How Middle-Market Companies Leverage Integrated Business Planning

Transcription

1 Informative guides on industry best practices One of a Kind How Middle-Market Companies Leverage Integrated Business Planning Eric Deutsch Principal, Oliver Wight Americas Aditya Sobti Principal, Oliver Wight Americas Imagine the possibilities, realize the potential.

2 You don t get it. We re different. This is a common perception held by executives of fast-growing, middle-market companies. They re right. Managing these companies to success can be likened to having a tiger by the tail. These executives have the daunting task of driving expansive growth, staying more nimble and innovative than competition, all while retaining the entrepreneurial culture and core values of the company. These efforts can be put at risk when integrated business processes, financial rigor, and managerial discipline are lacking. 2 HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING

3 In helping companies navigate through these challenges, the authors have found the successful enterprises have the following in common: they embrace bestpractice business management principles and integrate the key elements of the value chain through Integrated Business Planning. In addition, they apply bestpractice concepts uniquely to answer their companies distinct challenges in the middle-market segment. There are good reasons to desire that these companies sustain success year over year. Middle-market enterprises (MME) are driving the renaissance of the American economy. continue to We see that, if you want to drive growth in the U.S. economy, you will find it in the middle. We continue to see that, if you want to drive growth in the U. S. economy, you will find it in the middle. says Tom Stewart, executive director at the National Center for The Middle Market. The Center defines the middle market as companies with revenues between $10 million and $1 billion. Businesses in this segment account for only 3 percent of the companies in the U.S. but for one third of the private sector GDP 1. In addition, middle-market companies enjoy double the revenue growth rate of S&P 500 companies. This growth is not limited to the United States. The economies of the U.K., France, Germany, and China also report more than a 15 percent direct impact on GDP from middle-market companies. HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING 3

4 Other common characteristics typically shared among middle-market companies are private ownership, leadership position in a particular technology or service, and focus on growth through regional expansion. (Only 40 percent of U.S. companies in this market generate revenue outside the U.S.) 2 All companies face difficulties of sustainable growth in the face of uncertain economic conditions and competitive pressures. But middle-market companies deal with their own unique hurdles. Three key challenges facing middle-market businesses are: 1. Establishing disciplined financial planning and execution 2. Managing and sustaining the right growth 3. Attracting and retaining talent We provide insights below, based on our experiences helping these companies overcome these hurdles. The Need for Disciplined Financial Planning and Execution Middle-market companies are too big for government subsidies yet too small to have the deep pockets to simultaneously embark on several initiatives and weather the ebbs and flows of business cycles. Adding to the challenge, in recent years, the prices of goods and services have not increased in line with rising health care costs and the costs of technological advances (e.g., planning software and automated manufacturing equipment). The need for disciplined financial planning and execution is key for these companies to survive and thrive. 4 HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING

5 In his best-selling book, Great by Choice, author Jim Collins researched small companies that made it big (e.g. Microsoft and Southwest Airlines) over a 30- year period, between 1972 and 2002, to see what they did differently than their competitors who did not thrive as well. One hallmark of successful companies is what he called productive paranoia, a practice of taking a conservative approach to balance sheets and risk taking. The most successful companies kept their powder dry (e.g. cash) for calculated risks, opportunities, and to weather storms. Our experiences validate Collins's findings. For example, we often find companies have several operating plans and forecasts created by sales, marketing, supply chain, research and development, and other functional areas. This forces the finance organization to create its own forecast to add to the mix. Yet, the financial forecast is usually as unreliable as the operating plans and forecasts of the other functional areas. If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them. -Henry David Thoreau In our experience, companies with an Integrated Business Planning process establish financial discipline by getting the business oriented around a single operating plan. This is the primary output of an Integrated Business Planning process. A single operating and financial plan, updated and agreed upon by the executive team every month, takes the chaos out of planning and execution. This financial plan is directly linked to disciplined and reliable operating plans coming from product development, marketing, sales, and supply chain. Freed from primarily expending energy on forecasting, the finance organization shifts its focus to more strategic areas of the business. The other functional areas, also liberated from fighting over the numbers, have more time to execute the agreed-upon plan. HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING 5

6 Managing and Sustaining the Right Growth Companies operating in the middle market tend to have intimate relationships with their customers, making them well positioned to adapt and respond to changes in customer requirements. Being nimble allows for faster innovation and launch of new products in comparison to their larger counter parts. While speed to market with product innovation is a key differentiator and integral to growth strategy, only a small proportion of industrial companies in the middle market have formal innovation management processes 3. We find companies without a formal innovation management process are continually struggling to keep pace with their competitors. In our experience, effectively managing the product and service portfolio requires focus on two critical areas: 1) Ensure that the portfolio is aligned with the strategy and mission of the company; 2) Brutal honesty about product potential, risks, and resource needs. It is not unusual to find our client companies have far more projects than people and financial resources to support product innovation and launch. What makes things worse, these companies do not have a process to prioritize the projects. As a result, resources are shifted and then re-shifted. Product launches are rarely on time. The result? People are overloaded with too many projects and unneeded layers of complexity in their organizations. Management becomes exhausted from trying to deal with the chaos of overload. (A good book on this subject is The Founder s Mentality by Chris Zook and James Allen.) 6 HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING

7 Chaos caused by overload results from short-sightedness. Visibility of at least a 24-month rolling planning horizon gives companies these advantages: The ability to anticipate and prevent problems. The ability to leverage the risks and opportunities associated with all company initiatives. Enabling executive management to gain firm control while connecting business plans and strategies to functional execution. The characteristics shown above are hallmarks of a well-run Integrated Business Planning process. Companies utilizing Integrated Business Planning principles in the management of the product and service portfolio avoid the pitfalls of short-sightedness, avoidance of issues, and uninformed decision making. The portfolio plans are balanced with resource plans, and there is sufficient rigor to ensure that only approved projects are being worked. Projects that are not performing to expectations are suspended or removed entirely from the pipeline. Growth management doesn't end with the product and service portfolio. Selling and marketing activities require connection to strategy as well. They also need to be properly resourced and have their own risks and opportunities assessed. (See the Oliver Wight white paper, Want to Execute Your Strategy and Improve Financial Performance? Focus on Demand Management, by Todd Ferguson.) Ultimately, growth comes down to agility and responsiveness to changing market conditions. This ability is a relative strength for middle-market companies in maintaining growth. Agility is developed first by becoming effective at executing plans, then becoming efficient at it, and finally becoming agile through visibility and control of demand risks and opportunities further over the horizon. Ultimately, proper opportunity planning is like storing productive selling and/or marketing capacity -- having shovel-ready actions to deploy to maintain and manage growth at the ideal pace. HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING 7

8 In companies without discipline in this area, risk and opportunity management becomes a meaningless mathematical exercise in which probabilities are multiplied by potential, and a useless net number is derived. The business conversation around the feasibility and impact of actions is lost. We find the most successful middle-market enterprises have a well-managed list of vetted options to take advantage of opportunities and sometimes, pure luck. Integrated Business Planning provides a venue for the vetting of options. It also is the venue for aligning supply resources to projected demand, which is critical for enabling growth in middle-market companies where resources are often tight. A clear resource strategy aligned to the single business plan and opportunities can prevent the large swings in volumes and staffing so frequently seen in fast-growing, middle-market enterprises. A longer planning horizon provides the visibility needed to see storms coming, prevent them if possible, and weather them in the most profitable way. The Challenge of Attracting and Retaining Talent Attracting and retaining talent is a challenge for all companies, especially when unemployment rates are low. Companies operating in the middle market compete for talent with their often better-known, larger competitors. Hiring and keeping the right people is also critical to maintaining the core values and the entrepreneurial culture that is often a unique competitive advantage in middle-market companies. The key is to get professional early. The founders of a start-up company are typically busy driving innovation and gaining new customers, which can come at the cost of developing a structured business management approach. Management of functional areas can quickly become disconnected silos, making the people feel disconnected in the process. 8 HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING

9 Job seekers in the millennial age desire professional environments where they are connected, feel like they can contribute to something bigger, and are able to learn and grow with the organization. Developing talent through a professional management process like IBP ensures that a growing company has a strong bench of future leaders at the ready. An Oliver Wight client related this story after the middle-market company implemented IBP. A new hire was being trained in the production area. The new hire asked his supervisor what the acronym IBP meant. The supervisor responded: I don t know for sure, but since the management team started doing IBP, my life got a lot easier. We no longer have constant chaos. I can actually get my job done every day. Integrated Business Planning for Middle-Market Enterprises So how can companies overcome their financial, growth, and people hurdles, with reasonable cost and rapid time to results? Charlie Munger, American businessman, investor, and philanthropist, once said, You ve got to have models in your head. And you ve got to array your experience - both vicarious and direct - on this latticework of models....since the management team started doing IBP, my life got a lot easier. We no longer have constant chaos. I can actually get my job done every day. HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING 9

10 Mental models and disciplines of business planning have been applied to the middle-market enterprises with a distinct flavor that addresses the opportunities and challenges unique to these companies. Oliver Wight is credited with pioneering the Sales & Operations Planning (S&OP) and Integrated Business Planning (IBP) processes which are being used by numerous successful midmarket companies and widely cited as industry standard processes. The purpose of Integrated Business Planning is to align strategy, portfolio, demand, supply, and resulting financials through a focused and exception driven, monthly replanning process. The result is a single operating plan, over a 24+-month rolling horizon, to which the senior executives hold themselves and their teams accountable for achieving. Done well, it is the formal way that the business is managed. (A good book on this subject is The Transition from Sales and Operations Planning to Integrated Business Planning, by George E. Palmatier with Colleen Crum.) Integrated Business Planning is ideally suited to formally manage change, something that middle-market companies typically have in spades. The informal alternative to managing change is through fire fighting and brute force, but the results are ineffective, costly, and decidedly not scalable. The formal monthly review cycle of IBP is used to maintain focus and rigor around the critically important aspects of managing the business during both positive and negative times of change. Companies sometimes postpone or defer the implementation of formal processes like IBP because the executives feel there are too many things going on. In our experience, this approach is a bit like continuously chopping wood and forgetting to sharpen your axe. There is no time like the present, especially when a company is struggling to grow year over year and finds it difficult to generate the profits needed to create cash to invest in future growth. 10 HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING

11 When chaos reigns, it is a sign that Integrated Business Planning is needed. Implementing IBP can be done quickly with results seen in two to three months. The implementation methodology that Oliver Wight uses with middle-market companies is adapted to fit more typically limited resources in both time and money. We work to harness the existing entrepreneurial nature of the organization. Oliver Wight s approach leverages our intellectual property and coaching and the client s innate drive to learn and solve problems independently. We optimize the schedule of process design and coaching sessions, recognizing that a day away from the desk in a middle-market company may not be the same as a day away in a larger organization. In summary, you are different if you are a middle-market company, but the core principles of managing a business through IBP can be adapted and applied to your business. For additional reading on this topic or other business management processes, please visit our website at The website includes a library of white papers and client profiles. 1 Dave Sutton, Challenges and Opportunities in Accelerating America's Middle Market, 13 October For Reference: Steve Bottomley, Hidden Impact: The Vital Role Of Mid-Market Enterprises, HSBC 3 Thomas A. Stewart and Dawn Patrick, Three Ways Middle Market Manufacturing Executives Can Drive Profitable Innovations, Industry Week, 11 December 2015 HOW MIDDLE MARKET COMPANIES LEVERAGE INTEGRATED BUSINESS PLANNING 11

12 Informative guides on industry best practices ABOUT THE AUTHORS Eric Deutsch, principal with Oliver Wight and Sales and Operations Planning process educator, works with companies to implement and improve their integrated business planning processes. Eric has extensive hands-on industry experience in manufacturing, distribution, and supply chain management in the global specialty chemical and biotech industry. Aditya Sobti, a principal with Oliver Wight, has 18 years of experience in the chemical process industry. He comes to Oliver Wight with international experience and a successful track record in streamlining global supply chains, optimizing operations assets, restructuring, and process improvement. He is recognized for being a business team partner, and has a passion for building and leading customer-centric teams focused on achieving company goals and improving customer satisfaction through continuous improvement. Oliver Wight Americas, Inc PO Box 368, 292 Main Street New London, New Hampshire 03257, USA Telephone: Facsimile: Asia/Pacific 131 Martin Street Brighton, VIC 3186, Australia Europe, Africa & Middle East The Willows The Steadings Business Centre Maisemore, Gloucester GL2 8EY, UK info@oliverwight.com americas.com Oliver Wight International Imagine the possibilities, realize the potential.