New Performance Management Strategies for the Post-crisis Economy

This document is confidential and is intended solely for the use and information of the client to whom it is addressed.

New Performance Management Strategiesfor the Post-crisis Economy

2010 PMI Great Lakes Chapter Symposium

Sterling Heights, Michigan

April 28, 2010

Newport Consulting Group, LLC

Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium

Welcome and Introductions

Effective Strategies for the New Normal

Managing Risk for Enterprise Performance

Reducing Cost and Increase Profit for the emerging upswing

Methods to Manage Spend in the Organization

Methods to Optimize the Supply Chain

Summary and Special Offer

Newport Consulting Group, LLC 2010 PMI Great Lakes Symposium - 2

About Our Firm

Newport Consulting Group is an independent

consulting firm founded by several leading

consultants from DMR Consulting Group and

strategy firm Booz & Company

Our clients enjoy working with our experienced

professionals who deliver large firm capabilities

in the context of a boutique firm culture

We function as top-end, high-touch advisors

to our clients, unencumbered by large

overhead cost models or downstream

deployment agendas


About Our Services

Strategy

Operations

Risk &

Program Management

Technology

Newport’s Services Model (“SORT”) allows our Clients to benefit from a broad, holistic perspective on

key business issues and challenges, while focusing on deep experience in one or more critical areas.

What market and business strategies do I need to address post-crisis scenarios? What KPIs govern my initiatives and what do I do when KPIs are “out of bounds”?

How do create a culture of sustainability?

How do I strategically manage intellectual property?

How do I fit my organization to improve existing or introduce new operating models?

How do I structure the functions, people, and resources in my organization to drive strategic initiatives?

What approaches do I use to structure and prioritize initiatives inside my organization?

How do I manage and mitigate risk across my business operations?

How do I drive maximum value from my portfolio of initiatives?

Based on my operations and existing technology investments to date, how do I select and implement the best technology solutions to support my business?

How do I manage that process from planning to go live?


Since last year …

Programs started in 2009

Programs started in 2010 …

still looking …


47

41

60

62

61

65

3.9

4.7

0

5

10

15

20

25

30

35

40

45

50

55

60

65

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Sep-09Jul-09May-09Mar-09Jan-09Nov-08Sep-08Aug-08

%Index Level

Jun-08Apr-08Feb-08

0.0

Nov-09

Production versus Consumption PotentialISM Key Index Levels / Personal Savings Rates

And into this year …

New Orders

Savings

Production

Inventory

Source: ISM Manufacturing Index Report, 2008-2010; Bureau of Economic Analysis, US Department of Commerce Report, March, 2008-2010.

ISM Levels < 50

indicate

contraction, levels >

50 indicate

expansion

Historical 40-year

average of

personal savings

rate of +/- 10%

We ended 2009 with an early steady-state trend, inventories continued to shrink and production and

new orders expanded, savings was constant. Since then inventories have grown as has production.


Focus on Sustainability ProgramsPercentage of Respondents focusing on Area (by Position)

Where is the focus?

The Post-crisis economy requires new as well as very traditional business thinking, taking into account

long-term sustainable growth. Short-term profit taking of the “Roaring 2000s” is a thing of the past.

Source: Valuing Corporate Social Responsibility, The McKinsey Quarterly, February 2009

3

24

35

39

43

52

79

27

24

36

9

24

42

39

61

79

Improving access to capital

2

Strengthening competitive positioning 14

Improving risk management

18

Improving new growth opportunities

24

Improving operational efficiency and/or decreasing costs29

Meeting society’s expectations for good corporate behavior30

Attracting, motivating, and retaining talented employees55

Maintaining a good corporate reputation and/or brand equity

75

CSR Professionals

Investment Professionals

CFOs


How do we get there?

Strategic planning, aligned with sustainable thinking, is top of mind for business leaders. Addressing

the “strategy gap” between the board room and the plant floor is critical to achieve results.

Do you have a strategy gap? Ask yourself

these questions:

Are we too busy creating more and more

efficiency in the organization in the

absence of effectiveness?

Are we performing at high levels in one

area of the organization at the expense of

other areas of the same organization?

Is it difficult to determine which suppliers

are working in different parts of the

organization?

Is it common to use cost allocations to

determine total contributions of functions

and operating units?

Is there a common governance model?

Operations

Strategy

Reporting and

monitoring

Production

and planning

http://www.detroitdiesel.com/engines/series60/


Addressing the Strategy Gap

A closed-loop Enterprise Performance

Management (EPM) model provides a framework

for the development, alignment, and execution of

strategy in the organization, leveraging outcomes

for future strategy cycles based on actual results.

Strategic Plan

Operating/Financial Plan

Test

and Adapt

Align the

Organization

Monitor

and LearnPlan

Operations

3

4 5

6

Develop

the Strategy

Translate

the Strategy12

Six Stages of the Closed-loop EPM Model

Develop the Strategy – this involves applying tools, processes, and concepts, such as mission, vision, and value statements

Translate the Strategy – using other tools and processes, including strategy maps and balanced scorecards

Align the Organization – both the business units and shared services units to the corporate strategy and the business processes

Plan Operations – translate the strategic objectives into rolling forecasts, activity-based costing, resource and capacity planning, dynamic budgeting

Monitor and Learn – with managers continually reviewing internal operational data and external data on competitors and the business environment

Test and Adapt – updating it when they learn that the assumptions underlying it are obsolete or faulty, which starts another loop around the system

Source: “Understanding SAP BOBJ Enterprise Performance Management,” 2010.


Today’s Take-aways

Look at risk through a

new lens

Know what your profit

model is and work to

maximize it

1

2

Based on these new realities, decision makers are challenged to consider more integrated and holistic

approaches to managing portfolios of activities, both inside the company and throughout the value chain.

Rationale for Decision Makers

Understand who is

working for you, and

how they add value

3

• What is the “big picture” risk? Learning to broaden awareness of risk events.

• When a risk event occurs having contingency plans and a playbook fosters business continuity.

• Allocate the key cost contributions and focus on truly profitable customers and products

• Forecast your models based on anticipated as well as realistic business scenarios

• Avoid “maverick spend” in the organization

• Treat each member in the value chain with an “aggregate view”

• Understand your supply chain member positions both economically and mechanically

View your organization

holistically for greater

effectiveness

4

• Effective versus efficient execution across all business operations

• Aggregate KPIs at the corporate level as well as for the business operations


A Post-crisis View of Risk

Source: The Fat Tail, Ian Bremmer (as modified by Newport Consulting Group)

“Our risk analysis is at best a look in the rear view mirror. It would be very advantageous for our business to be able to

rely on innovative solutions that would provide real-time dashboards of our global operations” - Fortune 100 Risk Manager

Conventional risk has been the practice for years, the recent economic crisis has shown that

“extraordinary risk” -- with low probability and high impact -- create “fat tails” difficult to predict.

Extraordinary Risk vs. Ordinary RiskImpacts of Low Probability - High Impact Risk

Extraordinary Risk

Ordinary Risk Profile

Geopolitical

Terrorist Event

Social Uprisings

Liquidity Market Collapse

% Probability of Occurrence

$ Im

pact

on

Bu

sin

ess p

er

Occu

rren

ce

Classic Porter 5-forces Modeling

Monte Carlo Analysis

Production Scheduling

Supplier Shipments

Conventional Financial Analysis


Risk as Viewed through Different Lenses

Source: SAP BusinessObjects (as modified by Newport Consulting Group)

While Risk Managers may be responsible for risk identification and mitigation, executives and

operations managers have responsibility for performance of the organization. This can create conflict.

Send out MS Excels

Workshop afterworkshop

Ask for additional

input

Brainstormone-off response

possibilities

Siloed risk thinking

Focus only onnegative risks

Risk

Managers

What is the status

of our top risks?

What risks don’t we

know about?

Am I on track to

reach my goals?

Another assessment to

fill out?

Lines of

Business

Directors &

Executives

Will we meet analyst /

market expectations?

What are our

top 10 risks?

Risk is in the “Eye of the Beholder”When roles and perceptions of risk vary


Sources of Risk (you may be surprised)

Source: IBM Global Business Services, The Global CFO Study, 2005.

A recent study of risk indicates that while financial and operational segments have received the

greatest attention in the recent Crisis, in a steady state they account for only 13% of all risk events.

Material risk events

encountered in the past three

years (for enterprises over

US$5 billion in revenue).

Financial• Currency exchange rates

• Interest issue and increasing reserves

• Accuracy of realistic balance sheet reporting

• Ability to manage cash

• Non-transparent markets

• Economic recession

• Energy and commodity costs

Political/Geopolitical• Change of government – and minority governments

• Grants and budget changes

• Constant change of ministers

• Federal Accountability Act

• Terrorism

Strategic• Industry consolidation and globalization

• Error-filled release of software upgrade

• Change in core product demand

• Cancellation of major customer contracts

• Performance standards and service quality

Environmental / Health• West Nile Virus

• Safety crisis

• Compliance with environmental standards

• Food sanitary management problem

• Climate change

• Environment pollution

Operational• Hurricane Katrina

• Data center outage

• Delivery risk

• Blast furnace cold run

• ERP application crash

• Plant disaster causing production stoppage

Legal & Compliance• Fraud

• Product liability claims

• Missed time line for legal changes

• Embezzlement of parts

• Safety of goods or products


Managing Risk for Performance


“Best of breed” organizations view risk as a critical part of the performance management process.

Risk managers are drivers of business change, creating an environment for effective operations.

Everyone “Plays Position”When roles and perceptions of risk are embedded and common

Lines of

Business

Risk

Managers

Embedded in existing

processes

Reapply best practice

mitigations

Enable performance

(and risk) innovation

Risk in context of corporate strategy

and performance

Understand true exposure resulting

from risk correlation

Achieve proactive transparency

Automatic risk

monitoring

End-to-end risk

processes across the

value chain

Become a driver of

business change

Program

Management

Key Process

Area

1. Refine and develop the project plan

2. Maintain the project plan

3. Monitor progress against baselines (scope, schedule, cost) and targets using EVM metrics

4. Craft and manage communications plan

5. Conduct Project Status Meetings with Key Stakeholders

6. Brief leadership on Project Progress

7. …

Key Activities

Program

Management

Key Process

Area

1. Refine and develop the project plan

2. Maintain the project plan

3. Monitor progress against baselines (scope, schedule, cost) and targets using EVM metrics

4. Craft and manage communications plan

5. Conduct Project Status Meetings with Key Stakeholders

6. Brief leadership on Project Progress

7. …

Key Activities

A history of requirements review suggests the need for strong product configuration management. Program

management presence is the single most critical factor in the successful delivery of compliance program at ABC.Summary

Program Compliance ManagerRundown Role

Program AdministratorSecondary Resource

Primary Resource

A history of requirements review suggests the need for strong product configuration management. Program

management presence is the single most critical factor in the successful delivery of compliance program at ABC.Summary

Program Compliance ManagerRundown Role

Program AdministratorSecondary Resource

Primary Resource

Playbook - Role Responsibilities


Internal Spend Rising

A recent survey of executives by McKinsey & Company indicates growth in funded initiatives, with

significant increases in areas such as hiring and new product introduction in just two months.

Source: McKinsey Quarterly - Economic Snapshot, April 2010.

Growth in Funded InitiativesSurvey of executives, February versus April results


Emerging need for Focused Growth

As companies grow and increase internal spend, a resurgence in activity-based costing approaches

suggest the true cost of doing business, while understanding which customers are profitable.

Customer Profit & Loss

Based on Apportioned Overheads

Customer

A

Customer

B

Revenue $10,000 $11,000

Cost of Sales $7,000 $7,000

Contribution $3,000 $4,000

Overhead

(30% Cost of Sales)$2,100 $2,100

Profit/Loss $900 $1,900

Customer Profit & Loss

Based on Activity-Based Costing

Customer

A

Customer

B

Revenue $10,000 $11,000

Cost of Sales $7,000 $7,000

Contribution $3,000 $4,000

Sales Calls @ $50 $300 (6) $600 (12)

Order Processing @ $10 $120 (12) $520 (52)

Pick and Pack @ $15 $180 (12) $780 (52)

Shipping @ $40 $480 (12) $2,080 (52)

Credit Control Calls @ $25 $0 (0) $300 (12)

Cost to Serve $1,080 $4,280

Profit/Loss $1,920 ($280)

What is the best use

of scarce resources

to maximize profit?



Position for effective Profit Reporting

Depending upon the nature of the business, activity-based costing approaches can illustrate an error

in profit reporting up to 500% compared to allocated cost approaches, leading to internal risk.

Source: “Understanding SAP BOBJ Enterprise Performance Management,” 2010.

Under

Costed

500

%

250

%

0

ABC costs as

a % of

traditional

apportioned

costs

Product folio offered

to customers

High Volume

Low Complexity

Low Maintenance

Low Volume

High Complexity

High Maintenance

Over Costed

“Cost Gap”

Potential


The Spend Management Challenge

A recent survey of Chief Procurement Officers considered the causes that organization look at spend

management and analysis. The key recurring theme is to (1) increase visibility and (2) reduce costs.

Source: Aberdeen Group, Spend Analytics - Pulling Back the Cover on Savings (2008).

Track Off-contract

Spend28%

Place More Spend under

Management38%

Improve Negotiation

Leverage40%

Indentify Top Spend

Categories41%

Identify Savings within Spend

Categories54%

Top Pressures to Cause Organizations to Look at Spend AnalysisSurvey of Chief Procurement Officers


Spend Rationalization - Then and Now

The 1980s saw broad cutting of supply base -- in some cases 20-30% of suppliers eliminated for

reasons other than performance and strategic fit. Today “pruning” is more effective than “clear cuts.”

Supplier Cutting - 1980s style “clear cut”

Supplier Rationalization -

>2000s style “selective pruning”

“Reduce supplier spend 20%

across the board.”

“Reduce supplier spend where

needed, increase spend where

it helps us to grow.”


Rationalizing Spend by Adding Suppliers

For areas of strategic importance, or for areas of the portfolio expected to be high growth potential,

suppliers may be added to provide a balanced portfolio of the value chain.

Planned Supply Chain ActionsPlans before and after Supply Base Rationalization Efforts

Planned since supply base

rationalization began

Baseline Plan 12-24 Months

18%

6%3%

No Change Decrease 21-40%

17%

Decrease 41-60%

4%

11%

54%

Decrease up to 20% Decrease

61% or More

1%

19%21%

Increase

43%

3%

Source: Spend Analysis and Supply Chain Rationalization, Institute of Supply Management (2005).

Increase in total

supply base after

rationalization.

Larger effective

decrease in total

supply base after

rationalization.

May lead to this …. … or may lead to this.


Today’s Supply Chain

Global organizations face many challenges both internal and external, creating communication and

execution divergences in day-to-day operations. This creates the possibility of risk events, capital

shortages, and materiel disturbances in the supply chain.

Suppliers andCustomers

Manufacturing

CRO

Receiving Fulfillment

COO

SourcingCFO

DISTRIBUTIONCENTER

CUSTOMER

SUPPLIER

Implications

• Uncontrolled supply chain cost

• Working capital tied up

Costs moved around, departments

“passing the buck”Implications

• Overburdened IT

• Ineffective decision making

Lack of visibility

into processes

Daily surprises,

and fire fighting

Implications

• Loss in

revenue

• Customer

dissatisfaction

Risk Management focused

on financial risk only

Implications

• Non-compliance

• Loss of trust

Material events noticed too

late, risks under-estimated

Suppliers andCustomers

ManufacturingManufacturing

CROCRO

ReceivingReceiving FulfillmentFulfillment

COOCOO

SourcingSourcingCFOCFO

DISTRIBUTIONCENTER

DISTRIBUTIONCENTER

CUSTOMERCUSTOMER

SUPPLIERSUPPLIER

Implications

• Uncontrolled supply chain cost

• Working capital tied up

Costs moved around, departments

“passing the buck”Implications

• Overburdened IT

• Ineffective decision making

Lack of visibility

into processes

Lack of visibility

into processes

Daily surprises,

and fire fighting

Implications

• Loss in

revenue

• Customer

dissatisfaction





Implications

• Non-compliance

• Loss of trust

Material events noticed too

late, risks under-estimated

Misaligned goalsMisaligned goals

Implications

• Lack of collaboration

• Frequent break-downs

3PL’s3PL’s3PL’s


Implications

• Incomplete view of risk

• No understanding of

operational drivers

Source: SAP, as modified by Newport Consulting Group


Proactive Event Management

Proactive vs. Reactive Supply Chain EffectivenessApproaches to Strategy Monitoring activities

Executive Boardroom

Proactive Path

Reactive Path

Supplier Operations Supplier Labor DisruptionCompany Operations Supplier Shipments

✓Real-time operational data flow

Pre-configured event mitigations KPI Tracking

✗

KPI Tracking Time-lagged operational data flow

Unanticipated event mitigations

Operation

Reports

Increased performance management demands a proactive event management. No longer can

organizations operate as if they were “driving forward looking out the rear view window.”

Source: Understanding SAP BusinessObjects Enterprise Performance Management, 2010.


Holistic Approach to Operation Performance

The result of strategic plans aligned to corresponding tactical plans address common efficiency

problems in the organization. More importantly, the organization behaves more effectively – doing the

right things rather than executing in a non-aligned manner more rapidly. This may yield many benefits.

Suppliers andCustomers CUSTOMERCUSTOMER

Manufacturing

CRO

Receiving Fulfillment

COO

SourcingCFO

Streamlined supply chain

operations

Improved financial

compliance & control

Reduced supply chain cost,

Optimized cash flow

Reduced supply chain risk,

and no surprises

Bottlenecks identified and

tackled proactively

DISTRIBUTIONCENTER

DISTRIBUTIONCENTER

SUPPLIERSUPPLIER



Full visibility into

business processes

Source: SAP, as modified by Newport Consulting Group


Today’s Take-aways

Look at risk through a

new lens

Know what your profit

model is and work to

maximize it

1

2

Based on these new realities, decision makers are challenged to consider more integrated and holistic

approaches to managing portfolios of activities, both inside the company and throughout the value chain.

Rationale for Decision Makers

Understand who is

working for you, and

how they add value

3

• What is the “big picture” risk? Learning to broaden awareness of risk events.

• When a risk event occurs having contingency plans and a playbook fosters business continuity.

• Allocate the key cost contributions and focus on truly profitable customers and products

• Forecast your models based on anticipated as well as realistic business scenarios

• Avoid “maverick spend” in the organization

• Treat each member in the value chain with an “aggregate view”

• Understand your supply chain member positions both economically and mechanically

View your organization

holistically for greater

effectiveness

4

• Effective versus efficient execution across all business operations

• Aggregate KPIs at the corporate level as well as for the business operations


Special Offer

Order your advanced

copy of SAP Press

“Understanding SAP

BusinessObjects

Enterprise

Performance

Management” during

the symposium and

receive 10% off the

cover price!


Contact

Newport Consulting Group, LLC

William Newman, CMC

Managing Principal

[email protected]

7286 North Village Drive O 248-978-2000

Clarkston, MI 48346 USA M 248-635-9902

New Performance Management Strategies for the Post-crisis Economy

Documents

Transcript of New Performance Management Strategies for the Post-crisis Economy