financial realities to strategy (public)

C O N S U L T I N G

A L i m i t e d L i a b i l i t y C o m p a n y

ParCon Consulting, LLCApplying Financial Realities to Strategic Planning

ParCon Consulting Education & Seminar Series

Market Focus: Engineering, Consulting & Architecture

October 3, 2014

Revision (6.1)

Copyright ParCon Consulting, LLC | Page 4

Applying Financial Realities to Strategic PlanningObjectives and introductions

Learning Objectives:

Architecting a robust strategy forecasting model

Capabilities that enhance strategic decision making

Building fiscal reality into strategic initiatives

Approaches to strategic risks

Integrating strategic and operational forecasts

Attendee goals and input…

Goals & Learning Objectives

Structured discussion about how professional

services firms are using advanced financial

models in parallel with strategic planning to help

leaders assess how a chosen strategy could

impact revenues, returns and risks over time and

enhance the quality of strategic decision making.

Speaker Backgrounder

Matthew GillManaging Partner

Atlanta, GA

e [email protected]

o 770.740.9621

m 770.329.6219

Career Summary

ParCon ConsultingCo-Founder, Principal

ePsolutions, Inc.CEO, Chairman

Philips Electronics, CE, N.A.EVP & General Manager, North America

ViewSonicEVP & General Manager, Americas

International Business Machines

Established since 2002, ParCon is

an Atlanta based management

consulting firm committed to

delivering superior strategy and

execution solutions to professional

services clients in North America.


Building Meaningful Links Between Strategy & FinanceWhat do we mean when we talk about strategy and strategic planning?

mission

values

ambition

strategy

strategic initiatives

team / individual goals

Lifetime

20 + Years

5-20 Years

1-5 Years

3-7 Years

<1 Year

Descriptions

Mission Why we exist• What do we want to contribute?

• Why our best efforts matter?

Values How we think & behave• What are our shared beliefs & principles

• How do we conduct ourselves (internally, externally)

• What are our ethics and culture

Ambition Where we intend to go• What do we want to accomplish and by when?

• How will we “measure” success?

Strategy How we intend to get there• Choices about markets, clients & offerings

• How we differentiate ourselves from our competitors

• Critical processes and capabilities we need to deliver value

Strategic Options & Initiatives Changes we will make• Systematic investments in new capabilities or improved processes

• Compelling options for growth and expansion

Individual Goals The work I will do• My individual or team goals

• How strategy impacts my career, opportunities, time allocation

?

Areas of special focus for financial leaders

Strategy Pyramid

Revenues

Profits

Costs

Priorities

Capital

Risks

Timing

?

Finance


Building Meaningful Links Between Strategy & FinanceChallenges and pitfalls we’ve witnessed between the “concept” and the “reality”

Breakdowns in Process Challenges in ImplementationThe Clarity & Simplicity

of Your Strategic Vision Poor linkage between strategic

forecasts & operating plans

Lack of buy-in (or understanding) by

leaders, managers and staff

Rigid plans that become the prime

focus for leaders, limiting their range

of actions or new ideas

Missing links between strategy and

performance management systems

Lack of consistent evaluation of

progress or quantitative impact

Lack of strategic “learning loops”

Lack of financial rigor within the

strategic planning process

No attempt at projecting the cost or

impact of chosen strategic initiatives

A plan that results in no real choices

or priorities – “do it all- now”

No clarity on how strategy impacts

shareholder value

Disregard of true financial capacity &

capital requirements

Static models that focus executives

on a single possible outcome

The conundrum of perfection

The Ambiguity & Challenges

of Your Operational Reality


SECTION THREE

A Financial Architecture for Long-Range PlanningAddressing breakdowns in the planning and initial forecasting process


A Financial Architecture for Long-range PlanningAn approach that has evolved over many engagements

We generally design our models with; 5 years financial

history, current year, and 5 year annual forecasts

For multi-divisional firms, we strongly prefer building the

strategy & forecast at a BU level and then aggregating

Financial components in our architecture usually include; revenues (net)

profits (contribution and IBT or EBITDA)

resources (FTE)

cash flow (we typically do not model the balance sheet)

global variables

The level of detail in a strategic forecast should be kept as

simple as possible (avoid “false precision”)

Our strategic impact models (SIM) are created in parallel

with our strategic planning process

Building an effective model can be daunting but with time

& effort, it can be evolved into a powerful planning tool

Five Building Blocks of Our Strategy

Forecasting Architecture (SIM)

Baseline Forecasts1

Growth Options

2Strategic Initiatives

3

Risk Assessment4

Modeling & Reporting5

We suggest building the model from bottom to top…


I. Developing baseline financial forecastsEvaluating the impact of

a given strategy is

easier if teams first

attempt to forecast

business results as if no

strategy was in place

Finance needs to understand

what leaders consider their

“business as usual” trajectory

A baseline also provides

context from which to

understand and evaluate

other scenarios or plans

Ultimately, a baseline helps

establish a minimum

expectation of future

performance for the firm.

Baseline forecasts are ideally developed at a business unit level

by the planning teams using a standardized set of assumptions

Assumes that no “strategic” investments will occur but that

business units would continue to drive their business

We typically recommend using a linear progression of future

results based on historical performance & trends

Insights regarding current & near-term market and competitive

conditions typically enter into baseline forecast discussions

Extended revenue forecasts should be “range accurate” without

relying on detailed sales forecasting and resource plans

Contribution level profit forecasts reduces BU concerns about

uncontrollable corporate costs.

Resource estimates (headcount) can be projected using simple

productivity estimates of net revenue / FTE

Finally, an enterprise roll-up is generated and evaluated by the

CFO & executives with top-down modifications taken as needed

Do you see value in a building a “business as usual” forecast?Group discussion on variations they are using or finding effective.

group discussion

ParCon Learning Module: October 7, 2014

Baseline forecasts should be established early in the planning process based on what leaders believe would happen over the planning period if the business were to continue on with no “strategic” investment.

NET REVENUES

CONTRIBUTION

RESOURCES

CASH FLOWS

ASSUMPTIONS & GUIDANCE

Building a Baseline Forecast


II. Identifying and exploring growth optionsAt the heart of strategy

lies a compelling

vision or aspiration for

growth and innovation

Give planners the opportunity

to dream and innovate when

identifying new growth options

Strategic intelligence focused

on opportunities in services,

clients and geographies can

dramatically improve the

quality of options that emerge

Business cases take time but

are critical to developing

decision grade options

The process can also help

engage key people and allows

potential leaders to emerge

Growth options represent the next critical element of a robust approach to strategic planning; namely the identification, evaluation and selection of one or more viable opportunities for growth or key market moves.

How successful have you been at getting teams to develop innovative ideas?Are their good practices that support strong, consistent growth in new markets, services or clients?

group discussion

A process to identify and discuss viable growth options in a

creative or innovative way is critical to building a compelling plan

Growth options typically include; acquisitions, investments in

organic growth or innovation (technology, processes, etc.) and

may include spin-outs or adjustments to the business portfolio

Planners can rapidly prioritize options using filters and standard

evaluation criteria which allow the best ideas to surface

A subset of the best options should be further developed using

business cases developed by sub-teams

Interesting opportunities that lie outside of current business units

can be identified in parallel by members of the executive team

A portfolio of completed growth cases are then presented and

evaluated by senior executives with an eye toward selecting the

best “portfolio” of options that maximize returns and reduce risks

In Search of Profitable Growth


Marginal Opportunities Low Risk Opportunities

MMM STRATEGIC OPTION EVALUATION

Big IdeasRisky Game Changers

Re

ven

ue

& P

rofi

tIm

pac

tH

igh

Low

Obstacles & Challenges MinimalSignificant

Water, Waste Water Offering

Build Tunneling CoE

Drive I&E Growth in Alberta

Build Transit Practice

Build Aviation Practice

Enter U.S. Markets

Western & Northern Expansion

Double Commissioning

Owners Rep / CM Model

Win in AlbertaTriple National Utilities

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1.0 1.5 2.0 2.5 3.0 3.5 4.0

Each growth option should

represent a discreet investment

opportunity that can legitimately

be selected or eliminated based

on a chosen strategy or

changing operational realities.


III. Putting fiscal rigor to strategic initiativesA robust strategy

balances growth with a

systematic focus on

enhancing bottom line

performance

As with growth options, the

operational success or failure

of initiatives is hit & miss

Identifying a willing & capable

leader and committed team

are critical first steps

Treat strategic initiatives like

your would handle a complex

projects for a client

Periodic executive reviews of

progress and quantitative

impact keeps teams focused

How comfortable are you with the financial rigor of your current initiatives?What are you doing today? Are expected results integrated into your operating forecasts?

group discussion


Strategic initiatives represent investments focused on improving business results by enhancing key processes or building strategic capabilities that sustain or create a competitive advantage.

During a strategic planning effort, one or more strategic initiatives

are typically identified and selected for investment based on what

planners believe are critical to achieving strategic goals

Initiatives include both “enterprise” initiatives (cross divisional

efforts) as well as initiatives that impact only a single group

ParCon finds the “Balanced Scorecard” framework useful for

identifying initiatives that support long-term value creation

We find most firms are too informal when developing the costs

(money, resources) and impact (revenues, margins, costs and

resources) of any initiatives selected to move forward

Industry performance benchmarks can be helpful in determining

performance goals and targets for a given initiative

How strategic initiatives will be treated within the budgeting and

manpower process needs to be consistent & transparent

Break-through Results From:

Improving PM processes

Better management of talent

Business development

Leadership development

Marketing & Intelligence

Quality management

M&A process excellence

High performance culture


IV. Assessing & quantifying strategic risksA robust approach to

modeling risks can

help inject much-

needed reality into

strategic forecasts

Strategic risk assessment is

distinctly different from adding

a safety buffer in a forecast

We recommend that risk

modeling be integrated into

the strategic planning process

Engaging business leaders in

evaluating risks helps highlight

areas where doubt exists

Developing mitigation plans

for the most significant

strategic risks is good practice

Risk is an inherent element of every strategy (or strategic scenario), the nature of which needs to be identified and evaluated using appropriate enterprise risk management (ERM) parameters.

How is risk management approached within your current planning process?Do you have a formal ERM approach? Is it applied to your long range planning efforts?

group discussion


Some firms lack a systematic way of identifying and quantifying

risks to their strategy or internal operations

While approaches to ERM vary from firm to firm, we generally

find a matrix that includes likelihood & impact serve well

Business leaders evaluate the potential financial impact of risks

on; revenues, operating costs and cash flows

A risk component supports better sensitivity analysis of strategic

results; allowing business leaders and financial professionals to

understand which risks will have the greatest impact on results

The ability to generate “risked” and “unrisked” forecasts builds

stakeholder confidence in the legitimacy of strategic forecasts

Increasingly, active Boards want clarity about the nature and

magnitude of the risks in your strategy & financial forecasts.

ParCon Strategic Risk Grid

CHART DATA:

Business Unit:

ML&M

Risk Impact:

Contribution

Updated:

April 30, 2014

Baseline Forecasts

Organic Growth Investments

Acquisitive Growth

Investments

Strategic Initiatives

Operational Issues

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

Leve

l o

f C

on

tro

l

Likelihood of Occurrence

ML&M Strategic Risk AnalysisSize of Bubble Indicates Potential Impact based on Selector

Very High / Frequently Very Low / Infrequently

Hig

h C

on

tro

lN

o C

on

tro

l

BASELINE FORECASTS

ORGANIC GROWTH ACTIVITIES

ACQUISITIVE ACTIVITIES

STRATEGIC INITIATIVES

EXTERNAL FACTORS

Revenues Costs Cash Flow


V. Modeling & reporting capabilitiesBuilding a system that

allows planners to

easily test a variety of

scenarios makes for a

superior final strategy

One goal of modeling is to

allow planner to “flex” key

variables across a range of

reasonable possibilities and

evaluate the fiscal results

Without the ability to model,

planners tend to become

locked in to a single potential

strategic scenario

What is your experience with scenario modeling and stress testing your plans?Are your current long-range forecasts based on single point estimates or multiple scenarios?

group discussion


Advanced modeling and reporting are powerful tools for planners & executives who are asked to make strategic decisions on a comprehensive strategy that optimizes shareholder value and minimizes risk.

Evolving from a single, static financial view to one that allows

easy evaluation of multiple options and variables helps leaders

evaluate the impact of their choices on financial outcomes

We prefer a design that supports modeling of revenues, costs,

profits, cash flows & risks across a broad spectrum of options

and variables

We find that creating a control panel that non-financial

executives find easy to use helps to create deeper insights

By building forecasts from the BU level up, planners can add or

eliminate various BU results to evaluate the overall impact on the

business portfolio and shareholder value

Allowing planners to quickly model major choice (e.g.

acquisitions, initiatives) create insight into what drives key results

Finally, we have found that reporting & powerful visuals are key

tools in both assessing and communicating the chosen strategy

Empower Your Planning Team

Growth Options: Add or remove,

change start dates, adjust costs

Strategic Initiatives: Add or

remove, modify kick-off, impact,

funding and resource impacts

Reporting: Quick add or remove

business units, risks, and various

revenue streams (e.g.

acquisitions)

Global Variables: Modify costs

of capital, return thresholds,

overhead rates, labor costs, etc.


A Financial Architecture for Long-range PlanningGroup discussion on the process described

What questions do you have about this approach?

What have you found historically that has worked

well for your firm?

Where have you experienced breakdowns?

What can you do going forward to improve your

internal processes?

Five Building Blocks of Our Strategy

Forecasting Architecture (SIM)

Baseline Forecasts1

Growth Options

2Strategic Initiatives

3

Risk Assessment4

Modeling & Reporting5 Failures in Process group discussion


SECTION FOUR

Fully Realizing Results by Sustaining the EffortAddressing challenges with implementation


Fully Realizing Strategic ResultsLinking strategy with your existing operational systems

Successful execution requires you to link & align…

Organizational Structure: Leaders, people, management & information systems

Goals & Objectives: Aligning annual revenue, profit & efficiency goals with a well

considered roll-forward budgeting approach

Initiative Impact: Determining how active initiatives should be integrated into

company & departmental operating goals & periodic performance results

Investment: Making consistent investments in high priority initiatives (StratEx)

Resources: Assign the right people & recognize the impact on utilization & profit,

delegate existing workload and discontinue lower value activities to free up time

Performance Systems: Integrate strategic performance into PM systems with

appropriate rewards & consequences

Risk Management: Insure that strategic risks are integrated into internal ERM

reporting and mitigation efforts

Operating Plans

Strategic Forecast

? Linkage ?


Fully Realizing Strategic ResultsBuilding muscle memory in the execution of strategy

Supporting strategy execution as a priority…

MOS Integration: Integrate strategy processes (planning, review, refinement,

funding) into existing annual management calendars & operating systems.

Strategy Governance: Build a disciplined governance process that focuses

executive, planners & leaders on reviewing & assessing your current strategy

and focusing on the “big picture” during periodic reviews

Honest Evaluation & Review: Focus strategy reviews on learning & decision

making coupled with an honest assessment of both progress (achievements,

milestones, wins) & impact (quantitative improvements)

Strategy Refinement: Your strategic plan is not an “end” but a way of looking

at the world, prioritizing resources and testing your hypothesis. Ongoing

refinement is important to help balance strategic focus with operational agility

Learning Loops: Companies that learn faster and translate insights into

concerted action have a distinct competitive advantage. Creating “learning

loops” linked to disciplined execution is challenging but increasingly critical

Imp

ort

an

ce

Urgency -

+

+

-

Covey’s Time Management Matrix

The core issue is that strategy

represents Quadrant 2 work

30%

40% 20%

10%


Fully Realizing Strategic ResultsOwning and leading organizational change

Harness the full power of your organization …

Leadership: Success in strategy (or change) requires active and visible leadership

and frequent engagement. It cannot be delegated and it can’t be relegated.

Engage High Performers: Change efforts require resources and a commitment of

substantial time, focus and effort. The quality of the people on these teams has allot

to do with the success of your major initiatives. Reward success…

Consistent Communication: Keeping your strategy and successes top of mind

across the firm helps create a shared feeling of progress & inertia, helps overcome

cynicism and can get the critical “60%” off of the fence

Strategic Filters: Great leaders use strategy as a tool for helping make important

decisions. They then take the time to link their decisions back to strategy so people

develop an understanding of how strategic plans, decisions & outcome tie together.

Strategy as a “Day Job”: Today, high performing companies have found unique

ways to “manage” the business while simultaneously “changing” their business.

They’ve done this by making strategy a part of everyone’s “day job.”

Leadership > Strategy