4Converging/Diverging Gross Margins $%GROSS REVENUE $CONVERGING GROSS MARGIN AS A % OF GROSS REVENUE - A Good Thing!!DIVERGING GROSS MARGIN AS A %OF GROSS REVENEUE - A Bad Thing!!!TIMECONVERGING GROSS MARGINS INDICATE OPERATIONAL EFFICIENCYAS EACH SUCCESSIVE SALE IS MORE PROFITABLE THAN THE ONE THATPRECEDED IT. THE CONVERSE IS TRUE OF DIVERGING GROSS MARGINS.Hilliard Consulting Group, Inc.
5Hilliard Consulting Group, Inc. Minute Margin SqueezeHilliard Consulting Group, Inc.
6Third Party Market Studies Typically, you know what 3rd party marketstudies will show before you buy them - a growthslope for the respective market of between 45° to60°. The only thing that changes are the timeperiod on the “X” axis and the metrics on the “Y”axis.Hilliard Consulting Group, Inc.
7Hilliard Consulting Group, Inc. Environmental ModelsFIST - Factors, Implications, Strategies & TacticsPEST - Political, Economic, Social and TechnologicalMOST - Mission, Objectives, Strategies & TacticsSWOT - Strengths, Weaknesses, Opportunities & ThreatsTOWS - SWOT BackwardsHilliard Consulting Group, Inc.
8Hilliard Consulting Group, Inc. TOWS MatrixHilliard Consulting Group, Inc.
9Hilliard Consulting Group, Inc. Product CurvePerformanceBundlingInterconnectivitySpeedMobilityConvergenceScalabilityDev. CycleTimeHeatWeightSizePowerCostUpward CurveDownward CurveTIMEHilliard Consulting Group, Inc.
10State, Trend and Gap Analysis Current StateFuture StateTHEGAPHilliard Consulting Group, Inc.
11Sales Forecasting Tool The following Sales Forecasting Toolwas developed to take the HYPE outof sales forecasts. The model presentedhas ten steps, each equally weighted.Your business may have fewer meaningfulsteps, and most likely, steps will beweighted unequally.Hilliard Consulting Group, Inc.
12Sales Forecasting Tool In this example, assume the salesdepartment forecasts a sale to a singlecustomer in January of $20 million to occurby November of the same year. Under theprocess presented, sales may only includein its forecast a percent of the $20million relative to the step in the processsales is at relative to that customer. If salesis at step one in this example, only $2million could be included in the forecast.This number could not be increased until ahigher step is reached. Once you have refined yoursteps and weights, this method becomes very accurate.Hilliard Consulting Group, Inc.
13Relative Mix Shift in Total Communications Components Hilliard Consulting Group, Inc.
14Hilliard Consulting Group, Inc. Relative Mix ShiftHilliard Consulting Group, Inc.
15Hanging Up - RBOC Line Decline No. ofLines inMillions168160150140130120164163150140125130YEARSSource: Solomon Smith Barney ResearchWall Street Journal , p.B5Hilliard Consulting Group, Inc.
16Hilliard Consulting Group, Inc. Spending DropsHilliard Consulting Group, Inc.
17Average Price/Minute for Mobile Telephone Service $0.53$0.58$0.57$0.56$0.54$0.43$0.35$0.28$0.21$0.45$0.10$0.20$0.30$0.40$0.50$0.601991199219931994199519961997199819992000Average Price Per MinuteSource: FCC Annual Report on Wireless Industry, June 2001Hilliard Consulting Group, Inc.
18Hilliard Consulting Group, Inc. DriversWhat are They?That element that turns a need, want, or requirement into a purchaseHow can I use them?To discern the size, direction, growth, and limits of a market thereby gaining competitive insight.Hilliard Consulting Group, Inc.
19Recent Market Conditions and Their Causes CAGRin %25201510Causes:Confluence of Forces1) Y2K - replace versusremediate significantnetwork elements2) Telecom Act of 1996-create many new player with lots of infrastructure needs - CLECs, BLECs, ISPs, etc.3) Internet growth4) Wireless Digital OneRate Plans - 30 to 100+million subscribers5) Shift from circuit to packetCAPEX Growth26%The Revenue/Expenditure GapGross Revenue Growth Rate12-15%6-8%YEARSHilliard Consulting Group, Inc.
20Wireless Narrowband Drivers Hilliard Consulting Group, Inc.
21Life Cycle Analysis - The Gaussian Curve - Where Are You? Height and widthof the curve mayvary dependingon the numberof entrants andtime periodsinvolved. Also,the curve willusually beskewed at one or both ends.Main StreetThe TornadoThe Bowling AlleyThe ChasmEarly MarketMidLifeTeenAge YearsConsolidationOldAgeInfantMortalityTIMETechnology Visionaries Pragmatists ConservativesEnthusiastsEmerging Rising Cash SunsetHopeful Stars CowsHilliard Consulting Group, Inc.
22Life Cycle Curve Examples Category Number/Year Number Year Number/YearIXCs + Resellers 1 / ,000+/ ,000+/2001CLEC/ISPs 300 / / /2002RBOCs 0 / / / 2002Hilliard Consulting Group, Inc.
23Technology Penetration Hilliard Consulting Group, Inc.
24Hilliard Consulting Group, Inc. Dramatic Growth in Mobile Wireless Industry Mobile Subscriber EstimatesApprox.700 milliontodayHilliard Consulting Group, Inc.
25Hilliard Consulting Group, Inc. Dramatic Growth in Mobile Wireless Data - Data Enabled Terminal EstimatesSource: Nokia19961997199819992000200120022003200420051,4001,2001,000800600400200Projected Cellular Subscribers (Nokia 1999)Projected Web handsets (Nokia 1999)Projected PC’s connected to the Internet (Dataquest 1998)MillionsHilliard Consulting Group, Inc.
27Developmental Cycle Time Imperatives The above is a graphicalrepresentation of the table presentedon the previous slide.Hilliard Consulting Group, Inc.
28Financial Metrics - Important High Level Tools IRR Problem - Calculate the IRR(round-off) - $1,000* Inv’t.Net Cash 10% $ 20% $Year Flow $ PVIF NCF PVIF NCFPV:(1000*) (1000*)PV= (76) = 15%Internal Rate of Return (IRR) is an important concept to understand. IRRs permit a comparison of one project or activity to others on a stand alone basis. IRRs are based on NET CASH FLOWS, NOT net income. Additionally, IRRs are calculated on net cash flows after recovery of the cash investment.Calculation of IRR is an iterative process and uses interpolation if done manually. Microsoft Excel and many calculators have this function built into them. If calculating manually, one needs present value tables found in many accounting or finance books. Most companies have an IRR hurdle rate of 40+%.Hilliard Consulting Group, Inc.
29Hilliard Consulting Group, Inc. Macro Demand CurvesHilliard Consulting Group, Inc.
30Hilliard Consulting Group, Inc. Price Volume Sensitivity Analysis - Changing One Variable at a Time: Micro Demand CurvesHilliard Consulting Group, Inc.
31Hilliard Consulting Group, Inc. Inflection PointsMARKETCAPCOMPANY APHASEONEPHASETWOCOMPANY BInflection points represent majorturning points. We as individuals alsohave inflection points (births of children,marriage, divorce, death of a loved one,etc.). So do corporations.Above we see two companies runningneck an neck (Phase One). Then, onecompany sees what the market wants,while its competitors do not (Phase Two).At Phase Two, we see the company thatgets it, breaks away from the competition.TIMEINFLECTION POINTCOMPANY A AND B ARE RELATIVELY CLOSE IN PHASE ONE, BUT SUDDENLY ONE GETS IT,AND THE OTHER DOESN’T. AT THE INFLECTION POINT, VALUATIONS DIVERGE.Hilliard Consulting Group, Inc.
32Microsoft, Apple & Lotus Shareholder Value Microsoft $3 billion $220 billionApple $4 billion $4 billionLotus $1 billion $3 billionThe next few slides are illustrative ofInflection Point Analysis. One does nothave to be in a high tech industry torealize an Inflection Point.Inflection Points may be foreseenby constantly applying Altman’s ZScore Discriminant Function Algorithm.Altman’s tool will help in discerning changes inoverall health. Discerning such changesearly is important so that you may drill downto find the root causes, and determine if youare possibly at an Inflection Point.One Apparently “Got it,” and two did not.Hilliard Consulting Group, Inc.
33Inflection Point Analysis - Altman’s Z Score Z score above 2.99 represents a companyfinancially strong.Z score 1.81 or less has over a 90% correlationthat they will be in bankruptcy in 12 months.Z score in between 1.81 and 2.99 may goeither way. Over 90% accurate 12 months out!Edward Altman a professor at NYUdeveloped a powerful tool for predictingfuture financial performance of enterprises.Altman used empirical data and regressionanalysis to develop a weighteddiscriminant algorithm that projects andpredicts financial health and wealth on agoing forward basis.Hilliard Consulting Group, Inc.
34Hilliard Consulting Group, Inc. Z Score ContinuedAlgorithmX1 = Working Capital/Total AssetsX2 = Retained Earnings/Total AssetsX3 = EBIT/Total AssetsX4 = Market Value of Equity/Book Value of Total DebtX5 = Net Sales/Total AssetsZ = Overall Index of Corporate HealthAltman’s model is not perfect, and shouldonly be used by skilled professional asbut one more tool in their analyticaltoolkit. It is not a “be all, end all.”The version of Altman’s algorithmpresented here was developed for mid-sizedmanufacturing companies. However, itworks relatively well for infrastructureintensive industries such as telecom. However, asthis model was developed for mid-sized companies,Altman’s time lines regarding failure may be pushedout in time relative to the asset richness of theenterprise.Z = (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5)Hilliard Consulting Group, Inc.
35Modifications to Altman I recommend modifying Altman’s Z Score based on changes in gross margin as debt becomes significantly more onerous as gross margins declineSee “Plan to Win: Analytical and Operational Tools - Gaining Competitive Advantage” for a suggested conversion table.Hilliard Consulting Group, Inc.
36Chanos’ Discriminant Model Like Altman, Chanos has developed atool for determining which companies arelikely to decline. Chanos developed thistool as part of his business in “ShortSelling” securities. He has been highlysuccessful in his use of this tool.No one should rely on this tool alone. Further, it should only be used by skilledfinancial professionals as an adjunct totraditional analytical tools.Hilliard Consulting Group, Inc.
37Market Share/Market Growth Matrix Cash CowsMilk the cows forcash to fuel growthfor Winners andHigh Potential units.Cows are mature units.WinnersMarket ShareFund WinnersGrow WinnersDogsHigh PotentialBruce Henderson, founder of the Boston Consulting Group applied portfolio analysis to multi-unit enterprises.His model permits a division of units based upon opportunities for growth.Henderson postulates that enterprises should reallocate resources to those units with the highest growth prospects.Model Shortcoming: Assumes that units with the largest market share growing the fastest are profitable. This need not be so.Terminate or sell theseunits. Of little value. Useproceeds to fund Winnersand High Potential units.Fund High PotentialUnits. Try and move themto Winner’s quadrantMarket GrowthHilliard Consulting Group, Inc.
38Portfolio Pruning – A Cautionary Note When we decide we must reduce elements, projects, programs, etc. we must pay attention to how costs are being allocated.When we eliminate a project/program, etc. in an entity that allocates costs, the remaining elements/programs/projects must now absorb previously otherwise allocated costs.This may complicate your decision process.Hilliard Consulting Group, Inc.
39Relative Measure of Merit A Relative Measure of Merit (RMM) function may be applied to a number of development activities in order to prioritize ongoing capital commitments and work initiatives.The RMM function does not take in to consideration sunk costs. Rather, it only looks to future returns as a function of time each project will yield going forward.Hilliard Consulting Group, Inc.
40Hilliard Consulting Group, Inc. Accounting TermsSales, General & Administrative CostsIndirect CostsBelow the line CostsFixed CostsThey all mean the same thingCost of Goods SoldDirect CostsAbove the Line CostsVariable CostsThey all mean the same thingIt is important to understand and not be confused by interchangeable accounting terms. Hence as we see, CGS goes by several names as do SG&A expenses.Please note that SG&A expenses are only fixed within a relevant range - that is, it is represented by a step function:Hilliard Consulting Group, Inc.
41Hilliard Consulting Group, Inc. In Financial Form:CGSCost of Services SoldAbove the Line CostsDirect Expenses(Costs)Variable CostsGross Revenue- Cost Of Goods SoldTHE LINEGross Margin (a/k/a Contribution Margin)- Sales, General & Administrative CostsSG&AIndirect ExpensesBelow the Line CostsFixed CostsNet Income Before TaxHilliard Consulting Group, Inc.
42Hilliard Consulting Group, Inc. Fixed Costs – A NoteFixed Costs are ONLY fixed within a relevant range!Fixed Costs are a “Step Function”Example: First factorywill only produce somany widgets – evengoing to 3 shifts.When a second factoryis required, we reachthe “step function.”Fixed ComponentsHilliard Consulting Group, Inc.
43Hilliard Consulting Group, Inc. Breakeven AnalysisBES = FC + VCBES = Breakeven Sales, always represented as 1.00BESFC = Fixed Costs, always represented in $sVC = Variable Costs, always represented in decimalform - CGS as a % of sales converted to a decimalTo calculate for profit use: (BES =FC + VC + P)It is imperative that managers understand their cost and revenue relationships in order to effectively manage their business. The Breakeven formula is important in this regard.The Breakeven formula tells managers how much in sales they need just to cover costs. By adding a profit %, one can calculate the needed revenue to realize the given profit %.Example: FC = $1,000,000, VC (CGS) = 55% or .551.00 BES = $1,000,000BES = $2,222,222Hilliard Consulting Group, Inc.
44Some Typical Aggregate Valuation Metrics Aggregate Valuation Metrics can be very misleading. They are used because they are easy to apply and understand.However, each has shortcomings in that they do not permit tailored value based on a disaggregation of Key Performance Indicators (KPIs).Hilliard Consulting Group, Inc.
45Key Performance Indicators (KPIs) Must identify, measure and use key performance indicators in managing an enterpriseDon’t measure unimportant thingsPareto is alive an well – 20% of the metrics will yield 80% of the bang for the buckNo more than 10 KPIs for each responsible professionalCockpit Chart, Digital Dashboard, Balanced Scorecard, etc.Hilliard Consulting Group, Inc.
46A Disaggregate Weighting Value Model By applying aggregate value metrics, we can then disaggregate those metrics to arrive at a tailored value by applying premiums or discounts to industry KPIs relative to how the enterprise under examination measures up. Premiums and discounts may becalculated using empirical data or via statistical tools such as standard deviations.Hilliard Consulting Group, Inc.
47Disaggregate Value Worksheet In the disaggregate model used above, we see that an aggregate value of almost $11 billion would result in a disaggregated tailored value of some 40% less based on how this company measures up KPI by KPI.In some heated market situations where management does not have the discipline to not overpay, this tool will not have value.Hilliard Consulting Group, Inc.
48Hilliard Consulting Group, Inc. PricingValue PricingCost PricingService PricingPorter’s ModelHilliard Consulting Group, Inc.
49Hilliard Consulting Group, Inc. Porter’s ModelPorter proffers that there are two fundamental – but diametrically opposed means of pricing:COST VALUEFollowing is a model that uses these diametrically opposed models in concert.Hilliard Consulting Group, Inc.
50Hilliard Consulting Group, Inc. Value PricingValue PriceLead PriceDegradationSlopeForce Compe-tition to lowerprices beforeNRE RecoveryIntroduce nextSolution at aValue priceAs we have seen, cycle time, including development cycle time and time to market, are critical in a competitive landscape. By being first to market, one is able to quickly recapture development costs (NRE - non recurring engineering).This permits one to lead the market and the price degradation slope at the appropriate time. Continuous implementations requires a high technology reuse function.Studies indicate to be a market leader usually requires 30 to 35% market share, and to be a player, 13 to 15% market share.Hilliard Consulting Group, Inc.
51Hilliard Consulting Group, Inc. Cost Pricing ModelDirect Labor+ Direct Materials+ Other Direct Charges (Consultants, etc.)= Total Direct ChargesX + Overhead Rate= Burdened Material, Labor & Overhead (MLO)X + G & A Rate= Total Burdened CostsX + Risk Factor= Total CostsX + Profit Factor= PriceHilliard Consulting Group, Inc.
52Hilliard Consulting Group, Inc. Cost IssuesCan not look at only the direct cost of an expense elementMust look at burdened impactExample: Give $10,000 to a charity when you have a 5% after tax profit and a 30% tax rate.Real Cost is = $140,000 ($10,000/5% - 30% = $140,000). That is what the entity has to sell to cover this gift – not $10,000.Hilliard Consulting Group, Inc.
53Hilliard Consulting Group, Inc. Service PricingTypically 2 primary functions: Rate & TimeRealization RATE = % of stated rate actually billed and collectedUtilization RATE = % of workable hours in a man year (2080) actually billedHilliard Consulting Group, Inc.
54Hilliard Consulting Group, Inc. Realization RateStated Hourly Rate: $300 per hourThrough negotiation rate is cut to $200 per hourRealization Rate is 67%.Hilliard Consulting Group, Inc.
55Hilliard Consulting Group, Inc. Utilization Rate2080 Work hours in the US work yearLess than available hours are typically billable because of vacation time, sick time, training time, etc.So if 1500 hours are billed, the utilization rate 75%.Hilliard Consulting Group, Inc.
56Hilliard Consulting Group, Inc. Combined RateMost consulting firms strike to reach a combined rate of 140 (70% + 70%).It was just reported in Business Week that McKinsey’s utilization rate dropped to under 50% and that its realization rate was also below plan.What actions do you think McKinsey partners are likely to take?Hilliard Consulting Group, Inc.
57Sensitivity and Scenario Analysis Sensitivity Analysis is where we change one variable at a time. This permits direct correlation between cause and effect.Scenario Analysis is where we change multiple variables at the same time making it harder to discern cause and effect.Hilliard Consulting Group, Inc.
58Hilliard Consulting Group, Inc. Price Volume Sensitivity Analysis - Changing One Variable at a Time: Micro Demand CurvesHilliard Consulting Group, Inc.
59Simple Scenario Analysis Pay Metric/ Hour/yr.Rate Per HourXYX Co.AnnualRevenueEstimate/operatorNumberOfOperatorsEst.Opera-torExpense$17/hrburdenedSupr$19/hrG&AFromJohn$75K/moNetIncome<Loss>2080$25$52,00010$520K$354K$40K$900K<$774K>20$1,040K$707K$80K<$647K>30$1,560K$1,062K$120K<$522K>$24$49,920$499K<$795K>$998K<$689K>$1,498K<$584K>$23$47,840$478K<$816K>$957K<$730K>$1,435KHilliard Consulting Group, Inc.
60Hilliard Consulting Group, Inc. Pareto’s Rule4. Pareto’s Rule = 80/20 split – In any given activity, 20% of the set will be responsible for 80% of the effect.Dr. Juran’s repostulation: “The Vital few and the Trivial Many!”Hilliard Consulting Group, Inc.
63Wireless: Some Definitions Broadband - US FCC defines broadband as 200 KBPS in both directions5G - Free Air Optics above 300 GHz and delivering over 100 MBPS throughputs - already in the market - Terabeam, AirFiber, etc., packet - Soon Intel with UWB solutions4G - 2 definitions: US NSF MBPS throughputs, DoCoMo 2-20 MBPS throughputs - UWB, a WLAN, etc., packet3G - WCDMA, IMTS, UMTS, CDMA MBPS, packet2.75G - EDGE, 1XRTTEV(some use 1XRTTDO) - 384KBPS,packet2.5G - GPRS, 1XRTT and 144 KBPS respectively,packet2G - TDMA, CDMA, GSM narrowband digital - typically <14.4KBPS, circuit1G - AMPs, etc., narrowband analog - typically <10KBPS, circuitHilliard Consulting Group, Inc.
64Current Wireless Landscape FCC Defines Broadband as 200KBPS in both directionsNarrowband/Broad- band DivideAnalog/Digital DivideCircuit/Packet DivideGSMTDMACDMAGPRSEDGEWCDMA/3GAMPS1XRTT1XRTTDO1XRTTDV/3G/CDMA20001G G G G GNarrowband/Analog/CircuitBroadband/Digital/Packet1980s 1990sHilliard Consulting Group, Inc.
65Comparative Stage Chart Hilliard Consulting Group, Inc.
663G? Which Country, Which Standard ? North American Carriers cdmaOneIS95IS95Bcdma20001xRTT3xRTT(Sprint, Verizon, Qwest Wireless, Leap Wireless, Bell Mobility)TDMA,IS136+IS-136HS, (EDGE)TDMA,IS-136(CDPD)Gate ?(AT&T Wireless, Cingular)GSM(HSCSD)GPRS(EDGE)WCDMA(VoiceStream, Microcell)Hilliard Consulting Group, Inc.
67Navini NLOS Portable/Nomadic Modem Solutions Partners Careers Press ContactPCMCIA Version also availableHilliard Consulting Group, Inc.
68Hilliard Consulting Group, Inc. a,b & Wireless LANs802.11b - a/k/a Wi-Fi (Wireless Fidelity), 2.4 Ghz.5.5, 11 MBPS, DSSS, security issuesno roaming interface specified (but see MeshNetworks)802.11a -5Ghz bands, up to 54 MBPS, OFDM802.11d - Worldwide Mode - SDLans802.11e - QoS802.11g - Standards implementation suspended temporarily- broadband nature of a, & backward compatible with 2.4Ghz802.11i - Authentication and Security802.1610-66 Ghz bands, up to 135 MBPSBluetooth - 30 ft., <1MBPS, 2.4Ghz, FHSS, up to 8 devicesHilliard Consulting Group, Inc.
69Wireless LANs & Bluetooth Hilliard Consulting Group, Inc.
70Some Primary Wireless Disruptive Technologies HDR (Qualcomm)1X Plus (Motorola)Ultra Wideband Radio (Time-Domain, Intel) - 4G/5GSpitfire (TRW) - 4GiBurst (ArrayComm) - 4GMeshNetworks, Bell Labs BLASTFree Air Optics - Optical Wireless (Terabeam, AirFiber) - 5GSoftware Defined Phone (Quicksilver Technologies)Hilliard Consulting Group, Inc.
71Inflection Point Analysis - Altman’s Z Score Z score above 2.99 represents a companyfinancially strong.Z score 1.81 or less has over a 90% correlationthat they will be in bankruptcy in 12 months.Z score in between 1.81 and 2.99 may goeither way. Over 90% accurate 12 months out!Edward Altman a professor at NYUdeveloped a powerful tool for predictingfuture financial performance of enterprises.Altman used empirical data and regressionanalysis to develop a weighteddiscriminant algorithm that projects andpredicts financial health and wealth on agoing forward basis.Hilliard Consulting Group, Inc.
72Hilliard Consulting Group, Inc. Z Score ContinuedAlgorithmX1 = Working Capital/Total AssetsX2 = Retained Earnings/Total AssetsX3 = EBIT/Total AssetsX4 = Market Value of Equity/Book Value of Total DebtX5 = Net Sales/Total AssetsZ = Overall Index of Corporate HealthAltman’s model is not perfect, and shouldonly be used by skilled professional asbut one more tool in their analyticaltoolkit. It is not a “be all, end all.”The version of Altman’s algorithmpresented here was developed for mid-sizedmanufacturing companies. However, itworks relatively well for infrastructureintensive industries such as telecom. However, asthis model was developed for mid-sized companies,Altman’s time lines regarding failure may be pushedout in time relative to the asset richness of theenterprise.Z = (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5)Hilliard Consulting Group, Inc.
73Hilliard Consulting Group, Inc. AT&T FinancialsIn this application of Altman’s algorithm,financial information was taken fromAT&T’s home page.This financial information was theninserted into Altman’s algorithm.As will be seen, in 1999 one could haveforeseen the large problems encumberingAT&T long before market analysts did.This model may be employed quarterlyregarding public companies.Hilliard Consulting Group, Inc.
74Hilliard Consulting Group, Inc. AT&T Z Score Results--As can be seen, AT&T’s Z Score was cutby more than half in a single year. Thisis disastrous. CHANGES IN SCOREARE AS IMPORTANT AS THE SCOREITSELF.As AT&T is an asset rich enterprise, thelikelihood that it would default intobankruptcy is negligible.Nevertheless, if we were a supplier orcreditor to AT&T, such early warningswould yield a competitive advantage.Hilliard Consulting Group, Inc.
75Altman’s Z Score Caveats Not a “be all, end all” metric.Just another data point.Decent leading indicator/predictor.The degree of entity asset wealth can mitigate Altman’s time line.Should only be used in conjunction with other tools.Should tailor for different industries.Clearly Altman’s tool is very powerful.We may run it on ourselves, ourcompetitors, our suppliers, and ourcustomers. Variants of the weightedalgorithm presented herein have beendeveloped by Altman for use in differentindustries.Hilliard Consulting Group, Inc.
76Modifications to Altman I recommend modifying Altman’s Z Score based on changes in gross margin as debt becomes significantly more onerous as gross margins declineSee “Plan to Win: Analytical and Operational Tools - Gaining Competitive Advantage” for a suggested conversion table.Hilliard Consulting Group, Inc.
77Chanos’ Discriminant Model Like Altman, Chanos has developed atool for determining which companies arelikely to decline. Chanos developed thistool as part of his business in “ShortSelling” securities. He has been highlysuccessful in his use of this tool.No one should rely on this tool alone. Further, it should only be used by skilledfinancial professionals as an adjunct totraditional analytical tools.Hilliard Consulting Group, Inc.
78Financial Metrics - Important High Level Tools IRR Problem - Calculate the IRR(round-off) - $1,000* Inv’t.Net Cash 10% $ 20% $Year Flow $ PVIF NCF PVIF NCFPV:(1000*) (1000*)PV= (76) = 15%Internal Rate of Return (IRR) is an important concept to understand. IRRs permit a comparison of one project or activity to others on a stand alone basis. IRRs are based on NET CASH FLOWS, NOT net income. Additionally, IRRs are calculated on net cash flows after recovery of the cash investment.Calculation of IRR is an iterative process and uses interpolation if done manually. Microsoft Excel and many calculators have this function built into them. If calculating manually, one needs present value tables found in many accounting or finance books. Most companies have an IRR hurdle rate of 40+%.Hilliard Consulting Group, Inc.
79Financial Metrics - Important High Level Tools High level look at time cycle cost & savingsY1 Y2 Y3 (Y1+2) SavingsRevCOGSGMNRE+SusSG&AEBBT (3.5) (.3) 1.4Applying the concept presented by Sterling Design of quartering one’s cycle time in the empirical example above, it can be seen on the next slide that in additional to a significant reduction in costs, the IRR relative to development efforts was also increased.By employing cycle time imperatives and shortening developmenttimes(some of Y2 into Y1), significant early period costs can be saved.Hilliard Consulting Group, Inc.
80Hilliard Consulting Group, Inc. Cycle Time - IRR Imperatives Based on $1M investment and cash savings from 1/4 Cycle Time - all $ in MsYear NCF NCF(3.5) (2.1)IRR % %By shifting forward one quarter to one third of a year’s development efforts (time to market), the company’s IRR is increased almost 20%.By quartering cycle times, expenses were reduced and the IRR dramatically increased.Hilliard Consulting Group, Inc.