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THE INSTITUTE OF COST AND WORKS
ACCOUNTANTS OF INDIA
Regional Cost Convention
30TH November, 2007
Strategic Management Accounting for
Value Creation
P. Thiruvengadam
Deloitte, India
Strategic Management Accounting
Strategic Management Accounting provides
information and analysis for planning, control
and decision making from a strategic
perspective
Strategic Decisions and Value
 Decisions create options
 Good decisions create valuable future options
 Poor decisions limit future options,
 The more good decisions management makes, the more valuable options a
company will have
Management should seek to maximize the number of good decisions it
makes each year
Superior Strategy Development + Superior Execution = Superior Performance
Insights
Decisions
Performance
Strategy Development
Strategy Execution
 Strategy Development – taking great
information, ideas and insight and
turning them into great strategy:
 Strategy Execution – taking great
decisions and strategy and turning
them into great performance:
• Where to compete?
• How to compete?
• What needs to be done?
• How will it be accomplished?
Which is the bigger challenge in driving superior performance –
strategy development or strategy execution – and how should
companies best meet this challenge?
The Strategy-to-Performance Gap
There is a significant What
gap between
the performance
most companies could deliver –
drives superior
strategy execution?
were they to choose the right strategy and execute it in the right way – and the
results they actually produce over time
Two Underlying Causes
1. Decision-making
• Quality
• Quantity
• Magnitude
2. Execution
• Information
• Process
• People
Three Contributing Factors
1. Agenda management is undisciplined
and unfocused
2. Strategic planning produces too few
good decisions
3. Strategy execution is poor
What Are Execution Processes?
Two broad sets of processes are involved in turning strategy into performance –
planning and performance monitoring
Strategy Development
Planning
Performance Monitoring
 Strategy development
determines “where we
intend to go” and describes
(at a high level) “how we
intend to get there”
 Planning delineates the
resources required to get
us from here to there and
the associated financial
implications
 Performance monitoring
tracks actual performance
relative to plan
Closing the Decision-making Gap
1.
Deal with operations separately from strategy
1.
Focus on decisions, not discussions
2.
Measure the real value of every item on the agenda
3.
Get issues off of the agenda as quickly as possible
4.
Put real choices on the table
5.
Adopt common decision-making processes and standards
7.
Make decision-making consequential
Disciplined Strategic Management
•
•
•
1. Ambitious &
Stretching
Goals
Value-based compensation
Align with short and long term delivery
Instill enterprise-wide leadership
•
•
•
Use value goals to create new ambition for strategy
Measure performance vs. peer set
Cascade value goals to each BU
•
2. Value-based
Facts &
Priorities
6. Performancebased Rewards
Value
= Common
Currency
•
•
•
•
5. Effective
Performance
Management
Establish performance dialogues
Simple value driver dashboards
Use financial, strategic and
operating KPIs to trigger
intervention
Work on quality of forecasting
over the cycle & track
performance over time
3. Strategic
Choices &
Commitments
4. Targets &
Resource
Allocation
•
•
•
Communicate clear management guidance and/or constraints
Track resource deployment as a leading indicator
Link to team and individual targets and operating plans
Develop clear line-of-sight
into the sources and drivers
of value
Create a single strategic
agenda – priorities based on
value-at-stake
Use common standards for
participation and competitive
strategies
•
•
•
•
Formulation and evaluation
of strategy alternatives to
drive decision-making
Ensure strategies
translated into concrete
and synchronized action
and operating plans
Performance Measurement
Performance Measurement is the process of collecting, analyzing,evaluating,
and communicating information relative to an organization's performance and results.
Effective Performance Measurement provides information for the planning and
control of organizations, and is a means of ensuring that the direction, efforts
and results of an organization are in alignment.
Performance Management
S
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N
BUSINESS
PLANNING
PERFORMANCE
MANAGEMENT
PERFORMANCE
MEASUREMENT
INFORMATION FOR
DECISION MAKING
AND TAKING ACTION
 Activity Based Management
 Priority Setting
 Impact Analysis
Performance Management is the integration of the results of
performance measurement into management processes so that
the results can influence the decisions made by the organization.
Why Performance Management?
1- To improve the breath of performance reporting (continued)...
MANAGEMENT
NEEDS
INFORMATION
THAT IS:
• High Level
• Broad Scope
• Strategic
• Long-term
• Top-Down
TRADITIONAL
MEASUREMENT
SYSTEMS PROVIDE
LITTLE SUPPORT TO MEET
THESE NEEDS:
• Too Detailed
• Limited Scope
• Tactical Information
• Short-term
• Bottom-Up
• Financials not linked
to operational data
•Report only on the past
Why Performance Management?
2- To counter-act the phenomenon of
“Strategy Dilution”:
Strategy Dilution is the gradual erosion
of understanding of strategy and
direction the lower in an organization
you go. Measures link process
performance directly to strategy.
Developing a measurement framework
which cascades down through the
organization and allows results to be
pyramided-up builds organization
understanding and reduces "dilution".
Why Performance Management?
3- To establish accountability for results
throughout the organization  At the Corporate level




At the Business line level
At the Product level
At the Process level
At the Functional level
 At the Team level
 At the Individual level
 Linkages at all levels allow individuals to
understand their role and expected
contribution to the achievement of
corporate objectives and goals.
Why Performance Management?
4- Used as a dashboard, the use of a
Performance Management framework
also allows management:
 To assess strengths and
weaknesses of business processes
 To monitor performance of major
improvements efforts
 To better understand root cause
performance
 To make strategic decisions
 To more effectively manage the
business
Management Dashboard
A new framework is required that encompasses three types of
measures: Business Performance Measures, Management
Accounting Measures, and Diagnostic and Control Measures
New Performance Measurement Framework
Business Model
 Strategy
 Investment
 Operational
 Business Performance
Measures
 Management
Accounting Measures
 Diagnostic & Control
Measures
Value Creation
Benefits : MAC and Customer / Product Profitability
Consistent comparisons gives interesting results!
High margin business is not always the most profitable!
Sector contribution by business
15
Compare individual customers
30
sector 1
sector 2
sector 3
sector 4
Business Sustaining
10
5
25
20
15
10
%
%
GM%
ABM - ROT%
5
0
0
-5
-5
-10
y
an
mp
o
C
X
y
an
mp
o
C
Y
-15
-10
A
B
C
D
E
Product profitability identifies it’s own challenges
Only 30% of customers make a positive contribution!!
Product Profitability
The “Whale Curve”
3,000
Marginal or No
Return Customers
Negative Margin
Customers
2,000
Service
rationalization
1,750
Cost reduction
opportunities
750
1,000
2,000
1,000
350 400
100 250
Cumulative
Net Margin
0
-1,000
-1,200
Number of Customers,
Ranked by Contribution
-2,000 -1,750
-50 -40
-250 -100
Possible product
redesign opportunities
-1,000 -850
Targets for
increased sales
opportunities
Benefits : MAC Process Analysis - Invaluable Management Information
The focus is on what an organisation does, not just £’s
The Traditional View
Comparison of process costs by business = Challenge
Benchmarking - Business cost profiles
The Activity Analysis View
Costs
Activity
 Salary and wages
1,151
 Develop policy and strategy
75
414
671
 Social costs – general
372
 Manage provisioning system
 Social costs – specific
173
 Manage the supply chain
 Travel – car
 Store equipment
89
 Other personnel costs
38
 Hotel & overnight
63
 Entertainment
8
 External services – training
4
105
 Refurbish equipment
110
 Issue equipment on priority basis
235
474
 Issue equipment on non-priority
basis
 Premises costs allocation
117
 Perform modifications and upgrades
40
 Provide post design services
65
 Plan the maintenance of equipment
85
2,550
321
 Manage employees
99
Total
10
5
0
2,550
A
B
C
D
E
Supporting a review of overall customer value
Review of Non Value Added activities can be fruitful
Value added / Non-value added
Customer Lifetime Value
Positive lifetime
value
Manage Customers
Manage & Source Prods
Process Sales Orders
VA
NVA
Replenish Stock
Cost to sell &
serve
Cost
Total
15
218
 Maintain storage assets
61
20
115
 Dispose equipment
 External services – other
 15 further cost elements
Manage the business
Manage finances
Deliver product
Store product
Purchase product
Process sales orders
Manage Customers
Market the business
25
Manage Stock
Cost to
Manufacture
Deliver Product
Cost to win and retain
Collect Cash
0
500
1000
1500
£000s Costs
2000
2500
Time
Integrating with Performance Management
 Performance Management is growing in importance as
companies seek to align their reward systems with their
strategic imperatives. The balanced scorecard is the
most common vehicle for accomplishing this goal. This
typically measures an organisation’s key strategies and
core processes such as customer satisfaction,
innovation, operations, employee satisfaction, financial
performance and value.
 The strategic nature of performance measures and
related targets can focus ABM measures and analysis.
Then ABM can be a powerful enabler to generate costbased, process and/or profitability performance
measures which are part of a scorecard.
 For example, accurate activity costs can be computed
using ABM techniques and rates can be input into the
Performance Management process to facilitate
accurate reporting of performance measures at the
operating level. Furthermore, costs and capital can be
allocated directly to objects., which can then be
included in value metrics.
 Accountability for measures can be identified at the
detailed activity level as well as the higher cost
attachment point level (i.e., product, customer, channel,
etc.). This is consistent with the need for measures to
be cascaded throughout the organisation to be most
effective.
Integration Aspects
Value Driver Modelling and Strategic Measurement Focus
Management
Cost Driver Definitions, Measures and Volumes
(Actual & Budget)
Cost and Profitability Goals
Revenue, Cost and Profitability Results
“What If” Scenarios for simulation
Performance
Measures
Integrating with Profit Improvement
 Strategic Profit Improvement efforts are
strategically focused on improving cost structures
to increase shareholder value.
 Activity Based Management (ABM) plays a
significant role in assessing the cost of both
activities and processes in identifying those
processes with high impact improvement
opportunities. The ability to cost the effect of
asset and technology utilisation can assist in the
optimisation process of asset and technology
usage.
 The role of ABM is extended during the
implementation and embedding process of
improvement opportunities. Advanced Cost
Management is viewed as a core competence to
realise the benefits of Enterprise Wide Cost
Reduction initiatives.
 ABM and performance measurement becomes
an integral part of the continuous process of
valuing products, processes and services.
Embedding Improvements
Opportunity
Identification
Shareholder Value Analysis
ABM Process
Costing
Processes
Value Drivers
Organisational
Units
Portfolio Analysis
Shareholder
Value
Products &
Services
Performance
Measures
Understanding Profitability
- Understand product & customer profitability,
what to focus on / manage?
- Understand differing channel costs
- Understand customer cost base, i.e. cost to serve
and cost to retain
- Profile the profitability of scare resource e.g.
space utilisation, FTEs etc
Performance Management
- Provide multidimensional views of the business
giving improved ways of measuring and managing
performance
- Provide key KPIs to support performance
reporting e.g. Balanced Score Card
- Highlight best areas for investment e.g. brand
support, internet strategy
- Understand brand costs and profitability profiles
- Underpin sales and marketing campaigns by
providing customer segmental analysis e.g. socioeconomic splits, method of payment etc
- Give transparency of costing and pricing
mechanisms on a consistent basis to provide robust
analysis to regulators
- Provide internal benchmarking of processes and
activities to measure performance gaps of similar
areas
Mg. A/C Principles provide a
solid foundation to support:
Cost Reduction
- Identify high cost, low value processes to focus cost
reduction effort on
- Provide insights into when businesses are able to work
with suppliers and customers to share costs,
mutually increase profits and share benefits
- Understand causality and the variability of the cost
base as business changes
Shared Services / Outsourcing
- Provide service menu pricing
- Support process analysis and ongoing management
through KPIs
- Resource requirements planning through Activity
Based Budgeting
- Support decisions on process off-shoring /
outsourcing
THANK YOU