The value map
Even for the world’s very largest corporations, enterprise-wide supply chain transformation projects pose a considerable challenge. The rewards, very evidently, can be high. But so, too, is the level of risk entailed – not to mention the resource requirement.
Recognising this, our client, one of the global oil and gas majors, asked for our help in carrying out a five year system, enabled process transformation. Deployed across 29 countries, the intention was to combine over 180 Six Sigma projects with the roll-out of a joint ERP and CRM platform, embracing nine process areas and every major business unit within the company’s downstream operations. Deloitte’s scope is to provide project management support by keeping the project on track, helping establish the metrics and methods for value management, matching resources to requirements, and providing assistance in change management.
Of course, we all know that businesses are supposed to maximise shareholder value. In reality, aspiration and achievement can diverge sharply. For all sorts of reasons, management’s attention is often focused on objectives that, while undeniably contributing to shareholder value, don’t necessarily maximise it.
Boosting revenues, improving profit margins, making assets sweat more are all building blocks of shareholder value. But as building blocks, these must be underpinned by deep foundations: actions, policies and processes that provide consistency and support.
Consider the hierarchy of cause-and-effect shown in our Value Map. Revenue growth, to take an example, can logically be achieved either by improving the volume of sales, or the prices charged for those sales, or both of these.
Volume, in turn, is underpinned by actions to capture new customers, as well as actions to achieve better retention of existing customers. Prices, on the other hand, are impacted both by formal price optimisation techniques as well as actions taken to alter the shift of supply and demand-actions such as differentiating products and services, improving the focus on relatively priceinsensitive customer segments, and potentially even, acquiring competitors. In turn, these strategies break down into a dozen or so subsidiary underpinning actions.
And that’s just for revenue growth. As the Value Map makes clear, the same applies with the top-level objectives of improving asset utilisation and boosting profitability through cost reduction or indeed executing actions that drive more intangible benefits and improve the expectations of future performance in the marketplace: each is built up from a series of underpinning actions that collectively combine together to deliver the intended goal.
Subtle interactions
It would be a mistake, however, to regard actions as additive in effect. There are subtle interactions to consider between actions, as well. For instance, sliming inventories reduces the cost to the business of financing that inventory: at first glance then, a clear-cut positive impact on shareholder value. Yet lower levels of inventory can harm sales, and hamper sales growth, adversely impacting shareholder value.
Roll it all together, and it’s clear that businesses face several difficulties in attempting to genuinely maximise shareholder value. These difficulties affect not just where the business is today, but where it is going in the future.
Consider a snap-shot of a business at a moment in time. Given the enormous number of possible actions that have a potential impact on shareholder value, how likely is it that each of them will have been pursued to the full, without conflicts with other actions?
Worse, given the functionally-oriented organisational structure of most businesses, how likely is it that moves to pursue shareholder value will have been carried out by functional managers with a clear enough insight into the imperatives facing other functions within the business? Has the sales function, for example, genuinely been able to take decisions concerning promotions and forecasts, fully cognisant of the impact that these decisions will have on their logistics function? One doesn’t need to talk to too many logistics managers to discover that precisely this problem is a very common complaint.
And if a snap-shot of a business at a point in time reveals that it is unlikely to be maximising its shareholder value, contemplate the challenges facing a business as it evolves and moves forward. Plans and strategies are conceived, resources put in place, and projects set in motion to deliver the intended results. But will the starting point, those initial plans and strategies, have been formulated with a clear enough view of maximising shareholder value? Are the projects and subprojects that follow on from them really those that will have the greatest impact on shareholder value, or will they be those of who shouted loudest within the organisation?
Now complicate the question further still, in the way that our oil and gas client was contemplating, by initiating an enormous transformation project backed by almost two hundred Six Sigma projects. Would decisions that were about to be taken by hundreds or thousands of people across the business – decisions concerning changed business processes, revisions to corporate policies, and improvement programmes – really take place in an environment guaranteed to maximise the contribution to shareholder value? We thought it unlikely, and so did our client.
Straightaway, introducing the concept of shareholder value within such a context achieves three things. First, it makes explicit the overarching objective to maximise shareholder value, and articulates it in a way that reinforces the message. The goal isn’t to ‘implement an ERP system’, for example, but becomes ‘implement and leverage an ERP system in order to maximise shareholder value’. It’s a subtle change, but an important one: the strategy is to maximise shareholder value – and the new system to be put in place is one of the tactics by which that will be achieved, rather than being a necessary and sufficient means to itself.
Second, a focus on shareholder value provides a conceptual framework within which the various projects and actions taking place within the business can be examined. Projects can be positioned on the company’s Value Map within the context of the value that they will deliver to the business and its shareholders.
Assessing the value
In other words, it’s a combined gap analysis and validation exercise. Are there potential actions that would contribute towards maximising shareholder value, but against which no projects have been pencilled in? If so, reconsider the project portfolio. And are there projects about to be implemented which appear to have no beneficial impact on shareholder value? If so, ditch them: projects that add no value have no place in any business’ portfolio.
Third, and perhaps most importantly, the concept of shareholder value acts as a ‘corporate glue’, a kind of common language. As the individual managers within the business assess and evaluate the projects and changes to the business that they are about to set in train, the company’s Value Map acts as an invaluable ‘Rosetta Stone’, enabling them to compare like with like.
Not only can managers see the impact on shareholder value of their own actions, but they can also see how the actions of others within the business are impacted and how these, too, affect shareholder value. Dialogues that might previously run the risk of being protectionist ‘turf battles’ are instead illuminated by the light of their impact on shareholder value. At its starkest, it’s a brave or foolhardy manager who will continue to argue for a course of action demonstrably damaging to shareholder value.
What’s more, the common language extends not just across the organisation structure – from function to function, and business process to business process – but also vertically within the organisation hierarchy.
Towards the top of the structure, for example, where managers work closely with the most direct drivers of shareholder value, the question is ‘How can we improve the effectiveness or impact of these drivers?’ Taking asset effectiveness, an important contributory factor to shareholder value, as an example, this question might be posed in respect to drivers such as fixed asset utilisation, working capital utilisation, and MRO inventory utilisation.
Yet lower down the organisation structure, where managers are working at the level of projects and policies that might, for example, work towards reducing inventory levels, reducing days of supply and reducing inventory cost, the question becomes ‘Why are we working towards this particular goal and what results are we expecting?’ The simultaneous combination of ‘top down’ and ‘bottom up’ is a powerful one.
And within our client’s organisation, such questions brought the dialogue about ‘the way forward’ into sharp relief. After several years of intense merger and acquisition activity, the business recognised that process transformation could help it to finally unlock the synergies and cost-savings that formed the rationale behind the acquisitions strategy. Better still, a focus on shareholder value would enable processes to be substantially streamlined, as activities that added little or no value were eliminated.
And with new and streamlined processes defined, the combined ERP and CRM enterprise platform would at last deliver business systems that were not only truly aligned with the operational needs of the business, but which also promised to deliver maximum value to shareholders. The contrast with the more usual approach to ERP implementation (‘Here’s an approach that works for most businesses, hard-coded into the software – now change your business to suit it…’) could not be more stark.
Gross Margin Growth
Our starting point was the creation of a customised Value Map, specially developed for our client’s business, and which incorporated industry-specific and clientspecific terms and language. An overall goal of ‘Gross Margin Growth’, for example, was shown as influenced by just those actions that were actually pertinent to our client, and were expressed in ways that would readily aid their understanding and implementation. This was a project, remember, that stretched across almost 30 countries and touched thousands of people. This was then supplemented by a central ‘Value Centre’ to establish best practice, and enable it to be shared more effectively across the business.
With the ‘value drivers’ defined, work then began to develop consistent metrics, termed ‘Process Performance Indicators’, in order to establish the state of play with respect to the underpinning actions. Then, with the existing performance established, work could take place to establish the actions that would close the gap between the existing performance, and the target level that would maximise shareholder value. These could then be defined as projects, complete with costs, resource levels, and intended benefits. Templates were constructed in order to link these together, and provide a business case.
For our client, the benefits were clear. Finally, there was a way to link project targets to their financial impact. Projects could be assessed on a constant, ‘like for like’ basis and similarly compared in terms of their impact on shareholder value. What’s more, the approach enabled projects to be consistently measured and tracked, with analysis tools and frameworks common to the entire company irrespective of business unit, process area, or geographic region.
As a roll-out, it’s still concluding. But our client is adamant that without the Value Map, the out-turn would have been very different. We have, he tells us, enabled the company to not just meet its own aspirations, but those of the shareholders. And what more can a business ask?