STUDY ON PERFORMANCE BASED MANAGEMENT FORBEST PRINTER INDUSTRIES LTD

CORPORATE PERFORMANCE MANAGEMENT

Submitted byNishant Bhaskaran

STUDY ON PERFORMANCE BASED MANAGEMENT FORBEST PRINTER INDUSTRIES LTD

Introduction

Performance-based management is a systematic approach to performance improvement through an ongoing process of establishing strategic performance objectives; measuring performance; collecting, analyzing, reviewing, and reporting performance data; and using that data to drive performance improvement.

In todays cost-cutting environment, companies have been successful in cost management and reducing costs by outsourcing, by using supply chain management to manage suppliers and customer, and by reducing the number of employees. This chapter focuses on the customer profitability area, an emerging area in todays marketplace. A lot of benchmarking efforts are under way for understanding the new product introduction costs and for establishing, by simulating and modeling, the impact of their market insertion.Activity based costing/management (ABC/M) becomes a foundation and an enabler to identify costs and understand the causal impact of the driver data. In this area, the value of data and information is essential.

About the IndustryBest Printer Industries Ltd (BPIL), a leading check printer, is over 20 years old and generates over Rs 12700 crore in annual revenue. The quotation at the beginning of the chapter became a rallying cry as the company determined to build and deploy a sustainable ABC/M system in six months and during a simultaneous SAP implementation.

The urgency was born of competitive necessity. For Best Printer Industries Ltd (BPIL), understanding customer profitability amid a maturing check market and an intensely competitive pricing environment was essential. At the same time, Best Printer Industries Ltd (BPIL) believed it could improve relationships with its customers by using ABC/M to identify costs along the supply chain and help customers reduce their costs and improve their profitability. Heightening the urgency was the need to fund a growth strategy to ensure the check-printing companys long-term survival as the Indian market begins to shift to a more electronically oriented payment system. Using ABC/M, Best Printer Industries Ltd (BPIL) identified ways to maintain and enhance the precious fuel (i.e., profits from BPILs core check business).

Realizing that SAP did not offer the needed ABC/M flexibility, Best Printer Industries Ltd (BPIL) decided to develop a bolt-on solution to SAP using leading commercial ABC/M software. The team set out to:

Define profit by each of Best Printer Industries Ltd (BPIL)s more than 18,000 customers. Create a sustainable ABC/M system. Build and deploy an ABC/M system in six months. Deliver results of major impact, namely information that could strengthen sales strategy in an extremely competitive pricing environment and competitive banking industry.

Given the standards of quality set for the project and other significant changes under way at Best Printer Industries Ltd (BPIL), including the SAP implementation and restructuring and downsizing, many of the potential partners invited to a special request-for- proposal (RFP) day deemed six months from start to finish impossible. Many also cited the big obstacle of gaining acceptance from senior and middle management and employees and transforming an eight-decade-old manufacturing culture in such a short time. The Best Printer Industries Ltd (BPIL) response was: We can. We will. We have to. The company was proud to say We did.

ORGANIZATIONAL ISSUES

Founded in the early 1900s, Best Printer Industries Ltd (BPIL) is a large check printer firm. As a service to banks and their customers, it prints more than 100 million check orders a year. Although it has ventured into new payment-related areas, such as payment protection services and electronic funds transfer processing, the company still derives more than half of its annual revenues and net income from check-printing services provided to approximately 18,000 Indian financial services companies (primarily commercial banks) and small-business customers.

Like other manufacturing companies trying to make the transition from the Industrial Age to the Information Age, Best Printer Industries Ltd (BPIL) has sometimes been a victim of its own success. Best Printer Industries Ltd (BPIL)s 80 years of prosperity gave the company no compelling reason to understand its costs in detail. The result was an unwieldy organization (people plus brick-and-mortar infrastructure) and a just-say-yes service philosophy in which the company provided what was essentially customization to each of its thousands of bank customers. In this environment, Best Printer Industries Ltd (BPIL)s cost to serve was close to its cost to produce. The cost system was much like a Stage II System which means that this type of system satisfies regulatory requirements but provides poor feedback for learning and improvement.

In the 1990s, things changed for Best Printer Industries Ltd (BPIL) as the company began to witness pressure on its check-printing revenues from the deregulation of the banking industry. At this time, the check market began to mature. The forecast was that it would begin a gradual decline after the year 2000 as other payment options credit cards, debit cards, smart cards, and online paymentsgained market share.

This rapid growth of alternative payment methods and the fact that financial institutions were endorsing and funding new payment and business models causeda significant impact to Best Printer Industries Ltd (BPIL)s business (see Fig 1). As a result, banks continue to squeeze every opportunity for fee income from both their customers and their suppliers. As pricing pressure and a maturing market began to erode Best Printer Industries Ltd (BPIL)s check-printing revenues, the company needed to reduce costs and increase productivity. It also had to re-evaluate its high-touch, high-cost service philosophy and develop a more effective sales strategy in which successful bids would result in profitable business. Also mixed into the equation was that check printing remainedand would remaina wonderful profit generator for Best Printer Industries Ltd (BPIL), but it needed to be an even better profit generator to fuel the companys growth strategy and ensure its long-term survival.

Light Grey BPILDark Grey Financial Institution marginFig.1 Financial Institutions Continue to Increase Check Order Revenue with Price Increases While Seeking Steeper Discounts

New senior management came on board beginning in May 1995 (chief executive officer, executive vice president, and chief financial officer joined over three years in that order) to oversee building a new Best Printer Industries Ltd (BPIL). The top areas of new managements focus were:

Consolidating operations and infrastructure to improve efficiency and productivity and reduce costs

Divesting nonstrategic businesses.

Implementing a value-added economic philosophy to calculate the return on any investment in the business and proceed only if the return meets approved targets

Determining a growth strategy centered on information solutions that help banks and retailers increase their profits and lower their risks in a swiftly changing payment system.

Transforming the corporate culture into one of personal accountability

Initial Efforts

According to the Law of the Lid in the book The 21 Irrefutable Laws of Leader ship Leadership ability determines a persons level of effectiveness.4 BPIL was lucky to have strong leadership. That leadership would not only determine the projects effectiveness but the organizations effectiveness. As BPIL moved to implement SAP, the ABC/M team, led by the director of Customer Profitability, set out with help from a respected consulting firm and on-site technical consulting from its ABC software vendor to build a flexible solution in its ABC package that would link with SAP.

The project scope was very broad: 18,000 customers, 8,700 employees, and hundreds of products and services representing more than Rs 6400 Crores in annual revenues and Rs 2551Crores in annual selling, general, and administrative costs.

Given that time was of the essence, a key point about the project staffing is that it was not a finance project, developed by and for the bean counters and delivered to the masses with a resounding: Here. Implement. End of story. To avoid surprises, the project was set up to involve the right people from all levels.

It was an inclusive effort, with cross-functional teams consisting of middle managers and others from across the process-driven organization who were challenged to understand the business, develop a better way of operating it, and address the urgent business need to define customer profitability.

Senior management buy-in was attained early in the project, and senior managers participated on the steering committee. Communication was consistent and two-way: bottom up and top down. Training, from ABC/M fundamentals to database modeling, was integrated into the various project phases so there would be no surprises once the system went live.

Project Team

The project team consisted of 40 people at four levels of engagement:1. Executive sponsor (1 member). Provided focus, resources, monitored progress, and resolved high-level issues.

2. Steering committee (12 members). Approved the project approach, agreed on priorities, reviewed and approved interim findings, ensured senior management alignment, and approved deliverables.

3. Project managers (2 members). Developed methods and plan; were responsible for quality control, issues resolution, leadership, and training.

4. Field teams (25 members). Consisted of full and part-time team members responsible for executing the detailed work plan.

Project Description

The project is planned to be progressed in five phases:

Phase 1: Establishing a FoundationIn Phase 1, Best Printer Industries Ltd (BPIL) identified and confirmed the business issues to be faced. There was a clearly understood base of knowledge and a common focus. During this phase, Best Printer Industries Ltd (BPIL) also created a project team and developed a detailed work plan. In essence, this was a stage of definition. For example, Best Printer Industries Ltd (BPIL) adopted a supply chain view of its businessBest Printer Industries Ltd (BPIL) Paper Payments Systemsredefining it from a functional (vertical organization) to a process driven framework (horizontal), which would lend itself to ABC/M (Fig 2). As part of defining ABC/M, management determined how it could be linked to a new value-added philosophy or discipline that the company was adopting. Referred to as Best Printer Industries Ltd (BPIL) Value Added (SDVA), this theory is similar to the value-based management/value-added theory other companies have implemented. Best Printer Industries Ltd (BPIL) also defined ABC/M as the enabling system to help the company determine its return on investment (or SDVA) by a particular customer relationship. In Phase 1, it was agreed that ABC/M was an analytical tool that would provide insight into value-added activities, nonvalue-added activities, performance improvement ideas, and customer profitability. There was also agreement on the major questions that the project needed to answer:

Who are our most profitable customers? Which practices create win-win or profit-building situations for BPIL and its customers? What new practices should we adopt?

Fig 2 Process driven Frame work

Business Events What new products and services should we provide? How can we reengineer customer relationships to be more efficient while lowering costs? What is our cost to serve, and how does that cost affect customer profitability?

Phase 2: Activity AnalysisIn Phase 2, all cost-driving activities and processes were in the Best Printer Industries Ltd (BPIL) Paper Payment Systems. The result was a dictionary of 150 activities. As BPIL looked at the business, it also identified process development ideas and opportunities to be explored.

Phase 3: Activity Costs Linked to Cost ObjectsCalling a product or a customer a cost object may seem insensitive, but it is necessary in the world of ABC/M. In Phase 3, Best Printer Industries Ltd (BPIL) finalized all cost drivers, linked activity costs to cost objects, and raised awareness of key cost drivers through continued training. The result of this phase was ABC/M costs by customer.

Phase 4: Detailed Profitability AnalysisPhase 4 was when the revelations began to occur. With costs now linked to cost objects, Best Printer Industries Ltd (BPIL) validated revenue per cost object, then determined profitability. In this phase, management learned the profitability and SDVA for each of its 18,000 customers.

Phase 5: System DeploymentIn Phase 5 (Fig 3), all of the recommendations were finalized, the process improvements were ranking in order of importance, and an architecture was developed for a self-sustaining ABC/M system that interfaced with SAP R/3.

Fig 3 Final System Data FlowInitial BenefitsThe Best Printer Industries Ltd (BPIL) project team achieved the primary objectives of understanding profitability and SDVA by customer, identifying and making process improvements, and creating a sustainable ABC/M system (numbers refreshed monthly) that interfaces with SAP. The base for choosing a software package was its ability to interface with SAP. A package created by ABC Technologies was chosen to deliver seamless integration between SAPs R/3 and the Oros ABM (now SAS Activity-Based Management) software. Best Printer Industries Ltd (BPIL) was pleased when, in 2002, SAS acquired ABC Technologies. SAS ABM, the next release of the Oros Software, now has extended capabilities for leveraging not only SAP R/3 data but also SAP B/W data and a SAS ABM Adaptor for R/3 with a model-building wizard that can automatically load and build a model.

Sales Strategy/Customer RelationshipsWith a new understanding of customer profitability (see Exhibit 4.4) and cost drivers, Best Printer Industries Ltd (BPIL) is poised to identify win-win practices in its customer relationships.

For instance, check orders submitted via paper order forms are labor intensive and costly compared to orders submitted via Best Printer Industries Ltd (BPIL)s electronic order channel. ABC/M tells Best Printer Industries Ltd (BPIL) exactly what the cost differences are and enables it to present a supply chain approach to customers, positioning Best Printer Industries Ltd (BPIL) as a partner and establishing the sales personnel as profit-building consultants. This insight has supported a strategy for migrating banks to the electronic ordering channel, as well as a streamlined paper order process to improve a banks customer satisfaction levels and reduce Best Printer Industries Ltd (BPIL)s internal costs.

Understanding customer profitability allows Best Printer Industries Ltd (BPIL) greater advantage in bid situations and contract negotiations to make customer relationships more profitable. Business below certain price points may be declined if a customer is unwilling to collaborate with Best Printer Industries Ltd (BPIL) to remove cost along the supply chain. Moreover, Best Printer Industries Ltd (BPIL) considers its new understanding of customer profitability a best practice in its industry that enables the company to submit bids with the confidence that an ensuing contract will be profitable for Best Printer Industries Ltd (BPIL) and the customer.

Initial Lessons LearnedUndoubtedly, the most challenging aspect of this project was the time frame. BPIL had to build and install an ABC/M system, gain acceptance, and transform a culture, and do it all during a simultaneous SAP implementation. So how did it do it?

First, Best Printer Industries Ltd (BPIL) invited all potential consultants to a special RFP day to hear the same story from the same source. As Best Printer Industries Ltd (BPIL) communicated its objectives, schedule, and expectations, management emphasized that failure was not an option.We can, we will, we have to is what management told its prospective partners.

Several consulting firms declined right away, saying the projectgiven the quality standardscould not be done so quickly. The consultants who signed on did so with enthusiasm and a can-do winning attitude. The project got off to a great start with everyone aware of and ready to take on a major challenge.

Second, to gain acceptance and transform the just-say-yes service culture, BPIL built cross-functional teams, got the right senior managers on board early, and challenged all team members to market ABC/M as it would a product.

As a marketing effort, Best Printer Industries Ltd (BPIL) developed key messages and ready-to-use PC-based presentations that enabled each team member to be a true ambassador for ABC/M. These presentations featured videos of senior management and key leaders speaking about the necessity of ABC/M and urging all employees to support the ABC/M team. As the team members spread the news about ABC/Ms ultimate benefits, management energized the employee group of almost 9,000.

As part of gaining acceptance, Best Printer Industries Ltd (BPIL) incorporated training at every possible step in the project to define and deliver the reasons for ABC/M. Both employees and senior managers were trained. Everyone understood ABC/M and participated in what was an inclusive effort.

Finally, to overcome the obstacle of a concurrent SAP implementation, theoretically two models had to be developedone legacy and one anticipating the new SAP environment. ABC/M actually enhanced the SAP implementation by improving the accuracy of the activity costs and streamlining more than 500 cost center feeds into SAP and enabling SAP to go live smoothly. The company has been asked many times: What was the return on investment of your ABC project? Although it is difficult to articulate in hard dollars, Best Printer Industries Ltd (BPIL) would reply: What would it be worth to you if you could cut your SAP implementation time in half?

Initial Next StepsThe main goal of the project was to understand the profitability of the Best Printer Industries Ltd (BPIL) customers. After the project was on track, Best Printer Industries Ltd (BPIL) realized that it would be advantageous to use ABC/M budgeting. Since wrap-up of the initial implementation, Best Printer Industries Ltd (BPIL) has begun to use activity-based budgeting as part of its annual operating plan process, including capital justification initiatives. It is also using ABC/M for forecasting purposes to provide additional information about financial results.

Beyond the budgeting aspect, the team identified that there could be a standardization of services. This new knowledge has aided in standardization services and elimination of those services that provide little or no value to their customers.

This standardization removed a significant amount of overhead from Best Printer Industries Ltd (BPIL)s cost structures. Custom services are still offered, but at custom prices. Most important, results from recent customer satisfaction surveys show that service levels are improving. The Best Printer Industries Ltd (BPIL) goal is to provide consistent excellent customer service that customers want while making those services cost effective and efficient to meet shareholder approval.

Current State: TodayThe current theme at Best Printer Industries Ltd (BPIL) is Continuous Improvement and Performance Measurement. Its efforts in benchmarking and trending span internally to departments, locations, production sites. The information is used to justify new business cases and also contract negotiations. Best Printer Industries Ltd (BPIL)s process improvement efforts are supporting the identification of which process will be improved, what processes will be measured, and which key performance indicators (KPIs) can be surfaced in the future on a scorecard or balanced scorecard. One side benefit of the ABC project was channel costing. Understanding its costs of channels, products, and customers will influence the methods Best Printer Industries Ltd (BPIL) uses to acquire new companies and how it creates new marketing programs.

The ABC/M model is also used to evaluate these needs: Investment justification Make versus buy decisions New product and service evaluations New equipment evaluationsNext Steps/Future Plans: Today and BeyondOne of the four major deliverables that the ABC/M team set out to provide was results of major impact, namely information that could strengthen sales strategy in an extremely competitive pricing environment and competitive banking industry.

Fig 4 Implications for Sales effectivenessThe implementation proved that there are often significant opportunities to increase selling time. Based on recent surveys, less than 40% of a salespersons time is actually spent on selling activities. Best Printer Industries Ltd (BPIL) is now looking at the implications for improving sales effectiveness (Fig 4). Eight sales management pillars depicted in Fig 5 encompass the disciplines Best Printer Industries Ltd (BPIL) must master to maximize its ability to grow profitably. Decisions in each pillar may vary over time, to reflect changing business environments. Best Printer Industries Ltd (BPIL) must assess the alignment of each pillar continually to optimize the organizations effectiveness and growth capacity. In the future ABC/M will be used to enhance decisions in all of the pillars.

Fig 5 Sales Process

SUMMARYThere has been an educational/cultural transformation at Best Printer Industries Ltd (BPIL). At Best Printer Industries Ltd (BPIL), the ABC/M project has blended well with the overall corporate goal of transforming the culture into one of personal accountability. Using formal and informal training, ABC/M is being incorporated into everyday thinking at Best Printer Industries Ltd (BPIL).

Employees now clearly understand that time is money: What an employee does counts toward the companys costs, SDVA, and bottom line. We cant charge for that is a catch phrase understood to be part of an outdated just-say-yes service philosophy that Best Printer Industries Ltd (BPIL) can no longer afford, given market and industry conditions.

The results an ABC/M team can achieve with the proper focus, support, partners, and motivation in a short time frame is amazing. As with mission control of launching Chandrayaan successfully, Best Printer Industries Ltd (BPIL) had no choice but to succeed. Having accomplished its objectives, the firm is now reaping the benefits that a sustainable ABC/M system can deliver to an organization and its customers.