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Excerpted from S&P 500 Organic Growth Efficiency Benchmarking: Leaders & Laggards
com 212‐785‐0205 Dominic Paniccia dpaniccia@brilliont.CONTACTING THE BRILLIONT TEAM Contact Us We welcome the opportunity to discuss any questions and ideas you have after you have reviewed this presentation.com 212‐785‐0302 2 . Anand Sanwal asanwal@brilliont.
In reality. Non‐clients. This presentation discusses our OGM research. Research Methodology Our research into organic growth efficiency examined the period from 2002‐2007 for the entire S&P 500 and was created using our proprietary OGM models coupled with research surveys. organic growth discussions are typically one‐dimensional. Simply put. buy and sell‐side analysts. Our summary findings and analysis of XL Capital reveal the following: • XL Capital’s OGM is in the second quartile relative to the S&P 500 Financials. its implications for corporate performance and the characteristics of OGM leaders as well as our findings as they relate to XL Capital. In our research. industry consultants and others can purchase the report directly from us. M&A transaction history and secondary market research. public financials. we analyzed all companies in the S&P 500 over the period 2002‐2007 to understand their individual Organic Growth Multipliers.EXECUTIVE SUMMARY Organic Growth Multiplier: Measuring Your Company’s Organic Growth Efficiency Organic growth indicates management's ability to expand business using internal resources and hence is a key driver of corporate performance. About the Research This presentation contains excerpts from our S&P 500 Organic Growth Efficiency Benchmarking: Leaders and Laggards report specifically for the S&P 500 Financials. and when maximized is an organization’s truest and best driver of shareholder returns. OGM represents the amount of organic revenue and profit created per dollar of investment. The full report for the S&P 500 Financials sector is available on a complimentary basis to select clients. • A modest improvement to XL Capital‘s OGM could result in an estimated $588 million of incremental revenue and $483 million of incremental profit for the company over the next three years. The overall report analyzes the organic growth capabilities of all companies in the S&P 500. a company’s performance is largely driven by its Organic Growth Multiplier (OGM) – a measure of organic growth efficiency that accounts for both revenue and profit. 3 . focusing on either revenue or profit. Unfortunately though.
R&D. it is the best indicator of how well management uses its internal resources to expand revenues and profits. 4 . What Matters Most in Driving Organic Growth? To maximize shareholder returns. initiatives and investments in marketing. advertising. IT. solely looking at organic revenue or profit growth misses the point. operations. it is the efficiency by which organic revenue and profit are created that is the best predictor of shareholder returns. Instead. innovation. Organic growth clearly identifies whether managers use their skills to improve the business and is a prerequisite for top‐tier performance over the long term.What is Organic Growth? What Drives Organic Growth? IT’S VITAL TO GET THE RIGHT TYPE OF ORGANIC GROWTH Organic growth represents the true growth for the core of the company. Organizations that are efficient organic growth creators are those that deliver more organic revenue per dollar invested in strategic discretionary projects and investments. sales. The efficient commitment of resources by management to discretionary projects. and capital projects is the driver of organic revenue and profit growth. It doesn’t include growth derived from M&A or market‐driven growth and as a result. Our research and analysis finds that companies are rewarded for this efficiency by shareholders and outperform their competitive peers.
5 High M&A Revenue as % of Revenue Growth TSR = 15% TSR = 18% TSR = 11% TSR = 28% Low Low Organic Growth Multiplier (OGM) High Notes: Average Annual S&P 500 Financials TSR over ‘02‐’07 was 19%. while a company’s average annual OGM over the period was positively correlated with greater TSR. In essence. acquired growth. Furthermore. Growth from M&A Increases Shareholder Returns Commentary In the case of S&P 500 Financials. companies with consistently efficient resource allocation as manifested by high annual OGMs are rewarded with higher annual TSRs and revenue growth as well. a significant positive relationship between a company’s OGM and Total Shareholder Return (TSR) is apparent. The obvious implication of this is that a company’s ability to efficiently and profitably generate organic revenue is rewarded by shareholders. Lastly. The same relationship was evident for the entire S&P 500. 3556 M&A deals evaluated within S&P500 Financials . greater OGM consistency led to even better returns as the figure above illustrates.S&P500 Financial s ‐ Organic Revenue Efficiency is Rewarded Consistency of Organic Revenue Creation is also Prized S&P 500 FINANCIALS High TSR = 13% Total Shareholder Return TSR = 16% Standard Deviation of OGM Revenue growth = 8% Revenue growth = 10% 0% TSR = 15% TSR = 20% Revenue growth = 5% Revenue growth = 13% ‘02‐’07 Average Annual Organic Growth Multiplier Low Low Organic Growth Multiplier (OGM) High Note: Data presented for S&P 500 Financials A Focus on OGM vs. those with high OGMs who derived less of their total revenue from M&A activity also saw the best TSR performance. This indicates a preference by shareholders for efficiently created organic growth which is less risky vs.
As we look forward. XL Capital could drive: • $588 million of cumulative incremental revenue over the next three years and $295 million of per annum revenue thereafter. as well as the ongoing benefit of $295 and $260 million of incremental revenue and profit each year thereafter. We’ve estimated that with a disciplined effort to improve the company’s OGM by 10%. what are the implications to performance if XL Capital successfully improves and sustains higher OGM levels even modestly? It is also worth considering the implications of not improving the OGM. S&P 500 FINANCIALS – XL CAPITAL XL Capital Revenue & Profit Implications of Improving OGM Incremental Revenue = $588 million Incremental Profit = $483 million $205 $88 $53 $170 Year 1 Year 2 Year 3 Organic Revenue Incremental Profit OGM 6 . respectively. This was done to be pragmatic as it assumes modest improvements to OGM year‐over‐year with the 10% improvement fully manifesting itself fully by year 3. we examined the impact to XL Capital of an approximate 10% improvement in the company’s OGM which would be fully realized in three years. not improving the OGM modestly as described above puts at risk the cumulative $588 and $483 million of incremental revenue and profit. we see the company’s OGM ranking puts it in the second quartile amongst its S&P 500 Financials peers. To understand this. • $483 million of cumulative incremental profit over the next 3 years and $260 million of incremental profit per annum thereafter.Where Does Your Organization’s OGM Stack Up? S&P 500 Financials Organic Growth Multipliers (OGM) Commentary As we look specifically at XL Capital’s average annual OGM for the period of this analysis. $295 $260 Conversely.
and more importantly.How Can Brilliont Help Improve Your Organic Growth Effectiveness? WHAT DO OGM LEADERS DO THAT OTHERS DON’T? Our research revealed that OGM leaders exhibit certain similarities that drive their success. please detail what number of projects were reviewed. please detail your company segments and your understanding of each in delivering profitable efficient growth. please detail the information collected. Is there a credible and empowered governance process that ensures proper go/kill decisions regarding organic growth projects and investments? If yes. please illustrate how your resource allocation reflects this. Furthermore. With this in mind. (Please note the term “segments” refers to business units. product groups and/or geographic business lines. Examples include: Has the organization analyzed and understood the ability of each organizational segment to deliver profitable efficient growth? If yes. Is credible information collected. across organizational segments to take advantage of the best organic growth opportunities? If yes. we look forward to sharing insights. experiences and case studies with you on other organizations who’ve taken steps to improve their organic growth efficiency. We welcome the opportunity to further discuss our research into organic growth and the investment optimization process. funded and stopped in the last year? Are resources regularly moved within. accepted. It allows you assess areas of strength and development and ultimately serves as the basis for a set of targeted measures that can be enacted to improve your organic growth efficiency. analyzed and tracked to gauge organic growth performance and inform future investment decisions? If yes. Responses to the twenty questions provide you with specific insights into how your organization allocates its discretionary resources for organic growth and the appropriateness of this allocation. analyzed and tracked as well as its use to inform future decisions.) Based on this segment‐level analysis. are resources allocated so that segments with the best record of delivering efficient organic growth and who have the best opportunities for growth receive the most funding? If yes. as well as how it relates to XL Capital. please provide examples of how this was done both inter‐ and intra‐segment. we identified a list of twenty key questions for organizations to consider in order to understand and improve their organic growth capabilities. 7 .
ORGANIC GROWTH IN THE WORDS OF OTHERS 8 .
Business Finance Magazine. The firm’s groundbreaking report.BRILLIONT BACKGROUND About Brilliont Brilliont is a boutique consulting and advisory firm helping clients create and deliver shareholder value through disciplined cost optimization. June 2008 – Beyond Budgeting Roundtable. July 2008. investment optimization and innovation. March 2008. Nov 2008 – BPM Summit. S&P 500 Organic Growth Efficiency Benchmarking: Leaders and Laggards is the most exhaustive analysis of organizational organic growth efficacy ever done and has already been used by many organizations as a starting point to begin understanding how they can improve their organic growth generation capabilities. by Anand Sanwal Select Recent & Upcoming Events Members of the Brilliont team have been or will be featured speakers at the following events: – World Bank Resource Forum. by Anand Sanwal with foreword by Gary Crittenden. by Anand Sanwal and Sandeep Arora “Budgeting: All Bad Things Must Come to an End”. Journal of Corporate Accounting and Finance. BPM Magazine. Fall 2008. The Brilliont team is comprised of experts and practitioners who have managed and led significant organic growth enhancement efforts at S&P 500 companies. Recent & Upcoming Publications “S&P 500 Organic Growth Efficiency Benchmarking: Leaders and Laggards”. CFO Citigroup “OpEx as Investment: How to Spend More Strategically”. by Dominic Paniccia Optimizing Corporate Portfolio Management (book). Dec 2008 – Pharmaceutical Portfolio Management Summit. Oct 2008 – American Strategic Management Institute. June 2008 “The House of Rolling Heads”. April 2008 9 .