Did Somebody Say Strategy?

Acquisition Toolbox

A Management student recently asked me what would be in an 'acquisition toolbox' for most companies.

In addition to due-diligence, benchmarks, and the business (customer, market, product) plan, I mentioned another tool (or set of tools) should be on the financial management side.

Your goal here is to minimize risk and uncertainty in the capital structure of the "NewCo" by integrating strategic financial management processes and technology.

So past experiences can be stored in the form of models and scenarios of each financial statement (Profit & Loss, Balance Sheet, and Cash flow statement) and the interrelated drivers of value.

Pre-acquisition guidance (in the financial context) is given in the form of interrelated models (if I add this much debt, and remove this much overhead cost, for example, what happens to my potential Return on Capital).

Post acquisition budgets, plans (operating plans, capital expenditure plans, workforce plans, etc), and revenue & expense forecasts can all be linked to the pre-acquisition models for easier comparison (what worked, what didn't).

Many companies that are good at acquisitions have 'operationalized' the financial modeling process and tools.

The most important driver of value

We had a client in the high-tech industry (4,000 employees) where we interviewed all of the top executives and senior leaders to determine what the most important drivers of value in the company were. We talked to the CEO, COO, EVP Sales, VP HR, and even the Chairman of the Board. We expected the consensus would be somewhere in profitable (sustainable) revenue growth, maximizing operating margins, or at least customer satisfaction. It turned out that the #1 driver of value was “Employee Skills.” Employees with advanced degrees, professional certifications, industry experience, etc., were THE key driver of value in the company: they made customers happy, they developed superior products, and they captured revenue.

Yet the company did not have one single measure around employee skills. They didn’t capture that information, they didn’t share it, report on it, or even plan for it in the budget.

This gap was enlightening for them. In order for them to put their money where their mouths were (in other words “people are our most important asset -- now lets utilize that asset”), they had to build Employee Skills measures into their models, plans & forecasts, and management reporting and analysis processes and systems.

This wasn’t HR-centric involvement in the strategic planning process – I think every function, including Marketing, Sales, Development, and Operations, has a stake in “people as assets,” or at least in measuring and improving employee skills…to drive customer & stakeholder value.

And for more on HR Key Performance Indicators, see this entry.

Key Performance Indicators for Human Resources

The VP of HR at a financial services company recently asked me if I had any suggestions on People Management or People Development KPIs they can set for managers. In addition to the common HR metrics and measures, I pointed him to theses Business Foundation performance markers:

 

At the Strategic level:

- New Hire Quality

- Skills Inventory

- Base & Incentive Comp

- Succession

- Employee Sat

 

At the Operational Level

- Salary Benchmarks

- Cost per Head/Cost per Hire

- Rewards & recognition

- Diversity

 

At the Tactical Level

- # Training hrs vs. plan

- Overtime as a % of salary

- Productivity (however measured, incl. Revenue per FTE)

- Resource allocation (bench time for example)

 

For each of your KPIs, don't forget to set goals around them (with measurable targets), model them (what's the impact on the P&L and cashflow when you invest or don't invest), plan for them (put the KPIs into the workforce plan), monitor them, analyze them with related KPIs (eg: amount of incremental cross-sell/up-sell revenue compared to # of training hours or skills index), and report on them.

Here's a quick story on the importance of HR measure.

Here are some links to books about this subject (the link will take you to amazon.com):

How to Measure Human Resource Management (3rd Edition)
HR Metrics The World Class Way
The HR Scorecard: Linking People, Strategy, and Performance

Strategy Safari

My good friend Frank Buytendijk turned me on to an excellent (comprehensive) book on the history and evolution of strategic management called “Strategy Safari: A Guided Tour Through The Wilds of Strategic Management” by Mintzberg et al.

There is a broad range of topics in this book including leadership, business processes, planning, analytics, learning organizations and other areas that we get involved with in the Business Foundation.

The book divides strategy into 10 ‘schools’ of thought:

1. The Design School(…a Process of Conception)
2. The Planning School (…a Formal Process)
3. The Positioning School (…an Analytical Process)
4. The Entrepreneurial School (…a Visionary Process)
5. The Cognitive School (…a Mental Process)
6. The Learning School(…an Emergent Process)
7. The Power School(…a Process of Negotiation)
8. The Cultural School (…a Collective Process)
9. The Environmental School (…a Reactive Process)
10. The Configuration School(a Process of Transformation)

It includes a good summary of Michael Porter (I’m 2 degrees separated: he was my friend Catherine’s professor) – I’m on my second reading of Porter’s Competitive Strategy, and Competitive Advantage is not far behind. I got to hear him lecture in ’05 at the Los Angeles World Business Forum and a few of the key things I took away include:

- most companies don’t have a strategy

- operational efficiency is *not* a strategy

- how you think about competition drives how you think about strategy

- there is more than one way to compete (there are lots of customers and many needs), so compete to be unique; to deliver some distinctive value (not just be ‘the best’ or ‘the first’)

- all strategy translates into a higher price (through differentiation) or a lower cost…or both. What balance are you seeking to achieve?

- Strategy has to be connected directly to the income statement and the balance sheet (and cash flow statement).

I’m interested to find out if you ‘belong’ to one (or more) of the 10 schools of strategy!

Is it XPM, BPM, TPM?

IBM and Business Objects (which acquired Cartesis) call it BPM (Business Performance Management) which is the original acronym that Hyperion coined in 2003 (when it combined Analytic Applications with OLAP). It also stands for Business Performance Measurement, and Business Process Management – quite different from performance management. Oracle (which acquired Hyperion) and Accenture call it EPM (Enterprise Performance Management). Cognos, SAP (which acquired Outlooksoft), and Capgemini call it CPM (Corporate Performance Management). Deloitte calls it IPM (Integrated Performance Management).