1. © 2000, 2003 Six Sigma Academy Valuing Intangible Projects November, 2003

2. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 1 Examples Of Intangible Projects Sales & Marketing -Telemarketing -Direct Mail -Sales Force Effectiveness Engineering/R&D -New Product Design -New/Improved product features Manufacturing/Production -Cost reduction (passed on to customer as price reduction) -Product quality/consistency -Expanded capacity (to meet customer needs) Installation & delivery -Options (expedited, etc.) -Accuracy (shipping) -Cost to customer Maintenance/Support and service -Scheduling (Cable TV maintenance call) -Availability (and cost) of parts Billing/Collections -Invoice accuracy Customer Facing/Customer Satisfaction Other General R&D -New Technology -Non-Product Specific Employee Satisfaction -Telecommuting -Flex-Hours -Employee Self-Serve Projects Safety Regulatory Legislated -EEOC -Tax -OSHA

3. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 2 Measurement And Valuation Measurement: 1.Specific identification Counting Volume of increased sales units Number of safety events Specific price increases Number of customers selecting “options” 2.Control Group Comparative analysis Sales person to Sales person comparison Region to Region comparison 3.Estimation: Business expert opinion Market Data Competitive Analysts ID Opportunity Determine Measurement Method Improve Process Measure Improvement Benefits Determination (dollars to defects): 1.Accounting Method (benefits identified at account level) 2.Present Value/ WACC (same as accounting method plus consideration for time-value or investment value of money) 3.Market or Utility Value (what is it worth in today's market?): Business Expert Opinion Market research supporting customer purchasing habits 4.Replacement Value (What would you pay an outside firm to complete the project?) Benefits Determination Method Value The Improvement Implement Control Plan Establish Baseline Project Valuation is a combination of Measurement, Benefits Determination and ROI Calculation. ROI Calculation

4. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 3 Measurement Methods

5. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 4 1. Specific Identification Sales Force Effectiveness Project Control Plan Implemented Sales force records and specifically identifies sales closed as a result of new process – cross-validated with customer survey data Example: Identify and record each sale attributable to new process. Sales – New Process

6. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 5 2. Control Group (Comparative Analysis) Project: Improved Telemarketing Procedures Control Plan Implemented Implement process in isolation: -Specific Business, Sales Person(s), limited period of time, certain customers, etc. Compare results to control group (without new process) Measure difference Example: Controlled isolation, comparison and measurement. Customer Time Business

7. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 6 3. Estimation Six Sigma Project reduces production cost, resulting in price reduction to customers Business experts believe this will help increase units sold by about 10 units/month Control Plan Implemented Record sales units and review results with business experts Validate estimates – must identify specific drivers if estimates to be revised Example: Business experts estimate impact of improvement. 50% Improvement attributed to Six Sigma # Units

8. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 7 Summary Customer Time Business 1. Specific Identification2. Control Group3. Estimation Preferred MethodLeast Preferred Several Approaches to Measurement Methods

9. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 8 Benefits Determination

10. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 9 Benefits Determination MethodBenefits DeterminationComments 1. Accounting MethodDirect contribution to Operating Income* (OI)Preferred method, accurate & simple. E.g. Increase sales of 1,000 units over the next year at the current price of $8,000 will result in an increase to revenue of $8M. At the current OI contribution rate of 15% this will translate to an OI contribution of $1.2M 2. Present Value/WACCCash inflows less Cash outflows over time with time-value of money consideration. Also consider use of Weighted Average Cost Of Capital (WACC) Various versions. See controller for appropriate/required calculation and interest/ WACC assumptions. 3. Utility ValueRely on market, expert and/or competitive price & value to estimate potential value to company Use this input to calculate ROI and/or prepare business case 4. Replacement ValueDetermine the maximum amount you would pay (value) an outside firm to complete the project successfully Should be prepared to actually pay for this service Should approach project valuation with the same rigor, thoroughness and accountability as any “investment” decision. * Your Company may use EBIT, Net Income or other measure instead of Operating Income

11. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 10 Example Valuation (1. Accounting Method) Project: Chemical manufacturer has peak demands for a certain product that exceed production capacity. Because this is a commodity product customers turn to competition for required product. A Six Sigma project is initiated to improve manufacturing throughput and ultimately peak capacity by 15% to accommodate customer demand. Lost sales are estimated at 18,000 tons at an average discounted unit price of $0.32/pound, lost revenue is estimated at $11.5M. Measurement: Specific Identification. For the project proposal (Define Phase) the estimate will be based on the increased number of units the plant is expected to sell, based on the current sales forecast and the increased plant capacity (15%). After the project is completed (Control Phase) the measurement will be the actual sales units (pounds) that were booked in excess of the previous plant capacity. Benefits Determination: ↑ Units X Price X OI% = Benefits Increase in units sold (initially forecast, actual after project closes) as a result of Six Sigma project TIMES the average discounted unit price for the product TIMES the OI contribution % for this product = the project Benefits. In this example, the expected increase in units is 18,000 tons which equals 36M pounds. The average discounted unit price is $0.32/pound. The OI contribution % for this product line is 8%. Therefore the expected benefits are calculated as follows: 36,000,000 X $0.32 X 8% = $922K annual OI ROI Calculation: Cost to complete project (investment) = $75K Net Project Benefits ($922K – $75K) / Investment ($75K) = 1,129% ROI in first 12 months. NOTE: May be appropriate to use longer period for ROI calculation based on your company practices Benefit will be realized through increased sales volume.

12. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 11 Example Valuation (2. Present Value Method) Project: Healthcare provider has “high” outstanding accounts receivables as compared to industry peers. DSO is currently calculated to be 118 days and Accounts Receivable balance averages $120M. Initial analysis of customer “disputes” that DSO could be improved by several days by improving the invoice accuracy from one of the several billing systems in the company. This project will focus on that area and is expected to result in a DSO reduction of 5 days which will reduce the rolling A/R balance by $5M. A system modification is required to accomplish this task. The total cost of the project including the system modification is estimated at $80K Measurement: Specific Identification. Tracking of Customer Disputes resulting from invoice accuracy, dollars associated with those disputes and time to resolve disputed invoices. Benefits Determination: ↓A/R Balance X WACC The reduction in Accounts Receivable Balance will result in a one- time cash flow benefit. The company uses a standard 8% WACC when calculating the OI impact from cash flow projects. $5M X 8% = $400K OI ROI Calculation: Cost to complete project (investment) = $80K Net Project Benefits ($400-80 / Investment ($80K) = 400% ROI Benefit will be realized through reduced Accounts Receivable balance.

13. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 12 Benefits Determination: (↑Units X Price) + (Total Units X 2%) X 5% = Margin improvement During project proposal phase an estimated 4% increase in units and a 2% increase in unit price is used to estimate increase in revenue. Example Valuation (3. Utility Value Method) Project: A computer manufacturing company initiates a Design For Six Sigma project to design and establish a new product launch process to accelerate, optimize timing & effectiveness of product launches. Market data indicates that a 3-day delay in the launch of a new model results in a 3%-5% loss in total units sold over the product lifecycle. Furthermore, historical, competitor &market data validates that first to market results in a 2% price premium over the life of the product. This project should be completed in time for the new model launch for the upcoming holiday season. Projected sales are 100,000 units at an average units price of $1,800/unit. EBIT % for these products is 5%. Measurement: Estimation: Unit price will be raised by 2% on units launched through the new process, actual units sold would be compared to forecast and historical units volumes from like-product launches. The difference in units would be attributed to the Six Sigma project. ROI Calculation: Cost to complete project (investment) = $150K Net Project Benefits ($547K - $150K / Investment ($150K) = 265% ROI 4% more units, 2% increased unit price Will drive $547K EBIT improvement.

14. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 13 Benefits Determination: Business experts have determined that they would pay an outside organization no more than $150,000 for a designed and implemented “customer welcome process” Benefits are determined to be the “Replacement Value” of $150K Example Valuation (4. Replacement Value) Project: One of the three strategic goals for a popular retail chain is Customer Satisfaction. A Six Sigma project has been approved to establish customer welcome procedures to make customers more comfortable entering stores and giving them a chance to ask questions and receive direction upon first entering the store. The company feels strongly that the completion of this project will improve Customer Satisfaction, but can not put a dollar value on the successful completion of this project. Measurement: Estimation: Improvement in Customer Satisfaction will be measured through customer surveys and use of outside rating agencies. ROI Calculation: Cost to complete project (investment) = $50K Net Project Benefits ($150K - $50K / Investment ($50K) = 200% ROI Benefits are valued at $150K based on “replacement value.”

15. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 14 R&D And Engineering Project Examples

16. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 15 R&D Projects – Relationship To Financials Increase in Volume (# of units sold) Price Increase (price per unit) Reduction in Product Cost (Cost Of Goods Sold) R&D projects primarily impact sales and cost of goods sold. Target Contributions: Financial Statement (P&L)

17. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 16 Types Of Projects And Benefits Type Of R&D ProjectSales VolumePriceCOGS New Product or Service        Re-Design       - If DFM New Feature      Different types of R&D projects contribute in different ways.

18. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 17 Sources Of Additional Sales Volume 1.Take market share from competition 2.Increase overall market 3. Create new market Various ways to increase sales volume.

19. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 18 R&D Contributions To Pricing 1. Additional Features Base Unit$$ Add-Ons: a) ---------$$ b) ---------$$ c) ---------$$ 2. Differentiation: Features Function Quality Market, Use, Branding 3. Market Dominance Considerations Of R&D Impact On Product Pricing.

20. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 19 Project Benefit Calculation Project benefit determined at the gross profit line, ROI = Net benefit divided by cost. Volume increase from added product features, no change to Unit Price Unit Cost Reduced by $2

21. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 20 Summary Identify business opportunity (must establish project value proposition) Decide on appropriate measurement for project Determine project valuation method (dollars to defects) Baseline performance, value current performance Improve process, value improvement Treat projects as funding requests, develop business case.

22. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 21 Trademarks And Service Marks Six Sigma is a federally registered trademark of Motorola, Inc. SigmaFlow is a trademark of Compass Partners, Inc. MINITAB is a trademark of Minitab, Inc. VarTran is a trademark of Taylor Enterprises. The following are trademarks of Six Sigma Academy as of October 2003 (alphabetical): Breakthrough Design Breakthrough Software Design Breakthrough Diagnosis Breakthrough Execution Breakthrough Lean Breakthrough Sigma Lean Breakthrough Six Sigma Breakthrough Strategy ® Breakthrough Value Services FASTART INTELLEQ METREQ SigmaCALC ® SSA Navigator Weaving excellence into the fabric of business

23. ©2000, 2003 Six Sigma Academy Valuing Intangible Projects Pg 22 Six Sigma Academy www.6-sigma.com US Tel: (480) 515-9501 US Fax: (480) 515-9507 International Tel: +44-1403-218-588 International Fax: +44-1403-218-788 8876 E. Pinnacle Peak Road, Suite 100 Scottsdale, AZ 85255