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Focusing Business Improvement The words ‘execution’ and ‘follow-up’ are synonymous with PIP’s reputation for delivering sustainable results. But that’s only part of our story. The other closely related source of value creation is ‘prioritising’.

Rapid, sustainable results

PIPS P E A K

IN THIS ISSUE:

Pages 1-4 Focusing Business Improvement

THE NEWSLETTER OFPartners in Performance

Too many times we see companies putting immense effort into initiatives that, even if executed well, do little to improve the economics of the business.

In our experience, a common characteristic shared by underperforming companies is that they do not have enough understanding of where to focus, or what is driving their results. When they ask themselves questions like “why have costs risen 20% over the past three years?”, or “how is it that we consistently produce at only 50% of our theoretical capability?” they don’t have a way to readily find out.

In the worst cases, we hear the mantra – “it’s the supplier’s fault” or some other external factor like “exchange rates” or “price cycles”.

The reality is managers need to be looking inside their business, not outside, for sources of business improvement.

Whether it’s looking back to understand what drove results, or looking forward to identify how to meet difficult targets, understanding the critical levers that drive a business’ performance should always be the starting point.

The ideal tool for this is the Value Driver Tree.

Value Driver Trees are basically a visual picture of the gears that power a business. A well designed Value Driver model represents the issues in a business, is economically correct, and models driver sensitivities and trade-off decisions.

Diagram 1 - Total Cost Driver Tree

Actual Last Year

Total Cost

Total Volume Sensitive Cost

Period Costs

Production

Volume Sensitive Costs$/t

kt

40,000

30,000

20,000

10,000

0 M J J A S O N D J F M A

20,000

15,000

10,000

5,000

0

25,00020,00015,00010,000

5,0000

M J J A S O N D J F M A

M J J A S O N D J F M A

2,000

15,00

1,000

5,00

0

15

10

5

0

$/k

$/k

$/k

M J J A S O N D J F M A

M J J A S O N D J F M A

Partners in Performance

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Partners in Performance

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2004 [Y/SOV Impact]

Plant at Equilibrium - Impact of Drivers since 2001 Impact on Total Cost $k

Mining VolSensitive Costs

Conc RelatedVolume Sensitive

Costs

Production Engineering &Site Services=

CommercialTotal{}

Mining PeriodCosts

Smelting PeriodCosts=

ProcessingPeriod Costs=

Recoverable Zn /tonne Ore{}

Bal: Total Cost Total Cost[Y/SOV Impact]

Accounting representations, including Activity-Based Costing models, do none of the above.

Value driver trees can help to more effectively analyse trends, sensitivity, variance analysis and results over time or against budget. Diagram 1, above, is an example of a Value Driver Tree being used to quickly identify trends in total costs and the relative impact of multiple levers. Additional trees are added for each lever so that underlying drivers can be identified. This understanding is then used to highlight the source of change.

Value Driver Trees can also help in the Planning Process and the Control Process. The tool is used to review recent results, and can highlight which drivers had the most significant impact. A single integrated model can link the activities of an operator ‘in the line’ with financial outputs that are critical to the General Manager.

Diagram 2, below, is an example of how to represent the relative impact of different change drivers.

Furthermore, Value Driver Trees are used to help break down a business into logical components (the different stages of a value chain) and then establish appropriate accountabilities.

Every PIP engagement begins with two questions: Where is the opportunity? How big is the opportunity?

To answer these questions we interview all relevant client personnel to get their perspective. Too often the answers we get reflect a gut-feeling rather than facts – and as a result they are often wrong. It’s only when the driver trees are developed and the data is reviewed that the ‘real’ value creation levers are uncovered and behaviors begin to change for the better.

Following are two excellent examples of how Value Driver Trees were used to change behaviors in an organization.

COAL MINE

ContextThis integrated coal facility has both mining and processing operations. While primarily an underground mining operation, additional coal is also brought through the processing facility from surface mines, coal dumps, and external sources.

As an old mine, life-of-mine issues were pushing up costs, while prices were falling. Margins were being squeezed, and the situation was expected to get worse.

Management was given the task of identifying ways to lift profits by increasing throughput and reducing costs per tonne. They knew which levers mattered, but didn’t know how to prioritise. Moreover, they needed to quickly compare a number of scenarios.

What we did• Developed a detailed Value Driver Tree for the business• Performed trend and sensitivity analysis to test

management assumptions regarding “which levers mattered”

• Developed scenario models for the business as a whole (i.e. how to meet our cost targets)

• Implemented a review structure based on dramatically increased levels of accountability driven from clarity on key business drivers

Results• Identified and commenced implementing ideas worth

$34 million EBIT• Re-configured the sources of coal to extract more coal

at higher EBIT• Enabled management to focus on the highest priority /

highest value ideas

Diagram 2

Partners in PerformancePartners in Performance Rapid, sustainable results

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ENERGY DISTRIBUTION

ContextThis retailer and wholesaler of energy bought the raw energy product from third parties as well as from in-house production facilities. Energy was then delivered to the city gate via independently owned transmission networks. The intra-city distribution was done via a substantial distribution network which was owned and maintained by the distributor.

Parts of the network had been around for many decades and in places needed repair. In other areas new suburbs and higher consumption required new, expensive network infrastructure. In order to compete in a deregulating market and take advantage of expansion options, the client needed to invest more broadly in distribution assets.

Management needed to find a way of acquiring expensive assets with limited funds.

What we did• Developed a detailed Value Driver Tree for the business

• Identified major risks between different stages of the value chain and how to price these

• Established a basis through the Value Driver Tree for breaking down the business into logical components

• Implemented an accountability-based organization

• Performed trend and sensitivity analysis to test management assumptions regarding “which levers mattered”

Results• Established a new model for utility ownership that has

since been replicated by others

• Separated the Distribution Infrastructure asset consistent with risk, pricing and accountability frameworks. Subsequently sold for double the initial valuation.

APPLICATIONS DEVELOPMENT

Context• Services company providing skilled labour as an

outsourced solution to other (mainly service) clients

• Employees typically worked in excess of the 7.5 hours that they habitually logged - and this habit was reinforced by timesheet system defaults

• Company had not historically validated that the hours people were working were being (i) logged and (ii) charged to clients

• The company was entitled to charge more hours per planned resource day than it was currently charging

• Poor information and unwillingness to discuss fees with clients meant that contractual caps (on hours that could be charged without client agreement) caused further unnecessary revenue leakage, as additional hours that were logged were typically “given away” to the client

• The issue was recognised within the company, but seen as too complex to address - particularly as it cut across operational and commercial areas of the business

Partners in Performance

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Partners in Performance is a firm that builds better businesses. We deliver rapid performance improvements in industrial, resource, manufacturing and service companies, using specialist teams and a hands-on approach to lower costs and increase revenues.

Partners in Performance

PO Box H52, Australia Square, Sydney NSW 1215 Australia Phone: +61 (0) 2 9321 0800 Fax: +61 (0) 2 9321 0888 Email: info@pipint.com www.pipint.com

What we did• Drew up the driver trees to disaggregate the problem,

identify the key levers on performance and set targets for the key accounts

• Instigated training throughout the organisation to educate all levels on the importance of logging actual hours

• Set up a “spin cycle” approach with appropriate KPIs for monitoring compliance with the prescribed logging (and billing) process

• Cascaded the KPI monitoring down to the individual employee and tracked progress at all levels

• Determined the degree to which worked hours that were now being “captured” could/should be passed on to the client

• Developed work-arounds for the systems and processes that reinforced inappropriate behaviours

Results• Fundamental shift in the approach to logging and

reconciling hours worked at all levels of the organisation• Increased accountability for managing account

profitability in operational and commercial areas of the business

• 5%+ increase in billed hours (revenue) achieved within 2 months for each account in which the spin cycle approach was tried - AT NO EXTRA COST (US 9m annual savings)

Hours Logged Driver Tree