Services

Cases

	Value Management Profile: Telecommunications Co. A large telecommunications firm had implemented a value management program two years earlier, and now wanted to review how well the program was working for them. "We got a lot of hay out of the program when we rolled it out two years ago, but I'm not sure we've kept our focus since then. Maybe it's time for some additional training," their CFO said, indicating a clear readiness to spend significant sums in this area. Managers were interviewed across all functions and divisions, and at several levels in the organization. Over 40 managers contributed to a clear picture of their company's current management processes. They provided vivid examples of behavioral and methodological changes over the last two years. They shared where their program had made a difference in their work, and they were candid about the perceived pitfalls of the program. The verdict was generally positive, but experiences were notably uneven across units. We specifically inquired into the potential benefits of additional training. "We're very busy with new initiatives," reported several marketing managers. "We have enough opportunity to learn about EVA (their main measure). Our training center has regular classes on it, which would be useful, except that my boss is still asking me about NOI. So, what's the point?" It turned out that even though EVA was a basis for funding corporate bonuses, NOI was the basis for distributing bonus dollars among the marketing units. In other words, where bonuses were not felt to be greatly impacted by knowledge of EVA, the motivation to learn about EVA was weak. No amount of spending on training would change that. Our interviews with network operations managers revealed a very different story. Their bonuses were funded and distributed based on EVA. "EVA dragged our engineers into the process of value creation, said their COO. "This is the first year in our history where our capital spending will not exceed depreciation. We're working much smarter now, always seeking better ways of using our capital." Was the measure too complicated? "Hey, we're tech heads. And that's where our money is coming from." In other words, where the bonuses were perceived to be based substantially on EVA, further spending on training was hardly necessary. After ten weeks of interviews, we presented our findings to their executive committee. The final report described their planning, decision-making, and reporting relative to what their managers had experienced (a) prior to their implementation of VBM, (b) relative to their expectations, and (c) relative to best practices and what our experience suggested was possible. We concluded that significant new spending on training would be wasted without changes in their measurement and incentives. Their top management thanked us for comprehensive and well-organized findings and actionable recommendations, but they expressed special appreciation for the patience with which we approached their vast organization, and for the great trust we were able to engender from their people, made plain by the candor of our report Value Management Profile: Information Services Co. A major financial information service had been managing their company and its divisions under a VBM program they had implemented three years earlier. Although they felt that the program had helped them significantly, they wanted to understand where it was helping them most, and where they were losing out on potential benefits. They were considering strengthening their incentive program, but a peculiar issue had arisen for them in the third year which complicated this wish. "In our first two years, our stock price went up along with our EP (economic profit). But last year, our EP rose while our stock price dropped. That kind of divergence produces bonuses that are difficult to justify to our Board. Before we can make any other changes to our plan, we need to understand what happened, and make sure we're doing everything right." We interviewed over thirty of their managers across all their divisions and various levels of management. We found that their VBM program was, in fact, creating significant operating and strategic benefits. They had an acquisitive history, and their pace of acquisitions had barely fallen off under VBM. But both corporate and the divisions agreed that capital budgeting and spending was now being conducted with greater discipline and confidence. At the same time, we analyzed their corporate EP results and stock price performance. We found that EP growth reflected stronger operating profits, but did not account for a recent spike in interest rates. Since their stock was sensitive to interest rates, it had dropped. Our recommendation on this issue, which the client adopted, was to leave their measure alone. Modifying their measure to account for interest rate effects would (a) complicate the measure, and (b) penalize (or reward) managers for a factor that, though it clearly affected stock price, was also clearly out of their control. They agreed that the anomalous results of the prior year could be explained to the board on the rare occasions when it may arise. With our findings and recommendations in hand, they subsequently modified their incentive plans, with Board approval, and took their operating and their stock price performance to the next level.
	VBM Implementation: Public Apparel Company Can a shoe company create a VBM program to cover their licensed and house brands, international outsourcing and domestic manufacturing, company-owned stores and distribution through chain and specialty retailers? The CFO warned us at the outset: "We've signed up for this program. I'm a believer. But a lot of people here remain to be sold. They each have their particular way of operating, and some have been very successful and well paid under the existing compensation plan." We mapped out the full implementation plan, formed a working group and steering committee, and got to work. We began with training of a broad group of internal finance and planning managers on the outline of the program, with some details of how their various management processes would be modified. Thus began the transfer of technology that would create internal experts who could work with us and make the program their own. Over eight months, we defined a new measure for each of their many business units, developed decision support models for their most common types of investment, and designed a new incentive plan covering most of their managers. We were then prepared to get final approval from their executive committee, who had been briefed monthly on the progress, and their Board, who had to approve the plan. "What was wrong with the old plan? Will we be paying our people enough? Will we be paying them too much? Will we be paying them for the right things?" These were questions the Board had asked at the time the project was approved nine months earlier. Now they were getting their answers with simulations of how the bonus plans would pay out under different scenarios. Even after they approved the changes, there was some anxiety among certain Board members. Their anxiety was short lived. Within days of the announcement of the new plan in early 1999, the share price jumped nearly twenty percent. It has tripled since then. VBM Implementation: Private Textile Company A focus on shareholder value isn't only for publicly traded companies. Some of VBM's greatest success stories are with private companies. "I don't want to be the only person around here thinking about the owners," said one CFO when he introduced his company to us. He was the trusted "outsider" to the family that owned and ran the company. "I want a solid business structure in place for the next generation, and a focused team working for them." Most of the managers had been with the company for a very long time. During the implementation, we patiently brought them along step by step, listening to and addressing each of their concerns. The entire implementation process took us across four countries over nine months. At dinner in an Irish castle, the division president in that country shared his concern that the peculiar conditions of his market meant that a plan as simple and objective as ours would not earn him any bonus next year. We had a choice of complicating the plan to account for his market conditions, or having him trust that over a couple of years, the market peculiarities would get played out, and he would get the reward he earned. By the time we were done with coffee, he was satisfied that the multi-year structure of the plan was sound, and he was willing to count on the owner to let the plan work as it was designed, i.e., as a fixed interest in his division's results over time. Since each division manager was a longtime colleague and friend of the owner, they were each given the choice of whether or not to ultimately adopt the compensation element of the program we had prepared for them. Five of the six divisions took on the new plan, including the Irish division. Eventually, seeing how the plan had worked for the rest of the company, the sixth division adopted the incentive plan as well. And the Irish division's belief in their owner and themselves was well rewarded.
	Valuation and Strategy: Consumer Goods Company The owners of a southern consumer goods company wanted to better integrate value-based management into its planning. "We've got the motivation to create value. We need to see if our plans will actually result in value creation," was how their CEO introduced our task. We began with a valuation of their four business units. From these, we were able to determine the aggregate growth in economic profit (EP)that would be required to justify those valuations. We then reviewed EP projections from their long-term plans, which combined projected growth in their current operations with the value of projected acquisitions. Two of their business units showed more than adequate EP growth in their planning. These units were then sent off to specify resource requirements, risks and contingencies for their major initiatives. One unit that showed barely adequate growth to justify its value was sent back to develop stretch targets. When acquisition opportunities for any of the divisions were evaluated, they were especially careful to pursue them only to the extent that the additional returns from the combined entity would actually exceed the cost of capital used in the purchase. Over the next two years, two acquisitions plus operating improvements from investment in distribution capabilities enabled the company to realize the value in their plan. The fourth business unit projected inadequate EP growth. It was instructed to review its plans to see how it could make up the shortfall, including alternative operating scenarios and sale of unproductive assets and operations. At the same time, since the excess valuation implied that the unit may be worth more if sold than operated, senior management began investigating divestiture opportunities. Later that year, when a strategic buyer made a strong offer, the company was already positioned to quickly evaluate and accept it. Thus, they realized far more value from that underperforming unit than they could have under any operating scenario they had developed. They probably also saved many jobs in that unit that might have been lost if it ended up operating in the red and eventually getting shut down.
	Valuation and Strategy: Consumer Goods Company The owners of a southern consumer goods company wanted to better integrate value-based management into its planning. "We've got the motivation to create value. We need to see if our plans will actually result in value creation," was how their CEO introduced our task. We began with a valuation of their four business units. From these, we were able to determine the aggregate growth in economic profit (EP)that would be required to justify those valuations. We then reviewed EP projections from their long-term plans, which combined projected growth in their current operations with the value of projected acquisitions. Two of their business units showed more than adequate EP growth in their planning. These units were then sent off to specify resource requirements, risks and contingencies for their major initiatives. One unit that showed barely adequate growth to justify its value was sent back to develop stretch targets. When acquisition opportunities for any of the divisions were evaluated, they were especially careful to pursue them only to the extent that the additional returns from the combined entity would actually exceed the cost of capital used in the purchase. Over the next two years, two acquisitions plus operating improvements from investment in distribution capabilities enabled the company to realize the value in their plan. The fourth business unit projected inadequate EP growth. It was instructed to review its plans to see how it could make up the shortfall, including alternative operating scenarios and sale of unproductive assets and operations. At the same time, since the excess valuation implied that the unit may be worth more if sold than operated, senior management began investigating divestiture opportunities. Later that year, when a strategic buyer made a strong offer, the company was already positioned to quickly evaluate and accept it. Thus, they realized far more value from that underperforming unit than they could have under any operating scenario they had developed. They probably also saved many jobs in that unit that might have been lost if it ended up operating in the red and eventually getting shut down.
	VBM Preview For Top Managers: Building Materials Co. A building materials fabrication and distribution company with operations stretched across North America was interested in a long-term incentive plan for their managers, but was intrigued by going the next step into a full VBM program. Before committing to a major implementation, however, they chose to have us review their business so we could describe what VBM would look like for them. We gathered reports, business plans, and records of their existing compensation programs. We also conducted interviews with senior managers of each of their divisions. These interviews were helpful in three ways: (1) as a source of information for us about their current operating and management practices; (2) as a chance to answer specific questions regarding VBM in a one-on-one setting; and, (3) as a safe place for their key managers to air their concerns about implementation. The interviews were individual (by business unit) and confidential (even from the CEO, per his agreement) to assure that we had everything needed to be able to report on potential constraints as well as benefits in an implementation. We shared our findings before the entire senior management team in a full-day presentation, including nearly two hours of Q&A. Before the presentation, we were warned that the management team would need up to several weeks to decide whether to go forward with an implementation. That was all right with us since it was winter and most of their operations were in Canada. However, as soon as the discussion was completed, and all their questions had been answered, they felt ready to vote then and there to go ahead with a full implementation. Consultants learn from their clients, too. We learned that complete disclosure--the good, the bad, and the ugly--provide a great deal of comfort to managers facing the unknown (i.e., what are these guys going to do to our compensation?). We also learned that the southernmost parts of Canada are still north of northern Minnesota, if you can imagine how cold that gets.
	Value Measures Revealed: Aerospace Company An aerospace company decided to fly us in for a meeting with their financial managers from over thirty business units, to discuss value-based metrics in the context of their divisions. Defense companies have an array of peculiar measurement issues. Much of their plant and equipment is related to R&D, some of which is client funded. They have special accounting rules for percentage-of-completion contracts with the government. They have multiple business lines with varying degrees of collateral revenues and costs across them. The first day of our training program was devoted to general principles of value metrics applying three key distinctions. First, we distinguished managerial accounting for internal reporting and decision support from financial accounting for external reporting and compliance. The client saw areas where they were using external financial reports for internal managerial decision-making to their obvious detriment. Second, we made the distinction between measurement of business unit value added using reporting on their activities versus measuring of business unit contribution to corporate value added. The latter required reviewing how well transfer prices actually tracked the transfer of value between business units, and how cross-BU cooperation impacted the value of the company. Third, we made the distinction between accounting for reporting purposes versus measurement for compensation purposes. We illustrated how these had to be related to maintain a link between performance and pay without encouraging a short-term focus or a bias toward disinvestment. We sent them away with homework the first night to consider specific issues that arose for them in their respective business units as a result of these distinctions. The second day included a discussion of many division-specific issues with several breakout sessions and lots of Q&A. By the end of the program, the client had learned from and contributed to a thorough, practical discussion of how value metrics would be applied in their company, how their company would significantly benefit by using those metrics, and the cost in time and energy required to make the necessary changes and to train their people accordingly. This two-day seminar made a huge difference in their eventual implementation of VBM into their measurement, decision making, and compensation, and in the wide dispersal of knowledge that would facilitate later training of their business units.

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