Managing Your Company's Cash: Using EPM To Capitalize On Future Growth September 28, 2014 Scott Leshinski

Managing Your Company's Cash:Using EPM To Capitalize On Future GrowthSeptember 28, 2014

Scott Leshinski

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• Introductions• Overview Huron Consulting Group• Capital Allocation & Optimization• Q&A

Agenda

3 © 2014 Huron Consulting Group. All rights reserved. Proprietary & Confidential.

Overview of Huron Consulting Group

• Formed in 2002, with approximately 200 professionals• Today, over 1,600 full-time consultants with leading

experts in numerous industries and key services• 2013 revenue of $720.5 million• Headquartered in Chicago with other domestic and

international offices, including those located in the following major metropolitan areas: Atlanta, Boston, Detroit, Houston, London, New York, Portland (Ore.), San Diego, Toronto and Washington, D.C.

• Publicly traded on the NASDAQ under ticker symbol “HURN” since October 2004

• In 2013, served more than 900 clients, including more than 200 new clients


Enterprise Solutions CapabilitiesDelivering process improvement and financial and operational solutions worldwide

Enterprise Performance Management

Enterprise Planning, Strategy Management, Financial Close,

Customer Analytics

Business Intelligence

and Analytics

Customer Relationship Management

Sales, Customer Service, Contact Centers, Marketing

Private Cloud, Public Cloud, and Managed Services

Technology Infrastructure and Operations

Performance Management and

Analytic Capabilities

Enterprise Resource Planning

Financials, HCM

Information

Management

Data management, architecture

and infrastructure

Information Visualization

Information Analytics

Organizational Readiness

Pre-configured Industry Solutions

Education, Retail, Oil & Gas, Healthcare

Integrated Business Planning

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Integrated Enterprise Planning Strategic Planning providing the basis for “bottom up” tactical operational plans

© 2014 Huron Consulting Group. All rights reserved. Proprietary & Confidential.

• Target are set by management based on external indicators and

events and aligned to strategic imperatives (e.g. Profit) and

communicated to the Business Unit (BU).

• BU’s provide feedback on the assumptions that went into the

targets.

• The targets and assumptions are then set.

• BU’s do the first level of planning to meet the targets and gain

agreement from Corporate.

Targets are set within the strategic framework and cascaded throughout the organization

Corporate Strategy

Development

Target Development

Budget Development

Target Cascade

Operations /

Measurement

Corporate

Business Group / Business Unit

Business Unit / Region / Country

Feedback: Update as required

BG / BU Consolidation

Corporate Consolidation

Update Forecast

(as required)

Update Forecast

(as required)

Target Validation

• BU’s “planned targets” are cascaded down to the Business Units / functions.

• Business Units / functions develop the bottom’s up plans to meet the targets.

• Management then uses rolling forecasts for base level performance and identify initiatives to close the gaps between targets and expectations.

The strategies of the Business Units / Regions must be aligned with one another and with the Corporate scorecard if organizational purpose and synergies are to be achieved.


Starting Point for Best Practice Planning“Top Down” modeling capabilities allow for rational targets

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• Forecasts are based on SEPARATE, INDEPENDENT views of what “might happen”

• Internal (operational, financial)

• External (market, competitor, regulatory, etc.)

• External (econometric)

• ASSUMPTIONS are the basis for forecasts and development of forecasts

NOT specific sets of numbers

• Forecasts are set based on EXTERNAL INDICATORS and events and aligned to strategic imperatives

• Targets/Assumptions are cascaded to the Business Areas

• Business Areas (BAs or BUs or product areas, regions, etc.) provide feedback on the assumptions that went into the targets. The

ASSUMPTIONS AND TARGETS ARE THEN MUTUALLY AGREED to and set.

• BAs complete the forecasting/planning and begin to develop operational / tactical plans to meet the targets

• BAs “planned targets” are cascaded down to the functions

• Projects & Programs develop specific, actionable operational / tactical plans to meet the BA’s targets

• Management then uses rolling forecasts for base level performance and identify initiatives to close the gaps between targets and

expectations

Corporate

Business Unit

Programs &

Projects

1 1

1 1

22

2

Top Dow

n

Bot

tom

Up

2

Top Down Forecasting still utilizes Bottom Up “tactical” & “operational” planning

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• The enormous amount time corporations spend conducting strategic planning doesn’t cascade to an operational plan which results in only modest resource shifts.

• Resource defined as CAPEX, OPEX, resource, R&D, marketing, etc.• Most companies allocate the same resources to the same business units year after year. • Given the performance edge associated with higher levels of reallocation, this undermines performance,

profitability and ability to realize strategic goals• Performance reigns in companies where capital and other resources flow more readily from one business

opportunity to another, returns to shareholders are higher and the risk of falling into bankruptcy or the hands of an acquirer lower.

• Introducing new decision rules and processes to ensure that the allocation of resources is a top-of-mind issue for executives, and remaking the corporate center so it can provide more independent counsel to the CEO and other key decision makers.


The Value of Integrated Enterprise Planning“If you don’t know where you’re going, any road will get you there.”


The Value of Integrated Enterprise Planning“How to put your money where your strategy is” – McKinsey Quarterly

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• McKinsey reviewed the performance of >1,600 US companies between 1990 and 2005.2

• US capital markets have annually issued ~$85B of equity and $536B in corporate debt.• Amount of capital allocated or reallocated within multi-business companies was approximately $640B

annually—more than equity and corporate debt combined.1

• For one-third of the businesses, the amount of capital received in a given year was almost exactly that received the year before—mean correlation was 0.99. For the economy as a whole, the mean correlation across all industries was 0.92

• Companies that reallocated more resources—the top third of our sample, shifting an average of 56 percent of capital across business units over the entire 15-year period—earned, on average, 30 percent higher total returns to shareholders (TRS) annually than companies in the bottom third of the sample. This result was surprisingly consistent across all sectors of the economy. It seems that when companies disproportionately invest in value-creating businesses, they generate a mutually reinforcing cycle of growth and further investment options.

• A company in the top third of reallocators was, on average, 13 percent more likely to avoid acquisition or bankruptcy than low reallocators.



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• Long-term view: over time spans of less than three years, companies that reallocated higher levels of resources delivered lower shareholder returns than their more stable peers did.

• One explanation could be risk aversion on the part of investors, who are initially cautious about major corporate capital shifts and then recognize value only once the results become visible.

• That provides the time necessary for new investments to flourish, for established businesses to maximize their potential, and for capital from declining investments to be redeployed effectively.

• Kleiner Perkins Caufield & Byers partner Randy Komisar “If corporations don’t approach rebalancing as fiduciaries for long-term corporate value, their life span will decline as creative destruction gets the better of them.”

• The goal isn’t to make dramatic changes every year but to reallocate resources consistently over the medium to long term in service of a clear corporate strategy.



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• Formalize approach with target setting and resource allocation• Setting targets is just a starting point; companies also need mechanisms for revisiting and adjusting

them over time.– Google holds a quarterly review process that examines the performance of all core product and engineering areas against three

measures: what each area did in the previous 90 days and forecasts for the next 90 days, its medium-term financial trajectory, and its strategic positioning.

• Evaluating reallocation performance relative to peers also can help companies set targets.– From 1990 to 2009, for example, Honeywell reallocated about 25 percent of its capital as it shifted away from some existing

business areas toward aerospace, air conditioning, and controls. Honeywell’s competitor Danaher, which was in similar businesses in 1990, moved 66 percent of its capital into new ones during the same period. Both companies achieved returns above the industry average in these years—TRS for Honeywell was 14 percent and for Danaher 25 percent.

• Systematic processes strengthen allocation activities. Create planning and management processes that generate a granular view of product and market opportunities. The overwhelming tendency is for corporate leaders to allocate resources at a level that is too high - namely, by division or business unit. Need a high level and detailed perspective

• This is not a trivial endeavor, however, the rewards make the effort worthwhile


The Value of Integrated Enterprise PlanningImproving the Process

Documents

Managing Your Company's Cash: Using EPM To Capitalize On Future Growth September 28, 2014 Scott Leshinski