1. Balanced Scorecard Budgeting Fusing the Link Between Strategy & Budgeting Lawrence Serven The Buttonwood Group www.ButtonwoodLLP.com 203/328-3056

2. 2 –A Tale of Two Companies –3 Immutable Laws (and their implications) –Balanced Scorecard Budgeting –Keys to Success –Q&A Outline

3. 3 Company ACompany B Sales Growth8% 0% Gross Margin %55% 35% SG&A as a % of Sales5% 15% EBITA as a % of Revenue15% 3% Company snapshot: which company has been more successful? A Tale of Two Companies RONA %20% 2%

4. 4 Why has “Company A” been more successful?

5. 5 Company ACompany B Customer Satisfaction Index9075 # Defects per Thousand 520 New Product Dev. Cycle Time6 mos. 18 mos. % On Time Delivery95% 70% Employee Satisfaction Index90%70% % of Sales Coming From Products Introduced in the Last 2 Years 20%1% % Product Returns1%8% Company snapshot (part 2): why has Company A been more successful?

6. 6 Customer Satisfaction Index # Defects per Thousand New Product Dev Cycle Time % On Time Delivery Employee Satisfaction Index % of Sales Coming From Products Introduced in the Last 2 Years % Product Returns Which way should the arrow go? Which set of measures drives the other? Sales Growth Gross Margin % SG&A as a % of Sales EBITA as a % of Revenue RONA %

7. 7 Customer Satisfaction Index # Defects per Thousand New Product Dev Cycle Time % On Time Delivery Employee Satisfaction Index % of Sales Coming From Products Introduced in the Last 2 Years % Product Returns = Measures for What Really Drives Success in the Business

8. 8 Set annual plan targets (numerical) Report on every month to sr. exec team Analyze variances Bake into the budget Set annual plan targets (numerical) Report on every month to sr. exec team Analyze variances Bake into the budget

9. 9 Most companies manage to the P&L while the actual drivers of business performance “fade into the background”.

10. 10 Highly successful companies manage to the real drivers of success… …and also understand how and why they impact the P&L

11. 11 Customer Satisfaction Index # Defects per Thousand Employee Turnover % On Time Delivery Employee Satisfaction Index % of Sales Coming From Products Introduced in the Last 2 Years % Product Returns Customer Satisfaction Index # Defects per Thousand Employee Turnover % On Time Delivery Employee Satisfaction Index % of Sales Coming From Products Introduced in the Last 2 Years % Product Returns Customer Satisfaction Index # Defects per Thousand Employee Turnover % On Time Delivery Employee Satisfaction Index % of Sales Coming From Products Introduced in the Last 2 Years % Product Returns Set annual plan targets (numerical) Report on every month to sr. exec team Analyze variances Bake into the budget

12. 12 –A Tale of Two Companies –3 Immutable Laws (and their implications) –Balanced Scorecard Budgeting –Keys to Success –Q&A Outline

13. 13 3 Immutable Laws Immutable Law #1: Strategy has no value on it’s own other than to achieve specific goals. Strategy for strategy’s sake is corporate make work. Set corporate targets first, then build a strategy to meet them. That’s purpose built strategy.

14. 14 Immutable Law #2: It’s all about execution. A plan exists only in PowerPoint until it’s executed. Build the ongoing monitoring and reporting mechanisms to ensure plans are being followed through on. 3 Immutable Laws

15. 15 Immutable Law #3: Any project, strategic or operational, will die unless resources are allocated to it. The resources necessary to see a project though must be identified and included in the operating budget. 3 Immutable Laws

16. 16 –A Tale of Two Companies –3 Immutable Laws (and their implications) –Balanced Scorecard Budgeting –Keys to Success –Q&A Outline

17. 17 Plan Budget Monitor KPIs

18. 18 KPIs Step 1: Identify Company KPIs

19. 19 Best KPIs Worst KPIs Seen as not really relevant to line managers Embraced by line managers Used to make better decisions Shelfware Reflects what actually drives success in the business Nothing but Financial Stats Step 1: Identify Company KPIs Cocktail NapkinTelephone Directory

20. 20 The Value Driver Workshop Who: The Senior Management Team (or designates) What: A one day Workshop to identify what really drives success in the business (e.g, Innovation, being the Low Cost Producer, etc.) How: A series of facilitated workshop exercises Step 1: Identify Company KPIs Next

21. 21 Identification of KPIs Who: The project work team What: A Workshop to translate what Senior Management has identified as driving the success of the business into Key Performance Indicators (KPIs) How: A series of facilitated brainstorming exercises Step 1: Identify Company KPIs

22. 22 Step 1 Deliverables: A Company Scorecard of KPIs Customer Satisfaction Index # Defects per Thousand New Product Dev Cycle Time % On Time Delivery Employee Satisfaction Index % of Sales Coming From Products Introduced in the Last 2 Years % Product Returns Step 1: Identify Company KPIs

23. 23 Step 2: Establish targets for the KPIs Plan KPIs

24. 24 KPI Target Setting Who: KPI Teams What: Benchmarking and historical analysis to determine both long term (strategic) and short term targets for each KPI How: After a kick off meeting led by the KPI team leader, the group conducts benchmarking and historical trend analysis to establish long term (i.e., 3 to 5 years) targets as well as targets for the upcoming year. Depending upon the circumstances, this may take a few days to a few weeks. Step 2: Establish Targets for KPIs

25. 25 Step 2 Deliverables: Targets for KPIs Customer Satisfaction Index # Defects per Thousand New Product Dev Cycle Time % On Time Delivery Employee Satisfaction Index % of Sales Coming From Products Introduced in the Last 2 Years % Product Returns 200520062007 808590 Step 2: Establish Targets for KPIs

26. 26 Plan KPIs Step 2: Establish targets for the KPIs Step 3: Develop Strategy to Achieve Targets

27. 27 Develop Strategy to Achieve Targets Who: KPI Teams & SMEs (subject matter experts) What: Each KPI team develops a strategy that is designed to achieve the targets for their KPIs. This is a long term view that incorporates strategic initiatives. How: Each KPI team, working with internal experts and other subject matter experts develops a strategy, including long term initiatives, that if executed will achieve the targets established for the KPIs. Step 3: Develop Strategy to Achieve Targets

28. 28 Step 3 Deliverables: Strategic Initiative Summary KPI: Employee Satisfaction Strategy Description Through investments job rotation and other programs, we will make our employees the most sought after in the industry. Clearly this will be “a win” for our employees, but it will also be a “win” for the company. If, in fact, our employees are the most sought after in the industry, that will be a major selling point in recruiting new talent. It also serves as an acid test for us, for in fact our employees are the most sought after in the industry, they most sought after skills and know how. We will be known as the company that enables employees to build their marketable skills and understanding of the business. Integrate the goal of developing employees into each manager’s bonus calculation Develop a career rotation program Set standards for hours of training per year for each job level and monitor Create a job shadowing program Launch an alumni network Strategic Initiatives Leader Hans Bergen [V.P., Career Development] ‘05-’07 Targets 2005: 802006: 852007: 90 Step 3: Develop Strategy to Achieve Targets

29. 29 Plan KPIs Step 2: Establish targets for the KPIs Step 3: Develop Strategy to Achieve Targets Step 4: Develop Action Plans to Achieve Near Term Targets

30. 30 Develop Action Plans Who: KPI Teams What: Each KPI team develops Action Plans that are designed to achieve the targets for their KPIs. Particular attention is paid to what can be done in the first year. How: Each KPI team, working with internal experts and other subject matter experts develop Action Plans; complete with Activities, Tasks, and Milestones. Step 4: Create Action Plans to Achieve Near Term Targets

31. 31 Develop Action Plans Who: KPI Teams What: Each KPI team develops Action Plans that are designed to achieve the targets for their KPIs. Particular attention is paid to what can be done in the first year. How: Each KPI team, working with internal experts and other subject matter experts develop Action Plans; complete with Activities, Tasks, and Milestones. Step 4: Create Action Plans to Achieve Near Term Targets

32. 32 Step 4 Deliverables: Action Plans (Summary View) Career Rotation Program Margaret Cho PROJECT LEADER 1) Organize a cross functional team – April ’05 2) Draft a complete project charter (Objectives, Scope, Approach, Structure) – May ’05 3) Complete RFP process for outside expert – July ’05 4) Develop program blueprint – Oct ’05 5) Validate program with Sr. Management – Nov ’05 6) Implement program -- 2006 KEY MILESTONES BRIEF DESRIPTION December DEADLINE INTERNAL 8 Person cross functional team (on average 2 hours a week for 9 months) 1 Procurement specialist to help us through the RFP process EXTERNAL HR Specialist (TBD) (HIGH LEVEL) RESOURCE REQUIREMENTS Enable employees to rotate through various business units/ functional areas to build their skills and understanding of the business. Step 4: Create Action Plans to Achieve Near Term Targets

33. 33 Step 4 Deliverables: Action Plans (Gant Chart) Step 4: Create Action Plans to Achieve Near Term Targets

34. 34 Plan Budget KPIs Step 5: Develop Action Plan Budgets

35. 35 Develop Action Plan Budgets Who: KPI Teams, working closely with Finance What: Each KPI team works with the Finance build budgets for their Action Plans How: Each KPI team, working with Finance, identifies the resources they need to execute their Action Plans. Finance then translates these resource requirements into SG&A line item detail and CAPEX requests for budget purposes. Step 5: Develop Action Plan Budgets

36. 36 Step 4 Deliverables: Action Plans Budgets Step 5: Develop Action Plan Budgets

37. 37 Step 6: Combine with the Baseline Budget Plan Budget KPIs Step 5: Develop Action Plan Budgets

38. 38 Create a Baseline Budget Who: Finance and budget managers What: The Finance area facilitates the development of a baseline budget (“keep the lights turned on”) that can then be combined with the Action Plan budgets to produce a total company plan How: Working with managers, the Finance area develops a baseline budget, that incorporates all elements of the annual plan P&L, that is then combined with the Action Plan budgets. Step 6: Combine with the Baseline Budget

39. 39 Step 6 Deliverables: A Combined Budget (Incorporating both Action Plan Budgets and the Baseline Budget Step 6: Combine with the Baseline Budget

40. 40 Plan Budget Monitor KPIs Step 7: Establish ongoing reporting and review

41. 41 Establish Ongoing Reporting & Review Who: Finance and IT work team. What: Finance and IT work together to build an ongoing reporting mechanism for: Financial Results, KPIs and the progress of the Action Plans. How: A combined Finance and IT work team identify requirements and select the tools that will enable monthly monitoring of results (both financial and KPIs). In addition, the work team will develop a process for the monthly review of progress of Action Plans alongside of the financial results. Step 7: Establish Ongoing Reporting

42. 42 Step 7 Deliverables: Reporting and monitoring tools for KPI results Step 7: Establish Ongoing Reporting

43. 43 Step 7 Deliverables: Reporting and monitoring tools for progress of Action Plans Step 7: Establish Ongoing Reporting Career Rotation Program Margaret Cho PROJECT LEADER 1) Organize a cross functional team – April ’03 2) Draft a complete project charter (Objectives, Scope, Approach, Structure) – May ’03 3) Complete RFP process for outside expert – July ’03 4) Develop program blueprint – Oct ’03 5) Validate program with Sr. Management – Nov ’03 6) Implement program -- 2004 KEY MILESTONES BRIEF UPDATE December DEADLINE KEY QUESTIONS We’ve slipped 60 days due to a delay in reaching a decision on our RFP vendor, but we should be able to make up half that time. Project on Schedule? # Days Delayed: Actions to get back on track? Reasons? NO 60 Senior management approval of vendor by 60 days. Streamlining brainstorming and documentation should result in a savings of 30 days

44. 44 –A Tale of Two Companies –3 Immutable Laws (and their implications) –Balanced Scorecard Budgeting –Keys to Success –Q&A Outline

45. 45 Keys to Success Keys to Success #1: Benchmark your company against national averages to quantify if your organization could benefit (or not): Do people know what the strategy is? Do they know how it links to the plan/budget? Do they know what the company’s key performance measures are? Do they think they have anything to do with them? Do goals really cascade down through the organization? Are we any different from national averages?

46. 46 Keys to Success Keys to Success #2: Don’t create a separate budget exercise; bring balanced scorecard budgeting into your current process Many companies make the mistake of creating a separate process for budgeting balanced scorecard initiatives. But the “real” budgeting process still dictates how resources are allocated.

47. 47 Keys to Success Keys to Success #3: Know thyself. Customize Balanced Scorecard Budgeting to suit your culture & planning processes If you currently employ a rolling six quarter forecast, for example, then tailor the Balance Scorecard Budgeting approach to synch up with it. If your strategic planning process looks out five years, for example, then your KPI targets should go out five years.

48. 48 Keys to Success Keys to Success #4: Pick the right technology tools to enable Balanced Scorecard Budgeting. After designing your Balanced Scorecard Budgeting process, develop a set of requirements for a planning/reporting system. Determine if your current set of tools can meet the requirements If the current set of tools will not adequately meet the needs, conduct a vendor selection process (with a minimum of three vendors).

49. 49 –A Tale of Two Companies –3 Immutable Laws (and their implications) –Balanced Scorecard Budgeting –Keys to Success –Q&A Outline

50. 50 Q&A