Who has the Profit and Loss Responsibility in Your Company? Presented by: Fletcher L. Groves, III Vice President SAI Consulting

Who has the Profit and Loss Responsibility in

Your Company?

Presented by:

Fletcher L. Groves, III

Vice President

SAI Consulting

What’s behind the Question?

� The inescapable conclusion that a lot of what we do doesn’t work.– Business Performance Improvement

initiatives as just one example.

� What’s missing?– We are missing a context – a business

context – in which everything we are trying to do makes more sense.

The Human Dimension

“ . . . The human dimension of business – the wanting, the caring, the enthusiasm, the problem-solving, the initiative-taking – is where more and more of the competitive battles are being won and lost . . . the only way for a company to boost performance consistently over the long haul is to have employees who work enthusiastically and effectively, and . . . take responsibility for their own work.”

- John Case, The Open-Book Experience

“What is the greatest managerial challenge facing your company today?”

- SAI’s 1997 Reference Point survey

0 5 10 15 20 25 30 35 40 45 50

Employees

Profitability

Land

Processes and Structure

Subcontractor Quality

Marketing/Sales

Growth and Expansion

All Others (less than 3%)

Employee Selection, Training, and Motivation

Complexity, Financing, Government Regulation, Systems, Product Design, Competition

“What is the greatest managerial challenge facing your company today?”

- SAI’s 1996 and 1997 Reference Point survey

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Employees

Profitability

Land

Processes and Structure

1997

1996

Managements’ Perspective

� The only people that need to be concerned with financial performance are owners and senior managers.

� Employees can perform their jobs without understanding the way they impact profitability and economic return.

� Companies are the sum of their individual parts.

Employees’ Perspective

“That’s your job. Don’t hold me accountable for ‘profitability’ – or anything related to ‘business performance’ – if you won’t . . .

let me see the numbers,

let me make decisions, and

give me a stake in the outcome”

The Frustration and the Fear

� Owners and senior managers are powerless to drive needed improvement in operating and financial performance.

� Employees look out for their self-interests, but they don’t have the power to insure their own job – or financial – security.

� The walls of mistrust and self-interest are built.

The Real Failure

1. We have failed to build a connection between better business performance, and the interests of those who must make it happen.

2. We have spent too much time on the what and the how-to, and ignored the why and the want-to.

Making the Case

� Companies perform better when employees see themselves as the partners in the business, instead of its hired hands.

� Everything else – the strategies, the performance initiatives, the decision-making – makes more sense within this new business context.

When you are a Company ofBusiness-people:

1. Everyone sees and learns to understand the operating and financial numbers.

2. Everyone has the responsibility and authority for moving the right numbers in the right direction.

3. Everyone has a financial stake in the outcome.

What does it do?

� Teaching them the business and being transparent with the numbers makes your employees savvy.

� Handing them responsibility and authority makes your employees mutually-accountable.

� Giving them a stake in the outcome motivates your employees and gives them a future.

You probably don’t wantto go there if . . .

. . . losing what you never had bothers you.

. . . you don’t like living in a fish bowl.

. . . you have all the answers.

. . . you want to make all the decisions.

. . . you are smarter than your employees.

. . . you like carrying people on your back.

. . . you really don’t like having fun.





Creating Transparency

� Everyone has to see – and learn to understand – the real operating and financial numbers of the business.

� Everyone has to be able to connect their day-to-day jobs and decision-making – to the company’s overall financial goals.

“How often do you discuss the details of the company’s financial performance with your employees?”


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Never

Only as needed

Once a year

Twice a year

Quarterly

Every other month

Monthly

Twice a month

Weekly

“Our employees understand how the work they perform relates to the company’s financial performance.”


0 5 10 15 20 25 30 35 40 45 50

Describes very well

Describes somewhat

Describes a little

Doesn't describe at all

Have no idea

Understanding the Numbers

� Generic to Industry-specific� Financial Statements

– Income Statement– Balance Sheet– Cash Flow Statement

� Business Plans and Budgets� Compensation� Learn by DOING and make it FUN!!

Connecting Operating Drivers to Financial Outcomes

� Understanding – from an operational standpoint – what happens to money in a homebuilding company.

� Understanding the impact the operational perspective of money has on financial measures, like Net Profit and Return on Investment.

What happens to money?

� Throughput (T) = the rate at which a builder generates money through sales.

� Inventory (I) = all the money a builder invests in things it intends to sell.

� Operating Expense (OE) = all the money a builder spends turning Inventory into Throughput.

The Impact on Profitability and Economic Return

Productivity = Throughput ÷ Expense

Inventory Turns = Throughput ÷ Inventory

Net Profit = Throughput - Expense

ROA = (Throughput - Expense) ÷ Inventory

Seeing the Real Numbers

� The operating and financial numbers need to be presented and discussed:– Currently– Collaboratively and Collectively– Concisely and Comprehensively– Consistently

- Format- Frequency

– Conspicuously and Creatively

When you are Company ofBusiness-people:




Developing Accountabilityand Responsibility

� Mutual Accountability and Responsibility.� Accountability and Responsibility cannot

exist without Ownership.� Ownership requires Involvement (in the

planning process) and Authority (to make decisions).

� The will to get involved, to exercise Authority, and to assume Responsibility requires Transparency and Freedom.

“We expect a higher level of job performance (solutions and decision-making) from our senior managers . . .”


0 10 20 30 40 50 60

Describes very well

Describes somewhat

Describes a little


Have no idea

“Our employees believe that their job security is based on individual job performance.”


0 10 20 30 40 50 60

Describes very well

Describes somewhat

Describes a little


Have no idea

“Our employees view their job responsibilities in terms of their job descriptions.”


0 10 20 30 40 50 60

Describes very well

Describes somewhat

Describes a little


Have no idea

Moving the Right Numbers in the Right Direction

� Involvement starts with planning – employees won’t take ownership of OPB (Other People’s Budgets).– Sales and Marketing Plan– Operating Plan and Budget

� Employees won’t take ownership of OPD (Other People’s Decisions).

� There must be a structure for presenting, discussing, and challenging numbers that allows bottom-up decision-making to take place.

� Employees won’t take ownership of OPN (Other People’s Numbers) – they have to have line-of-sight responsibility for their numbers.

� The numbers that reflect expenses are important – but the numbers that drive the rate of revenue generation are critical.





“Performance-based compensation for all of our employees . . . exceeds 20% of total compensation.”


0 5 10 15 20 25 30 35 40 45 50

Describes very well

Describes somewhat

Describes a little


Have no idea

“Our employees know . . . bonuses and profit-sharing before the numbers come in at the end of the year.”


0 5 10 15 20 25 30 35 40

Describes very well

Describes somewhat

Describes a little


Have no idea

“We believe employee stock ownership is a relevant issue for our company.”


0 10 20 30 40 50 60

Describes very well

Describes somewhat

Describes a little


Have no idea

Rewarding the Outcome

� It must place a bounty on the financial performance you want to achieve.

� It must be about compensation and equity, not just recognition and games.

� It must define performance as the achievement of commonly-held goals.

� It must change peoples’ behavior.

Eliminating Unproductive Compensation

� Eliminating performance compensation paid regardless of performance.

� Eliminating divisive and discriminatory compensation.– Compensation based on individual job

performance.– Bonuses for specific positions.– Bonuses exclusive to management (the

exceptions are equity or deferred comp).

Designing Bonus Plans

� Focused (critical numbers).� Simple, straightforward, and equitable� Self-funding.� Uncompromising (100%).� Non-discretionary.� Visible.� Significant (10% - 20% of total comp).� Progressive (weighted payouts).

Real Ownership

� Equity: Crossing the Rubicon. – Mentality (the end of short-term thinking).– Walls (the end of “us versus them”).

� Equity: Is it important?� Stock ownership vehicles:

– Employee Stock Ownership Plans (ESOP)– Stock Options– 401-K

Becoming a Company of Business-people

� If you start now, 2003 is realistic.� In every company, the process starts

somewhere – it might as well start with you.

– Find out more.– Start asking others “What if . . .?”

� Get a realistic picture of where you stand and the problems you will encounter.

� Start teaching business.– Make it part of the landscape.

– Formal doesn’t mean boring.– Mandatory doesn’t mean onerous.

– Start simple and generic.– Move to detailed and industry-specific.– People learn by doing – use games.

� Start sharing the real numbers.– Make it part of the landscape.– Focus on the critical numbers.– Connect the drivers to the outcomes.

� Get rid of the constraints and problems.– Policies– Compensation– People

� Push Involvement – put your freshly minted business-people in charge of producing the 2003 Business Plan.

� Develop a regular, consistent structure for presenting, discussing, and challenging the numbers.

� For 2003, find a new bonus plan.– My recommendation? Go with a pool plan

in lieu of a fixed payment plan.– 6-8 gross profit buckets per year– funded 100% by the increase in net profit – progressive weighting– 100% participation– salary – no commissions– blended allocation (50-50)– paid within one week, not tied to the calendar

Did you get it?

� RULE I– Everyone sees and understands the

numbers.

� RULE II– Everyone has the authority and

responsibility for improving performance.

� RULE III– Everyone has a stake in the outcome.

Questions and Information

Fletcher Groves is a Vice President and Senior Consultant with SAI Consulting, LLC. He can be reached at (904) 273-9840, or by

e-mail at [email protected].

A download version of this PowerPoint presentation will be available on the SAI

website at www.saiconsulting.com.

Documents

Who has the Profit and Loss Responsibility in Your Company? Presented by: Fletcher L. Groves, III Vice President SAI Consulting