Strategic Management Accounting for Value Creation P. Thiruvengadam Deloitte, India
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Transcript of Strategic Management Accounting for Value Creation P. Thiruvengadam Deloitte, India
THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA
Regional Cost Convention30TH November, 2007
Strategic Management Accounting for Value Creation
P. Thiruvengadam Deloitte, India
Strategic Management Accounting
Strategic Management Accounting provides information and analysis for planning, control
and decision making from a strategic perspective
Strategic Decisions and Value
Decisions create options
Good decisions create valuable future options
Poor decisions limit future options,
The more good decisions management makes, the more valuable options a company will have
Management should seek to maximize the number of good decisions it makes each year
Insights Decisions Performance
Strategy Execution Strategy Development
Strategy Development – taking great information, ideas and insight and turning them into great strategy:
• Where to compete?• How to compete?
Strategy Execution – taking great decisions and strategy and turning them into great performance:
• What needs to be done?• How will it be accomplished?
Which is the bigger challenge in driving superior performance – strategy development or strategy execution – and how should companies best meet this challenge?
Superior Strategy Development + Superior Execution = Superior Performance
The Strategy-to-Performance Gap
What drives superior strategy execution? There is a significant gap between the performance most companies could deliver – were they to choose the right strategy and execute it in the right way – and the
results they actually produce over time
Two Underlying Causes
1. Agenda management is undisciplined and unfocused
2. Strategic planning produces too few good decisions
3. Strategy execution is poor
Three Contributing Factors
1. Decision-making• Quality • Quantity• Magnitude
2. Execution• Information• Process• People
Two broad sets of processes are involved in turning strategy into performance – planning and performance monitoring
Performance Monitoring
What Are Execution Processes?
Performance monitoring tracks actual performance relative to plan
Planning delineates the resources required to get us from here to there and the associated financial implications
PlanningStrategy Development
Strategy development determines “where we intend to go” and describes (at a high level) “how we intend to get there”
Closing the Decision-making Gap
1. Deal with operations separately from strategy
1. Focus on decisions, not discussions
2. Measure the real value of every item on the agenda
3. Get issues off of the agenda as quickly as possible
4. Put real choices on the table
5. Adopt common decision-making processes and standards
7. Make decision-making consequential
Disciplined Strategic Management
• Value-based compensation• Align with short and long term delivery• Instill enterprise-wide leadership
• Establish performance dialogues• Simple value driver dashboards• Use financial, strategic and
operating KPIs to trigger intervention
• Work on quality of forecasting over the cycle & track performance over time
• Communicate clear management guidance and/or constraints• Track resource deployment as a leading indicator• Link to team and individual targets and operating plans
• Use value goals to create new ambition for strategy• Measure performance vs. peer set• Cascade value goals to each BU
• Develop clear line-of-sight into the sources and drivers of value
• Create a single strategic agenda – priorities based on value-at-stake
• Use common standards for participation and competitive strategies
• Formulation and evaluation of strategy alternatives to drive decision-making
• Ensure strategies translated into concrete and synchronized action and operating plans
1. Ambitious & Stretching
Goals
2. Value-based Facts &
Priorities
3. Strategic Choices &
Commitments
4. Targets & Resource Allocation
5. Effective Performance Management
6. Performance-based Rewards
Value = Common
Currency
Performance Measurement
Performance Measurement is the process of collecting, analyzing,evaluating, and communicating information relative to an organization's performance and results.
Effective Performance Measurement provides information for the planning and control of organizations, and is a means of ensuring that the direction, efforts
and results of an organization are in alignment.
Performance Measurement is the process of collecting, analyzing,evaluating, and communicating information relative to an organization's performance and results.
Effective Performance Measurement provides information for the planning and control of organizations, and is a means of ensuring that the direction, efforts
and results of an organization are in alignment.
Performance Management is the integration of the results of performance measurement into management processes so that the results can influence the decisions made by the organization.
Performance Management is the integration of the results of performance measurement into management processes so that the results can influence the decisions made by the organization.
STRATEGIC
DIRECTION
BUSINESSPLANNING
PERFORMANCEMEASUREMENT
PERFORMANCEMANAGEMENT
INFORMATION FORDECISION MAKING
AND TAKING ACTION
Activity Based Management Priority Setting Impact Analysis
Performance Management
Why Performance Management?
1- To improve the breath of performance reporting (continued)...
MANAGEMENTNEEDS
INFORMATIONTHAT IS:
• High Level
• Broad Scope• Strategic
• Long-term• Top-Down
MANAGEMENTNEEDS
INFORMATIONTHAT IS:
• High Level
• Broad Scope• Strategic
• Long-term• Top-Down
TRADITIONALMEASUREMENT
SYSTEMS PROVIDE LITTLE SUPPORT TO MEET
THESE NEEDS:
• Too Detailed
• Limited Scope• Tactical Information
• Short-term• Bottom-Up
• Financials not linked to operational data
• Report only on the past
TRADITIONALMEASUREMENT
SYSTEMS PROVIDE LITTLE SUPPORT TO MEET
THESE NEEDS:
• Too Detailed
• Limited Scope• Tactical Information
• Short-term• Bottom-Up
• Financials not linked to operational data
• Report only on the past
Why Performance Management?
2- To counter-act the phenomenon of “Strategy Dilution”:
Strategy Dilution is the gradual erosion of understanding of strategy and direction the lower in an organization you go. Measures link process performance directly to strategy. Developing a measurement framework which cascades down through the organization and allows results to be pyramided-up builds organization understanding and reduces "dilution".
Why Performance Management?
3- To establish accountability for results throughout the organization - At the Corporate level At the Business line level At the Product level At the Process level At the Functional level At the Team level At the Individual level Linkages at all levels allow individuals to
understand their role and expected contribution to the achievement of corporate objectives and goals.
Why Performance Management?
4- Used as a dashboard, the use of a Performance Management framework also allows management:
To assess strengths and weaknesses of business processes
To monitor performance of major improvements efforts
To better understand root cause performance
To make strategic decisions To more effectively manage the
business
Management Dashboard
A new framework is required that encompasses three types of measures: Business Performance Measures, Management
Accounting Measures, and Diagnostic and Control Measures
Value Creation
Business Performance Measures
Management Accounting Measures
Diagnostic & Control Measures
Business Model Strategy Investment Operational
New Performance Measurement Framework
Benefits : MAC and Customer / Product Profitability
-10
-5
0
5
10
15
%
A B C D E
sector 1
sector 2
sector 3
sector 4
Business Sustaining
%
Consistent comparisons gives interesting results! High margin business is not always the most profitable!
Only 30% of customers make a positive contribution!! Product profitability identifies it’s own challenges
Product Profitability
Compare individual customersSector contribution by business
CumulativeNet Margin
Number of Customers,Ranked by Contribution
Marginal or NoReturn Customers
Negative MarginCustomers
The “Whale Curve”
CumulativeNet Margin
Number of Customers,Ranked by Contribution
Marginal or NoReturn Customers
Negative MarginCustomers
The “Whale Curve”
-15
-10
-5
0
5
10
15
20
25
30
GM%
ABM - ROT%
Servicerationalization
Cost reductionopportunities
Possible productredesign opportunities
Targets forincreased salesopportunities
-1,750
-1,200-1,000 -850
-250 -100 -50 -40
100 250 350 400750
1,000
1,7502,000
-2,000
-1,000
0
1,000
2,000
3,000
Servicerationalization
Cost reductionopportunities
Possible productredesign opportunities
Targets forincreased salesopportunities
-1,750
-1,200-1,000 -850
-250 -100 -50 -40
100 250 350 400750
1,000
1,7502,000
-2,000
-1,000
0
1,000
2,000
3,000
Value added / Non-value added
0 500 1000 1500 2000 2500
Collect Cash
Deliver Product
Manage Stock
Replenish Stock
Process Sales Orders
Manage & Source Prods
Manage Customers
£000s Costs
VANVA
Benefits : MAC Process Analysis - Invaluable Management Information
Cost to win and retain
Co
st
Time
Cost to Manufacture
Cost to sell & serve
Customer Lifetime ValuePositive lifetime value
Reven
ue
0
5
10
15
20
25
A B C D E
Manage the business
Manage finances
Deliver product
Store product
Purchase product
Process sales orders
Manage Customers
Market the business
Benchmarking - Business cost profiles
The focus is on what an organisation does, not just £’s Comparison of process costs by business = Challenge
Review of Non Value Added activities can be fruitful Supporting a review of overall customer value
The Traditional ViewCosts
Salary and wages
Social costs – general
Social costs – specific
Travel – car
Other personnel costs
Hotel & overnight
Entertainment
External services – training
External services – other
Premises costs allocation
15 further cost elements
Total
1,151
372
173
89
38
63
8
4
474
117
61
2,550
The Activity Analysis ViewActivity
Develop policy and strategy
Manage provisioning system
Manage the supply chain
Store equipment
Refurbish equipment
Dispose equipment
Issue equipment on priority basis
Maintain storage assets
Issue equipment on non-priority basis
Perform modifications and upgrades
Provide post design services
Plan the maintenance of equipment
Manage employees
Total
75
414
671
105
115
110
218
235
321
40
65
85
99
2,550
Integrating with Performance Management
Performance Management is growing in importance as companies seek to align their reward systems with their strategic imperatives. The balanced scorecard is the most common vehicle for accomplishing this goal. This typically measures an organisation’s key strategies and core processes such as customer satisfaction, innovation, operations, employee satisfaction, financial performance and value.
The strategic nature of performance measures and related targets can focus ABM measures and analysis. Then ABM can be a powerful enabler to generate cost-based, process and/or profitability performance measures which are part of a scorecard.
For example, accurate activity costs can be computed using ABM techniques and rates can be input into the Performance Management process to facilitate accurate reporting of performance measures at the operating level. Furthermore, costs and capital can be allocated directly to objects., which can then be included in value metrics.
Accountability for measures can be identified at the detailed activity level as well as the higher cost attachment point level (i.e., product, customer, channel, etc.). This is consistent with the need for measures to be cascaded throughout the organisation to be most effective.
Performance Measures
Management
Integration Aspects
Value Driver Modelling and Strategic Measurement Focus
Cost and Profitability Goals
“What If” Scenarios for simulation
Cost Driver Definitions, Measures and Volumes (Actual & Budget)
Revenue, Cost and Profitability Results
Integrating with Profit Improvement
Strategic Profit Improvement efforts are strategically focused on improving cost structures to increase shareholder value.
Activity Based Management (ABM) plays a significant role in assessing the cost of both activities and processes in identifying those processes with high impact improvement opportunities. The ability to cost the effect of asset and technology utilisation can assist in the optimisation process of asset and technology usage.
The role of ABM is extended during the implementation and embedding process of improvement opportunities. Advanced Cost Management is viewed as a core competence to realise the benefits of Enterprise Wide Cost Reduction initiatives.
ABM and performance measurement becomes an integral part of the continuous process of valuing products, processes and services.
Opportunity Identification
Embedding Improvements
Products & Services
Org
an
isati
on
al
Un
its
Pro
cesses
Performance Measures
Shareholder Value Analysis
ABM Process Costing
Portfolio AnalysisValue Drivers
Shareholder Value
Mg. A/C Principles provide asolid foundation to support:
Understanding Profitability- Understand product & customer profitability,
what to focus on / manage?- Understand differing channel costs- Understand customer cost base, i.e. cost to serve
and cost to retain- Profile the profitability of scare resource e.g.
space utilisation, FTEs etc- Understand brand costs and profitability profiles- Underpin sales and marketing campaigns by
providing customer segmental analysis e.g. socio-
economic splits, method of payment etc
Performance Management- Provide multidimensional views of the business
giving improved ways of measuring and managing
performance- Provide key KPIs to support performance reporting
e.g. Balanced Score Card- Highlight best areas for investment e.g. brand
support, internet strategy- Give transparency of costing and pricing
mechanisms on a consistent basis to provide robust
analysis to regulators- Provide internal benchmarking of processes and
activities to measure performance gaps of similar
areas
Cost Reduction- Identify high cost, low value processes to focus cost reduction effort on- Provide insights into when businesses are able to work with suppliers and customers to share costs, mutually increase profits and share benefits- Understand causality and the variability of the cost base as business changes
Shared Services / Outsourcing- Provide service menu pricing- Support process analysis and ongoing management through KPIs- Resource requirements planning through Activity Based Budgeting- Support decisions on process off-shoring / outsourcing
THANK YOU