Business Performance Management Create a Framework for Sustainable Value Creation

October 11, 2012

Dr. Paritosh C. Basu

Flow of Discussion
BPM – Thought Lines for Creating a Framework Decision Management - The Universal Driver for BPM
Avoid Eight Traps Liberate from Bounded Rationality Observe Six Cs Follow Boundaries of Corporate Governance

Risk Management - The Other Name for BPM Imperative Measures for CFOs in Executing Decisions Sustainability Management - Key to Long Term BPM A Case Study
When future looks hazy, it is time to go back to basics

Business Performance Management Thought Lines for Creating a Framework

Does Business Performance Management mean any one or any combination of the following?

Source: faculty.css.edu/dswenson/web/Powerpoints/ChangeDrivers.ppt

Business Performance Management (BPM) =
“Value has a value only if its value is valued.”^ Maximisation of Value Additions & Innovention* Pre-assess impacts of seeds in the Womb of Time

Increase in Shareholders’ Wealth

*Innovention =
Innovative and Inventive Value Creation ^ Bryan Dyson, former CEO of Coca Cola

Target - where to go from where ??

Zone - A Tomorrow BPM is all about making sense of • What is happening now and • What should happen in forward path Today Zone - B % age Change in Turnover
Conduct trend analysis > Map present position > Fix strategic intent > Initiate Action

Yesterday

Determination of Expected Return Risks - Return Trade Trade-off
Risk-Return Indifference Line T a r G e t R e t u r N (%)

XX%

Assessed Return (Selected Strategy)

Risk Free Return %

Risks ($ Million )

Organisational goals are best achieved when aligned with individual goals Let us review the results of a case study

G. H. Hofstede’s Graph for Employee Behaviour (in the Process of Target Setting)
Zone C Impossible Zone B Difficult Zone A Easy

Management Expectation

A c H i v e m e n t

Employee Performance

8

Efforts & Perception of Employees and Management

The Ultimate Criteria
The Factor for differentiating the product / service offered to the society

Society Enterprise Benefits Win - Win Harms

Benefits

Parasite

Harms
Parasite Terrorists Martyr Successful Strategy

Martyr

Terrorists

– Not be able to suck for long – Killed in no time – Bleed to death – Create a win win-win situation
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Exclusive reliance on financial indicators promotes short term behaviour that sacrifices long term value for short term performance - Porter

Revisit Fundamentals of Value Addition
Value creation = Utility ÷ Cost, or Result ÷ Cost > 1

Maximise Value = Maximise Utility or Minimise Cost Add value by minimising value destruction Focus on strategic drivers of values Remove sub-optimality in operations Process cross - functional data and use information Work innovatively and use simple solutions Develop superior capabilities effective for both
External, and Internal Environment

The Trend is visible - Sustained value generation skill and not ownership is the ultimate criteria for occupying the Driver’s seat
10

BPM - The Process Orientation
BPM is nothing but the disciplined process that enables the Leadership team to

Integrate strategies to business plans and execution Monitor and control results against pre-planned performance Process cross - functional data and use information Conduct gap analysis and identify root cause for variation Take mid-course corrective action for short term optimisation Make sense out of what has happened and note learning points

Cash is the King - King is he who earns and invests Cash to again earn Cash and the process goes on

Long Term Drivers of Business Values
1. Productivity - ‘High Capital-Output Ratio’ 2. Output based contracts for outsourcing (Yield) 3. ‘Whole Life-of - Asset Costing’ (Life Cycle Costing) 4. Economies of scale in total volume of operation 5. Benefits of volume in procurement of inputs and utilities 6. Capital at Risk - Capital structure and financing decision 7. Single Point Responsibility - Scope for integration 8. Innovation - Systems, processes and their application / execution 9. Competition and Competitors - Domestic and overseas 10. Risk transfer and avoiding repetition of mistakes
Developed from the thoughts of Adrian Montague, Dy. Chairman of Partnerships, UK
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How to Approach BPM
1. Half filled with water 2. Half empty 3. The glass is full - half filled with water and half with air. Successful BPM presupposes positive attitude and proactive approach
Source: Unknown

Decision Management
The Universal Driver for Performance at All Times

When the future looks hazy it is time to go back to basics
Source of the Ant Graphic http://www.makinglocalfoodwork.co.uk/cmsfiles/assets/300.jpg

What is Decision Making
“Decision making is the process by which managers respond to opportunities and threats by analysing options and making decisions about goals and course of actions” Opportunities = Ways to improve organisational performance Threats = Occurs when the organisation is affected by adverse impacts of events

Learning Points “Doing what is right is not hard - Knowing what is right is.”
Lyndon B Johnson

“Once you have made your marks watch out for erasers.”
Will Rogers

The story of a kid on a winter morning in a hill town ... Learning Point: Make the best use of environment Crisis is a wonderful opportunity to waste - Remain in a state of readiness
15

Improve BPM - Avoid Eight Traps of Decision Making
1. Anchoring - Disproportionate weight to the first information 2. Statuesque - Biases towards present situation 3. Sunk Cost - Leads to perpetuate past mistake 4. Confirming evidence - Leads to seek information supporting an existing penchant and to discount opposing information 5. Framing - Errors in statement while framing a problem on which a decision is to be taken 6. Overconfidence - Leads to over estimation about accuracy in forecasting decision variables 7. Prudence - Leads to over cautiousness while evaluating impacts of uncertainties 8. Recallability - Leads to give undue weight to recent dramatic events
Hammond J. S. , Keeney R. L. and Raiffa H. Harvard Business School, Boston, MA USA

“The best way to avoid all the traps is awareness - Forewarned is forearmed.”
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Improve BPM - Liberate from Bounded Rationality
People show bounded rationality while taking decisions It means ability to make rational choices is bounded by Insufficient information about the problem Relevant criteria Constraint of time and cost Quality and amount of relevant data Mental constraint to solve the problem As a result people Compromise on the best possible solution Go for something which is acceptable to him Just delivers instead of optimising value addition
Laureate Herbert Simon
Source: Indian Management, December 2010

One of the major way-outs is to run through the Risk-based Models Human biases can affect strategic business decisions
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Improve BPM – Observe Six Cs of Decision Making
Construct - Clear picture of what must be decided Compile - List objectives and requirements to be met Collect - Information on alternatives that meet requirements

Compare - Alternatives that meet requirements Consider - The ‘what might go wrong factor’ with each alternative Commit - Take a decision and remain committed through it

Factors to be considered for Decision making Perception Goals Priorities Style
Data

Acceptability Demands Risks Resources Business specific factors

Value Judgment
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Improve BPM - Take Decisions within Four Boundaries of Corporate Governance
Risk and Performance Management

Legal and Regulatory Boundaries

Disclosure and Transparency

Corporate Governance

Independence and Value Orientation Business Practices and Ethics
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Tools for Evaluating Options to Optimise Business Performance
Tools for Evaluating Options and Variables To Optimise Business Performance

20

What Are Decision Variables?
Decision variables are those factors which are essential for Determination of the BPM objectives and its measurement Definition of the problem to be resolved or tasks to be accomplished Assessment of impacts of subjective elements on BPM Evaluation of alternative courses of action; Assess and anticipate requirements and realities during the process of execution and Selecting the best alternative course of action
Degree of Importance of Decision Variables Direct or Indirect Primary or Secondary Immediate or Futuristic and Internal or External
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Tools for Evaluating Decision Variables for BPM
Ongoing Activities
Relational Analysis of Variables (Ratio Analysis e.g. Contribution on Sales) Marginal Cost vs. Marginal Revenue Profitability Index Cost Volume Profit Relationship (e.g. Break Even Point) Differential Cost vs. Differential Revenue Equivalent Unit Approach (in cases of scrace inputs) Activity Based Costing
Cost is the value of any kind sacrificed to create a product or another value

22

Tools for Evaluation of Decision Variables for BPM ... 2
Ongoing Activities (Contd.)

Economic Value Addition Market Value Addition Sensitivity Analysis Quantification and Measuring of Impacts of Subjective Factors Risk modelling with ‘Certainty Equivalent Approach’

Right selection of the tool leads to the right decision

23

Tools for Evaluation of Decision Variables for BPM ... 3
Future Activities

Life Cycle Costing Relational Analysis of Variables (e.g. ROI, ROCE, etc.) Discounted Cash Flow Net Present Value Pay-back Period Sensitivity Analysis Social Cost Benefit Analysis
Economic Rate of Return Domestic Resource Cost
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Risk Management
The other Name of Business Performance Management
25
Source: of picture: Big wave surfing en.wikipedia.org

Create and Review the Risk Register

BPM Process and Risk Exposure Profile
External Risks – Reforms, Market, Technology,

Competitor, Natural, Legal & Regulatory, Political
Action - Map every ‘Cash Generation Unit’ vs. Risks and Mitigation Steps Currency Exchange Customer Success Human Resource Secrecy Liquidity Image Erosion

Financial Operational and Environmental Strategic

Credit Goal Congruence Health & Safety R&D Fraud

Planning

Cost of Capital

Leadership, Product Profile, Product Image Life Cycle, Business Portfolio, Business Erosion Model, Communication, Org. Structure, Business Alliances Product / Service Pollution Failure GAAP Conversion

Info. Reliability

Brand Compliance Erosion Direct and Indirect Taxes 26

External Reporting

The Risk Exposure Calculator
Growth
Pressure for Performance 1/2/3/4/5

http://calculators.bizezia.com/versiona/busriskcalc.asp

+

Rate of Expansion 1/2/3/4/5

+

Inexperience of Key Employees 1/2/3/4/5

=

Score

Culture
Rewards for Entreprenl. Risk Taking 1/2/3/4/5 Executive Resistance to Bad News 1/2/3/4/5 Level of Internal Competition 1/2/3/4/5

+

+

=

Score

Information Management
Transaction Complexity 1/2/3/4/5

+

Gaps in Diagonostic Performa- + nce Measures 1/2/3/4/5

Degree of Decentralised decision making 1/2/3/4/5

= =

Score Total Score

Score Results: Safe = 9 -20 Caution = 21 - 34 Danger = 35 - 45
Designed with Ideas from Source: Harvard Business Review, May-June 1999, Prof. R. Simons and C. M. Williams

Imperative Measures for CFOs Towards Continued Improvement and Growth

Emerging Imperatives for CFOs – Move on
Total focus on Cash and Cash Equivalents Immediately prevent swing from lower performance to insolvency Navigate the organisation – Be a strategic partner of the CEO, yet play the role of a conscience keeper Discharge the critical role with ‘Ethics’ being an outsider in a family business (Be careful about improper governance in ‘My
Money type of control’)*

Treat every single data and information as strategic asset Throw away ‘Executive Summaries’, critically examine details Ring fence talents and human resources handling volume Inculcate the habit of zero tolerance in ‘Corporate Governance’

* Charles Tilley, Chief Executive of CIMA – CFO Asia, March, 2009

Emerging Imperatives for CFOs … 2
Make decision takers aware of risks at every decision point Avoid ‘Quick Fix’ solutions and belt tightening for short term results – Be aware of organisational realities Think through for long run and bring in collective wisdom Converge entire organisation towards frameworks for planning, controlling and monitoring Introduce audit of Information Technology General Control (ITGC) Environment, Health and Safety (EHS) Operations discreetly using Forensic techniques Be dispassionate of what has to be dropped Do not ignore small things - Many a drops make the ocean Activate ‘Whistle Blowing’, Suggestion Box’ and ‘Code of Conduct’ And the list goes on for specific realms of organisations

Crisis is a wonderful opportunity to waste

Emerging Imperatives for CFOs … 3
Development through COSO Framework - Change approach and strategies From Traditional To COSO

=

Achievement of Results

1. Reactive 2. Focus on people 3. Direct and correct 4. Inspect in quality 5. Survival of the fittest
COSO Framework

1. Proactive 2. Focus on opportunities 3. Prevent and monitor 4. Build in quality 5. Everyone can contribute

6. Audit driven solutions 6. Operations driven solutions
"Committee of Sponsoring Organisations of the Treadway Commission, a nonprofit commission that in 1992 established a common definition of internal control and created a framework for evaluating effectiveness of internal controls. - 1. Control Environment, 2. Risk Assessment, 3. Control Activities, 4. Information and Communication, 5. Monitoring and 6. Rating”

Emerging Imperatives ... 4 - Introspect and Reposition
Competitors The Organisation

Known Public Knowledge

Not Known Unique Strength

Known

Not Known

Blindness

Unexplored

* Unique strength will lie in knowing what the competitors do not know * Continuous effort will be to move to the unexplored quadrant to achieve a
state of readyness for delivering what the society will ask for tomorrow

“The only limit to our realisation of tomorrow will be our doubts of today”
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Sustainability Management Key to Management of Long Term Business Performance

‘Four P’ Approach for Sustainability

Sustainability Management - Revisited
Questions to ponder over
1. Is the Earth finite or infinite? 2. Is the capacity of the Earth limited? 3. Is it possible to restore or reform its capacity? 4. Will growth in this Earth be limited to its capacity? 5. Can an organisation ignore such questions and grow?

Who will take lead to answer the last question - the CEO, CFO or CXO?
‘Four P’ approach – Sustainable Product, Planet, People and Profit

Sustainability Management - Revisited .. 2
The process of “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” is Sustainable Development
World Commission on Environment and Development (The Brundtland Commission), 1987

Sustainable Management Direct the course of a company in ways that restore and enhance all forms of capital to generate stakeholders’ value and contribute to the well-being of current and future generations Integrate environmental, social and governance issues into business strategy Build value by defining, evaluating and reporting on indicators beyond financial performance
Set priorities for ‘Bottom Line’ - Profit, People, Planet and / or Product

Sustainability Management – What to measure
Measurement of Sustainability emanates from Natural Capitalism Measure development and utilisation of four types of capital
Financial Manufacturing * Natural * Human * Material resources and energy used in manufacturing ** Stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into future, e. g., trees, water bodies

CFO’s Questions for Sustainable BPM
in Planning, Budgeting and Execution Process

What are the plans, action points, capital and revenue expenditure for Reducing material intensity Utility audit and reducing consumption of power, fuel, steam, water, etc. Optimisation and substitution of raw natural resources Minimising dispersion of toxic substances Green logistics for renewable and used products Recycling of scrap, wastage and spoilage Prolonging product life at minimum differential price Increasing service intensity to reduce frequency
CXOs to ensure viability and growth after absorbing all these expenditure

Similar points are also to be ensured by vendors

Criteria for measurement
Social Criteria* Socially desirable Culturally acceptable Psychologically nurturing
* To a certain extent subjective measurement

Financial Criteria Economically sustainable Technologically feasible Operationally viable within life cycle Environmental Criteria Environmentally robust Utility positive Generationally sensitive Capable of continuous learning

The G reat E nrichm ent
If I have one Dollar and if you have one Dollar and we exchange We have one Dollar each

but
If I have one Idea and if you have one Idea and we exchange We have two Ideas each Millions saw the apple falling, Newton asked why
This is the foundation of Sustainable Business Performance Management
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Thus spake the Wise Man

The first step to solve a problem is to begin Good beginning is half done Be Clear about your objectives Think twice before you do No risk no gain

40

The Case of an Indian Organisation on Discount Management and Related Decisions
(Objective - Supply cent percent of a customer’s yearly input volume)

Discount is a cost, netted-off from sales realisation
41

Discount - Revisited
What is Discount Is it lower realisation as compared to the real value delivered through the product and / or service? Types of Discount Volume linked Price linked - Trade discount Keeping parity with movements in international price For members in the channels of distribution Voluntary / discreet - sharing of achieved cost reduction till the same is factored in Price List General Customer specific Time related Off-season for seasonal products and services Speedier collection than credit terms
42

Discount – Revisited … 2
Why is volume related discount given? USP against competition Market penetration Keep the ‘Declared Price List’ intact for general customers Create price differential for large buyers and make them feel important Induce customers to lift more volumes Book production capacity with commitments from large buyers – slab based discounts Trade-off with inventory carrying cost Selling products at the fag end of its life-cycle

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Commandments for Discounting
Thou shall not offer discounts because everyone else does Thou should be creative with your discounting Thou should use discounts to clear stocks and generate extra business Thou should make sure that the ultimate customer gets the deal Thou should discount only to survive in a mature market Thou should stop discounting as soon as you can

Jack Trout Prices: Simple Guidelines to Get Them Right
Journal of Business Strategy, Nov.- Dec., 1998

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The Case unfolded

Four Tiers of Discount Management
Tier – I

1. Announce Corporate Policy for entering into MOU with large volume customers 2. Announce ‘Standard Terms and Conditions’ with for financial terms depending upon levels of volume 3. Write Bi-yearly or Yearly MOU with each individual large volume customer – may decide some additional / customer specific terms for exceptionally large customers 4. Include terms which will remain constant for the entire year: a) Yearly MOU Discount b) Additional MOU Discount for lifting agreed volume in two consecutive years – to be paid at the end of second year c) Interest free credit period d) Consistency Bonus for fulfilling quarterly / monthly commitments e) Any other condition specific to the customer
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Four Tiers of Discount Management (Contd.)
Tier – II

1. Announce List Price and revision thereof as and when change is required for all segments of customers in general 2. Announce quarterly rebate for each volume slab – This is to keep parity with changes in prices in international market and manage sympathetic medium term volatility 3. Announce additional quarterly discount – for lifting above prorated MOU commitment >> switch-on / switch-off depending upon plant level inventory and variations of sales in retail market

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Four Tiers of Discount Management (Contd.)
Tier – III

1. Manage month to month volatility in export market and domestic retail market by announcing additional monthly discount for lifting more than 1/12th of MOU quantity >> switch-on / switch-off 2. Respond to customers’ request for additional rebate for any sudden spike in their demand – keep it limited for the specific month/purpose

48

Four Tiers of Discount Management (Contd.)
Tier – IV 1. Assure ‘Output Performance – Yield’ from input supplied only to those customers who have Established and dependable technology Quality control procedure Supplier loyalty 2. This discount is to be given only if the output is below the assured yield calculated based on agreed formula and production/quality control procedure

At each stage of such decision making be aware of: Net Value Realised, Marginal Cost and Contribution, Level of booking plant capacity, and What is the next plan of competitors
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Further Thoughts

“The essence of management lies in dropping the last letter and make it ‘Manage Men’! It is still better to drop the last two letters and make it ‘Manage Me’!”
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Thank You