financial realities to strategy (public)
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How to improve business strategy by systematically applying financial realities.TRANSCRIPT
C O N S U L T I N G
A L i m i t e d L i a b i l i t y C o m p a n y
ParCon Consulting, LLCApplying Financial Realities to Strategic Planning
ParCon Consulting Education & Seminar Series
Market Focus: Engineering, Consulting & Architecture
October 3, 2014
Revision (6.1)
Copyright ParCon Consulting, LLC | Page 4
Applying Financial Realities to Strategic PlanningObjectives and introductions
Learning Objectives:
Architecting a robust strategy forecasting model
Capabilities that enhance strategic decision making
Building fiscal reality into strategic initiatives
Approaches to strategic risks
Integrating strategic and operational forecasts
Attendee goals and input…
Goals & Learning Objectives
Structured discussion about how professional
services firms are using advanced financial
models in parallel with strategic planning to help
leaders assess how a chosen strategy could
impact revenues, returns and risks over time and
enhance the quality of strategic decision making.
Speaker Backgrounder
Matthew GillManaging Partner
Atlanta, GA
o 770.740.9621
m 770.329.6219
Career Summary
ParCon ConsultingCo-Founder, Principal
ePsolutions, Inc.CEO, Chairman
Philips Electronics, CE, N.A.EVP & General Manager, North America
ViewSonicEVP & General Manager, Americas
International Business Machines
Established since 2002, ParCon is
an Atlanta based management
consulting firm committed to
delivering superior strategy and
execution solutions to professional
services clients in North America.
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Building Meaningful Links Between Strategy & FinanceWhat do we mean when we talk about strategy and strategic planning?
mission
values
ambition
strategy
strategic initiatives
team / individual goals
Lifetime
20 + Years
5-20 Years
1-5 Years
3-7 Years
<1 Year
Descriptions
Mission Why we exist• What do we want to contribute?
• Why our best efforts matter?
Values How we think & behave• What are our shared beliefs & principles
• How do we conduct ourselves (internally, externally)
• What are our ethics and culture
Ambition Where we intend to go• What do we want to accomplish and by when?
• How will we “measure” success?
Strategy How we intend to get there• Choices about markets, clients & offerings
• How we differentiate ourselves from our competitors
• Critical processes and capabilities we need to deliver value
Strategic Options & Initiatives Changes we will make• Systematic investments in new capabilities or improved processes
• Compelling options for growth and expansion
Individual Goals The work I will do• My individual or team goals
• How strategy impacts my career, opportunities, time allocation
?
Areas of special focus for financial leaders
Strategy Pyramid
Revenues
Profits
Costs
Priorities
Capital
Risks
Timing
?
Finance
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Building Meaningful Links Between Strategy & FinanceChallenges and pitfalls we’ve witnessed between the “concept” and the “reality”
Breakdowns in Process Challenges in ImplementationThe Clarity & Simplicity
of Your Strategic Vision Poor linkage between strategic
forecasts & operating plans
Lack of buy-in (or understanding) by
leaders, managers and staff
Rigid plans that become the prime
focus for leaders, limiting their range
of actions or new ideas
Missing links between strategy and
performance management systems
Lack of consistent evaluation of
progress or quantitative impact
Lack of strategic “learning loops”
Lack of financial rigor within the
strategic planning process
No attempt at projecting the cost or
impact of chosen strategic initiatives
A plan that results in no real choices
or priorities – “do it all- now”
No clarity on how strategy impacts
shareholder value
Disregard of true financial capacity &
capital requirements
Static models that focus executives
on a single possible outcome
The conundrum of perfection
The Ambiguity & Challenges
of Your Operational Reality
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SECTION THREE
A Financial Architecture for Long-Range PlanningAddressing breakdowns in the planning and initial forecasting process
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A Financial Architecture for Long-range PlanningAn approach that has evolved over many engagements
We generally design our models with; 5 years financial
history, current year, and 5 year annual forecasts
For multi-divisional firms, we strongly prefer building the
strategy & forecast at a BU level and then aggregating
Financial components in our architecture usually include; revenues (net)
profits (contribution and IBT or EBITDA)
resources (FTE)
cash flow (we typically do not model the balance sheet)
global variables
The level of detail in a strategic forecast should be kept as
simple as possible (avoid “false precision”)
Our strategic impact models (SIM) are created in parallel
with our strategic planning process
Building an effective model can be daunting but with time
& effort, it can be evolved into a powerful planning tool
Five Building Blocks of Our Strategy
Forecasting Architecture (SIM)
Baseline Forecasts1
Growth Options
2Strategic Initiatives
3
Risk Assessment4
Modeling & Reporting5
We suggest building the model from bottom to top…
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I. Developing baseline financial forecastsEvaluating the impact of
a given strategy is
easier if teams first
attempt to forecast
business results as if no
strategy was in place
Finance needs to understand
what leaders consider their
“business as usual” trajectory
A baseline also provides
context from which to
understand and evaluate
other scenarios or plans
Ultimately, a baseline helps
establish a minimum
expectation of future
performance for the firm.
Baseline forecasts are ideally developed at a business unit level
by the planning teams using a standardized set of assumptions
Assumes that no “strategic” investments will occur but that
business units would continue to drive their business
We typically recommend using a linear progression of future
results based on historical performance & trends
Insights regarding current & near-term market and competitive
conditions typically enter into baseline forecast discussions
Extended revenue forecasts should be “range accurate” without
relying on detailed sales forecasting and resource plans
Contribution level profit forecasts reduces BU concerns about
uncontrollable corporate costs.
Resource estimates (headcount) can be projected using simple
productivity estimates of net revenue / FTE
Finally, an enterprise roll-up is generated and evaluated by the
CFO & executives with top-down modifications taken as needed
Do you see value in a building a “business as usual” forecast?Group discussion on variations they are using or finding effective.
group discussion
ParCon Learning Module: October 7, 2014
Baseline forecasts should be established early in the planning process based on what leaders believe would happen over the planning period if the business were to continue on with no “strategic” investment.
NET REVENUES
CONTRIBUTION
RESOURCES
CASH FLOWS
ASSUMPTIONS & GUIDANCE
Building a Baseline Forecast
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II. Identifying and exploring growth optionsAt the heart of strategy
lies a compelling
vision or aspiration for
growth and innovation
Give planners the opportunity
to dream and innovate when
identifying new growth options
Strategic intelligence focused
on opportunities in services,
clients and geographies can
dramatically improve the
quality of options that emerge
Business cases take time but
are critical to developing
decision grade options
The process can also help
engage key people and allows
potential leaders to emerge
Growth options represent the next critical element of a robust approach to strategic planning; namely the identification, evaluation and selection of one or more viable opportunities for growth or key market moves.
How successful have you been at getting teams to develop innovative ideas?Are their good practices that support strong, consistent growth in new markets, services or clients?
group discussion
A process to identify and discuss viable growth options in a
creative or innovative way is critical to building a compelling plan
Growth options typically include; acquisitions, investments in
organic growth or innovation (technology, processes, etc.) and
may include spin-outs or adjustments to the business portfolio
Planners can rapidly prioritize options using filters and standard
evaluation criteria which allow the best ideas to surface
A subset of the best options should be further developed using
business cases developed by sub-teams
Interesting opportunities that lie outside of current business units
can be identified in parallel by members of the executive team
A portfolio of completed growth cases are then presented and
evaluated by senior executives with an eye toward selecting the
best “portfolio” of options that maximize returns and reduce risks
In Search of Profitable Growth
ParCon Learning Module: October 7, 2014
Marginal Opportunities Low Risk Opportunities
MMM STRATEGIC OPTION EVALUATION
Big IdeasRisky Game Changers
Re
ven
ue
& P
rofi
tIm
pac
tH
igh
Low
Obstacles & Challenges MinimalSignificant
Water, Waste Water Offering
Build Tunneling CoE
Drive I&E Growth in Alberta
Build Transit Practice
Build Aviation Practice
Enter U.S. Markets
Western & Northern Expansion
Double Commissioning
Owners Rep / CM Model
Win in AlbertaTriple National Utilities
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1.0 1.5 2.0 2.5 3.0 3.5 4.0
Each growth option should
represent a discreet investment
opportunity that can legitimately
be selected or eliminated based
on a chosen strategy or
changing operational realities.
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III. Putting fiscal rigor to strategic initiativesA robust strategy
balances growth with a
systematic focus on
enhancing bottom line
performance
As with growth options, the
operational success or failure
of initiatives is hit & miss
Identifying a willing & capable
leader and committed team
are critical first steps
Treat strategic initiatives like
your would handle a complex
projects for a client
Periodic executive reviews of
progress and quantitative
impact keeps teams focused
How comfortable are you with the financial rigor of your current initiatives?What are you doing today? Are expected results integrated into your operating forecasts?
group discussion
ParCon Learning Module: October 7, 2014
Strategic initiatives represent investments focused on improving business results by enhancing key processes or building strategic capabilities that sustain or create a competitive advantage.
During a strategic planning effort, one or more strategic initiatives
are typically identified and selected for investment based on what
planners believe are critical to achieving strategic goals
Initiatives include both “enterprise” initiatives (cross divisional
efforts) as well as initiatives that impact only a single group
ParCon finds the “Balanced Scorecard” framework useful for
identifying initiatives that support long-term value creation
We find most firms are too informal when developing the costs
(money, resources) and impact (revenues, margins, costs and
resources) of any initiatives selected to move forward
Industry performance benchmarks can be helpful in determining
performance goals and targets for a given initiative
How strategic initiatives will be treated within the budgeting and
manpower process needs to be consistent & transparent
Break-through Results From:
Improving PM processes
Better management of talent
Business development
Leadership development
Marketing & Intelligence
Quality management
M&A process excellence
High performance culture
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IV. Assessing & quantifying strategic risksA robust approach to
modeling risks can
help inject much-
needed reality into
strategic forecasts
Strategic risk assessment is
distinctly different from adding
a safety buffer in a forecast
We recommend that risk
modeling be integrated into
the strategic planning process
Engaging business leaders in
evaluating risks helps highlight
areas where doubt exists
Developing mitigation plans
for the most significant
strategic risks is good practice
Risk is an inherent element of every strategy (or strategic scenario), the nature of which needs to be identified and evaluated using appropriate enterprise risk management (ERM) parameters.
How is risk management approached within your current planning process?Do you have a formal ERM approach? Is it applied to your long range planning efforts?
group discussion
ParCon Learning Module: October 7, 2014
Some firms lack a systematic way of identifying and quantifying
risks to their strategy or internal operations
While approaches to ERM vary from firm to firm, we generally
find a matrix that includes likelihood & impact serve well
Business leaders evaluate the potential financial impact of risks
on; revenues, operating costs and cash flows
A risk component supports better sensitivity analysis of strategic
results; allowing business leaders and financial professionals to
understand which risks will have the greatest impact on results
The ability to generate “risked” and “unrisked” forecasts builds
stakeholder confidence in the legitimacy of strategic forecasts
Increasingly, active Boards want clarity about the nature and
magnitude of the risks in your strategy & financial forecasts.
ParCon Strategic Risk Grid
CHART DATA:
Business Unit:
ML&M
Risk Impact:
Contribution
Updated:
April 30, 2014
Baseline Forecasts
Organic Growth Investments
Acquisitive Growth
Investments
Strategic Initiatives
Operational Issues
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Leve
l o
f C
on
tro
l
Likelihood of Occurrence
ML&M Strategic Risk AnalysisSize of Bubble Indicates Potential Impact based on Selector
Very High / Frequently Very Low / Infrequently
Hig
h C
on
tro
lN
o C
on
tro
l
BASELINE FORECASTS
ORGANIC GROWTH ACTIVITIES
ACQUISITIVE ACTIVITIES
STRATEGIC INITIATIVES
EXTERNAL FACTORS
Revenues Costs Cash Flow
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V. Modeling & reporting capabilitiesBuilding a system that
allows planners to
easily test a variety of
scenarios makes for a
superior final strategy
One goal of modeling is to
allow planner to “flex” key
variables across a range of
reasonable possibilities and
evaluate the fiscal results
Without the ability to model,
planners tend to become
locked in to a single potential
strategic scenario
What is your experience with scenario modeling and stress testing your plans?Are your current long-range forecasts based on single point estimates or multiple scenarios?
group discussion
ParCon Learning Module: October 7, 2014
Advanced modeling and reporting are powerful tools for planners & executives who are asked to make strategic decisions on a comprehensive strategy that optimizes shareholder value and minimizes risk.
Evolving from a single, static financial view to one that allows
easy evaluation of multiple options and variables helps leaders
evaluate the impact of their choices on financial outcomes
We prefer a design that supports modeling of revenues, costs,
profits, cash flows & risks across a broad spectrum of options
and variables
We find that creating a control panel that non-financial
executives find easy to use helps to create deeper insights
By building forecasts from the BU level up, planners can add or
eliminate various BU results to evaluate the overall impact on the
business portfolio and shareholder value
Allowing planners to quickly model major choice (e.g.
acquisitions, initiatives) create insight into what drives key results
Finally, we have found that reporting & powerful visuals are key
tools in both assessing and communicating the chosen strategy
Empower Your Planning Team
Growth Options: Add or remove,
change start dates, adjust costs
Strategic Initiatives: Add or
remove, modify kick-off, impact,
funding and resource impacts
Reporting: Quick add or remove
business units, risks, and various
revenue streams (e.g.
acquisitions)
Global Variables: Modify costs
of capital, return thresholds,
overhead rates, labor costs, etc.
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A Financial Architecture for Long-range PlanningGroup discussion on the process described
What questions do you have about this approach?
What have you found historically that has worked
well for your firm?
Where have you experienced breakdowns?
What can you do going forward to improve your
internal processes?
Five Building Blocks of Our Strategy
Forecasting Architecture (SIM)
Baseline Forecasts1
Growth Options
2Strategic Initiatives
3
Risk Assessment4
Modeling & Reporting5 Failures in Process group discussion
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SECTION FOUR
Fully Realizing Results by Sustaining the EffortAddressing challenges with implementation
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Fully Realizing Strategic ResultsLinking strategy with your existing operational systems
Successful execution requires you to link & align…
Organizational Structure: Leaders, people, management & information systems
Goals & Objectives: Aligning annual revenue, profit & efficiency goals with a well
considered roll-forward budgeting approach
Initiative Impact: Determining how active initiatives should be integrated into
company & departmental operating goals & periodic performance results
Investment: Making consistent investments in high priority initiatives (StratEx)
Resources: Assign the right people & recognize the impact on utilization & profit,
delegate existing workload and discontinue lower value activities to free up time
Performance Systems: Integrate strategic performance into PM systems with
appropriate rewards & consequences
Risk Management: Insure that strategic risks are integrated into internal ERM
reporting and mitigation efforts
Operating Plans
Strategic Forecast
? Linkage ?
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Fully Realizing Strategic ResultsBuilding muscle memory in the execution of strategy
Supporting strategy execution as a priority…
MOS Integration: Integrate strategy processes (planning, review, refinement,
funding) into existing annual management calendars & operating systems.
Strategy Governance: Build a disciplined governance process that focuses
executive, planners & leaders on reviewing & assessing your current strategy
and focusing on the “big picture” during periodic reviews
Honest Evaluation & Review: Focus strategy reviews on learning & decision
making coupled with an honest assessment of both progress (achievements,
milestones, wins) & impact (quantitative improvements)
Strategy Refinement: Your strategic plan is not an “end” but a way of looking
at the world, prioritizing resources and testing your hypothesis. Ongoing
refinement is important to help balance strategic focus with operational agility
Learning Loops: Companies that learn faster and translate insights into
concerted action have a distinct competitive advantage. Creating “learning
loops” linked to disciplined execution is challenging but increasingly critical
Imp
ort
an
ce
Urgency -
+
+
-
Covey’s Time Management Matrix
The core issue is that strategy
represents Quadrant 2 work
30%
40% 20%
10%
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Fully Realizing Strategic ResultsOwning and leading organizational change
Harness the full power of your organization …
Leadership: Success in strategy (or change) requires active and visible leadership
and frequent engagement. It cannot be delegated and it can’t be relegated.
Engage High Performers: Change efforts require resources and a commitment of
substantial time, focus and effort. The quality of the people on these teams has allot
to do with the success of your major initiatives. Reward success…
Consistent Communication: Keeping your strategy and successes top of mind
across the firm helps create a shared feeling of progress & inertia, helps overcome
cynicism and can get the critical “60%” off of the fence
Strategic Filters: Great leaders use strategy as a tool for helping make important
decisions. They then take the time to link their decisions back to strategy so people
develop an understanding of how strategic plans, decisions & outcome tie together.
Strategy as a “Day Job”: Today, high performing companies have found unique
ways to “manage” the business while simultaneously “changing” their business.
They’ve done this by making strategy a part of everyone’s “day job.”
Leadership > Strategy