we are executing it. We are still performing well and fortunately a lot of the plan is within our control. The big unknown is what a rise in unemployment will do to the consumer environment, but our reporting and analysis functions are at such a level that we can be fl eet of foot and respond to changes more quickly,’ he observes.

‘In times like these, no one can get everything right, but people should not be worried about that. They should worry about being responsive and agile.’ ■


Darren Shapland

Appointed chief fi nancial offi cer in August 2005, Darren Shapland is also chairman of Sainsbury’s Bank. He was group fi nance director of Carpetright from 2002–2005 and fi nance director of Superdrug from 2000–2002.

From 1988–2000, Shapland held a number of fi nancial and operational management roles including joint managing director at Arcadia Home Shopping, fi nance director of Arcadia brands, fi nance director of Top Shop/Top Man and director of supply chain programme at Burton Group.

‘People must know how to respond whether measures are rising or falling.’


Excellence in LeadershipExcellence in Leadership

Performance and scorecards28

Flying coloursThe credentials of corporate performance management systems are under scrutiny as the global economy struggles to recover. Toby Willson, Finance Director of Microsoft UK, tells Jim Banks that when they have been kept fi rmly in line with the tactical and strategic needs of a business, scorecards are rising to the challenge.

The breaking down of economic borders has opened up many more companies to global markets and international supply chains. Some have developed a truly global presence, with all the structural, legal and administrative complexity that brings. Getting a clear and complete view of such a company is a mighty challenge, leading some to embrace performance management (PM).

From the vast amount of data a company generates in its day-to-day activities PM solutions derive indicators on which managers can base key decisions and track the effect of their actions across the organisation. As it has grown up, the emphasis in PM has been on aligning day-to-day corporate activities with strategy. In today’s weakened economy, however, it is proving just as important for managing a company in the face of pressing short-term issues.

Some organisations are being forced into drastic action just to stay alive, and even the

CIM011_018_Microsoft.indd 28 24/6/09 09:34:42

Excellence in LeadershipExcellence in Leadership

29Performance and scorecards

strongest and most successful companies are mindful that leaner times for the global economy throw the emphasis onto cost-cutting and effi ciency.

‘From the forums for fi nance professionals that I have attended it seems there is no doubt that cash fl ow has been at the top of people’s minds. If companies are looking at days or weeks to survive, then tactics take precedence over strategy,’ says Toby Willson, Finance Director of Microsoft UK.

‘However, there are many companies that have acted to change their cost base and refocus on long-term strategy. Acquisitions are a good example, and there is some good value in today’s market. Some companies are even selling their cash cows, which might have limited scope to grow, in order to invest in future growth,’ he adds.

Microsoft has shown that it is keen to invest in its long-term future, spending around $8 billion on R&D this year, but it has also cut expenditure on day-to-day operations. A large proportion of its cost savings have come through using its own technology to implement low-cost applications that enable more effective communication throughout its global network of subsidiaries and corporate partners [see box, right]. It has targeted costs of all kinds and in the UK, for example, there have been year-on-year savings of nearly 50% on travel. Travel costs are currently down 58% on last year as more EMEA meetings and events are conducted in a virtual environment.

‘IT administration costs can also be dramatically reduced if we remotely manage the network. IT costs per user were around $30, but now they are down to $8. Also, with applications like Instant Messaging we can fl ow information quicker. It allows you to hold many conversations at once, and faster fl ow of information increases the agility of the organisation and leverages everyone’s intelligence,’ notes Willson.

The savings derived from leveraging communications technology are, however, only one small part of the strategy for managing a complex and global organisation through the economic downturn. Like many leading companies, Microsoft uses balanced scorecards as the basis for performance management. Its experience shows that if the scorecards can be aligned with the needs of the business across its many subsidiaries they can deliver tangible business value.

Set the record straightBalanced scorecards have not always delivered on their promise, and yet more large organisations are now relying on them to inform key decisions from the boardroom to the shop fl oor. So, what has changed?

The answer lies largely in the fact that many companies have realised that the indicators that PM provides are only as good as the metrics it tracks. There is no single set of measures that can be applied to every organisation. There is no black box that can interpret a company’s culture, processes and long-term vision. Those companies getting the best of PM have worked hard to defi ne the metrics that best refl ect their strategy and, crucially, they keep refi ning them as the company and its markets evolve.

Microsoft has 30 metrics on its scorecard, in fi ve key areas: ‘winning customers’, ‘customer satisfaction’, ‘growing the business’, ‘innovation’ and ‘people’.

‘It may seem like 30 metrics is a lot, but this is a very complex, global organisation. We are constantly trying to eliminate some metrics, and next year we will be down to around 25 for the whole organisation,’ says Willson.

‘Winning customers’ measures the company’s performance against market indicators to identify market-leading and growth products. ‘Customer satisfaction’ recognises that a happy customer is likely to generate more business, so the focus is on contact with and feedback from a large community of end users. ‘Growing the business’ identifi es and measures the cash cow products that are the main revenue drivers in the business.

‘This means looking at the profi t metric, which is not easy in the current economic climate, so we are adapting the scorecard to suit the times. For instance, we are asking managers to hit a profi t percentage, not an absolute dollar fi gure,’ notes Willson.

‘Innovation’ examines how the organisation is perceived and how future projects, including incubator products, will shape its future. ‘People’ includes measures of the health and satisfaction of employees, recognising that people are the company’s most valuable asset.

While this template shows the areas of highest priority for improving Microsoft’s performance, it also illustrates a broader theme that should inform any company’s approach to PM and its defi nition of metrics – constant engagement with a clear set of measures and the willingness to review these metrics to refl ect the dynamics of the marketplace as well as the company’s strategic goals.

‘The scorecard is embedded at Microsoft, but it is not perfect. It is important to adapt the scorecard to make it relevant to the current market conditions, without making too many changes. There are some key deliverables, such as hitting a profi t percentage, but there must be focus across all the measures across the scorecard,’ says Willson.

‘It is important to change the scorecard to make it relevant to the current market conditions, without making too many changes.'

Cutting communications costs

Microsoft has successfully leveraged its own technology to improve communication throughout the organisation, generating savings in areas such as SG&A spend.

Instant Messaging (IM) – used by 150,000 Microsoft employees and key vendors. It enables effective communication throughout the business and is quicker and cheaper than a phone call. 70 million IM communications are sent each month across the organisation.

Voice-over-IP (VoIP) - Microsoft is pushing the technology for all internal calls and over 1 million calls each month made without a landline.

Microsoft Offi ce Live – used for over 60,000 virtual meetings per month, bringing signifi cant reduction in travel and entertainment costs.

Unifi ed messaging – brings communications of every type into a user’s inbox, providing one point of contact. The vast majority of Microsoft’s business units use Unifi ed Communications (UC) technology, generating notable gains in effi ciency throughout the sales cycle.



Performance and scorecards30

The diversity of the measures on the scorecard also stands out. Not all will directly impact the daily tasks of everyone in the organisation, but each metric must be a powerful tool for the parts of the business to which it relates.

‘It is tough to achieve metrics that are understood by all, though some items like the employee health index are obvious, and measures of customer loyalty should be part of everyone’s day job. Some metrics mean more to some parts of the organisation than others, but there needs to real transparency in the scorecard,’ notes Willson.

‘Sales, for instance, must know about the need to drive certain products, particularly

those that have a bigger multiplier, so that department needs to understand what the scorecard is telling them.’

Clear communicationDeveloping a set of metrics that encompass the many facets of a global business is an ongoing challenge, and there is a clear need for constant reassessment of how well the measures on the balanced scorecard refl ect the shape and strategy of an organisation. As those metrics evolve, however, they must also be presented to the different parts of the business in such a way as they are understood and accepted.

Communication is the key, and in companies like Microsoft there is an emphasis on transparency. Defi nitions of the metrics are freely available within the organisation. PM is about leveraging data to support the decision-making process, so a culture of sharing information is key to its success, although care must be taken where sensitive or confi dential data is concerned.

‘People understand the scorecard at a high level, and in our fi nance department we always share where we are. When you work at Microsoft you engage with business metrics and understand how you can contribute. It is all about clear communication and transparency,’ says Willson.

When the goals of an organisation are clearly articulated and the metrics are understood

throughout the business an inevitable – and desirable – consequence is that managers become more accountable for their decisions.

‘Everything can be mapped back to fi gures, especially when there is a single, central data warehouse as we have here, which covers 90% of our world-wide business. This gives confi dence that decisions are based on real numbers,’ comments Willson.‘We have a culture of accountability, but you need to balance that with empowerment and not have too many controls. If you get that right the achievements can be signifi cant.’

For some managers there will be a clear link between the scorecard’s metrics and their

day-to-day responsibilities. For the rest of the organisation, however, it is still vital to communicate the broader message across about why a company is using scorecards at all, and how they enable better decision-making at tactical and strategic levels.

‘There must be a balance between short-term fi nancial targets and the long-term goals of the organisation. You must have the right metrics, but you must also listen to feedback from within the organisation on what is relevant and what is not. After all, if you are getting a lot of feedback it shows that there is engagement with the scorecard,’ confi rms Willson.

The fi nance function plays a central role in communicating the important messages about PM in any large organisation. The structure of that team and its ability to work closely with other parts of a business is, therefore, fundamental to the success of PM.

‘We believe that fi nance must be the custodian of the truth. The numbers should come from the fi nancial systems. We are helped by the fact that my fi nance team is dispersed across the organisation, working in a virtual environment to bring together different areas of the business across the UK,’ explains Willson.

‘Finance people sit with the teams they support and are there to answer questions or advise on policy and procedures that the

numbers on the scorecard refer to. As a result I have a clear view of how the business is performing and where the pain points are.’

While this level of integration between fi nance and other business functions is fundamental to deriving value from the scorecard and improving the effectiveness of PM, but it cannot be achieved overnight.

‘You need accountability, you need buy-in from the top of the organisation, you need to build trust and earn your seat at the table. Finance has to be seen as a trusted advisor to the rest of the business, which means you have to be superb at the basics, know the numbers, understand reporting and get the data you need quickly and effi ciently. Then you can impress upon people the key metrics that drive the business,’ stresses Willson.

‘We are a long way on that journey and fi nance is playing more of a leading role at Microsoft in the economic downturn, but with the buy-in of the whole business.’ ■

Toby Willson was appointed as the Microsoft UK fi nance director in July 2008. In this role he is responsible for all fi nance and accounting operations in Microsoft’s UK subsidiary and is a member of the subsidiary leadership team.

‘You must have the right metrics, but also listen to feedback from within the organisation on what is relevant and what is not.’

Strategy under Stress

Responding to the demanding business environment is critical, but the focus should also be on strategies that will help ensure sustainable success when the crisis has passed. CIMA’s ‘Strategy under Stress’ report sets out a series of key questions that management accountants can use to drive strategic thinking at all levels of their organisation.

Visit www.cimaglobal.com/strategyunderstress to download your free copy.

Toby Willson


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In fact, the 2009 Forbes Magazine Best Countries

for Business survey puts New Zealand at number

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of red tape, investor protection, lack of corruption

and personal freedom. New Zealand is an ideal location

for investors seeking attractive investment opportunities

in sectors ranging from ICT to biotech and aquaculture

to functional foods.

According to the head of the IMF, New Zealand is

better placed to weather the current international

financial storm. Less exposed to the crisis in the

financial services sector than many European

countries, it remains a relatively buoyant economy.

A well regulated banking sector has left New Zealand

with very limited exposure to toxic assets.

Furthermore, after some years of above average growth,

the New Zealand labour market is now easing. There

is also increasing interest from experienced expats

to return home.

It is an economy well placed to adapt with the forces

that will shape the business world in the future.

New Zealand has a tradition of focusing on sustainable

growth, whether it is sustainable farming or renewable

energy. Seventy percent of New Zealand’s electricity

comes from renewable resources – hydroelectric,

geothermal and wind energy. It is a modern economy.

Among New Zealand’s key strengths is its geographic

gateway to Asia, where many economies are still

growing fast despite the global downturn.

New Zealand offers access to raw materials, world-

class processing, and easy access to Asian markets

for functional foods, seafood, and other high-value

agricultural products.

Many Asian people study in New Zealand, and some

stay and establish businesses, creating strong linkages

between regions.

Proof of its focus on the role of honest broker between

cultures is easy to find. In 2008, New Zealand was

the first country to sign a Free Trade Agreement (FTA)

with China. It has already signed a Closer Economic

Partnership Agreement with Singapore and is

negotiating a FTA with the GCC nations. Its Closer

Economic Agreement with Australia has enabled

free movement of people and goods between the

two countries since 1983. The stage is set for more

investment from innovative businesses in Europe and

around the world, particularly those seeking to reach

out to Asia. New Zealand offers a bright future for

overseas companies.

Further information

Investment New Zealand is New Zealand’s national

investment promotion agency and can be contacted

at +44 (0) 207 839 8026.

www.investmentnz.govt.nz

Think of New Zealand and you might conjure up images

of stunning landscapes, fine wines, dairy products and

sheep. What may be less obvious is that New Zealand

is an extremely attractive place to do business. Ranked

number two by the World Bank for ease of doing

business, the country’s economy, culture and location

are certainly enablers of growth.

The government is working hard to ensure that

overseas investors find an environment that is

conducive to setting up and running a business.

Corporate tax is 30 percent, and there is no payroll

or capital gains tax.

New Zealand has a very open and transparent business

environment. It is politically stable, has firm intellectual

property protection, and its legal structure is based

on UK law.

New Zealanders are open-minded and have an

innovative approach to doing business. Because

of its long tradition of international trading,

the nation recognises the value of overseas

partners and investors.

AT THE FRONTIER OF WESTERN AND ASIAN CULTURES, NEW ZEALAND

OFFERS EXCITING OPPORTUNITIES FOR INVESTMENT AND FOR

BUSINESSES EXPANDING THEIR TECHNICAL AND GEOGRAPHICAL

HORIZONS. GRAHAM MATTHEWS, DIRECTOR OF INVESTMENT

NEW ZEALAND, TALKS ABOUT WHAT THE COUNTRY HAS TO OFFER.

1022 NTD Euro Advertorial DPS_4cg.indd 1 29/05/09 5:33 PMCIM011_031 Advert.indd 2 19/6/09 10:06:01

In fact, the 2009 Forbes Magazine Best Countries

for Business survey puts New Zealand at number

five overall, and it takes top spot for the absence

of red tape, investor protection, lack of corruption

and personal freedom. New Zealand is an ideal location

for investors seeking attractive investment opportunities

in sectors ranging from ICT to biotech and aquaculture

to functional foods.

According to the head of the IMF, New Zealand is

better placed to weather the current international

financial storm. Less exposed to the crisis in the

financial services sector than many European

countries, it remains a relatively buoyant economy.

A well regulated banking sector has left New Zealand

with very limited exposure to toxic assets.

Furthermore, after some years of above average growth,

the New Zealand labour market is now easing. There

is also increasing interest from experienced expats

to return home.

It is an economy well placed to adapt with the forces

that will shape the business world in the future.

New Zealand has a tradition of focusing on sustainable

growth, whether it is sustainable farming or renewable

energy. Seventy percent of New Zealand’s electricity

comes from renewable resources – hydroelectric,

geothermal and wind energy. It is a modern economy.

Among New Zealand’s key strengths is its geographic

gateway to Asia, where many economies are still

growing fast despite the global downturn.

New Zealand offers access to raw materials, world-

class processing, and easy access to Asian markets

for functional foods, seafood, and other high-value

agricultural products.

Many Asian people study in New Zealand, and some

stay and establish businesses, creating strong linkages

between regions.

Proof of its focus on the role of honest broker between

cultures is easy to find. In 2008, New Zealand was

the first country to sign a Free Trade Agreement (FTA)

with China. It has already signed a Closer Economic

Partnership Agreement with Singapore and is

negotiating a FTA with the GCC nations. Its Closer

Economic Agreement with Australia has enabled

free movement of people and goods between the

two countries since 1983. The stage is set for more

investment from innovative businesses in Europe and

around the world, particularly those seeking to reach

out to Asia. New Zealand offers a bright future for

overseas companies.

Further information

Investment New Zealand is New Zealand’s national

investment promotion agency and can be contacted

at +44 (0) 207 839 8026.

www.investmentnz.govt.nz

Think of New Zealand and you might conjure up images

of stunning landscapes, fine wines, dairy products and

sheep. What may be less obvious is that New Zealand

is an extremely attractive place to do business. Ranked

number two by the World Bank for ease of doing

business, the country’s economy, culture and location

are certainly enablers of growth.

The government is working hard to ensure that

overseas investors find an environment that is

conducive to setting up and running a business.

Corporate tax is 30 percent, and there is no payroll

or capital gains tax.

New Zealand has a very open and transparent business

environment. It is politically stable, has firm intellectual

property protection, and its legal structure is based

on UK law.

New Zealanders are open-minded and have an

innovative approach to doing business. Because

of its long tradition of international trading,

the nation recognises the value of overseas

partners and investors.

AT THE FRONTIER OF WESTERN AND ASIAN CULTURES, NEW ZEALAND

OFFERS EXCITING OPPORTUNITIES FOR INVESTMENT AND FOR

BUSINESSES EXPANDING THEIR TECHNICAL AND GEOGRAPHICAL

HORIZONS. GRAHAM MATTHEWS, DIRECTOR OF INVESTMENT

NEW ZEALAND, TALKS ABOUT WHAT THE COUNTRY HAS TO OFFER.

1022 NTD Euro Advertorial DPS_4cg.indd 1 29/05/09 5:33 PMCIM011_031 Advert.indd 3 19/6/09 10:06:20


34 Business intelligence

Greater intelligence, greater performanceBusiness intelligence demands a change in culture for data-driven management to be accepted, and requires significant time and up-front investment to deliver value. McKinsey’s Markus Löffler explains why it remains a crucial investment, especially in an economic downturn.

CIM011_019_McKinsey.indd 34 24/6/09 09:41:26


Business intelligence 35

Ask finance directors in any large organisation about business intelligence (BI) and you are likely to find they are quite familiar with the concept. BI has been a buzzword for many years now, and many companies have grasped its underlying concept – the leveraging of data within the organisation to create clear, relevant metrics that inform management decisions. Yet BI has not been as widely adopted as one might think.

There is a healthy market for BI technology and the performance management solutions it supports, but so far it has not always delivered the great value it promises. In the current economic climate it may seem strange to consider implementing such a technology when companies are battling many short-term pressures, but there are those who feel that BI could be the best way to help a business survive and prosper.

‘As part of the McKinsey Technology Initiative we look at the macro-level view of business trends triggered by technology and we see data-driven management, or BI, as a major trend that will help companies reach the next level in quality. It is not a new topic at all, people have been talking about it for a decade, and the many systems out there make it seem mature, but very few companies have created much value with it,’ says Markus Löffler, Partner at McKinsey & Company.

Löffler sees a pattern evolving in BI that is similar to other groundbreaking business technologies, where the bubble of hype is burst by reality, leading to a phase of intense analysis to discover why it has not yet opened the gates to corporate nirvana. From there, a more realistic approach emerges from lessons learnt the hard way by brave early adopters.

‘It is like the early days of CRM systems. Now, the hype is over and we are in a new, sobering phase,’ he remarks.

Although the hype may have subsided, the potential benefits of BI clearly hold up under scrutiny. It can certainly enable more responsive decision-making based on measures and metrics that are aligned with a company’s strategic goals. It can help companies to accurately define the drivers of corporate performance with metrics that are relevant to each part

of the organisation and mark out how every team, from marketing to finance, can contribute to improving overall performance. It supports collaborative decision-making around agreed metrics.

When BI fails to deliver value it is usually down to the failure of a business to embed the principle of data-driven management into the core of its culture and across the entire organisation.

Some companies, however, have engaged fully with BI and accepted its impact on corporate culture and decision-making processes, and between them they have generated enough tactical and strategic success stories to prove that BI can deliver on its potential and create competitive advantage (see box, p 35).

One example is retailer Zara, which leveraged its data flows to closely monitor what is sold and change stock in direct response to sales.

‘Data-driven management moves you to a real-time business. If, however, decisions on stock take weeks or months, as they do with most retailers, then this approach won’t work,’ says Löffler.

Wanted: a perfect stormIf BI can deliver on its promise, then why is there still such a disconnect between its perceived benefits and tangible value? For Löffler, the answer is that four key elements must coincide for companies to get the best from true value from BI, and usually at least one is missing.

‘You need a perfect storm. You need to know about the data sources in your business, and you need the tools and technology to make it work. That is where many companies start. Additionally, you need to anchor BI to the decision-making process, and you need to know where it sits with the mindset and governance of your

organisation,’ he comments. ‘If these elements don’t come together then it is doomed to fail.’

In cases where businesses fail to anchor BI in the decision-making process it is often because managers are reluctant to give up their reliance on intuition and instinct in favour of metrics served up by an IT solution.

‘Many senior managers feel that a great manager is one that trusts gut instinct, but data-driven management enables fact-based intuition. It puts some science into decision-making, and in doing so it is a challenge to the traditional hierarchy,’ believes Löffler.

In the realm of BI, the data and metrics that support key tactical and strategic decisions are transparent across the organisation, so all managers become far more accountable for the decisions they make.

‘It is not a new topic at all, people have been talking about it for a decade, and the many systems out there make it seem mature, but very few companies have created much value with it.’

A tool for our times

How BI can help organisations to manage their performance better in an economic downturn:

BI helps identify opportunities to scale •down as the needs of the business change, including short-term cashflow management divestitures, shutdowns and capacity reductions.

BI can be used to clean up the •balance sheet, reduce direct costs and minimise complexity.

BI enables organisations to become •more flexible in their operations, helping to implement ‘lean’ business processes, rationalise individual projects and restructure SG&A costs.

BI brings greater clarity to the •restructuring of an organisation’s mix of products and services, helping them to achieve their long-term objectives.



Business intelligence36

‘Getting managers to give up their intuition is the biggest hurdle to BI, and it takes ‘courage for them to do it. As a manager you lose the information asymmetry and the power that gives you. All managers would have access to BI, so there is more accountability and transparency,’ says Löffler.

He also points out that the facts brought to light by data-driven management often reveal surprising improvement potencial – even in low-tech sectors.

Cement-maker Cemex, for instance, deployed an integrated performance management solution, which helped it identify the relatively high proportion of cost incurred as a result of its delivery

processes. Just-in-time delivery to construction sites is very important to its market proposition, adding significant value for customers, so it has addressed distribution costs by tracking all its trucks with GPS and implementing real-time distribution planning.

But is now the time for BI?A successful implementation of BI is unlikely to be cheap or quick. At a time when short-term pressures on many companies are mounting as a result of the global recession it is hard to see many taking the long-term view needed to support the transition to BI and performance management. And yet the efficiency, transparency and accountability they offer are precisely what those companies need.

BI could give a company the edge it needs by enabling more responsive management in volatile and unpredictable markets.

‘Many projects are defined in such a way that they require a large upfront investment and a long implementation time. BI must span every geography and every business division, and should deliver information at the touch of a button,’ notes Löffler.

‘The paradox now is that it is hard to invest, and moving to data-driven management is not a minor change. Companies with BI, scorecards and business plans in place are happier in times like these. It’s a brave decision to make that transition now – it needs, time, money

‘You need to anchor BI to the decision-making process, and you need to know where it sits with the mindset and governance of your organisation.’



Business intelligence 37

Markus Löffler is a partner with McKinsey in Germany. He co-leads the business technology office’s global technology infrastructure practice and is a leader in the IT architecture practice.

Löffl er advises clients primarily in the fi nancial and industrial sectors. He focuses on technology-enabled business strategies, IT infrastructure and architecture, and IT performance management.

Reaping the benefi ts of BI

Companies in a wide range of industries have used data-driven management to improve their performance.

Toyota eliminated 80% of defects • and reduced costs by 40% by sharing information between designers and engineers earlier in development

Fiat cut development time by 30% • by modeling systems to combine large volumes of complex data.

Pharmaceutical company Lilly • reduced data search time by 80% by deploying an R&D data warehouse.

Amazon enhanced revenues by 8% • by analysing customer data for effective segmentation.

Lego enhanced revenues with • end-consumer configured products.

Retailer Zara enabled real-time • tracking of all raw materials and shared its manufacturing process and capability data with designers.

Wal-Mart reduced stock-outs by • 16% by using RFID to manage inventory.

Timex reduced average order-to-• delivery time by 80%.

Mattel reduced costs of defective • returns by over 50% by collecting detailed information on returns from high volume retailers.

Markus Löffl er


Löffl er advises clients

fi nancial and industrial sectors. He focuses on technology-enabled business strategies, IT infrastructure and architecture, and

and courage – but there are opportunities in the current environment,’ he adds.

In fact, the shortcomings of many organisation’s structures and systems come to light in today’s challenging markets.

‘Many companies are running in emergency mode, where ad hoc and creative approaches to reporting are in use because classical models for reporting and decision-making may not work. They are looking for a more effective, real-time approach, and that is what BI gives them. Many companies have a short-term view of their business now, but once implemented BI can be the most important factor in both strategic and tactical decision-making. The fi nance community, for instance, is focused on managing cash fl ow now, so it may need to rely very intensively on BI,’ observes Löffl er.

Those companies at the leading edge of BI have proven the case for real-time, data-driven management, helping to define best practice for successful implementation and driving other organisations to look more closely at the technology. Across retail, telecommunications, financial services and other industries that are used to IT investment and are analytically intensive there are many success stories.

One example is Lego, the manufacturer of toy building bricks, which developed an online application allowing customers to generate their own models. The application, originally developed to drivetraffi c to its website, now has more than 80,000 users, orders of magnitude more than internal product designers. Lego has linked this data fl ow from their users to sales, marketing and production. Consequently it has generated greater engagement from customers and has a product line built to meet their needs.

There is an eagerness to fi nd out how BI is used in such companies, although because it is a source of competitive advantage they are not always willing to

share their knowledge. Even so, companies should remember that it is easy to learn, but hard to copy. BI needs to fi t with the governance, products and culture of each individual organisation,’ says Löffl er.

Buy-in from the topFor BI to meet a company’s specific needs it must be accepted by every part of the organisation. This requires backing at board-level, beyond the IT and finance functions.

‘If BI and performance management are seen simply as IT issues then they are doomed to fail. Whoever is in charge of IT, they should be part of a senior management team, especially if technology is fundamental to the business, but the rest of the company must embrace it too. Any BI project needs to be driven by business managers, supported by the IT department,’ believes Löffler.

‘The finance community could be the lead user of BI and at the forefront of innovation in a company, partly because it has a lot of know-how about reporting. Finance has typically the best data quality and data sources, so it has the high ground. Finance is at the heart of information flow, so BI should start in finance then spread to operations, sales and marketing,’ says Löffler.

BI could soon emerge as a business-critical technology. For Löffler, some organisations should now use it to prepare for the future upturn in market conditions.

‘If companies think about how to get competitive advantage for the new normality that will evolve out of today’s economic crisis then BI could be very important. It is wrong to be afraid of having more information on which to base critical decisions.’ ■

To learn more about the work that CIMA is doing in the fi eld of Business Intelligence and to download a free copy of our latest report, please visit www.cimaglobal.com/decisionmaking

‘It is like the early days of CRM systems. Now, the hype is over and we are in a new, sobering phase.’



38 Performing in emerging markets

Broaden your mindMark Easterby-Smith, Lancaster University Management School, and Shenxue Li, University of Strathclyde Business School, explain how and why companies must overcome ‘corporate rigidities’ if they are to respond to the huge opportunities in China.

Most multinational companies fail in China due to corporate rigidity, which results from a lack of local knowledge, making the company unable to anticipate the rapid changes of its environment, which puts pressure on its established systems, products, and markets.

We examined the performance of 30 leading multinational companies over a

five-year period, and investigated why some of those global leaders that possess demonstrated, home-based advantages couldn’t achieve what they should in the dynamic Chinese market.

A recurring problem is that multinational companies, Western multinationals in particular, understand the need to change their strategies far too late. The significant

differences between developed Western markets and a fast moving China often pose big challenges to them and demand viable and immediate strategic response.

Market dynamics and corporate rigidityVolkswagen in ChinaFor Volkswagen AG, as for many other multinational companies, China has

CIM011_017_Lancaster.indd 38 24/6/09 09:51:30


Performing in emerging markets 39

become a major global market.The company generated net earnings of $561 million from China in 2003, compared with its total global operating profit of $1,609 million. Through sales of almost 700,000 cars, it took a local market share of 30.8% and achieved 13.9% of its worldwide sales in the Chinese market – more sales than in any other market except Germany.

Yet, Europe’s biggest car maker has under-performed in China. Although China was the key driver of Volkswagen AG’s earnings in 2003, the company’s recent growth in that market was significantly below market average, characterised by a sharp decline in market share and profitability. It reported an operating profit of only $222 million from its two Chinese joint ventures in 2004, down 60% from 2003. Its market share dropped 5.6% year-on-year to 25.2%. Last year, the company’s China businesses failed to reach break-even. It held just 17.3% of China’s car market, down 7.9% from 2004, while sales of its main rivals such as General Motors, Toyota, and Honda all surged.

The Chinese car market has been growing rapidly at an average 49% annually over the last three years, but we see evidence that many automakers have increased output even faster than sales. Major American, European, and East Asian automakers have announced ambitious investment plans to expand production in China. Aside from over-production, the last three years also saw a headlong rush of new entrants and the emergence of local competitors such as Geely, Chery, and Great Wall.

Meanwhile, the Chinese government took steps to cool economic growth as local customers displayed a growing appetite for new models. As a result, prices in China declined and Volkswagen seemed to be surprised by the speed at which this took place.

In the face of those dramatic changes in the market, Volkswagen didn’t have a timely strategy to respond: it neither reduced its production volume nor launched anything fresh. According to informed contacts in the industry, Volkswagen misjudged the market. It assumed that China, as an emerging market which once willingly accepted Santana and Jetta, would demonstrate expected enthusiasm for its economic

models that sold well in other international markets. The company failed to anticipate the dynamic patterns of local demands and underestimated the impact of the dazzling increase in investment by its global and local rivals. This rigidity to change casts shadows over the company’s ambitious growth plans in China.

Like Volkswagen, many companies are unable to anticipate the dynamics of the Chinese market. They bring in what they utilised in the past when they invest in this high-velocity but emerging market, where the changing environmental conditions often render existing beliefs and practices irrelevant.

The four types of corporate rigidity We identified four distinct corporate rigidities that limit the company’s ability to respond to changing conditions. These are:

• mindsetrigidity• strategicrigidity• operationalrigidity• HRMrigidity.

Each of these manifests itself along different dimensions, some of which are readily obvious, while others are quite subtle.

1. Mindset rigidityThe most subtle and often overlooked source of corporate rigidity comes from a habitual or characteristic mental attitude which determines how a company will interpret and respond to real situations. Often due to rigidity in mindset, managers project misconceptions, prejudices, stereotypes, and insensitivities into their Chinese operations. Consider Western handset producers such as Nokia, Motorola, and Siemens. When bringing stylish models that sold well in their home markets to China, the companies were surprised to find that Eastern rivals such as Samsung and

Ningbo Bird were making phones with features and styles they could not match. For them, it was hard to understand why the Chinese favoured the more expensive folding phones largely introduced by Korean and emerging Chinese rivals. As a result, long-time leader Nokia saw its profits tumble dramatically in 2004, and its share of the market fell to the lowest level in five years. Historical success causes these companies to think narrowly around strategies that have worked in the past, even when environmental change has rendered these strategies ineffective.

‘Many companies still believe that their own taste is better than any other’s and they try to bring this across to China. It is not a very successful strategy,’ says a high-ranking Siemens China executive.

Another high-ranking executive at ThyssenKrupp China said: ‘It is no surprise that those Eastern multinationals have played the competitive game with relatively more success than their Western counterparts. The Eastern mind doesn’t have the same rigidity as the Western mindset and they’re terrifically successful players.’

2. Strategic rigidityA second source of corporate rigidity comes from the company’s strategic planning system aided by market information. The dynamics of China have resulted in a lack of transparency of the market. However, many MNCs operating in China still stick to their home-based strategic planning and forecasting cycles, which can be as long as once every four years. Often facing dramatic changes in the Chinese business environment, managers do not have a set of clear, company-wide goals. Therefore, they chart obscure courses or formulate policies and make decisions that do not account for very complex and dynamic local conditions.

3. Operational rigidityA third source of corporate rigidity comes from the company’s operating system that determines the speed of effective decision-making and problem solving. In recent years, the pace of change in China has dramatically quickened. Yet, the decision-making and problem-solving processes at many multinational companies have not. A centrally-manipulated operating system is well ingrained in many big companies;

‘The Eastern mind doesn’t have the same rigidity as the Western mindset and they’re terrifically successful players.’



40 Performing in emerging markets

however, it increasingly fails to deliver the size or speed of change required for companies to keep pace with local customers, and ahead of competitors.

In many multinationals, local customer services are provided across-borders. For instance, leading mobile handset makers like Nokia and Ericsson all sent mobile phones back to Europe for repairing. Yet the cost for doing this is extremely high, not only because of the added expenses for transportation and time, but also in terms of loss of customer credibility. In stark contrast, local rivals such as TCL, Kejian, and Chinabird provide after-sales services around the clock locally. The financial bleeding from this legacy system triggered a rapid decline in these companies’ fortunes in China.

4. HRM rigidityA final source of rigidity comes from sticking with an existing human resource management system for too long. For many managers of big companies,

persistence through thick and thin is a virtue. These managers take pride in staying the course, despite the fact that the forces of change are hard at work in China.

Motorola and Microsoft, for example, exercised higher levels of command and control from the top and thus made it difficult for local talents to breathe. They imposed their home management styles on China operations with a view to changing the Chinese.

That didn’t work. There was a strong desire among able locals for freedom and responsibility, especially in recent years, and the surge of international and local companies in China provides the possibility. Motorola lost key people to rivals such as Siemens, Ericsson, and Nokia, whereas Microsoft lost senior managers and highly skilled engineers to emerging local companies.

Strategies for increasing competitive agilityIn China’s business environment, where

the pace of change is more rapid – and more unpredictable – than elsewhere, a company’s success depends on its competitive agility, adapting more quickly than its rivals and transforming change from an adversary into an advantage. In our research, we identified four practical strategies for overcoming the four types of corporate rigidities.

Challenge existing propositionsOur research indicates that companies increase mindset agility by challenging their existing notions about how to operate in the business world. Agility thrives on a foundation of broad learning, new knowledge and innovative thinking, which forms a high level of integrative intelligence.

To facilitate the formation of agility, managers often adopt a team-based learning approach nurtured by an entrepreneurial culture. In this regard, Siemens and ThyssenKrupp’s experience in launching the magnetic levitation (Maglev) line in Shanghai provides a good example.

‘Agility thrives on a foundation of broad learning, new knowledge and innovative thinking, which forms a high level of integrative intelligence.’



Performing in emerging markets 41

ThyssenKrupp in ChinaThe world’s only commercial high-speed Maglev line, which cruises at 430km per hour from Pudong International Airport to the city’s eastern suburbs, started operation in December 2002. The technology holders, Siemens and ThyssenKrupp, anticipated the project would take six years to complete, not the two-and-a-half years it actually took. It was the Chinese government’s strong desire for gaining this first-class technology within three years that forced these established business conglomerates to rethink their initial assumptions.

The two companies brought state-of- the-art technology and hands-on project experience to discuss with local partners and local government officials, to identify potential barriers to a fast and smooth process, and thus resolve issues before the project started. This joint team integrated the two companies’ existing knowledge with new situation-specific knowledge about the local technical base, local ways of working and thinking, and the project’s environmental conditions; synthesising these, they worked out a solution to speed up the process.

Such a team-based approach was particularly valuable because it involved both home-based management and local experts who were able to challenge outdated propositions so as to analyse alternative solutions from different vantage points.

To facilitate this teamwork, managers nurtured a team culture of entrepreneurial spirit which promoted the belief that nothing is impossible, and thus encouraged new ideas about how to operate in this dynamic environment. With this culture in place, executives were prepared to receive challenges to their propositions. It was an agile mindset that ensured the project’s successful introduction and implementation within the three-year target.

1. Revise strategies frequentlyThe Chinese market has been changing so quickly that strategic redirection needs to be assessed frequently. In our research, a number of companies – such as AVL and ABB – shortened their strategic planning cycles to as short as four times a year. Therefore, it is important that executives realise the need to accelerate strategic

innovation in order to redefine the basis for competition and carve a niche for a fast-moving China. They need to establish an organisational information gathering system that regularly receives information about what is happening in its dynamic environment. This information can infuse new perspectives that respond to environmental dynamics.

High-performance multinationals in China displayed unusual capabilities of anticipating strategic changes. Siemens’ profitability in China, for example, relied on its frequent strategic planning and forecasting in infrastructure development,

which ensured its earlier recognition of the changes in the market and quicker response than others. At Siemens, concrete studies of the construct and the trend of the market, as well as the needs of potential customers, were conducted all the time.

The results formed the basis for its ‘multi-step’ China strategy. In order to lobby with the Chinese government and to promote its state-of-the-art industry products, Siemens moved to Beijing initially in 1982, when China was in its early stage of economic reform and when the Chinese government had just realised the need to modernise its industries.

Based on a solid relationship with the local government, Siemens provided electronic and computing equipment to 300 train lines and more than 45 pillar organisations between 1982 and 1990. Throughout 1993, when restrictions to foreign investment were loosened, it formed seven joint ventures with major industry players to expand its business to main economic zones. Since 1998, when China became a major potential

market for mobile phones, Siemens has shifted its focus onto information and communication infrastructure and become a key player in the Chinese industry.

Recently, it has further expanded its business into province-size territories to respond to local needs for overall infrastructure development. These steps all proceeded in the right time, with the right products and services. This multi-step focused strategy for an ever-changing China proved to be successful.

2. Cut off layers of hierarchyFor executives, it is important to understand that the conventional notion that the headquarters should occupy the commanding heights of the company and control every aspect of its local operations is out of date in China. Administrators must learn a new dance step in which they accept the role of China subsidiaries in decision-making with regard to the company.

For example, at an international fair in central Frankfurt, a Danish machinery company won 40% of a big Chinese bidding project, outpacing five other European companies in the competition. The reason for its success had nothing to do with superior technology, relationship, or the provision of better service. Rather, it was due to offering a package of solutions for existing hardware problems two days ahead of its rivals. A decentralised decision-making system allowed the company’s sales force to respond to its customers’ needs sooner than others which had to report back to managers for decision-making.

Cross-country complexity and rapid changes in the Chinese business environment place a premium on responsiveness and agility, making it hard for many cross-border competitors to match the performance of those locally decentralised ones because of the added operational complexity.

3. Manage locals locallyCompanies can increase managerial agility by repacking their management practices with local parameters in order to make them work in the Chinese market. Managers need to know the differences across industries and regions, be aware of the implications and then act accordingly. They should have sufficient authority to take special steps or to initiate

‘Cross-country complexity and rapid changes in the Chinese business environment place a premium on responsiveness and agility.’



Performing in emerging markets42

whatever they believe is suitable for the local market. Siemens, for example, has established ‘three cornerstones’ in its China operations to retain top employees, who are often hard to hold on to in a dynamic China.

The first cornerstone is a good salary package. Managers at Siemens understood earlier than others that in this day and age the Chinese are money-oriented, and that the sectorial differences in China are far more significant than those in its host market. They are willing to pay outstanding salaries for top people and they set no limit for that. The salaries reflect the changes and competitiveness of the market and the industry, which means that they pay far more in a competitive sector where the competition for top people is fiercer than that in an ordinary industry.

The second cornerstone is a career development package. The Chinese display far more eagerness to work for future opportunities than the Germans. Siemens is aware of this and offers a career path for its talents through its global operations. Finally, the third cornerstone, which is extremely important, provides continuous opportunities to learn. The Chinese are extremely eager to learn. They try to get additional degrees, such as an MBA or an executive MBA, after finishing their studies. Siemens offers such learning opportunities through its international companies and institutes, or through external bodies.

These three cornerstones ensured Siemens’ limited loss of top employees in the Chinese market where there is still a severe lack in the skilled workforce. Moreover, like many other companies in our research, Siemens also showed flexibility in working hours and assessment methods. Managers realised the need to meet local demand by rearranging working hours, and the need

to shorten their evaluation cycles because businesses in China process faster. In essence, a company’s management practices are like marketable products, which need to be repacked and given a new look from time to time. In the words of a Siemens high-ranking officer: ‘Recipes for success of executives and corporations change at almost the same pace as fashions in the lengths of women’s skirts or men’s ties.’

4. Implement the four strategies Implementing these strategies requires efforts from managers at all levels – headquarter executives in particular. When launching the Maglev line in Shanghai, managers at Siemens and ThyssenKrupp adopted a team-based decision-making approach nurtured by an entrepreneurial culture to enhance the opportunity to incorporate

diverse perspectives into decisions. Siemens’ success in conquering the Chinese infrastructure market depended on its management’s earlier recognition for strategic innovation and their efforts in establishing a frequent strategic planning system aided by just-in-time information.

The Danish company took the lead in a local bidding project because its headquarters executives accepted the role of Chinese subsidiaries in decision-making. Finally, Siemens’ establishment of its three cornerstones was attributed to local management’s understanding of the differences between an ever-changing China and the rest of the world.

The changes in the Chinese marketplace often create excellent opportunities for companies that possess certain strengths in technology and management, but only if they can respond faster.

Corporate rigidity – a company’s inability to anticipate changes and prevent new threats, as well as to create

and exploit new opportunities – has invariably resulted in failure throughout the history of foreign businesses in China. Managers must bear in mind that the degree of relevance of their existing assumptions and systems varies from one market to another.

China is a different and rapidly changing market where existing thinking and processes are eroded, and will break down over time. Those who want to succeed in the long run will have to learn the differences between China and other parts of the world, and figure out – rather than assume – what works in this market. The best investment in China is to focus on mindset and system changes. Managers must have an agile mindset, as well as a well-oiled organisational system, and be willing to change in this dynamic China. ■

Shenxue Li

Shenxue Li is a lecturer in the University of Strathclyde Business School. She obtained her master’s degree in Engineering in China, MBA from Nottingham University, and PhD from Durham University. She had years of business experience before she embarked on her career in academia. Her work appears in both academic and practitioner-oriented journals.

Durham University. She had years of business experience before

both academic and

Mark Easterby-Smith

Mark Easterby-Smith is past-president of the British Academy of Management, and professor of Management Learning at Lancaster University Management School. He has published extensively on management research methodology, organisational learning, dynamic capabilities and management in China. He has published ten books, including Management Research, and the Handbook of Organizational Learning and Knowledge Management.

management in China. He has published ten books, including Management Research, and the Handbook of

‘Recipes for success of executives and corporations change at almost the same pace as fashions in the lengths of women’s skirts or men’s ties.’



Company insight 43

For several months, businesses, governments and consumers have watched as economic storm clouds gather. Payrolls have dropped and unemployment figures have surged. The closely watched housing sales indicator continues to sag as the housing market rolls back from bubble-like prices. Few see any near-term end to the credit squeeze. And, of course, soaring energy prices are having a significant impact in virtually every sector of the economy, with little indication that price corrections are forthcoming.

We are now officially in recession and the Conference Board’s consumer confidence index is at its lowest level since the recession of 1990-91. These collective pressures are making their impact felt and rippling throughout the economy.

In such a climate, it is only natural that businesses would slash spending and investments. But, in truth, economic adversity represents opportunity. That is because slowdowns can lead to opportunities for companies to emerge smarter, leaner, and in a far better competitive position. A downturn becomes the impetus for subsequent waves of innovation because it forces governments and businesses to embrace greater efficiencies and find or invent solutions to business problems.

At first glance this appears counter-intuitive, but recessions can do many favours for forward-thinking organisations. At a macro level, we can find an elaborate example from the 1930s when the US embraced President Franklin D Roosevelt’s New Deal. Rather than adhere to the precedence of prior administrations and cut spending, Roosevelt invested in the country, establishing such programmes as the Works Progress Administration, the Tennessee Valley Authority, and Social Security to rescue the

economy from the Great Depression and improve society over the long term.

It is a similar dynamic at the individual business level as well. Those companies that find ways to invest in their infrastructure, in their efficiencies, and in their efforts to develop sustainable innovations emerge from lean economic times with momentum. They are not flat-footed but ready to pounce on opportunities and seize leadership when the economic winds change direction.Perhaps one of the greater opportunities for

that investment lies in IT spending, often the site of early cuts during challenging financial periods. IT is typically the source of innovation, automation and optimisation of business processes. It is through IT that businesses become more agile.

And rising to the top of the agenda for most CIOs are business intelligence (BI) and performance management (PM). With BI, companies can identify trends and take corrective actions sooner to capitalise on opportunities and mitigate or prevent threats.

In challenging economic times, stakeholders across the board will demand greater levels of accountability and performance. It is not surprising that Standard & Poors has added

enterprise risk management to its review criteria for evaluating the financial integrity of companies. Those companies that are best prepared to meet the rigours of imposed reporting will fare the best.

By applying BI in functional areas, companies across multiple industry segments can supply that clarity, develop competitive advantage and achieve strategic agility at a crucial time. After all, if BI and PM are all about enabling a company to transact its business more efficiently and make the hard decisions easier, there may never be a more advantageous time to make that investment than now, when business conditions are among the most challenging of the last 15-20 years.

Evidence suggests that industries are heeding this advice. Despite the economic downturn, BI spending is up. According to a 2008 Gartner report, BI platform spending is expected to grow at a compound annual growth rate of 8.1% to reach $7.7 billion in 2012.

While BI can deliver significant benefits to the widest range of industries, it can be instructive to look at a few key sectors to get a better sense of how it can help businesses and governments turn adversity into advantage.

ManufacturingIn the automotive sector, assembly lines are idle or even closing entirely, as fuel prices lead consumers to rethink their vehicle choices and manufacturers scramble

Turn adversity into advantageBy resisting the temptation to cut spending and tighten belts, businesses can emerge from lean economic times in a stronger position, explains Rob Ashe, General Manager, IBM Business Intelligence and Performance.

‘BI solutions can help organisations of all types and sizes achieve greater levels of accountability, innovation and agility.’

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Company insight44

to retool to produce fuel-efficient cars. Companies in most discrete manufacturing sectors are re-thinking factory decisions, prioritising initiatives that maximise customer service and re-evaluating their supply chains. As fuel costs drive up shipping expenses, for instance, they are weighing whether to continue outsourcing arrangements or build up domestic operations.

These are big decisions; companies value the ability to drive production and supply chain operations based on true market demand, to get the true picture sooner. Performance management can align sales, operations and finance to a single scenario, which provides an integrated picture of demand that can drive the supply plan and be evaluated in light of an organisation’s financial goals. BI can help manufacturers consolidate sales, inventory, purchasing, production and supply chain data to improve their scheduling and delivery, reducing cycle times, inventory and costs.

Scorecards can show which departments, product lines or factories are underperforming, defect analysis can help improve product quality and suppliers can be evaluated.

Optimised supply chain management can help spot late deliveries, changes in demand and production stoppages before they happen, offering a virtual safety net against typical risk factors. These insights can make the difference when corporate survival is at stake.

RetailAlthough recent federal stimulus rebates have arguably delivered some short-term relief, long-term challenges remain for retailers. Consumer spending patterns have become more unpredictable and are vulnerable to unexpected events. Competition continues to escalate; profitability is more important than ever, and more difficult to achieve.

BI in the retail and consumer packaged goods world unlocks a range of transformative insights that help managers balance profit protection with delivering a superior shopping experience. Retailers can use BI to closely monitor performance across the chain so they can adjust staffing levels and other controllable costs at the store-level, based on revenue, so they meet profitability targets. They gain greater visibility into which locations or channels are meeting sales and margin goals. They

can understand consumers’ buying patterns as their confidence rises and falls, adjusting assortments, displays, promotions and pricing strategies along the way to address buying patterns and spending priorities.

With BI scorecards and analysis, executives can see the performance of products, stores, channels (offline and online), divisions, regions and more. Understanding, by location, how products are selling lets managers react and take corrective actions as needed, including merchandise transfers, early mark-downs or early cancellation/re-orders for merchandise.

A demand-driven approach to merchandising and supply chain operations helps chains optimise merchandise levels, minimise out of stock items, eliminate lost sales and reduce inventory costs while still ensuring products are available at the right place and price when customers are ready to buy. In the delicate world of retail operations, this ability to control costs and drive operational excellence while delivering a superior shopping experience is even more crucial during difficult economic conditions.

Financial servicesPerhaps no other industry has borne the brunt of the fragile economy more than insurance and banking. The effects of the 2007-08 US sub-prime crisis continue to swell – the International Monetary Fund estimated in early April that it could cost the global economy $1 trillion – and lending restrictions are tighter as banks implement stricter risk-management policies while the secondary market for loans shrinks.

In the banking sector, success is increasingly predicated on customer insight. The more an institution knows about its customers, the better off it is in a downturn. With information in hand, banks are better positioned to effectively and optimally price products and services for customers with a clear and measurable understanding of risk. Competitive pricing, at the relationship level in particular, stimulates organic growth, drives customer acquisition and cross-selling opportunities, improves overall profitability and, most importantly in the face of today’s economic constraints, strengthens risk management.

In fact, it is for this ‘risk-aware’ reason that Datamonitor recently predicted that global spending on BI in the retail banking sector alone will reach $9 billion by 2012,

‘A downturn becomes the impetus for subsequent waves of innovation because it forces greater efficiencies.’

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Company insight 45

up from $5.6 billion in 2006. With BI, banks can define consistent risk- based pricing models that enable relationship managers to quickly measure and assess new profitability scenarios – and their associated potential risk – then compare them to corporate/hurdle rate targets. This minimises the institution’s risk by ensuring that pricing offers align with corporate goals and can be easily adjusted as strategies and corporate policies change.

On the insurance side, insurers, reinsurers and producers are all dealing with a market that has become more and more competitive. Even before the current economic downturn, carriers and brokers from other countries set their sights on new and broader spread markets. Mergers and acquisitions and the blurring of traditional lines between banks and insurance companies, coupled with new channels such as the internet, have made for challenges that require greater customer care and insight. Added to this has been the increased scrutiny of rating agencies such as AM Best in the US along with regulatory acts such as Solvency II, which is having its initial impacts felt across the EU.

One major, and sobering, change has already taken hold; given the volatility of the markets, insurers can no longer simply depend solely on investment income. They must now ‘underwrite to a profit’, and that requires insights into historical performance. To maintain profitability in the face of escalating risks, insurers also need to be able to manage conflicting priorities, tackle compliance issues quickly, maximise operational efficiency, growth, and product offerings and serve customers more effectively than the competition. Planning and diligence are now the watchwords, and simple spreadsheets cannot support that level of rigour.

With its ability to manage multiple reporting and consolidation standards (such as IAS and GAAP), currencies, eliminations and reconciliations, BI helps multinational insurance companies quickly understand their organisations better. They can manage captive and independent agents, increase regulatory compliance, better understand customer-relationship profitability, analyse cross-sell/upsell opportunities, and improve service.

GovernmentsGone is the belief that governments are unaffected during an economic downturn. The reality is that governments are as susceptible to the economy as businesses and need the same tools to weather these conditions.

The subprime crisis, for instance, leaves an often-overlooked victim: local councils. Neighbourhoods affected by waves of foreclosures are creating a series of direct and indirect impacts that are being felt across the UK. Fewer properties and lower valuations mean lower property tax revenues exacerbating funding issues. We are also all too familiar with the effects of massive natural disasters that have literally wiped some neighbourhoods away.

Local councils will need to rampup infrastructure investments in theseareas to encourage new homeowners tobuy and occupy these vacant homes.

Thankfully, BI is not strictly a corporate proposition. Local councils can turn to BI to help combat the effects of the subprime crisis. BI can help track and analyse foreclosure rates to identify risk-prone neighbourhoods, enabling cities and towns to mobilise appropriate resources for maintenance, community support and public health.

For public safety, BI presents dashboards to enable governments to monitor crime statistics, identify potentially troublesome spots and deploy forces to prevent incidents and neutralise crime rates. Essentially, rather than reacting, instant access to accurate information allows departments to redeploy in response to crime trends as they occur.

Furthermore, BI coupled with planning offers the detailed kind of forecasting

and modeling governments need to track future tax revenues, note where shortfalls will occur, then adjust budgets and programmes accordingly using ‘what if’ analysis to either deal with the shortfall or bump up revenue streams elsewhere.

BI can play a strong role in the government’s efforts to support and comply with initiatives to improve accountability and performance. In November 2007, President Bush issued an executive order requiring federal agencies in the US to set clear annual goals, lay out specifics for achieving them and designate ‘performance improvement officers’ to assess their progress and report their status to the public.

Business intelligence can play an instrumental role for federal agencies that are initiating the sweeping organisational changes needed to address today’s management challenges. Even in this financially constrained environment, BI gives government leaders at all levels new tools to focus their attention on these ambitious transformations. BI provides the visibility needed to ensure budget performance and compliance, variance management and optimal citizen service.

Moving forward with BIWhile no one can say with certainty what our economic future is, it is nonetheless safe to say that, economic indicators aside, our climate will continue to challenge businesses and governments to achieve higher levels of efficiency and performance.

BI solutions can help organisations of all types and sizes achieve greater levels of accountability, innovation and agility, and position them to capitalise on opportunities and respond to threats on a timelier basis.

The key is to avoid standing still or succumbing to the temptation to scale back on the very investments that can best position the organisation to withstand rough economic times. Instead, the proper course is to move forward, with business intelligence providing the information executives and managers need to navigate. ■

‘BI is not strictly a corporate proposition. Local governments can use BI to help combat the effects of the subprime crisis.’

Further informationIBM Cognos Website: www.cognos.com

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Budgeting, planning and forecasting46

Blow the budgetYou would be forgiven for assuming that a global recession is the time to take budgeting very seriously, but this way of thinking is becoming outdated. Steve Player, Director of the Beyond Budgeting Round Table (BBRT) North America Region, explains why a rising number of global companies are turning their backs on traditional budgeting in favour of ‘beyond budgeting’.

As we entered the 21st century, American Express confronted a worldwide financial services market that suffered from the stress of the dot.com meltdown and the threat of war in the Middle East. A global economic downturn threatened to severely hamper its growth. Shareholders were growing restless. How did this complex, New York-based financial services company respond to this daunting economic volatility? By introducing a continuous planning process adapted from the Beyond Budgeting principles (see box, opposite).

This evolutionary shift began in 2002, during the heat of the previous recession. Similar Beyond Budgeting-inspired shifts are

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Budgeting, planning and forecasting 47

taking place right now within numerous companies, across all industries. The changes, which are accelerating in response to the current global economic downturn, represent a way to use planning and forecasting processes to be better prepared for an unknowable future. Continuous planning and adoption control works far better than traditional budgeting.

The Beyond Budgeting Round Table (BBRT) North America Region, a network of member organisations with a common interest in improving planning, forecasting and control, thereby improving overall performance. As an outgrowth of the BBRT founded in the UK in 1997, the North American Region recently celebrated its eighth anniversary.

In the past year, BBRT has added 20% new membership throughout the US, thanks to Beyond Budgeting practitioners such as Charles Schwab, Millipore, Park-Nicollet Health Services, PPL Utilities, TW Telecom (formerly Time Warner Telecom), The University of Texas MD Anderson Cancer Center and many others.

Although Beyond Budgeting principles apply to all industries (including the public sector, MD Anderson receives 7% of its funding from the state of Texas), US healthcare and financial services companies have been particularly active in implementing the principles in the past 24 months, due to the extreme pressures confronting companies in those sectors.

In the US market pressure and economic volatility confront all industries because of global competition. So the useful question to ask is not whether Beyond Budgeting principles can be adapted to a particular company, but how the principles can be adapted.

On this count, the cost studies of US Beyond Budgeting practitioners is instructive. Their experience illustrates how adopting and/or adapting Beyond Budgeting principles can facilitate:

the advancement and integration of •new planning concepts and decision-making toolsthe sharing of best practices and lessons •learned at an executive level, and the reduction of performance •management challenges prevalent in most finance departments.

Revolutionary or evolutionary?Examples of revolutionary moves to eliminate the traditional budgeting process exist throughout the world: the Swedish bank Svenska Handelsbanken, Scandinavian building products distributor Ahlsell, the US consumer goods producer Slim∙Fast, and US glass manufacturer Guardian Industries each did so.

US companies have also demonstrated an interest in the evolutionary adoption of Beyond Budgeting principles. This iterative approach includes a time-phased implementation, which is being aided by a revamped, concise implementation guide for BBRT members.

American Express, for example, initially adopted a five-quarter rolling forecast to

help improve planning discussions. This ultimately led to more rapid returns from better investment optimisation decisions. The company immediately modified typical variance explanations so that relatively low-value discussions about differences between this year’s actuals and last year’s budget were replaced with discussions of differences between actuals and the most recent forecast.

While the company continued to produce annual budgets, the focus shifted from those budgets to the latest forecasts, which are inevitably closer to reality. In 2005 American Express eliminated budgets. This allowed finance staff to constantly look forward, comparing actuals to the expected results from the latest forecast.

The 12 principles of Beyond Budgeting

The BBRT framework, which includes the following 12 principles (half of which describe leadership actions and half of which identify how management processes align with leadership actions), was released to member companies in early 2000 and later publicly disclosed in the landmark book ‘Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap’ (Harvard Business School Press, 2003) by Jeremy Hope and Robin Fraser.

1. Customers Focus everyone on their customers, not on hierarchical relationships

2. Processes Organise as a lean network of accountable teams, not as centralised functions

3. Autonomy Give teams the freedom and capability to act, don’t micro-manage them

4. Responsibility Create a high responsibility culture at every level, not just at the centre

5. TransparencyPromote open information for self-management, don’t restrict it hierarchically

6. Governance Adopt a few clear values, goals and boundaries, not fixed targets

Leadership actions

1. Targets Set relative goals for continuous improvement, don’t negotiate fixed contracts

2. Rewards Reward shared success based on relative performance, not fixed targets

3. Planning Make planning an continuous and inclusive process, not a top-down annual event

4. Controls Base controls on relative indicators and trends, not variances against a plan

5. Resources Make resources available as needed, not through annual budget allocations

6. Coordination Coordinate interactions dynamically, not through annual planning cycles

Aligning management processes with leadership actions




TW Telecom and life sciences company Millipore also favoured an evolutionary approach to implementing Beyond Budgeting principles. TW Telecom’s rolling forecasts cover only the next six months, an approach that reflects the company’s belief that this time period represents the reach of its forecasting visibility. Millipore replaced traditional budgets with a fifteen month rolling forecast. This allowed their Balanced Scorecard implementation to operate freely. It cut the budget cords that often choke Balanced Scorecards to death.

The revolutionary approach to adopting Beyond Budgeting principles also remains in use in the US. Slim∙Fast posted an impressive 35% annual growth rate without budgets prior to its acquisition by Unilever in 2001, for example. This rapid implementation, typically in less than nine months, can suddenly eliminate a cumbersome, time-consuming practice. The primary challenges include the significant change requirements and also the need for visionary leadership.

While there are tools that can assist with the change in management process, such

as expense ratio management and league tables, the risk of leadership turnover, which remains historically high in the US, can make the evolutionary approach more appealing for many companies. When a new CEO and, later, a new CFO took over management of petrochemical giant Borealis in 2001, traditional budgets were eventually reintroduced. On the other hand, budget-less cultures remain intact at American Express, Millipore Guardian, Handelsbanken and Ahlsell, despite executive leadership changes since their original transformations.

North American nuancesThe growing adoption of Beyond Budgeting principles in the US may also relate to the relatively broad objective of BBRT’s mission and research.

The organisation’s overall objective is to help companies plan and control their companies more effectively. As a result, the case study and best practices research includes a number of examples of strong performance management capabilities at companies that have adopted some but not all of the Beyond Budgeting principles.

Southwest Airlines, for example, embraces the main Beyond Budgeting focus of continuously planning and maintaining adaptive control of their organisation’s quarterly budgets. These are changed regularly as the airline adds cities, changes equipment and routes and constantly responds to a competitive industry.

The company sought to refocus quarterly budget discussions away from budgets and back onto performance. ‘We also changed our quarterly departmental budget meetings to what we called the “business performance reviews,”’ notes Southwest Airlines CFO and Senior Vice-President, finance, Laura Wright. ‘Now our department heads, when they come in for their review, instead of talking about budget variances, they really talk about their department, their strategies, how they’re aligned to the corporate performance.’

BBRT has made a concerted effort to engage its critics, such as University of Southern California Marshall School of Business Accounting department chair and professor Ken Merchant, to learn from them, and to seek out relationships with other thought leaders (such as Balanced Scorecard guru

‘When different management concepts conflict, the concepts often leave managers confused by

competing signals on what action to take.’



Budgeting, planning and forecasting 49

and Harvard professor Robert Kaplan) that also provide practical insights for our member companies. Stanford University’s legendary accounting professor Charles Horngren has served as the academic advisor to the North American BBRT since its launch in 2002. He has co-authored case research and assisted on implementation approaches. The Horngren Visionary Award is BBRT’s highest honour and is given each year for outstanding contributions in advancing planning and control practices.

Applied principlesThe experiences of practitioners in North America have helped demonstrate how Beyond Budgeting principles can facilitate improvements in the following areas.

The advancement and integration of new performance management concepts and toolsThe introduction of Beyond Budgeting principles in tandem with other business-improvement methodologies, such as Balanced Scorecard, is not uncommon. Millipore is an example of moving Beyond Budgets to free your Balanced Scorecard to operate effectively. Many

organisations find the traditional budgets can choke the Balanced Scorecards attempts to make the organisation respond to threats and opportunities.

When different management concepts conflict, the concepts often leave managers confused by competing signals on what action they should take. Traditional budgets’ monthly variance explanations choke out the scorecards signals to be responsive to changing conditions. Eliminating the budget eliminates the confusion. Relative cost control provides a more up-to-date and responsible approach.

Another example is Minnesota-based Park Nicollet Health Services, which opted to implement Beyond Budgeting principles as part of a larger transformational effort to adopt the Lean practices exemplified by the Toyota Production System. The Lean concept of eliminating waste in processes struck Park Nicollet CEO David Wessner and CFO David Cooke as an opportunity to eliminate a traditional budgeting process that produced more waste than value.

BBRT members also regularly meet formally, through industry groups, and informally, to discuss the interplay of different concepts, such as activity-based costing, customer relationship management and others, with the Beyond Budgeting principles and supporting tools. During the heavy consolidation in the business software market of the past three years, including planning and business intelligence applications, BBRT members have shared insights on the impact on software implementation or support and service perspective when, for example, a large enterprise resource planning vendor acquires a business performance management software firm.

‘The increased adoption of Beyond Budgeting principles in the US has yielded a growing body of best practices.’




The sharing of best practices and lessons learned at an executive levelThe increased adoption of Beyond Budgeting principles in the US has yielded a growing body of best practices that are shared within companies and also among BBRT member companies. For example, Beyond Budgeting implementations require at least three high-level qualities:

Enlightened leadership. • Most senior managers reach their positions by being able to play the traditional budgeting games. It takes an enlightened leader to understand the problems those systems created and then move to overcome them by forgoing the games created by the traditional budgeting process, especially when they rose to success by mastering the old game.

A commitment to changing culture and behaviours as well as processes. Finance managers in the US tend to be particularly interested in changes to the planning and controls processes that Beyond Budgeting implementations require. These changes include the introduction of league tables (to create relative targets vs the fi xed targets in traditional budgets), the decoupling of incentive compensation from negotiated budget targets, continuous action planning, dynamic resource allocation, and more. However, successful Beyond Budgeting implementations require more than a fi rm grasp on process mechanics; cultural and behavioural change also must be a major focal point.

The use of fast, open information • systems. Effective information systems enable corporate managers to equip operational managers with the information needed to run the business and to monitor changes. American Express develops multiple scenario plans that identify leading indicators of when change is occurring and also identifi es the steps to take in response. Park Nicollet tracks process improvements on run charts and holds weekly reviews of performance and related improvement plans.

Multiple factors continue to drive need for change US companies face numerous challenges that are driving them to reconsider their budgeting and forecasting processes. These changes are reflected in the need to continuously update plans for an unpredictable and rapidly changing environment. These challenges typically fall into several areas:

Traditional budgets are time-• consuming, error-prone and quickly obsolete. According to an American Productivity & Quality Center (APQC) 2008 study, a typical 5% of US companies find that their annual budgets are obsolete before the year begins, 26% report that the budget is obsolete by the end of the

first quarter and 56% say the budget is useless after the second quarter. In an April 2009 Business Finance survey, 28% of US corporate finance executives report that their 2009 budgets were invalid before the year started. Over two-thirds of these respondents expected their 2009 budgets to be irrelevant by mid-year.

Traditional budgets cost too much and • trigger additional spending. The APQC examined how financial planners within the finance department spend their time finding that the bulk of their effort is dedicated to collecting and validating the data and administering the process: only 23% of the planning unit’s time is dedicated to value-added activities; the remaining 77% is squandered on data manipulation. It costs significant time, money and stress to create an obsolete budget. The Hackett Group research finds that organizations spend 25,000 person days per billion dollars in revenue on planning and control.

Traditional budgets stimulate • unethical behaviours. Companies that link incentive compensation to traditional budget targets unwittingly encourage managers to negotiate lower numbers

during the budgeting process to help ensure that they can ‘earn’ their incentive payment. This model also fails to address external market conditions that infl uence, either positively or negatively, the achievement of fi xed budget targets. As former General Electric CEO Jack Welch has noted, the traditional budgeting process ‘brings out the most unproductive behaviours in an organisation.’

These and many other challenges linked to traditional budgeting, planning and forecasting ensure that Beyond Budgeting’s adoption will continue to grow. Whether this growth is a revolution or evolution is at the discretion of each practitioner. Regardless of what forms these transformations assume, they have great value potential to both the implementors and other members who will learn from their implementations.

‘It is intriguing to see more management teams running their organisations without the forms of budgeting that so often become a millstone around the neck of operating managers who think that they are unsuccessful if they don’t make the budget,’ reports Charles Horngren, professor emeritus at Stanford University, whose ‘Cost Accounting: A Managerial Emphasis’ has been used to train more corporate finance executives in the US than any other finance and accounting text book. ‘They are overcoming the traditional budgeting attitude that I think leads to dysfunctional decision-making.’ ■

Steve Player

Steve Player is the director of BBRT North America Region and MD of The Player Group. Player has co-authored fi ve books on performance management and writes a monthly fi nance transformation column for Business Finance magazine. His latest book on rolling forecasts, ‘Future Ready’, co-authored with Steve Morlidge (John Wiley & Sons) will be available in early 2010.

transformation column Business Finance

magazine. His latest book on rolling forecasts, ‘Future Ready’, co-authored with Steve Morlidge (John Wiley & Sons) will be available in early 2010.

Business Finance

latest book on rolling forecasts, ‘Future Ready’, co-authored with Steve Morlidge (John Wiley &

‘The traditional budgeting process brings out the most unproductive behaviours in an organisation.’


Tel: +44 (0)20 7553 0777

Email: [email protected]

www.fergusonsnell.com

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Ferguson Snell & Associates an Xchanging Company

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Performance and business transformation52

The right remedyLarge organisations have made great efforts to become more flexible and respond faster to the customers’ needs, but their size and complexity makes transformation a tough task. For the UK’s National Health Service, the burden of change has become an opportunity for innovation, as Chief Executive of the NHS Institute for Innovation and Improvement Bernard Crump explains to Jim Banks.

The complex nature of any large organisation encompasses many stakeholders, all of which are affected by strategic and tactical decisions in very different ways. For many, the challenge is to bring about organisational change in such a way that decisions taken centrally have a positive effect at the local or operational end of the value chain.

Large, private sector companies may become extremely complex in structure, but arguably no organisation faces a greater challenge than a public sector organisation like the UK’s National Health Service (NHS). Nevertheless, the NHS has been able to bring about change successfully, and continues to do so, not least through the efforts of its Institute for Innovation & Improvement, which exists to

introduce programmes to improve patient care and clinical outcomes.

‘Someone once described the NHS to me as a whale, but after seeing it up close they described it as a shoal of fish that swims in the shape of a whale. It is a national framework, but any change is essentially local. We are a small, national organisation that is trying to make a difference,’ says the institute’s Chief Executive, Bernard Crump.

The institute supports the NHS in transforming healthcare for patients, mainly through the rapid development of new ways of working, new technology and world class leadership principles. Its programmes must be applicable across an organisation

that encompasses many healthcare practitioners and support staff spread around geographically dispersed delivery points, each with its own blend of clinical expertise and a unique set of demands on its resources.

Bringing all of these stakeholders together around any project for transformation is crucial, so for Crump the prime focus must be on communicating the motivation and process for change effectively.

‘If we focus on one part there are unanticipated effects on other parts of the service. We have high-profile priorities for improvement, but we need to give people locally an opportunity to shape how things happen. Like many organisations the NHS is

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Performance and business transformation 53

a people organisation, so we need to make sure we have people with the right clinical and technical skills. We need those people to understand change and how it comes about. It is about having the right information to inform decisions,’ he says.

Clear measures, clear messagesIn driving for the NHS the institute uses four key principles that permeate every programme it devises, all of which are relevant to any large organisation. The first is to focus on leaders to ensure that they understand how they can achieve improvement in the services under their control. Crump stresses, however, that when he says ‘leaders’ he does not mean simply the higher echelons of management, but leaders at every level throughout the organisation.

To ensure that the decisions made by these key individuals in the NHS are focused on the right goals the second priority in the Institute’s programmes is measurement. This not only applies to the evaluation of new treatments or surgical procedures that could improve patient outcomes, but also to the level of accountability in the organisation to ensure that standards are sufficiently high, and finally to key performance indicators that confirm improvements in care.

Different metrics are needed for all of these criteria, but at a high level the principle of measurement ensures that all change is approached in a systematic, structured and quantifiable way.

‘The third key criterion in our projects is the use of specific tools and techniques for improvement. This is where we can draw on Lean and Six Sigma principles in management, and technical or surgical tools,’ says Crump.

The fourth key point of focus is on relationships, not only with external organisations but also within the NHS.

‘Inter-organisational relationships define how services are commissioned, how performance managers manage, and how we ensure that good ideas for improving care from other organisations are used in a way that creates local pull for those techniques. The focus means creating respect between different teams and making sure that managers and their teams understand what they are trying to achieve,’ adds Crump.

The relevance to large organisations in the public and private sectors of the institute’s approach is proven by the fact that the

improvement programmes for the NHS have drawn on ideas from other business sectors.

‘This is a sophisticated approach to achieving change in a complex organisation. We have learnt a lot from other industries, but we must recognise the distinctive nature of our industry. You can’t run a hospital like a manufacturing plant or a shop, but some ideas can be very useful for us if they are developed hand-in-hand with the people who are delivering the care,’ notes Crump.

The case for co-productionThe involvement of stakeholders in defining its programmes has led the institute to focus on two techniques – co-production and observation – that have proven extremely useful in helping the people delivering care to shape how improvement is achieved.

Co-production ensures that staff within the NHS, as well as members of the public

who use NHS services, provide input to transformation projects. Observation ensures that what people say they will do is what actually happens. The use of handheld cameras, for instance, has captured valuable information on how processes happen and, therefore, how they could be changed.

‘When people sit back and watch the video they see ways in which to change a process for the better,’ comments Crump.

These practices have influenced specific programmes for change that have been highly successful. For example, the Releasing Time to Care programme, also known as The Productive Ward provides a modular series of interventions that enable ward staff to increase the amount of time spent on direct patient care. Co-production and observation were part of the intensive testing and development at a number of acute trusts around England.

Nurses usually spent only 25-30% of their time interacting directly with patients, but the project has brought clear gains.

‘It is a structured approach to developing change for each individual ward. The aim is to release nurses’ time for direct care and

we have seen dramatic improvements that enable nurses to spend up to half their time with patients. The average improvement has been 13%,’ notes Crump.

The programme is not a strict methodology, but a series of techniques for improvement that can be adapted to the needs of each individual application and this, Crump believes, is the only way it can work and relies heavily on input from all stakeholders.

‘The hospital dictates how that extra time with patients is used. It could focus on quality of handover, or services at meal times, or the drug round – it depends on what the ward needs. The key was our partnership with the nursing community, largely through the Royal College of Nursing, and our use of regional learning partners,’ he remarks.

Similarly the Leaders in Patient Safety Programme (LIPS) involved key partnerships,

‘Inter-organisational relationships define how we ensure ideas for improving care from other organisations are used in the right way.’

Lean Six Sigma

The Six Sigma business management strategy, originated by Motorola, is widely applied in many private sector companies, and has influenced key projects designed by the NHS Institute for Innovation & Improvement. Its objective is to improve process quality by removing errors and variation in business processes.

More recently, Six Sigma has joined up with ‘lean’ manufacturing principles to yield Lean Six Sigma. ‘Lean’ focuses all resource expenditure on creation of value for the end customer, branding other expenses as wasteful.

The criteria that determine value will differ in the NHS and private sector businesses. But whether measuring services that customers will pay for or the quality of patient care, the principles of Lean and Six Sigma are applicable in both contexts.

‘The Royal Bolton trust is a fantastic organisation that has done a lot of work on Lean and has successfully built its own programmes for improvement,’ notes the institute’s CEO, Bernard Crump.

CIM011_020_Crump.indd 53 24/6/09 10:14:31


Performance and business transformation54

external bodies and co-production with senior managers within the NHS.

‘We drew on work done in the US on patient safety and made that experience appropriate for the NHS. We developed a UK faculty to coach people and the senior safety people in many hospitals came to work with people from other hospitals to create and implement patient safety strategies, which have led to tangible results,’ says Crump.

The partnership principleEngagement with the organisation is vital, but so are external partnerships, be they with other healthcare organisations or academia, as in the institute’s Patient Experience-based Design project.

The project focuses mainly on the needs of patients with long-term care conditions, necessitating contact with a hospital over months or years.

‘We worked with hospitals with exemplary ratings, but that still wanted to improve. Using strong patient data and in partnership with academics from University College, London, we identifi ed the emotional trigger points - both positive and negative - and the factors at play in determining them,’ says Crump.

‘There were joint groups of managers, clinical staff and patients to develop ways of improving patient experience. As a result, even high-performing organisations with good patient surveys are bringing about dozens of

improvements in care at the emotional trigger points. We are now rolling out that approach across the whole country,’ he adds.

The over-riding themes that emerge from the Institute’s experience defi ne key factors for achieving change successfully in a large and complex organisation: clear communication, stakeholder engagement, fl exibility to accommodate disparate needs, and constant measurement.

‘Clear metrics help people to understand what you are aiming to do,’ stresses Crump

In the current economic downturn, the aims of the institute are, however, quite clear.

‘In a harsh economic environment we need to improve quality without the substantial year-on-year increases in investment that we have had in recent years. The focus is on high-quality, right-fi rst-time service. We can no longer associate better quality with additional expenditure,’ Crump observes.

Against that backdrop, the challenge now is to get the cycle time for projects down, in no small part because there is a strong demand for more programmes – a testament to the institute’s success so far in implementing change.

‘The NHS is still hungry, because they know that we are working on useful things. There is a pull from the organisation,’ says Crump.

‘Our aim is a self-improving NHS. We may have a long way to go, but we want to embed the concept of improvement in the philosophy of healthcare organisations.’ ■

‘In a harsh economic environment we need to improve quality without substantial year-on-year increases in investment.’

Bernard Crump

Bernard Crump became the fi rst CEO of the NHS Institute for Innovation and Improvement in July 2005. He has written and lectured on topics in healthcare, including aspects of population health, the role of clinicians in management, health and healthcare improvement, the use of metrics in encouraging improvement and the use of health economics in decision making.

the role of clinicians in management, health and healthcare improvement, the use of metrics in encouraging improvement and the use of health

CIM011_020_Crump.indd 54 24/6/09 10:15:17

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People and performance56

Ring the changesWhen it comes to improving the finance function, organisations often adopt an incremental approach, tinkering around the edges to make marginal gains. Some firms, however, make more radical transformations in pursuit of better performance, as Royal Dutch Shell’s Andy Roberts explains to Steve Coomber.

A radical overhaul of the finance function at Royal Dutch Shell was motivated by a desire to make the finance function the best in class, fit to drive the business forward into the 21st century.

The financial reorganisation was triggered by the appointment of Peter Voser as CFO in 2005, explains Executive Vice-president

Finance of Shell Gas & Power, Andy Roberts. After a two year stint at Swiss conglomerate ABB, Voser was rejoining a company where he had spent most of his working life.

‘Voser wanted to set out his vision, for finance to be best in class, so we focused on aspects such as the cost of doing business, and looking at whether finance

is involved in all the right aspects of the business, at what stages, and in what capacity,’ says Roberts.

Part of Shell’s finance leadership team, Roberts is head of finance in the Gas and Power division. The finance reorganisation was run through the finance leadership team, with the addition of a programme

CIM011_024_Shell.indd 56 24/6/09 10:17:43


People and performance 57

management offi cer who acted as the overall coordinator.

‘We took some external benchmarks as a starting point,’ says Roberts, ‘We looked at our cost effi ciency undertaking processes, the number of employees, where they spent their time – whether too much time is spent on transaction processing or data gathering and management, or too little on supporting the business, or on data analysis and interpretation, for example. We wanted to really get a sense of where we were, compared to what you might call best in class fi nance.’

While benchmarking can be a useful tool to help defi ne a vision, it shouldn’t become the exclusive raison d’etre for change, otherwise there is a danger people will struggle to understand or engage with the driving purpose for the transformation. Hence the need for a top level strategy and vision for the fi nance function.

‘The benchmarking gave us some indication that our costs were a bit too high, and that our processes and activities were quite complicated. They were not as standardised as they should be, there were areas where we could automate, eliminate activities and make them simpler,’ says Roberts.

‘On the effi ciency side, the hope was that people would be free to be more focused on the value added activities and supporting the business, for example being involved in business opportunities and adding to the fi nance value right from the beginning.’

Fuel injectionRoberts was tasked with dealing with the input, or lack of it, that fi nance had into business opportunity development. He points out that the involvement of fi nance in this process can make a very big difference to the outcome in terms of value creation.

‘If we take a business opportunity, and develop and structure it, enter into agreements, put the corporate structures around it, and then fi nd out it is actually not as optimum as it could be, then there is a lot wasted effort in unravelling it to get it right. It may be an old adage but we were trying to make things simple, but get them right fi rst time,’ Roberts says.

‘There are all sorts of areas where fi nance can add value just in terms of the business opportunity itself, the economics, the

contracting strategy, how it is going to be funded, how it is going to be structured for taxation purposes, whether there is any hedging, how to mitigate risks, non-US dollar exposure, for example. So there is a huge list of areas where fi nance can help improve performance when it comes to developing business opportunities.’

The vision was to have fi nance involved in business opportunity development right from the beginning, and to be proactive in providing the fi nance advice. Roberts started by putting together a small document detailing what needed to be done to improve the involvement of fi nance in business opportunity development.

‘A key starting point was a common understanding of what fi nance’s accountabilities were with respect to business opportunity development. So, for example, if it is accepted that fi nance is responsible for the robustness of the business opportunity economics, what does that actually mean?’

A four or fi ve-page detailed explanation of what the accountabilities of fi nance function were in this area was produced and then discussed with a wide number of stakeholders in the business. This exercise covered potential overlaps with people outside fi nance, and clarifi ed the defi nition of fi nance’s contribution, outlining boundaries beyond which fi nance did not have the expertise to go – estimating the costs of pipe installation, for example.

‘It was creating a checklist of what fi nance should do against each business opportunity,’ says Roberts. ‘A huge value is in the discussion itself; as part of the dialogue, people elsewhere in the business began to accept that they should let fi nance in at a very early stage.’

Talent identificationThe next part of the process involved matching the fi nance team’s capabilities against the business opportunity development accountabilities.

‘You have to ask if you have the people with the right skills and competencies within that fi nance pool of people that are accountable to the business opportunities,’ says Roberts. ‘There are two elements here: do they have the level of skill and competency; and do you have the competency or skill courses to enable fi nance people to acquire the level of skills and competencies that you need.’

These two aspects ran in parallel. A course curriculum was developed, which covered different elements of the business opportunity and allowed employees to address competency and skill gaps. At the same time, through annual or biannual appraisals, a structure was put in place around which it was possible to properly assess people’s competencies and skills,

Having spent several years involved in a signifi cant fi nance function reorganisaiton at one of the biggest multinationals in the world, Andy Roberts knows what needs to be done to make transformation work.

Suffi cient planning is essential, he says. ‘You have to defi ne the accountabilities very early on. You must explain to the team what their accountabilities are with respect to providing fi nance support to the business opportunities. Then you have to clearly communicate with the business what the new structure is and make it clear that these people need to be involved from the beginning of business opportunity development.’

Effective communication is integral to getting people on board with the changes, Roberts explains. ‘The initial reaction is often that it is just a job reduction exercise, there has to be a lot of communication to help people understand that it is much bigger than that, it is about giving individuals the skills and tools to be able to go forward and perform in the fi nance arena - whether it is in Shell or another organisation.’

‘While benchmarking can be a useful tool to help defi ne a vision, it shouldn’t become the exclusive raison d’etre for change’

Successful transformation

appraisals, a structure was put in place around which it was possible to properly assess people’s competencies and skills,

function reorganisaiton at one of the

Successful transformation

CIM011_024_Shell.indd 57 24/6/09 10:18:06


People and performance58

and defi ne how they could improve their performance in relation to the competencies and skills required.

The new approach to involving members of the fi nance team in business opportunity development at an early stage also shaped external talent identifi cation. As part of the restructuring, a community of practice known as commercial fi nance was created, comprising fi nance people specialising in business opportunities.

‘This had the benefi t of delivering economies of scale, making it easier to identify where competency gaps were and bring in external people if necessary, and to get some consistency in the approach taken by the fi nance function towards business opportunities,’ says Roberts.

‘By putting this framework in place, you enable the culture to evolve into something different. They have set up a mechanism for knowledge and best practice sharing, plus they can use real life examples, and then begin to generate a continual learning process.’

Measuring performance Getting a quantitative handle on the performance of the commercial fi nance team to confi rm that it is adding value as planned, is not easy. But there are ways of assessing its performance.

‘Commercial fi nance makes its own assessment. We also talk to the business and get a reading on where they feel fi nance has added value,’ says Roberts. ‘One area I look at is ‘business control incidents’. For example, if you have failed with the funding or taxation of a project, that might be a business control incident, because potentially you have lost some money or you have not made as much money as anticipated. Then you can look back and ask why that happened. That has some quantitative measurement to it.’

Roberts will also evaluate certain business opportunities himself, crosschecking the input of the fi nance team and whether value has been added right at the beginning, rather than later in the process.So has the upheaval in a fi nance function numbering in the thousands and spanning

the globe, across over 100 countries, been a success? Roberts believes it has, certainly in the commercial fi nance arena.

‘The transformation process began in 2006, and is now well advanced,’ says Roberts. ‘I would say that now, in just about every business opportunity, there is the early engagement of fi nance; fi nance plays a key part in every business opportunity.’ ■

The Gas and Power division

The Gas and Power division of Royal Dutch Shell liquefi es and transports natural gas markets and related infrastructures. It develops, owns and operates wind power projects in Europe and North America together with joint venture participants. It also licences coal gasifi cation technology. Gas and Power segment 2008 Revenues were $25.8 billion, and 2008 earnings were $5.3 billion. Gas and Power has operations in 35 countries and on average employed around 3,000 people during 2008.

Andy Roberts is EVP, fi nance for Royal Dutch Shell’s gas and power division. This division covers global liquefi ed natural gas production, marketing, shipping and trading, natural gas marketing and trading in Europe and the US as well as wind, solar and clean coal energy. His responsibilities include all aspects of fi nance, information technology, contracting and procurement and new business development process.

His responsibilities include all aspects of fi nance, information

contracting and procurement and new business development

Andy Roberts

‘I would say that now, in just about every business opportunity, there is the early engagement of fi nance.’

CIM011_024_Shell.indd 58 24/6/09 10:18:47

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60 M&A and restructuring

The buddy systemThe economy is a more alliance-based environment than it was 20 years ago. Organisations increasingly band together into multi-enterprise networks and these new collaborations require special skills to manage. CIMA’s Louise Ross looks at research that shows how, instead of contracts and terms of engagement, trust and information sharing are the key factors for success.

Economists advise that there are three basic approaches for organisations to configure themselves to obtain resources they need – they can buy from the market, build the required capability, or form networks. Put simply, the options are buy, build or band together. The first two options are often referred to by economists as the “market” and “hierarchy” options for industrial organisation

but the last is the one which has become increasingly common since the late 1980s.

Banding together into networks, often referred to as “virtual organisations”, requires a specific kind of management to ensure the networks’ goals are reached. The ability to build and sustain long-term relationships with other members of the

network becomes critical, to reflect the evolution from transactional to collaborative relationships. Ideally, collaboration offers access to resources, capabilities or markets that participants can’t benefit from individually, but one can also argue that participants are giving up flexibility or independence by specialising and locking themselves into such relationships.

CIM011_022_Ross.indd 60 24/6/09 10:22:22


Collaborative performance 61

Specialisation, and the consequent dependence on the contribution of other members of the virtual organisation, requires a network built on trust. Trust that individual participants will balance their own self-interests against the interests of the network as a whole. Management has to both react to, and help create this environment of trust.

Motives for virtual organisationsThere are several reasons why organisations might form alliances. McKinsey consultants Hagel and Singer argue that the traditional organisation has three elements – a customer relationship element, a product innovation element and an infrastructure business. Each element has a different driver:

• Thecustomerrelationshipelementis driven by economies of scope – extending the relationship with the

customer by offering the widest range of products and services;

• Theproductinnovationelementisdriven by speed – achieving the fastest possible time to market to win market share before competition builds; and

• Theinfrastructurebusinessisdriven by economies of scale – to reduce fixed costs.

For any of these elements, ‘specialists’ might provide those processes more cost-effectively than the organisation could itself, and remove some of the tension which exists between these competing drivers. These specialists organise themselves into a virtual organisation, in a value chain formed around these core processes. New activities or members are added as customer needs evolve, and economies of scale, scope, specialisation and integration are exploited.

Benefits of such collaboration include sharing of costs; or the reduction of risk when entering new markets. Collaboration can be an effective response to a macro-economic climate of fierce competition, globalisation or rapid growth; or for industries whose competitive landscape is characterised by increasing R&D costs, and shortening technology life-cycles.

For example, in the electronics industry there is an increasingly short golden period after the introduction of a new product to earn profits before first the competition, then enhanced products arrive on the scene. Achieving the optimum level of inventory to avoid stock-outs during the golden period, or gluts when the consumer has moved on to the next generation product, requires a fast and efficient flow of products, parts, cash and information between all parties within the typically fragmented supply chains in this sector.

The desire to collaborate might also be prompted by a participant’s own circumstances, when it does not itself have the capabilities it needs to profit from its innovations. Those capabilities may relate to R&D, marketing, manufacturing, or after-sales. Some theorists argue that the alliance itself can be seen as a learning and development process, that the proximity and interactions between customers, suppliers, researchers and competitors stimulates innovation.

Typology of virtual organisations (see box, left)An example of an internal virtual organisation is the shared service centre. Functions such as accounting, HR, IT, Legal Services or Purchasing are centralised in one location, servicing divisions of the company as internal customers. The organisation retains accumulated expertise, but also benefits from economies of scale and specialisation. Shared Service Centres may evolve into selling their spare capacity to other organisations – for example, life insurance and pensions group Aegon has outsourced certain middle office processes to service provider LogicaCMG, and opened these up to third party customers.

Examples of enduring virtual organisations can be found within outsourcing in the automotive industry. To avoid expensive retooling, major car manufacturers outsource the manufacture of components

Dedicated virtual organisations

Specialist expertise is banded together for the

duration of a specific project.

Fluid virtual organisations

Specialisation based on core competencies, where

the membership and nature of relationship with other

parties is subject to change.

Internal virtual organisations

Centralisation of specific functions within an

organisation to benefit from economies of scale and

specialisation, while retaining and building expertise.

Enduring virtual organisations

Specialisation based on economies of scale, with

an expectation of enduring relationships.

Figure 1. Typology of virtual organisations

‘Specialisation, and the consequent dependence on the contribution of other members of the virtual organisation, requires a network built on trust.’

CIM011_022_Ross.indd 61 24/6/09 10:22:54


Collaborative performance62

such as exhaust systems, wheels, gearboxes, carbon-fibre components (bumpers/fenders) and acoustic components. In the US, if demand for any component is less than 200,000 pieces annually, it is deemed better for production to be outsourced.

An example of a dedicated virtual organisation is the consortium known as the Groningen Long Term Project (GLT). This relates to a huge gas field in the north Netherlands which has been in production since 1959 for Dutch oil and gas producer NAM. Significant renovation of well-head plant was required to ensure continued access to reserves.

NAM produced detailed specifications for various engineering, construction, instrumentation or supply activities, and invited firms to form their own consortia to tender for the entire project. Shortlisted applicants presented their competing solutions, which NAM evaluated against total cost of ownership, predicted reliability and technological strength. The winning consortia Stork GLT consequently formed itself a legal entity for the duration of the original contract (1996-2006); and benefited from a major follow-on contract for further renovation.

An example of a Fluid Virtual Organisation is Nike, described by Datamonitor as ‘a designer, marketer and distributor of athletic footwear ..and accessories’. Nike directly manufactures only 6% of its products. It has different relationships with different partners (for example, with respect to the extent to which they collaborate on design).

Virtual organisations – simultaneously co-operative and self-interestedOne characteristic of virtual organisations is that they manage to be simultaneously co-operative and opportunistic or self-interested – there is, after all, a commercial relationship at the core of most of these networks. Management is thus about the balance of self-interest with the interests of the network as a whole, about how issues are resolved in the absence of competitive and adversarial relationships, or those governed by the relatively simple demands of a single transaction.

Traditionally, relationships between entities, or between customer and supplier, are governed by contracts, property rights, and commercial law. But it is impossible to draft an entirely comprehensive contract to cover all contingencies, yet allow for flexibility, responsiveness and the exploitation of opportunities.

Trust in virtual organisationsThere has been extensive research condsucted by organisational psychologists and accounting academics, which concludes that trust is the key to successful collaborative relationships. Research also suggests that the level of trust, along with the degree of risk, is the main determinant of the structure of the network.

A trusting relationship is one in which participants:

• Shareinformation–openness• Establishclearrules–understanding

of the other parties’ needs• Avoidsurprises–reliability• Deliverwhatispromised–competence • Demonstratecommitment–reciprocity• Careforthewelfareoftheotherparties

even if this is just in the self-interest of continuity of supply – mutuality

Although trust has to be demonstrably present in all the interactions and contacts between members of the network, these behaviours originate at the top level, being so rooted in the ethical culture of the organisation. And top level agreement is integral to the creation of ethical relationships, ones that establish an equitable basis on which surpluses are shared.

‘Trust reduces the costs of governance, which in turn

will reduce transaction costs.’

CIM011_022_Ross.indd 62 24/6/09 10:24:59


Collaborative performance 63

Benefits of trustTrust between network participants increases their commitment to long-term relationships. This commitment is demonstrated by offering long-term contracts, and undertaking not to use multiple suppliers. This will give other participants the confidence to think longer term about their investments in infrastructure or training.

Trust reduces the costs of governance, which in turn will reduce transaction costs. And trust facilitates the sharing of information which is essential to the performance of networks, and the provision of this information is the responsibility of the management accountant.

New roles for the management accountantAs well as new demands on management, virtual organisations make new demands on management accountants, requiring strategic management accounting and management accounting that extends beyond the traditional boundaries of the organisation.

Recent CIMA sponsored research undertaken by Ariela Caglio and Angelo Ditillo into the management accountant’s role in networked organisations indicated the prevalence of the following collaborative management accounting practices:

Other studies have identified interorganisational performance measurement, investment appraisal, activity-based costing (ABC), and open-book accounting. Given the importance of sharing financial information to both the success of the network, and the role of the management accountant, I’ll conclude by looking at a specific collaborative cost management technique, interorganisational cost management.

Interorganisational cost management (IOCM)Coad and Scapens discuss several examples where collaborative networks have exploited the significant economic advantages of interorganisational cost management (IOCM). They characterise IOCM as a cost management technique that should not be overlooked when evaluating make-or-buy decisions, between the ‘market’ (buy) and ‘hierarchy’ (manufacture) solutions. In both the latter options, Coad and Scapens advise that costs tend to be underestimated, because the transaction costs of sourcing, evaluating, and monitoring suppliers tend to be ignored; as do the non-production costs of manufacture, such as the creation of internal information and monitoring systems, budgets and planning. IOCM requires the company to recognise such transaction costs, both internal and external.

The cases Coad and Scapens discuss include Sainsbury’s, which rolled out IOCM to its

smaller suppliers after successfully using it to improve supply chain performance with 24 of its major suppliers, and Nissan, which used IOCM to support just-in-time (JIT) initiatives with its seat supplier, encouraging it to invest in JIT technology, and undertake collaborative value engineering and co-operative target cost management.

IOCM focuses not just on ‘cost’ but the ‘cost to use’. That is, it considers not just cost/price, but quality, lead times, on-time delivery, and other aspects that users might value such as customisation. It is helpful therefore for suppliers to familiarise themselves with their customers’ processes and strategic plans, to have contact between the two organisations involving technical people who are interested in product specifications which affect manufacturing decisions, marketing people who can discuss differentiation, and purchasing people who might provide the focus on costs and terms of trade.

Such dedication to relationship building is not dependent on both parties being connected by a network relationship, of course, but this would facilitate it.

ConclusionVirtual organisations require new management skills, less about managing resources and more about orchestrating relationships and managing the interfaces within networks. Research into successful and unsuccessful collaborative relationships demonstrates that the keys to success are trust and information sharing. Trust is essential to achieve the necessary balance between each organisation’s self-interest, and the mutual interests of the network.

The creation and maintenance of trust emanates from the very top of the participating organisations, as it is senior management who set the ethical tone of their own organisation, and hence their culture and behaviour as a partner in any collaborative effort. It also shapes any participants expectations of others’ behaviour and their confidence to create long-term relationships.

Information sharing, important in itself for the success of the virtual organisation because it supports collaborative strategic tools such as Value Chain Analysis, is also an important building block to create and maintain trusting and committed relationships. ■

Louise Ross

Louise Ross is a technical specialist at CIMA. Her special interests are narrative reporting, the changing role of the management accountant, and the impact of collaborative web-based technologies. Formerly, she was CIMA’s director of research and retains her interest in bringing academic research findings to practitioners.

Previously, Ross was a senior auditor at the National Audit Office.

‘Information sharing is an important building block to create and maintain trusting and committed relationships.’

8.4%in strategic planning

13.9%in the budgeting processes

more than

20%in information exchange

Involvement of other parties:

CIM011_022_Ross.indd 63 24/6/09 10:25:29


Risk and performance64

One move aheadThe use of scenario planning was put on the map by Shell but the work of GlaxoSmithKline’s Jerome Andries offers a valuable, current example of how focusing on possible futures creates a level of security in an uncertain world.

The practice of scenario planning, of creating plausible futures and designing systems and strategies to exploit and survive them, was brought into modern usage by French oil executive Pierre Wack, an analyst at Royal Dutch Shell in the late 1960s. Wack’s work focused on ensuring the business was ‘future proof’.

Wack believed Shell had to move away from its backward-looking, precedent-based system of formulating strategy,

towards a forward-facing approach that was based on ‘storytelling’ and embracing uncertainty. He argued that a combination of technical knowledge, deep perception and rigorous interrogation of possible future challenges could equip Shell with its own crystal ball, and prepare it to meet any and all future challenges. His work revolutionised the way Shell operated, making it one of the few oil firms in the 1970s to ride out the oil crisis thanks to its preparedness.

Although Wack lacks the profile of more famous executives, his innovative approach has paved the way for an entire movement, and underpins much of what we call ‘risk management’.

While he might not describe himself as a disciple, Jerome Andries has certainly taken Wack’s work to heart and used it on several occasions during his time as European CFO at US pharmaceutical giant Eli Lilly. Andries employed scenario planning on many

CIM011_026_Jerome Andries.indd 64 24/6/09 10:34:14


Risk and performance 65

occasions in order to protect the business from risk, and also to ensure it was well positioned to take advantage of market changes.

Andries, now vice-president of business development for Middle East North Africa at GlaxoSmithKline, cites an example of how scenario planning was used to improve future performance. Eli Lilly was looking to develop a long-term strategy for its Korean operation and as CFO Andries was mandated with the task of examining market conditions and setting the levels and types of investment required.

‘The objective was a long-term strategy for Korea,’ he recalls. ‘We had no idea what the future held so we had to look at the possible outcomes. We then prepared a strategy of safe investments, those needed in most of the scenarios and strategic investments, those required in only one scenario, but that would be critically important.’

At the time, the key issue for a pharmaceutical company looking to sell its products in Korea was whether the country would continue with its state-provided system or go down the private path. Which one of the two models – neither of which meant the end of Eli Lilly’s interest in Korea – would be adopted would mean a fundamental difference in emphasis for the company, and necessitate different types of investment. Tackling the fallout of this decision would prove a key test of Lilly’s scenario planning. So where to begin?

‘First of all you call the experts,’ Andries says. ‘They bring their insight on the specific market situation and are able to contribute expertise on many factors that will impact it. In the case of pharmaceutical, who would you invite? University professors, opinion leaders, doctors, policy makers and so on.’

However, a successful scenario planning exercise is not about creating an echo chamber. ‘You must bring into the exercise people with different views,’ Andries says.

For example, invite an expert from the insurance industry or from the retail industry. They will help you identify and understand early indicators that the future may evolve towards a certain direction and they will help understand what capabilities would be required and what investment would be needed in this situation.

Scenario planning works best when there is a cross section of opinion. ‘You have to identify what are the driving forces that shape the

future of the business,’ Andries says. ‘That means you will need to look at the indicators, that will have an impact on your business long term. The list will be long.’

Simply reinforcing what the company believes is correct is of little value. This is true of politics as well as business. It is often said of John F Kennedy that one of his key strengths was inviting and encouraging dissenting opinions in his Cabinet. Kennedy would even leave the room when contentious issues were discussed so as to avoid influencing outcomes or allowing his presence to sway people one way or the other. In that way, JFK ensured the best brains at his disposal were working at the optimal level.

Andries follows a similar line, and believes the the executives and consultants leading a scenario planning exercise should do their best to facilitate open discussion in order to identify genuinely important issues. And then once expert views, internal and external, have been heard, the next step is to determine their importance. As Andries points out, collating the information correctly – and identifying what matters– will determine whether the exercise has any value.

‘Out of the list of driving forces you have identified, select those that are easy to predict, so-called “pre-determined factors”. They will be common to all scenarios. For example, population size in 2020 or 2050. They will have a similar evolution and effect across all scenarios. They are set; you identify them and move on.’

The next step is to identify the forces that are the less predictable. They will be the source of the contrast between the various scenarios you build. In this exercise, the less predictable a factor is, the more important it becomes.’

In Andries’s version of scenario planning, the accepted wisdom has little value. ‘The major flaw in forecasting in most corporates is the “we know this” syndrome. The difficulty in forecasting is precisely that we do not know.’

Not knowing is actually not a bad state to be in. Uncertainty, according to Wack, should be embraced and used, because not knowing is liberating. ‘These unpredictable forces are the most valuable to build scenarios. Again, take the Korean insurance question: will healthcare be paid for privately or provided by the public sector?’

The CFO is keen to make sure that his scenario planning exercise steers clear of value judgements. The idea of looking at different outcomes should be a neutral one in order to avoid pre-determination. ‘To go back to the Korean example: public or private is neither good nor bad, ultimately, it’s just public or private. The decision is important and has a

huge impact on the market,’ says Andries. ‘But it’s not a question of bad or good.’

It is clear from this that the CFO has a crucial role to play. Long seen as the keeper of the forecast, the CFO is in the perfect position to begin planning for the business’s future. However, Andries believes the CFO – and the finance function in general – has become hamstrung by relying too heavily on both historical information and sticking too rigidly to past events. According to Andries, the best models, such as scenario planning, ‘accept uncertainty and make it part of their reasoning’.

For Andries, not having a clear definition of scenario planning is a classic example. ‘Many companies will talk about scenario planning and they will claim they do it. But what they are doing is just a projection of a worst case scenario and best case scenario. That is not scenario planning,’ he says.

‘Scenario planning is about looking at what the environment might look like. It’s not a question of value judgements, of what is positive or negative; it’s about a spectrum of different outcomes. For every scenario you will need to have a range of strategies.’

‘Scenario planning is not a question of value judgements, of what is good or bad; it’s about a spectrum of different outcomes. For every scenario you will need to have a range of strategies.’



Risk and performance66

‘For companies such as Shell, which created this approach,

there is no end to it, because the more you do it, the more you

discover you have to do it.’

Jerome Andries

Jerome Andries has spent most of his career in the pharmaceutical industry fi rst with Hoechst Marion Roussel, now part of Sanofi , then Eli Lilly. He joined Glaxo-SmithKline in 2009 as vice-president of business development for Middle East North Africa.

But how can CFOs be confident that they are looking at the right areas, and examining the right scenarios? In theory there are countless potential outcomes, so how can the busy CFO cover them?

‘For companies such as Shell, which created this approach, there is no end to it, because the more you do it, the more you discover you have to do it,’ Andries says.

Once you have built your scenarios incorporating the pre-determined factors and contrasted by the most impactful and less predictable driving forces, the next challenge is to able to detect as early as possible which scenario is becoming the most likely.

For this exercise, once again the insight from experts will be used. They will help you identifying early signals that will indicate the future is evolving toward one of the scenario. These indicators should be monitored regularly to then adjust the strategy as required. ‘Scenario planning should not be a one time exercise that you store in a cupboard once it is completed’, says Andries. ‘It is a dynamic tool that should be kept alive and updated over several years.’

Of course, many senior fi nancial executives, when confronted with claims of scenario planning’s crucial role in defi ning strategy, will retort that they already do that as risk

management. Most companies, of course, will have a risk register and will make, usually on a daily basis, any number of decisions based on likely outcomes.

‘The problem with simple risk management is that you tend to use models,’ Andries says. ‘And using models generally involves looking at the past. If you only use the past to predict the future then you’re in trouble.’

It is often said that CFOs and fi nance directors are too dependent on historical information, using the past as a guide. To truly gain an understanding of the business’s future needs, Andries believes more companies should stay true to the spirit of Wack and embrace future volatility and unpredictability.

‘One of the few companies, if not the only one, that anticipated that the oil would go the way it did in 1973 was Shell. It could do this because it was the fi rst company to use and embrace scenario planning. The reason why no-one else predicted it was because they all used similar models, and that’s the problem with the current risk management culture, it’s always looking backwards.’

Andries is at pains to dispel the notion that scenario planning is simply about mitigating future risk. Simply dismissing using scenario planning as a risk management tool would be a mistake. ‘Scenario planning is not only

about risk; it’s much broader,’ he says. ‘When you work on strategy, of course you want to make sure you identify everything that might be different. But you also want to maximise your opportunities. For me, risk assessment and mitigation is massively important, but it’s only one part of the strategy.’

In the current economic climate, it is up to the CFO to demonstrate a fi rm grasp of future risks while maintaining the business’s readiness to capitalise on potential gains. Tough times call for vision, and the CFO is in the perfect place to provide it. ■

Marion Roussel,

vice-president


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Remuneration and reward68

Reward systemThe perceived excesses of the banking sector have brought executive remuneration into the spotlight and many industries have been forced to rethink how they reward and retain key talent. Jim Banks asks Partner at Ernst & Young, Giles Capon, how companies can secure the services of their best managers and still deliver value to shareholders.

We have all read the headlines about the dangerous excesses of the bonus culture that have emerged as beleaguered banks fail and the world’s financial systems creak under the pressure of the credit crunch. While few industries have reached the extremes of short-term reward culture that took hold in the investment banking sector, the world’s economic woes have made the remuneration of executives a more complex issue than ever.

The people who shape the performance of a business must obviously be well rewarded for their efforts, but finding the right blend of short-term and long-term incentives will have a big impact on the future of any company. Every organisation has a careful

balancing act to perform, and it must be achieved successfully while the ground beneath its feet shifts.

‘There has been tension in the media over the last year about executive remuneration, particularly in the financial services sector, and companies need to appease shareholders, who are seeing their value decline with equity prices, and also meet the needs of the management teams. This must be understood by the remuneration committee,’ says Giles Capon, a Partner at Ernst & Young.

‘There is a need to balance incentives in the context of overall business performance and to ensure that appropriate rewards are

given. This is always a challenge, but more so now,’ he adds.

Capon’s area of expertise is in human capital, and he is part of the Ernst & Young team that helps companies to design compensation programmes for employees and executives that are aligned with corporate objectives. The damaged foundations of the global economy mean that these objectives have changed for many organisations. For some, survival is now the priority rather than growth.

In such circumstances it is unlikely that any strategy for executive remuneration could remain unchanged, given that it was most likely designed for times of growth

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Remuneration and reward 69

and opportunity rather than economic slowdown. For Capon, the new economic environment is already having a marked effect on reward schemes.

‘There will be no signifi cant change in base pay, which will be fl at in the majority of organisations, but total remuneration is likely to decrease because when there is less growth there is less variable pay. So, the focus now is on management performance conditions for variable pay. The problem, however, is that sensible projections about the future of a business are hard to make, so performance-setting is very diffi cult,’ notes Capon.

While it is perhaps more important than ever to put the different elements of variable pay in the context of future performance, rarely has it been so hard to predict the future with any degree of certainty.

Short-term bonus incentives are tied to tactical objectives, which are often changing rapidly. Long-term incentives, which often

involve a transfer of equity in the business, pose different problems. When share prices are falling there may, for instance, be a temptation to increase equity rewards, but this could simply store up a problem for later as the value of equity option may balloon should the stock market rise sharply.

‘Performance measures need recalibration,’ stresses Capon.

‘If you look at earnings per share, for instance, do you recalibrate your measures to refl ect the current environment, or do you set targets that are designed to deliver growth? Do you reward growth, or do you incentivise it?’

The extremes of bonus cultureMuch of the media focus on executive earnings has centred on the fi nancial services sector, which has shown how a culture of short-term reward can spiral into excess.

‘Investment banking came under fi re for the short-term risk-taking that the bonus culture created. Now we will see more linkage between short-term and long-term remuneration objectives,’ says Capon.

‘Investment banks set short-term targets to get one year of performance, but directors and boards generally focus on the long-term interests of shareholders. The way the results were interpreted it was seen as excessive risk-taking for personal objectives.’

Capon readily points out that the fi nancial services sector does not set the template for the industry as a whole, but is clear that it does hold valuable lessons for businesses of all kinds.

‘The approach of the investment banks would not usually be seen outside the banking environment. Bonus culture was at its most severe in the fi nancial services sector. Besides, at board level you don’t see people change organisations to chase bonuses as you did with the investment banks,’ says Capon.

The industry raises clear questions about how signifi cant bonuses can be paid in organisations that have palpably failed to

perform, whether they are measured against their own targets, industry benchmarks or the expectations of their shareholders.

A dramatic rethink in the investment banking arena, however, may inform how organisations in many industries will approach the issue of linking rewards to long-term business performance. Capon expects bonus deferment to become more prevalent. This entails paying proportion of the bonus up front, but tying the remainder to the organisation’s future performance.

‘This kind of approach is expected to address concerns in sectors like investment banking especially, and we already see it in use. Before the driver was for executives to build up equity in the company, but deferment of bonus to shares is now seen as a link between long-term objectives and short-term performance,’ Capon remarks.

That link is vital, given the obvious dangers of short-termism. Companies have tactical challenges to face in harsher economic times, but focusing solely on short-term targets to boost annual results for two or

three years is like papering over the cracks in business strategy. The last two decades are littered with examples of companies brought to their knees by short-termism.

Recruitment, retention and rewardThe state of the recruitment market also puts pressure on the structure of incentive schemes. When top talent is in short supply there is pressure to buy in the best executives at any price and the cost of executive remuneration soon starts to rise.

‘What is a challenge is the trend that the war for talent has created over the last ten years. When you identify an executive that you want you have to buyout their existing incentives to facilitate a move,’ says Capon.

The same pressures apply to the retention of key executives. Keeping hold of management teams who already understand the strategy and value of their business can be key to the continuity and long-term sustainability of a business.

‘Total remuneration is likely to decrease because when there is less growth there is less variable pay.’

The right reward

PressuresReward packages are often linked to a company’s share price. Share prices have become more volatile. Incentive payouts are linked to key performance indicators (KPIs). Some KPIs may be less relevant in a weaker economy where liquidity of fund is scarce.

PrioritiesReward programmes should be cost-effective. Short-term incentives must be affordable. Long-term incentive plans need careful planning in today’s volatile markets.

Emphasise company performancePerformance measures should be specifi c to the company. Payouts based on total shareholder return (TSR) must be carefully assessed.

Reward high performersThe best managers should get more attention in the current economic climate to tie in their services.Attracting and retaining top executives effectively and effi ciently is a top priority.

Source: adapted from ‘Rewarding executives in the new economic environment’, an Ernst & Young report.



Remuneration and reward70

‘You need good management teams now, and you need to recognise that under-performance may be due to market conditions, not the failings of management. You need to keep your good managers and give them the opportunity for reward. We are seeing this approach very clearly in the private equity market, but it applies to organisations of all kinds,’ Capon believes.

‘Looking to ensure that good managers remain to guide their organisations in the future, many companies are focused on how to reward them, especially because management teams are more portable now. The restructuring of incentives to keep managers and still refl ect the current market environment is important, because if a team leaves when market conditions improve then a company will need to pay even more to get a new team of the same quality,’ he adds.

Deteriorating economic conditions are putting managers to the test, and often their true value is revealed in adversity.

‘You need to reward and validate good managers to keep the in the long term. Shareholders need to support that and ensure that good variable remuneration packages are there,’ stresses Capon.

The spotlight falls, therefore, on the indicators that give the best guide to the value of a management team. For public companies Capon sees total shareholder return (TSR) as a robust measure.

‘TSR is a good indicator, in good times and bad, of the long-term value of a management team. We will see use of TSR as a metric a lot in the future. It allows you to see managers’ performance relative to your organisation’s competitors,’ he notes.

Clarity from confusionAnother important trend for the future that Capon highlights is the need for much greater visibility of how executive remuneration and rewards are calculated.

‘Transparency is very important. There have been instances recently where shareholders have been unhappy about the performance criteria that determine bonuses, and there have been problems when rewards have been given when managers have fallen just short of their targets. Discretion has been applied to at least a proportion of some bonus awards, which is seen as rewarding failure. That annoys shareholders,’ he remarks.

‘You have to ensure that you consider the outcomes – including the extremes – of your incentive scheme. For instance, base share prices are low at the moment, so if prices rise and you have made a lot of equity payments then that could prove expensive.’

No one can doubt the pressing need for companies to make decisions about tying rewards to corporate performance, taking into account the need to retain talent, the possible outcomes of the remuneration packages to be offered, and the short-term market pressures a business is facing.

‘You need to have a strategic view of remuneration, and your reward strategy should compliment your business strategy. You need to have a clear plan for three to fi ve years and see how that has changed over time, so that you can adapt your reward policy to refl ect those changes,’ Capon explains.

As if there were not enough confl icting factors to accommodate when trying to fi nd the right way to reward leadership talent, there are always new forces reshaping the landscape. The recent change in the UK’s tax structure, for example, has further complicated matters.

‘The last Budget increased marginal tax rates, and the impact on net deliverables will be signifi cant. Remuneration committees will have to look at the use of shares as incentives, when over half their value goes to the Inland Revenue. They have to ask if this is a sensible use of equity,’ Capon points out.

‘The structure of incentives may have to change as a result, as there may be greater investment in the business from senior executives in return for higher net-of-tax returns. Once again, we are seeing this trend in the private equity space. Executives are investing real money to get high returns, but they risk losing it.’

With so many issues to juggle in order to keep both shareholders and management teams happy it is not surprising that executive remuneration remains a thorny issue. The fi rst step in resolving it could well be to place decisions over executive remuneration fi rmly in the context of business strategy. From that point on the metrics and measures required will become far clearer. ■

Rewarding performance

A recent study conducted by Hay Group and World at Work surveyed approximately 763 organisations in 66 countries from a cross-section of industries to determine the reward practices of global organisations during the next two to three years. The global study shows that more than half of companies plan to focus more on the employee engagement as part of their reward program. Companies are also shifting their focus to make sure reward programs are both motivational and cost effective.

57% of companies plan to focus more • on engaging employees when measuring their reward programs during the next two to three years

64% will increase their focus on the • motivational value of reward programs

The study • also concluded that a huge number of organisations plan to increase their focus and improve ‘pay for performance’ reward programs. According to the study, current reward program performance is more heavily weighted toward fi nancial performance (71% of companies focus on this) than employee engagement.

The study also found that 57% of • companies plan to ramp up their focus, and regularly measure, the return on their reward investment, only 20% of respondents currently regularly measure this.

Source: Reward Next Practices Survey conducted by Hay Group and World at Work, May 2009.

Giles Capon

Giles Capon is a Partner with Ernst & Young in human capital with over ten years’ experience advising in the area of employee reward. He is responsible for the Ernst & Young performance and reward team across UK south and leads the fi rms global stock and mobility service.

Capon is a member of the Chartered Institute of Tax, and advises a number of quoted and non-quoted organisations on their reward practices to maximise the impact of their remuneration strategy while mitigating the associated cost.

The study also concluded that a huge number of organisations plan to increase their focus and improve ‘pay for performance’ reward programs. According to the study, current reward program performance is more heavily



Company insight 71

How to deliver on the performance promise We all strive for better performance but often create ‘stretch’ targets to will the company to do better. Last year’s results are often used as a baseline, but it is next year’s performance that shareholders lust over. ICit Business Intelligence’s Mark Bodger is convinced that an integrated performance management system is the intelligent way to deliver on the promise.

Further informationICit Business IntelligenceEmail: [email protected]: www.icitbi.com

Where do we start? The answer is simple. We start with a plan. The plan is based on some tangibles and a host of intangibles. We have assets (man, machine and money), expenses (man and machine) and we have revenue (customers). The challenge is to take all the variables into account and create a cohesive plan that encompasses the entire organisation.

Many companies still struggle to build such a plan and then struggle further when they attempt to make sense of their performance. There isn’t an article on performance management that doesn’t ridicule the over-reliance on poor old Excel, but the key message is that Excel was not designed for complex multi-dimensional business planning. Companies are quick to tell me that their problems are too complex and unique and, while this is sometimes true, there are better ways to manage business performance with the right framework.

There are numerous solution vendors that claim to provide integrated planning and so-called predictive planning solutions. The intelligent performance management system is made up of several components. The secret is to ensure that each component is integrated with the next and that the performance data is consistent. It is the lack of integration that causes most vendors to fail to deliver on their pre-sale promises.

Intelligent performance There are a number of core solutions required to provide an integrated performance management framework:

Planning and forecasting•Measuring and monitoring•Reporting and analysis•

Planning and forecasting solutions should be capable of scaling across the business, because the more devolved the process, the more likely that the plan will capture operational drivers. The solution must be capable of linking to underlying source data systems such as ERP or CRM in order to track performance against the plan. The plan answers the question: ‘What should we be doing?’

Measuring and monitoring solutions include scorecards and dashboards. These provide answers to the question: ‘How are we doing?’ The smarter companies are implementing role-based scorecards to deliver meaningful information to people who have direct control over the performance under their watch.

Reporting and analysis is used to answer the question: ‘Why are we performing this way?’ While standard weekly reports can, for example, show product sales mix and margin, higher skilled users can ask ad hoc questions and discover trends, top performers, poor performers and more. Distributing the information is a core challenge, but with the right technology, information can be delivered to PDAs,

intranet portals, extranet web pages or simple PDF files by email.

Business intelligence evolutionThe road to a fully integrated performance management framework is long. However, the vision and desire to build a robust solution needs to be supported by the right leadership and the right technology in order to turn the vision into a reality. The good news is that many businesses are already on the road and have made significant progress towards achieving their goal – to deliver dramatic improvements in business performance.

As ICit Business Intelligence celebrates its tenth year helping businesses achieve higher performance through better business performance management solutions, isn’t it time that all businesses embraced the vision that by better planning, monitoring and reporting they too can satisfy their shareholders intelligently. ■

‘The challenge is to take all the variables into account and create a cohesive plan that encompasses the entire organisation.’

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72 Lifelong learning

The learning curveTraining should not stop when you reach the top. Making the best decisions for your organisation means adapting to rapidly changing markets, constantly refining and adding to your skills. CIMA past president Claire Ighodaro explains to Jim Banks that, in competitive global markets, it is the wise who understand that there is always more to learn.

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Lifelong learning 73

Successful careers in business are built on a constant process of learning, and every organisation knows that improving the skills of its employees will hone its most prized corporate assets - the leaders who define strategy and the people that bring that vision to market. Nevertheless, there is a tendency in many organisations for senior executives to lose focus on their own learning process.

The reluctance among the top echelons of many businesses to engage in continued professional development (CPD) could, however, have a cost. Organisations find themselves competing in increasingly global markets, which can change rapidly, as can the rules that govern them. Business leaders need to understand these changes, not least for compliance reasons, and they can only shape their businesses to suit dynamic markets if they keep their technical, regulatory and managerial knowledge fresh.

‘There is a much greater need for global interaction and the speed of change means executives must be up-to-date and aware. They must understand the options available to them and how they will affect the business,’ says Claire Ighodaro CBE, Independent Director and former president of CIMA.

‘There is always more to learn, and learning stimulates the brain so can offer more to your organisation. The more senior you are the longer it is since you did formal study in a structured manner, so you need CPD. Your learning, and more importantly your approach to learning, cannot be stale.’

Ighodaro still prizes her own professional development even though she has a wealth of experience to draw on from her roles on the boards of some of the UK’s best-known organisations. She was once finance director for BT’s Broadband division, and is currently an independent board member of the Department of Business Enterprise and Regulatory Reform, a non-executive director of Lloyds of London’s Franchise Board, the Banking Code Standards Board and of UK Trade & Investment. As well as being a council member of the Open University, she is also on the board of the National Learning and Skills Council.

Ighodaro sees many reasons why today’s senior executives should share her passion for learning and embrace CPD. It is her firm belief that if learning is approached in a

conscious and structured way any business leader will find opportunities to strengthen or add to their skills, no matter how experienced they may be.

Senior executives who admit there is more to learn and make the time to engage in CPD will not only equip themselves better to face the challenging times ahead, but will also provide a focal point for the rest of the organisation. Leaders who are seen to be active in their own learning process set an example for people at every other rung on the corporate ladder, incentivising them to

add to their knowledge and experience.‘Learning cannot be a distraction, and it must come in many forms. Leaders visibly learning provide a good example for their employees. When I was at BT I often saw executives leading sessions of learning, often focusing on operational issues that were important for the business,’ Ighodaro believes.

Equipped for the journeyIt is obvious that each organisation will have its own unique blend of operational and strategic challenges to address, but Ighodaro believes that there are some key subject areas in which business leaders should ensure their skills are in line with the latest thinking. Given the growing role of the finance department in forming the strategy, and its increasing influence on the delivery of that strategy through the supply chain, it is no surprise that finance is the most important topic to address.

Given the ongoing upheaval in the world’s financial markets and the new regulatory environment that will no doubt develop in its aftermath, skills in finance are needed throughout the management of any large organisation.

‘If you run any kind of organisation – whether public or private – you must look at financial management. Executives need to ensure that they have the regulatory knowledge to understand how to achieve compliance. They should also not be frightened of financial reporting,’ says Ighodaro.

‘Risk management, too, is an extremely important topic. It used to be thought of as a highly specialised activity, but most of us understand that it is a much broader issue than previously thought. It is owned by the whole business, so it is important for all senior executives to understand the latest techniques and knowledge in that area.’

While there is a growing pressure for other parts of a business to understand the metrics, measures and reasoning of the finance team, it is also true that the people in that team gain a wider

understanding of operations. The need for a common language that will bridge the gap between operations and finance has been a recurrent theme in business over recent years, but nothing can help define the grammar of that language more than practical experience.

Strategic decision-makers need to have a rounded and holistic view of their organisation to understand how to gauge the impact of their decisions on their business and its future. As a result, Ighodaro believes that it is important for executives to step outside their comfort zone and use CPD to challenge themselves.

‘The days are gone when finance was just a gatekeeper for information about a business. As a business leader you must know about many things beyond the key areas on which you normally focus. CIMA has always sought to ensure that accountants understand the rest of the business, and there is an equal need for non-financial managers to understand finance,’ stresses Ighodaro.

‘One sees problems in organisations where finance and operations are separate. You really can’t separate finance from the delivery of goods and services,’ she says.

In her role at Lloyds, for instance, she attends regular sessions addressing key financial or technical issues for executive and non-executive directors, who can

‘Leaders who are seen to be active in their learning process set an example for people at every other rung on the corporate ladder.’



Lifelong learning74

achieve a high-level understanding of how they impact the organisation, and share a broader view of the business.

‘In boardroom discussions you can make informed decisions that lie outside your core area of expertise,’ she explains.

She cites as an example the UK public services, in which civil servants who were principally policymakers once led finance. The need to ensure sound financial management of some £600bn of public money has seen more of those individuals training to become qualified accountants and enhancing their broader knowledge of finance.

As well as technical training in areas such as finance, Ighodaro also believes that there are many personal skills that must not be neglected if senior executives are to lead their organisations successfully.

‘Some people are natural leaders, but in my many years of coaching and mentoring

I have never seen anyone whose leadership skills could not be improved through learning and training,’ she remarks.

Opportunities aboundOne of the main reasons why continued learning may fall by the wayside for top executives in many organisations is the difficulty they have finding the time in busy schedules to enhance and hone their own skills. Nevertheless, Ighodaro believes that they must find a way, because CPD for senior executives will have a direct impact on the quality of their decisions and, therefore, the overall performance of their business.

‘You need to find a balance between the strategic objectives of your business and your own learning. Learning happens in many ways, not just in the classroom. I consider discussions with colleagues, reading journals, peer reviews, webcasts and mentoring to be just some of the ways we can learn. It is part of being on the job, although courses are an important part of CPD,’ stresses Ighodaro.

‘Being an accountant I also approach learning in a formal way, but that alone is not the whole story. There are many approaches to learning that are not about just counting the days of training that you have had.’

Providers of executive learning understand the many demands that are placed on the time and attention of key decision-makers, and they have adapted what they offer to make their programmes more accessible.

Ighodaro cites the CIMA approach to learning as an example of how CPD can be delivered in a flexible way in order to maximise its impact. Finding the gaps and filling them is the prime concern, so training adapts to focus on the areas where it is most needed.

There is also an array of courses at the world’s leading business schools, which have worked hard not only to ensure that the content of their courses matches

‘Some people are natural leaders, but in my many years of coaching and mentoring I have never seen anyone whose leadership skills could not be improved through learning and training.’



Lifelong learning 75

the needs of today’s top executives, but also to adapt course structures and delivery methods to fit around busy schedules. Lack of time is not a valid excuse for ignoring CPD.

‘Time is critical, but it is about prioritisation. I’ve had a lot of discussions about peer learning and what I sometimes see among senior executives is a reluctance to engage in learning with colleagues, particularly those who are more junior. They are embarrassed about seeming to lack knowledge, but they must understand that they will be with people who will help them to learn what they need to know,’ remarks Ighodaro.

Technology has played a major role in enabling more effective distance learning programmes, which have greatly improved access to CPD, and its role will no doubt continue to become more crucial in the future.

‘I am on the council of the Open University, and I have seen it lead the way in distance learning. Business schools are also doing a good job, and the internet provides the ideal opportunity for busy people to continue with CPD. On-demand content is easily available online, enabling people to learn in their own time, which is very useful for executives,’ adds Ighodaro.

Through the internet it is also possible to improve group learning opportunities as well as self-directed study. Companies have proven that the technology can bring together people with diverse expertise but who are separated by distance to focus on strategic and operational issues that affect a business. The same kind of virtual meetings can also be leveraged to support CPD.

The technology is in place and the providers of executive learning programmes have worked hard to develop content and delivery methods that meet the needs of today’s business leaders, so the final step is to improve the willingness of senior executives to engage in CPD. This

becomes far easier when the link between executive learning programmes and business performance is clearly defined.Ighodaro firmly believes that ‘Good organisations understand the need for

executive education and invest a huge amount in it, but some others sees it as a waste of time, and that is a sad mistake. If you’re not doing CPD, then you should ask yourself why. Those who are succeeding are certainly doing it.’ ■

Claire Ighodaro

A past president of CIMA, Claire Ighodaro was the first female president of the organisation, which regulates and examines over 170,000 accountants and trainees in the UK and worldwide. Until 2005 she was a senior executive at BT plc, working in the UK and in Germany.

Ighodaro’s board roles include non-executive director of Lloyd’s of London, the Banking Code Standards Board and UK Trade & Investment.

She is involved in charities supporting education and skills development. She was awarded a CBE for services to business in the 2008 New Year Honours List.

‘Good organisations understand the need for executive education and invest a huge amount in it.’



M&A and restructuring76

Take the long viewThe number of mergers and acquisitions taking place has fallen sharply as the economic downturn sets in, but there are signs that companies with cash are starting to hunt for bargains. M&A expert Danny A Davis tells Jim Banks how negotiating a good price is only the first step. Without planning ahead for integration, an acquisition could turn out to be a white elephant.

The severe pressure on the global economy has put the dampeners on mergers and acquisitions as companies find it hard to access the credit to fund their purchases. Nevertheless, the downturn creates tempting opportunities for growth through acquisition if a company has the cash to spend. More businesses are available at bargain prices, and now could be the time to consolidate ahead in preparation for the upturn in the world’s economic fortunes.

As a result M&A is still happening, but there is a need to ensure not only that due diligence is thorough, but also that the purchaser knows as early as possible about potential problems with integrating a new business. Identifying good value in M&A is not straightforward, and it is not solely about price.

‘M&A is still going on, but a lot of people are sitting on their hands. They don’t want to be the one that bought a company at the wrong price, so some are holding back and

not acting yet. At the same time, however, some companies are being forced to sell off parts of their enterprise to raise cash,’ says Danny A Davis, partner at DD Consulting.

‘There are lots of opportunities and a lot of companies have money, though from the outside we don’t know which companies they are. Valuation is tough in normal times, but is especially so when companies are out there looking for bargains. There may be problems inside a company that

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M&A and restructuring 77

due diligence will miss. You might find more problems than you had hoped for,’ he adds.

Davis runs a consultancy, teaching companies about the processes and tools needed for the integration of merged businesses. The workshops help companies bring all business departments, IT and systems into a coherent, combined structure, and helps with strategic reviews of integration planning.

Although his company is relatively small, Davis has provided change programmes for some of the largest mergers in recent years, including a $6 billion global deal. He also handled the European merger of BP and Castrol with 180 projects in 30 countries across the IT, HR, finance, sales and marketing, distribution, manufacturing, property and legal functions.

This experience gives him a ringside seat on the M&A market, and he has seen the benefits of considering integration at an early stage. Failure to do so paves the way for unpleasant shocks, of which there have been many.

‘Some companies have said they will not do any more M&A, either because they do not have the cash or their strategy is influenced by greater caution. But, in some cases, that caution masks a desire to grow,’ he adds.

Considering integration before the deal goes through helps to take out much of the uncertainty from any acquisition.

Make or breakIntegration is Davis’ specialist area, and he urges companies to bring this kind of expertise to bear on the planning before a deal is struck.

‘Integration is generally a 100-day planning process followed by delivery. You need to plan as always, but you should do it as early pre-deal as possible. That way you get the integration and the synergies now rather than later. The quicker the better for all concerned, because if you are prepared for the integration process then you will create a stable business sooner,’ he remarks.

Adding an extra element to pre-deal planning is not without cost, but it could save both time and money in the long run.

Planning costs money, the earlier you begin the planning process the less information you have, but the faster you can deliver your synergies, you can’t start too soon. You certainly cannot leave it until too long after the deal. You must think about integration

before you buy a company. CFOs want to keep costs down and maximise the synergies of an acquisition, but they must find a balance,’ Davis warns.

Examples of both success and failure abound in the history of M&A, and Davis believes that there is as much to learn from those enterprises that got it wrong as from those that got it right. He recounts the tale of one business that had formulated a 10-point integration plan that had still not been implemented six months after its had completed its acquisition, its inexperience in M&A causing it to be caught out by unanticipated problems that only surfaced post-merger.

‘In the current environment, where companies are taking an opportunistic approach to acquisitions, there is a greater risk that they may not plan adequately, which can lead some deals to fail. Integration must be part of the pre-deal thinking, and it may sometimes lead companies to find that a deal is not viable. You need integration people involved in the due diligence process,’ says Davis.

‘A good deal is one in which you get the right price, where a sound level of integration is possible and there is nothing toxic that will come as a surprise post-merger. Transparency, however, is difficult if only limited information is available at the pre-deal stage,’ he adds. When it is impossible to get the full picture up front, then any purchasing company owes it to itself to be prepared for the unexpected, and its preparation for integration will be vital to this preparation.

‘There are always surprises after an acquisition and they need to be dealt with quickly. They must be contained,’ stresses Davis.

The fundamental question in any M&A activity is whether you are paying the right price for a company. This may not always be clear, but consolidation in sectors such as banking and retail is happening nonetheless.

‘There may be bargains, but in the banking market there is a lot of uncertainty about

what unpleasant surprises might lay in wait. So, do you wait until the share price rises, suggesting greater certainty about the integrity of the business, or do you gamble? It’s like buying a house. Do you buy it without a survey, or do you wait for the surveyor’s report and risk a price increase?’ asks Davis.

The integration equationThere is, of course, no cookie-cutter approach to integrating a new business.

‘The process will depend on the nature of a business, but in general it seems that companies don’t have a list of the issues they need to look at. The first thing they should do is look at the financial perspective. Then they should take control of the money in the business; get hold of the signatories so that no one can run off with the cash,’ says Davis. ‘Fiscal control must happen immediately.’

Successful integration means careful examination of the people, systems, data and processes that make up the finance

function, but this must also happen within the context of a review of the people and systems across the whole business. Finance is a priority, but cannot be approached in isolation.

‘Finance needs to integrate itself and the rest of the company. Financial integration of HR, for instance, must happen early. You need to get the resources to integrate finance across the company and achieve the necessary change in process and culture,’ Davis remarks.

The cultural element is a high priority, and a mismatch of corporate cultures can manifest in the most unexpected areas, with damaging results. Davis notes that even details as small as the design of expenses forms can cause rifts in a business, and he has seen such factors cause key people to leave a merged entity, particularly when a service company and a product company are brought together.

‘A good deal is one in which you get the right price, where a sound level of integration is possible and there is nothing toxic that will come as a surprise post-merger.’

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M&A and restructuring78

From the cultural differences at the top of the chain to down to the format of expenses forms, there are myriad issues a purchaser should try hard to foresee.

‘There are always differences in culture and structure, and an acquisition is often a fi nancial decision that ignores the issue of culture. But it affects every aspect of a business, from its systems and processes to how it deals with customers,’ Davis remarks.

Even if the initial integration has been successful, Davis warns that the process should not necessarily stop there. A second wave of integration of the merged entity may offer further opportunities to better integration and, therefore, greater effi ciency.

Davis recalls a huge global merger where he handled the integration of functions such as fi nance and HR, which revealed many synergies, but the merged entity continued the process, leading it to create a global fi nance function, replacing the country-by-country structures previously in place.

‘That company didn’t make the double-jump to a global fi nance infrastructure straight away. The second wave of cost cutting was made successful after the initial merger had settled down. At this stage, specifi c improvements can be split into shorter elements of planning,’ he comments.

Further questions arise if the process of growth through acquisition is ongoing. The

complexity of multiple acquisitions has led some large companies to limit the number of acquisitions, but this fi xes the possible rate of M&A growth and, therefore, overall growth. Davis believes that the right approach to integration can overcome this problem.

‘Where a company is making a series of acquisitions, the pre-deal and post-deal elements must be brought together. If a company is doing integration after integration there may be blurring around the edges of each deal as different strategies compete, so a fi rm must be clear about whether it is making a one-off acquisition or a series,’ he says.

‘Linking pre- and post-deal phases and delivering them well can release growth opportunities and allow a company to be a more opportunistic buyer, which is very useful in the current market. You don’t want your competitors to snaffl e all the bargains.’

Different strategies for integration have emerged, and they differ greatly. GE, for example, needs relatively little integration – setting fi nancial targets for its acquired companies to drive them in the right direction.

‘CFOs are sometimes too busy to see all potential problems or are focused on short term targets and so they don’t need look at the long-term consequences. CFOs – and the rest of the business – must see the full implications of any deal,’ believes Davis.

Without a thorough and considered approach to integration even acquisitions with good potential can fail. Companies must not only look at how to get a deal through, but must also envisage what the merged business will be like post-deal. Never has this lesson been more relevant than now. ■

Danny Davis

Danny A Davis is the youngest ever trustee director on the board of the Chartered Management Institute, also chairing the Marketing and Policy Committee. He is a guest speaker at a number of the world’s top business schools on the strategy and M&A courses, and soon to publish his fi rst book, M&A Integration Success.

Policy Committee. He is a guest speaker at a number of the world’s top business schools on the strategy and M&A courses, and soon to publish his fi rst book, M&A Integration

‘Linking pre- and post-deal phases can release growth opportunities and allow a company to be a more opportunistic buyer, which is very useful in the current market.’

CIM011_028_Davis.indd 78 24/6/09 11:15:06

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Head80

September 2009

Financial supply chain Why liquidity has become every company’s biggest priority

In our next edition

EXCELLENCE IN LEADERSHIP

FSC and working capitalAs bank lending becomes more scarce and expensive, corporates are looking for alternative ways of managing working capital and protecting their supply chain. In France, Volvo has pioneered the use of supply chain finance, leveraging its strength to improve payment terms while ensuring vital suppliers stay in business. Olivier Beyzalon has led the charge, and he explains the mechanics and the benefits of the system. Olivier Beyzalon, Business Control Director, Volvo France

The financial supply chain and riskManaging risk in an uncertain world – what are the key challenges pertaining to cash and liquidity management?Ian Ladd, Group Treasurer, DSGI

Financial supply chain and surviving the economic crisisWith widespread commodity volatility and fluctuation what are the key challenges that finance departments are facing? Plus, cutting costs and inventory levels: is leaning on your supply chain the answer? Philippe Perrodin, VP, Group Financial Control, Tetra Pak

Liquidity management in the downturnWhat are the benefits of centralising versus regionalising treasury? Plus: • Cash pooling – the respective virtues, benefits

and challenges of both physical pooling (cash concentration) or virtual pooling as an alternative route to financing

• Leveraging bank accounts • Counter party risk – managing banking relationships • SWIFT connectivity / e-banking David Brent, Group Treasurer, BAE Systems plc

The fi nancial supply chain and fi nancial reportingGlobal developments in corporate reporting – current tensions in international accounting standard-setting, accounting implications of the financial crisis, three initiatives in corporate reporting and the future of UK GAAP.Nick Topazio, Business & Financial Reporting Specialist, CIMA

Overcoming challenges in the debt capital marketsWhat are the biggest hurdles to overcome in credit ratings and fi nancial reporting?Justin Besley, Group Treasurer, Compass Group

Uniting the physical and fi nancial supply chain Organisations are continuously striving to meet customer expectations as effectively and effi ciently as possible – a strategic imperative all the more critical in today’s economic climate. The advent of customer-centred companies, every-day low prices, and expectations that prices will drop not rise is a huge change in the structure of the global economy. What is the best way to seek out a new strategic advantage?Edward F O’Donnell, Vice-president, Business Analysis, Teknor Apex Company Paul D Massey, Finance Leader, Cummins Turbo Technologies

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Head 81

Also in the next edition:

Executive educationWhy is a commitment to lifelong learning an essential attribute in a changing business environment? Is leadership a skill that can be taught, or is it an inherent quality? What is the importance of both lifelong learning and gaining valuable insight from other business leaders, especially during a recession?Norman Lyle, IFAC and Past President of CIMA

Human capitalLeadership development and motive training – how can empirical science be applied to leadership? Lorie Farrell, Management Consultant, Burnham Rosen and former finance director, St Ives

M&A – acquisitions in turbulent times Given their importance to future planning and the day to day running of any business the finance team face a wide variety of challenges in any acquisition. These challenges range from big strategic questions about the structure of the combined future business to ensuring day to day controls for cash management and treasury processes remain in place throughout the integration. But as we head deeper into the financial crisis – is now the time to be acquisitive?Jorg Passsler, Group Treasurer, Sappi International

Editorial contributors are subject to change

Excellence in Leadership is a series of official quarterly publications specifically designed to address the CPD needs of the top tier of CIMA members.

Excellence in Leadership is a must-read for this elite audience of CIMA members, helping to manage their career development while maintaining professional competence and employability. Visit www.excellence-leadership.com

ExcEllEncE in lEadErship

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Head82

Directory

Global contacts

Armadillo Executive Resourcing �� 79www�armadillo�uk�com

Cass Business School ��51www�cassmba�com

CODA ��IFCwww�coda-financials�co�uk

Ferguson Snell & Associates ��51www�fergusonsnell�com

IBM Cognos ��43www�cognos�com

ICit Business Intelligence ��71www�icitbi�com

Investment New Zealand �� 32www�investmentnz�govt�nz

Jones Kelleher & Associates Ltd �� 75www�joneskel�com

RBS �� OBCwww�rbs�com

CIMA would like to thank the following organisations for their support in funding the Excellence in Leadership series:

CIMA UK – Head OfficeThe Chartered Institute of Management Accountants26 Chapter StreetLondon SW1P 4NPUnited KingdomT. +44 20 8849 2287E. [email protected]

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CIMA Singapore51, Goldhill Plaza #08-02 Singapore 308900T. +65 6535 6822E. [email protected]/singapore

CIMA Southern Africa1st Floor, South West Wing, 198 Oxford Road, IllovoPostal: PO Box 745, Northlands, 2116T. +27 11 788 8723/ 0861 CIMA SA/246272E. [email protected]

CIMA Sri Lanka356 Elvitigala MawathaColombo 5Sri LankaT. +94 11 250 3880E. [email protected]/srilanka

CIMA Zambia6053, Sibweni RoadNorthmead, LusakaZambiaPostal Address:Box 30640, Lusaka, ZambiaT. +260 1 290 219E. [email protected]/zambia

CIMA’s global offices may change during the year, so please visit the global web links for the most up-to-date contact details.

For a full list of global contacts, please visit: www.cimaglobal.com/globalcontacts

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excellence in leadership june 2009

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