Value Based Management

1. Value Based Management Drive value for key stakeholders Focus your business on what counts - relentlessly Facilitate deployment of strategy and management philosophy Establish accountability at all levels Paul A. Sharman, President Focused Management Information Inc.

2. Agenda What should you do next? How do you implement Value Based Management? Introduction / Why and What Is Value Based Management

3. The Problem(s) • Shareholders want bigger returns • We are losing business to competitors on price and on performance • Customer expect high quality at low price • We are not ‘easy to do business with’ • We don’t pay enough attention to our ‘important’ customers • Today’s structure does not support the segmentation strategy • Financial information gets attention, but it isn’t enough • Our employees understand the need to change, but they don’t • Customers want a single problem owner • We are not able to adapt quickly to new business opportunities There are many complex and inter-related concerns. The combination is killing us!

4. Why VBM? - Because organizations have to change constantly in order to meet expectations • Superior executive performance is defined by delivery of value - to investors, customers, employees and others who have material influence • Growth in market value is a key to executive survival and the winning organization • Executives need new skills, new tools and a responsive organization to deliver value • Possession of facts is critical when making high risk decisions • Information Portals provide consistent communication to employees and other stakeholders

5. Benefits of VBM • Focus the efforts of people in the organization on driving to achieve what’s important in a holistic manner: • satisfied customers • correctly assigned resources • growing profits / SVA/ CFROI, etc. • streamlined processes that deliver • business facts to manage the business • motivated and accountable people • waste eliminated The bottom line: VBM = Performance

6. What is VBM? Value-based management (VBM) • A discipline that focuses on the management of the organization holistically • Emphasizes the creation of value as defined by its stakeholders and priorities defined by management • Focuses on the deployment of strategy and value creation by managing processes, activities, jobs, compensation and organization structure • Uses analytical methods, facts, computing /communications technology in an integrated framework

7. Why Value? • The creation of value is the primary goal of managers in leading companies • Organizations exist to create value for all constituencies / stakeholders • Stakeholders include customers, owners, managers, employees, suppliers and society in general • Organizations determine the degree to which they will prioritize the interests of each stakeholder group and will therefore balance performance goals accordingly • A new Manifesto for Management, Sumantra Ghoshal, Christopher A. Bartlett & Peter Moran. Sloan Management Review Spring 1999, Vol. 40, Number 3

8. What Values? Values depend on the stakeholder, however, examples might be: • Markets and owners expect that economic value be created • Customers may expect to obtain desired goods and services on time and at competitive prices • Employees may expect a substantive and meaningful job with commensurate compensation • Suppliers may expect to be paid on time • Society may expect that their environment will be improved

9. Step1 Step 2 CUSTOMER Value Based Management Framework Strategy Activity Based Costing/ Budgeting • Stakeholder Needs / Values • Customers • Employees • Regulators • Owners • Investors T I M E • Organization • Values • Goals • Results Q U A L I T Y Performance Measurement / Scorecard F I N A N C I A L • Process • Goals • Results Q U A N T I T Y Process Management Best Practices Objective Behavior • Activities • Goals • Results Consequences Performer Organization Design & Compensation Feedback HumanPerformance PERFORMANCE

10. VBM and Measurement • People behave as they are measured • The only purpose for measurement is to influence human behavior • The emphasis in measurement must be New Conditions, Future State and Desired Performance Therefore, disciplined application of defined measurements and goals is critical to accomplishment of the desired values / goals

11. Agenda What should you do next? How do you implement Value Based Management? Introduction / Why and What Is Value Based Management

12. Strategic Plan T I M E • Organization • Values • Goals • Results Q U A L I T Y Rapid Prototype VBM Detailed Analysis Design Implementation F I N A N C I A L • Process • Goals • Results Q U A N T I T Y • Activities • Goals • Results Two Cycles in VBM Foundation / Planning Cycle On-Going Management Cycle Performance

13. VBM Implementation Stages Rapid Prototype VBM Detailed Analysis Design Implementation

14. VBM Rapid Prototype Delivers • A complete status report • Gaps identified • Actions and plans agreed

15. What it is: • 3-4 week analysis • Situation analyzed • Values, directions and priorities agreed • VBM plan developed and agreed • What you have to do: • Executives provide 4 hours up front • Provide access to key staff • Provide access to data • Attend 2 executive workshops (4-6 hours) VBM Rapid Prototype Involves Rapid Prototype VBM Detailed Analysis Design Implementation

16. VBM AnalysisDelivers • Economic profile linking SVA to processes • Processes analyzed / disconnects identified • Profitability by segment / cost of processes • Design options defined and approved

17. VBM Analysis Involves Rapid Prototype VBM Detailed Analysis Design Implementation • What it is: • 3-6 month analysis of performance of key aspects of the business • Design assumptions established • Design specifications created / approved • What you have to do: • Provide teams of employees / data • Set goals • Participate in steering team meetings • Attend 4 executive workshops (4-6 hours)

18. VBM Design Delivers • Detailed process & organization specifications • Scorecards developed at all 3 levels: Org’, Proc’, Job • Change management planned • Detailed specifications for data • Information Portal specifications • Activity & process budgets developed

19. VBM Design Involves Rapid Prototype VBM Detailed Analysis Design Implementation • What it is: • 2 month design processes and • organization • Detailed design recommendations • Implementation plan agreed • What you have to do: • Provide teams of employees • Participate in steering team meetings • Attend 1 management workshop (2 days)

20. VBM ImplementationDelivers A completely aligned organization, measurement and management system including some or all of the following: • Process owners assigned • Change management implemented • Process changes implemented • Process Scorecards implemented • Individual Scorecards implemented • New computer and communications • software implemented • Organization design implemented • New job descriptions developed • Training requirements identified and • conducted • Incentive compensation changes • implemented • Activity and process budgets implemented

21. VBM Implementation Rapid Prototype VBM Detailed Analysis Design Implementation • What it is: • 4+ month implementation of new • measures / processes / organization • New measures and goals accepted • Employees in different jobs • What you have to do: • Provide teams of employees • Assign employees to new roles • Participate in steering team meetings • Drive implementation

22. VBM Information Portals for Communicating with all Constituencies Sample Measurement Scorecard / Dashboard • Distribution of consistent and appropriate measurement information to everyone in the organization is fundamental to execution of VBM • Use of computer technologies - data warehouse, OLAP and presentation layer software provide the “media” of distribution • It is the media that facilitates organization change. The marriage of management philosophy with technology and the imperative to create value • The media is represented by the presentation of current measures and performance information on computer screens to all accountable parties • The suite of tools includes software to perform simulation modeling of processes and economic performance

23. Agenda What should you do next? How do you implement Value Based Management? Introduction / Why and What Is Value Based Management

24. Next Steps • Complete a simple series of self assessment questions • Review results with an FMI representative • Undertake initial review of VBM with sponsor executives • Launch Fast Track VBM Visit our WEB SITE or contact us at: www.FocusedManagement.com psharman@focusedmanagement.com Phone (905) 829-2658 dmoorcroft@focusedmanagement.com Phone (613) 230-9379