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Presentation on theme: "MEASURING SUCCESS - WHY PROFIT AND CASH ARE NOT ENOUGH Andrew Likierman 12.11.08."— Presentation transcript:


2 Andrew Likierman MEASURING SUCCESS IS CRUCIAL TO ANSWER KEY QUESTIONS How do we know weve succeeded? So …What are our priorities? How well are we doing? So.. What do we do now? What are the implications for the longer-term? What do we tell people outside?

3 Andrew Likierman WHY PERFORMANCE MEASUREMENT IS NOT WHAT MANY ASSUME Most people assume - there is an established framework - it is quantitative - there is an answer to every question (or if there isnt, hard work will give an answer) In practice - there is no established framework or the answer

4 THE MENU How much choice on measures? Cash and profit Measures for different stages Non-financial measures Comparisons Risk Tomorrow morning

5 Andrew Likierman HOW MUCH CHOICE ON MEASURES? With no outside requirements, lots But these usually mean there isnt a choice Companies need to distinguish between objectives, means to objective and constraint eg-profit or cash may be any of the 3 -in a recession, cash constraints usually dominate

6 Andrew Likierman SO WHAT ARE THE CHOICES FOR OVERALL MEASURES? 4 TYPES Company financial Cash Profit Company non financial Market Share price and for non-quoted companies, personal objectives Satisfaction Vanity Not covered

7 Andrew Likierman CASH The ultimate objective (usually) is an ability to generate Its also the ultimate constraint But only one measure of success Because it gives only part of the story

8 Andrew Likierman WHY NOT THE ONLY MEASURE? Mainly - hopeless on fixed capital - doesnt register working capital - serious timing issues

9 Andrew Likierman PROFIT An essential measure But only one Because it gives only part of the picture And its based on so many judgements So cant be right

10 Andrew Likierman WHY ONLY ONE PART OF THE PICTURE? Inherent problems eg:annuality, inflation, cost of capital, international dimensions Prediction problems eg: depreciation, contracts, pensions Problems of definition eg:normal trading, profits/capital gains, extraordinary/ exceptional items, stock options The cost basis of accounts eg: asset definition (brands), opportunity costs

11 Andrew Likierman FINANCIAL MEASURES - POINTS TO BEAR IN MIND 1.All organisations need them 2.Financial success is a characteristic of a good company 3.There is no universally accepted financial measure 4.The main measure does not have to be financial 5.All measures are subject to manipulation. A financial measure will also be subject to financial manipulation 6.A financial measure may be a constraint, not a target

12 Andrew Likierman NON-FINANCIAL MEASURES Clear and useful But cant be the bottom line And can only be overall measure with protection Since they need to be financed

13 Andrew Likierman DIFFERENCES TO LARGER COMPANIES Owner/key shareholder dominance Reconciling objectives of owners/managers Fewer constraints on objectives Greater propensity to confuse constraints with objectives (Sometimes) more non-financial objectives Greater degree of ambiguity

14 Andrew Likierman Profit Cash DIFFERENT STAGES – DIFFERENT PRIMARY INTERMEDIATE MEASURES MaturityRecovery Crisis Expansion Start up Non- financial Pre-start up Resumed growth Profit

15 Andrew Likierman DIFFERENT STAGES, DIFFERENT MEASURES (1) Pre start up Progress against plan (gathering information and support from potential stakeholders (including finance, suppliers, customers and key staff) - non-financial measures dominant Early phase Progress against plan (including basic assumptions, start- up expenditure, growth of revenue, cash burn) Progress against milestones (including break-even) - cash dominant

16 Andrew Likierman DIFFERENT STAGES, DIFFERENT MEASURES (2) Expansion from proven base Performance against others Performance against plan (including budget and longer- term plan) - profit-based measures dominant Maturity Performance against opportunity cost of activities - cash dominant

17 Andrew Likierman MEASURES NEED TO CHANGE To reflect changing phases and stages of growth They usually change too late

18 Andrew Likierman PRE CRUNCH - Profits growth EARLY - Proportion of assets on vulnerable (ie sub-prime) categories Proportion of funding from wholesale sources LATER - Basel and regulatory ratios Liquidity AND CIRCUMSTANCES CHANGE

19 Andrew Likierman NON-FINANCIAL MEASURES Underpin financial measures …help to Focus on key strategic aspects Provide useful signals Get behind basis of financial decision-making Benchmark internally and externally

20 Andrew Likierman NON-FINANCIAL MEASURES - SOME EXAMPLES Marketsrepeat purchasessales data reputationsurvey Capacityhotel occupancy rateroom data oil replacement rate(geological) survey People turnoverpeople data commitmentsurvey Product/reject rateproduction data Serviceappreciation survey (complaints) Yes, but… How good is the measure? Whats the link to profitability?

21 Andrew Likierman FOR EXAMPLE –SPENDING ON BRANDS Spend on brands Formula More sales Black Box

22 Andrew Likierman LEADING AND LAGGING INDICATORS Lagging Focus historically and basis for decisions eg Market share, sales, employee satisfaction Normally easier to identify and capture But may lack future relevance Leading Measures that drive performance, often intermediate eg: proposals written, customers visited Help the organisation to plan and decide But difficult to identify and may lack credibility

23 Andrew Likierman SOME LEADING INDICATOR EXAMPLES If its raining in Brazil, buy Starbucks 10-year/2-year US Treasury yields R-word Burger King Insurance mis-selling claims Humana Net-Jets Case-Schiller index

24 Andrew Likierman CONSIDER BETTER MEASURES.... Profitable customer/regretted staff losses Not just new customers acquired And employee turnover Committed/embedded employees Not just satisfied Net promoter score (customers and employees) Not customer dissatisfaction (complaints) Or employee satisfaction (turnover)

25 Andrew Likierman THERE ARE 4 WAYS TO COMPARE PERFORMANCE… Last year Others Objective/plan This year Opportunity

26 Andrew Likierman OPPORTUNITY What were doing What we could be doing Opportunity

27 Andrew Likierman MEASURING OPPORTUNITY Personal Sliding Doors House maintenance At work When the successor to someone doing a job for many years shows what a great/lousy job he/she has been done Having property lying idle (and possibly in the books at the wrong price) and which could be sold Real examples GEC – opportunities lost then thrown away

28 Andrew Likierman COMPARISON BASES - PROBLEMS Last year Others Objective/plan This year Opportunity SAME BASIS? DISTORTED? LEVEL? RELEVANT? BASIS?

29 Andrew Likierman Others COMPARISON BASES – INTERNAL USES Last year Objective/plan This year Opportunity Minimum Most powerful If possible So what?

30 Andrew Likierman COMPARISON BASES - DEVELOPMENT Last year Others Objective/plan This year Opportunity

31 Andrew Likierman PERCEPTIONS MAY ALSO BE DIFFERENT Insiders may not be aware, may not understand or may have a different view of what outsiders want - eg measures of, timescales for, performance Outsiders may not be aware, may not understand or may have a different view of what insiders are doing - eg providers and users of capital or on strategic direction

32 Andrew Likierman COMPARISON BASES – POTENTIAL DISCONNECTS Last year Others Objective/plan This year Opportunity You Them


34 Andrew Likierman RISK HEAT CHART IMPACT Low High High LIKELIHOOD Low

35 Andrew Likierman …WITH NUMBERS IMPACT Low High High LIKELIHOOD Low

36 Andrew Likierman MAJOR IT PROJECT IMPACT Low High High LIKELIHOOD Low Primary risk

37 Andrew Likierman MAJOR IT PROJECT IMPACT Low High High LIKELIHOOD Low Primary risk Mitigating action

38 Andrew Likierman MAJOR IT PROJECT IMPACT Low High High LIKELIHOOD Low Residual risk

39 Andrew Likierman SO… SOME SUGGESTIONS (1) Understand fully how you are being measured -by those who analyse what you do -by those who provide your finance Be aware of realities of freedom of manoeuvre Performance measurement - shouldnt be taken for granted - is not an optional add-on

40 Andrew Likierman Recognise definition as -a crucial management task -involving politics and communication - as well as economics Externally -look coolly at misperceptions - use all your weapons Internally, measures must be - clearly understood -linked to overall measures SO… SOME SUGGESTIONS (2)

41 A FINAL TIP Numbers Commentary People Important Essential Critical

42 Andrew Likierman IN THE OFFICE TOMORROW Do I/colleagues understand how the organisation measures success? Do I agree with colleagues on how success is measured? Do we understand the implications of the choices? Getting it right gives comparative advantage

43 Andrew Likierman

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