Linking Financial Measures to Your Company's Strategy

Transcription

1 Linking Financial Measures to Your Company's Strategy David C. Schwerbrock Vice President Finance SAS Institute International

2 SAS International Overview! Total Revenues 2001 $541 mil USD! Local Currency Revenue Growth 16%! Subsidiaries in 51 Countries! Number of Employees ~

3 Objectives of the Presentation! Give an overview of Balanced Scorecards and systems thinking in strategic business management! Focus in detail on Strategy Maps and causal linkages including non-business systems analogies! Give an example of linking Financial Objectives & Measures to a SAS Business Unit's Strategy 3

4 A Review of Recent Business Past? A Lack of Focus on Financial Measures Finance Profit ROI Revenue mix Growth etc Learning & Growth Employee satisfaction Employee retention Employee productivity etc Strategy Customer Satisfaction Retention Profitability Mind share Click stream, hits Internal Process Risk Management Value Chain Analysis Best Practices Reengineering 4

5 A Review of Business Present? Too Much Focus on Financial Measures Finance ProfitMargins Strategy ROI Economic Value Added Cash Flows Customer Satisfaction Retention Profitability Mind share Click stream, hits Learning & Growth Employee satisfaction Employee retention Employee productivity Internal Process Risk Management Value Chain Analysis Best Practices Reengineering 5

6 Financial Measures Are Not Enough Some Telling Characteristics! They are merely an abstraction, a generalization of the activities of a business enterprise! They are mainly lagging indicators or effects of underlying causes! They tend to over simplify the results and current condition of a business enterprise! They are primarily, but not exclusively, output measures of a complex & dynamic system 6

7 Are there Lessons to be Learned from Non-Business Systems?! Yes Any Complex System will provide valid analogies and examples Definition: "A system is a network of many variables in causal relationships to one another." *! Example: Nuclear Power Plants 7 *Source: "The Logic of Failure" Dr. Dietrich Dörner

8 What do Nuclear Power Plants & Business Enterprises have in Common?! Both are very complex systems! Both are dynamic systems! Both systems have seemingly simple goals! Generate power! Generate shareholder value! Both when they meltdown have catastrophic results for thousands and thousands of people 8

9 A Non-Business Example - Too Much Focus on Output Measures! The System Nuclear Power Plant! The Output Measure Focus! Reactor Core Capacity! The Results Chernobyl 9

10 10 What were some of the causes of the Chernobyl Meltdown*?! "They tried to regulate the situation and not the process." - the focus reactor capacity level! "Inability to think in terms of non-linear networks of causation" nuclear reaction is exponential!! "Inability to properly assess the side effects and repercussions of one's actions"! "The great self confidence of this team... They were no longer operating the reactor analytically but rather 'intuitively'." *Source: "The Logic of Failure" Dr. Dietrich Dörner

11 A Business Example - Too Much Focus on Output Measures! The System Copy Machine Business in the 1970s! The Output Measure Focus! Financial Measures! The Results Xerox 11

12 12 What were some of the causes of the Xerox Meltdown in the 1970s*?! They Managed the Moment and not the process - focus only on financial measures of revenue and profits! Little or no concern for root causes and long-term repercussions of their actions! Poor copier quality & high costs per copy! High service charges for poor quality machines! Disgruntled customers *Source: "The Balanced Scorecard" Robert S. Kaplan & David P. Norton

13 13 How to Effectively Manage Complex Systems*?! Know the goal variables! Know how the other critical variables & component parts of the system can be broken down and where they are embedded! Know the how the individual critical variables & components fit into a hierarchy of broad and narrow concepts! Know how critical variables influence and change the goal variables the causal linkages *Source: "The Logic of Failure" Dr. Dietrich Dörner

14 The Essence of Systems Thinking*! "Seeing interrelationships rather than linear cause-effect chains, and"! "Seeing processes of change rather than snapshots" *Source: "The Fifth Discipline" Peter M. Senge 14

15 How to Effectively Manage Complex Business Systems? The Balanced Scorecard Finance Sales Growth Profit ROI Economic Value Added Cash Flows Learning & Growth Employee satisfaction Employee retention Employee productivity etc Strategy Customer Satisfaction Retention Profitability Market share etc Internal Process Risk Management Value Chain Analysis Best Practices Reengineering 15

16 16 The Balanced Scorecard An Overview! Translates misson and strategy into objectives (i.e. goal variables) and their measures! Organizes the business into perspectives - typically Financial, Customer, Internal Process and Learning & Growth (i.e. know the break-down of critical variables in the system)! Provides a framework to understand and communicate the company strategy and how the individual critical variables & goal variables fit into the strategy! Incorporates the complex set of cause-and-effect relationships (linkage) among the critical variables via a strategy map. Source: "The Balanced Scorecard" Robert S. Kaplan & David P. Norton

17 The Key Step in Developing a BSC and in Effectively Managing Complex Systems?! Know what other variables influence and change the goal variables understanding the causal linkages! Linking Financial Measures to your Company's Strategy 17

18 Principles for Linking Financial Measures to Company/SBU Strategy! Understand Mission, Vision & Values! Determine Strategies The Game Plan! Develop Strategic Financial Objectives (i.e. goal variables) and their measures! Identify Other Strategic Objectives, thier Performance drivers and their measures (i.e. other system critical variables)! Understand the cause-and-effect linkages (positive & negative) 18 Source: "The Balanced Scorecard" & "The Strategy Focused Corporation" Robert S. Kaplan & David P. Norton

19 Example - Linking a SAS Business Unit's Financial Measures to its Strategy! The Business Unit! SAS International Professional Services Division 19

20 At SAS, our mission is to deliver superior software and services that give people the power to make the right decisions. We want to be the most valued competitive weapon in business decision making. 20

21 SAS consultants become experts in your strategic goals, your challenges, and your unique business requirements so we can develop the right technical solutions for you. 21

22 SAS International Scorecard 22

23 SAS Institute International Professional Services Strategies! Drive Company Growth - Software Revenues! Through Profitable Services! Retaining Customers! Acquiring New Customers! Sharing Knowledge & Experience (input to R&D)! Use of Software Product Portfolio! Leveraging Partnerships 23

24 SAS International Prof Services Division Financial Objectives & Measures! Company Growth! Total Software Revenue growth! Improve PSD Profits! Gross Margin! Direct Operating Margin! Operating Margin after Indirect G&A Allocations! Increase PSD Revenues! Increase Consulting Revenues! Increase Education Revenues 24

25 Some Example SAS PSD Linkages! Company Growth! Positive Link from Use of Software Portfolio! Use of Software Portfolio! Positive Link from Maintain Right Skill Mix! Negative Link to Maintain Right Skill Mix! Positive Link to Selling Services Process! Maintain Right Skill Mix! Negative Link to - Improve PSD Profits! Negative Link from Use Right Partners! Positive & Negative Links to Maximize Resource Utilization 25

26 Key Points to Consider in Linking the Objectives! Use a Top Down Approach Start with Company Mission, Vision & Values! Consider both Positive and Negative Feedback Links between all system variables! Financial Objectives (goal variables) do link back to other objectives!! They are primarily, but not exclusively output measures!! The CFO together with the CEO should lead any BSC implementation they have the best overall view of the company or SBU 26

27 Summary & Conclusion! The entire business system in its needs to be understood, balanced and managed! Managing a business solely based on Financial Measures, or any singular measure for that matter, is a lot like managing a nuclear reactor solely on it's reactor capacity! Understand the linkage between your Financial Objectives and all other Strategic objectives via the Strategy Maps 27

28 28 Copyright 2002, SAS Institute Inc. All rights reserved.