This document summarizes a seminar on applying financial realities to strategic planning. The seminar objectives are to help professional services firms use advanced financial models in parallel with strategic planning to assess how different strategies could impact revenues, returns, and risks over time. This enhances strategic decision making. The seminar will discuss building a robust strategic forecasting model, capabilities that enhance decision making, integrating strategic and operational forecasts, and approaches to strategic risks.

1. C O N S U L T I N G
A Limited Liability Company
ParCon Consulting, LLC
Applying Financial Realities to Strategic Planning
ParCon Consulting Education & Seminar Series
Market Focus: Engineering, Consulting & Architecture
October 3, 2014
Revision (6.1)

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Applying Financial Realities to Strategic PlanningObjectives and introductions
Learning Objectives:
Architecting a robust strategy forecasting model
Capabilities that enhance strategic decision making
Building fiscal reality into strategic initiatives
Approaches to strategic risks
Integrating strategic and operational forecasts
Attendee goals and input…
Goals & Learning Objectives
Structured discussion about how professional services firms are using advanced financial models in parallel with strategic planning to help leaders assess how a chosen strategy could impact revenues, returns and risks over time and enhance the quality of strategic decision making.
Speaker Backgrounder
Matthew GillManaging Partner
Atlanta, GA
ematt@parconsult.como770.740.9621
m770.329.6219
Career Summary
ParCon ConsultingCo-Founder, Principal
ePsolutions, Inc. CEO, Chairman
Philips Electronics, CE, N.A. EVP & General Manager, North America
ViewSonicEVP & General Manager, Americas
International Business Machines
Established since 2002, ParCon is an Atlanta based management consulting firm committed to delivering superior strategy and execution solutions to professional services clients in North America.

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Building Meaningful Links Between Strategy & FinanceWhat do we mean when we talk about strategy and strategic planning?
mission
values
ambition
strategy
strategicinitiatives
team/ individual goals
Lifetime
20 + Years
5-20 Years
1-5 Years
3-7 Years
<1 Year
Descriptions
MissionWhy we exist
•What do we want to contribute?
•Why our best efforts matter?
ValuesHow we think & behave
•Whatare our shared beliefs & principles
•How do we conduct ourselves (internally, externally)
•Whatare our ethics and culture
AmbitionWhere we intendto go
•What do we want to accomplish and bywhen?
•How will we “measure” success?
Strategy How we intendto get there
•Choices about markets, clients & offerings
•How we differentiateourselves from our competitors
•Criticalprocesses and capabilities we need to deliver value
Strategic Options & InitiativesChanges we will make
•Systematicinvestments in new capabilities or improved processes
•Compellingoptions for growth and expansion
IndividualGoalsThe work I will do
•My individual or team goals
•How strategy impacts my career, opportunities, time allocation
?
Areas of special focus for financial leaders
Strategy Pyramid
Revenues
Profits
Costs
Priorities
Capital
Risks
Timing
?
Finance

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Building Meaningful Links Between Strategy & FinanceChallenges and pitfalls we’ve witnessed between the “concept” and the “reality”
Breakdowns in Process
Challenges in Implementation
The Clarity & Simplicity of Your Strategic Vision
Poor linkage between strategic forecasts & operating plans
Lack of buy-in (or understanding) by leaders, managers and staff
Rigid plans that become the prime focus for leaders, limiting their range of actions or new ideas
Missing links between strategy and performance management systems
Lack of consistent evaluation of progressor quantitative impact
Lack of strategic “learning loops”
Lack of financial rigor within the strategic planning process
No attempt at projecting the cost or impact of chosen strategic initiatives
A plan that results in no real choices or priorities –“do it all-now”
No clarity on how strategy impacts shareholder value
Disregard of true financial capacity & capital requirementsStatic models that focus executives on a single possible outcome
The conundrum of perfection
The Ambiguity & Challenges of Your Operational Reality

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SECTION THREE
A Financial Architecture for Long-Range Planning
Addressing breakdowns in the planning and initial forecasting process

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A Financial Architecture for Long-range PlanningAn approach that has evolved over many engagements
We generally design our models with; 5 years financial history, current year, and 5 year annual forecasts
For multi-divisional firms, we strongly prefer building the strategy & forecast at a BU level and then aggregating
Financial components in our architecture usually include; revenues (net) profits (contribution and IBT or EBITDA) resources (FTE) cash flow (we typically do not model the balance sheet) global variables
The level of detail in a strategic forecast should be kept as simple as possible (avoid “false precision”)
Our strategic impact models (SIM) are created in parallel with our strategic planning process
Building an effective model can be daunting but with time & effort, it can be evolved into a powerful planning tool
Five Building Blocks of Our Strategy Forecasting Architecture (SIM)
Baseline Forecasts
1
Growth Options
2
Strategic Initiatives
3
Risk Assessment
4
Modeling & Reporting
5
We suggest building the model from bottom to top…

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
I. Developing baseline financial forecasts
Evaluating the impact of a given strategy is easier if teams first attempt to forecast business results as if no strategy was in place
Finance needs to understand what leaders consider their “business as usual” trajectory
A baseline also provides contextfrom which to understand and evaluate other scenarios or plans
Ultimately, a baseline helps establish a minimum expectation of future performance for the firm.
Baseline forecasts are ideally developed at a business unit level by the planning teams using a standardized set of assumptions
Assumes that no “strategic” investments will occur but that business units would continue to drive their business
We typically recommend using a linear progression of future results based on historical performance & trendsInsights regarding current & near-term market and competitive conditions typically enter into baseline forecast discussions
Extended revenue forecasts should be “range accurate” without relying on detailed sales forecasting and resource plans
Contribution level profit forecasts reduces BU concerns about uncontrollable corporate costs.
Resource estimates (headcount) can be projected using simple productivity estimates of net revenue / FTE
Finally, an enterprise roll-up is generated and evaluated by the CFO & executives with top-down modifications taken as needed
Do you see value in a building a “business as usual” forecast?
Group discussion on variations they are using or finding effective.
group discussion
ParCon Learning Module: October 7, 2014
Baseline forecasts should be established early in the planning process based on what leaders believe would happen over the planning period if the business were to continue on with no “strategic” investment.
NETREVENUES
CONTRIBUTION
RESOURCES
CASHFLOWS
ASSUMPTIONS& GUIDANCE
Building a Baseline Forecast

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 II. Identifying and exploring growth options At the heart of strategy
lies a compelling
vision or aspiration for
growth and innovation
 Give planners the opportunity
to dream and innovate when
identifying new growth options
 Strategic intelligence focused
on opportunities in services,
clients and geographies can
dramatically improve the
quality of options that emerge
 Business cases take time but
are critical to developing
decision grade options
 The process can also help
engage key people and allows
potential leaders to emerge
Growth options represent the next critical element of
a robust approach to strategic planning; namely the
identification, evaluation and selection of one or more
viable opportunities for growth or key market moves.
How successful have you
been at getting teams to
develop innovative ideas?
Are their good practices that support
strong, consistent growth in new
markets, services or clients?
group discussion
A process to identify and discuss viable growth options in a
creative or innovative way is critical to building a compelling plan
Growth options typically include; acquisitions, investments in
organic growth or innovation (technology, processes, etc.) and
may include spin-outs or adjustments to the business portfolio
Planners can rapidly prioritize options using filters and standard
evaluation criteria which allow the best ideas to surface
A subset of the best options should be further developed using
business cases developed by sub-teams
Interesting opportunities that lie outside of current business units
can be identified in parallel by members of the executive team
A portfolio of completed growth cases are then presented and
evaluated by senior executives with an eye toward selecting the
best “portfolio” of options that maximize returns and reduce risks
In Search of Profitable Growth
ParCon Learning Module: October 7, 2014
Marginal Opportunities Low Risk Opportunities
MMM STRATEGIC OPTION EVALUATION
Risky Game Changers Big Ideas
Low Revenue & Profit Impact High
Significant Obstacles & Challenges Minimal
Water, Waste Water
Offering
Build Tunneling CoE
Drive I&E Growth in
Alberta
Build Transit Practice
Build Aviation Practice
Enter U.S. Markets
Western & Northern
Expansion
Double Commissioning
Owners Rep / CM Model
Win in Alberta
Triple National Utilities
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1.0 1.5 2.0 2.5 3.0 3.5 4.0
Each growth option should
represent a discreet investment
opportunity that can legitimately
be selected or eliminated based
on a chosen strategy or
changing operational realities.

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
III. Putting fiscal rigor to strategic initiatives
A robust strategy balances growth with a systematic focus on enhancing bottom line performance
As with growth options, the operational success or failure of initiatives is hit & miss
Identifying a willing & capable leader and committed team are critical first steps
Treat strategic initiatives like your would handle a complex projects for a client
Periodic executive reviews of progress and quantitative impact keeps teams focused
How comfortable are you with the financial rigor of your current initiatives?
What are you doing today? Are expected results integrated into your operating forecasts?
group discussion
ParCon Learning Module: October 7, 2014
Strategic initiativesrepresent investments focused on improving business results by enhancing key processes or building strategic capabilities that sustain or create a competitive advantage.
During a strategic planning effort, one or more strategic initiatives are typically identified and selected for investment based on what planners believe are critical to achieving strategic goals
Initiatives include both “enterprise” initiatives (cross divisional efforts) as well as initiatives that impact only a single group
ParCon finds the “Balanced Scorecard” framework useful for identifying initiatives that support long-term value creation
We find most firms are too informal when developing the costs (money, resources) and impact (revenues, margins, costs and resources) of any initiatives selected to move forward
Industry performance benchmarks can be helpful in determining performance goals and targets for a given initiative
How strategic initiatives will be treated within the budgeting and manpower process needs to be consistent & transparent
Break-through Results From:
Improving PM processes
Better management of talent
Business development
Leadership development
Marketing & Intelligence
Quality management
M&A process excellence
High performance culture

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 IV. Assessing & quantifying strategic risks A robust approach to
modeling risks can
help inject much-needed
reality into
strategic forecasts
 Strategic risk assessment is
distinctly different from adding
a safety buffer in a forecast
 We recommend that risk
modeling be integrated into
the strategic planning process
 Engaging business leaders in
evaluating risks helps highlight
areas where doubt exists
 Developing mitigation plans
for the most significant
strategic risks is good practice
Risk is an inherent element of every strategy (or
strategic scenario), the nature of which needs to be
identified and evaluated using appropriate
enterprise risk management (ERM) parameters.
How is risk management
approached within your
current planning process?
Do you have a formal ERM approach?
Is it applied to your long range
planning efforts?
group discussion
ParCon Learning Module: October 7, 2014
Some firms lack a systematic way of identifying and quantifying
risks to their strategy or internal operations
While approaches to ERM vary from firm to firm, we generally
find a matrix that includes likelihood & impact serve well
Business leaders evaluate the potential financial impact of risks
on; revenues, operating costs and cash flows
A risk component supports better sensitivity analysis of strategic
results; allowing business leaders and financial professionals to
understand which risks will have the greatest impact on results
The ability to generate “risked” and “unrisked” forecasts builds
stakeholder confidence in the legitimacy of strategic forecasts
Increasingly, active Boards want clarity about the nature and
magnitude of the risks in your strategy & financial forecasts.
ParCon Strategic Risk Grid
Baseline
Forecasts
Organic Growth
Investments
Acquisitive
Growth
Investments
Strategic
Initiatives
Operational
Issues
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Level of Control
Likelihood of Occurrence
ML&M Strategic Risk Analysis
Size of Bubble Indicates Potential Impact based on Selector
Very High / Frequently Very Low / Infrequently
No Control High Control
BASELINE FORECASTS
ORGANIC GROWTH ACTIVITIES
ACQUISITIVE ACTIVITIES
STRATEGIC INITIATIVES
EXTERNAL FACTORS
Revenues Costs Cash Flow

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
V. Modeling & reporting capabilities
Building a system that allows planners to easily test a variety of scenarios makes for a superior final strategy
One goal of modeling is to allow planner to “flex” key variables across a range of reasonable possibilities and evaluate the fiscal results
Without the ability to model, planners tend to become locked in to a single potential strategic scenario
What is your experience with scenario modeling and stress testing your plans?
Are your current long-range forecasts based on single point estimates or multiple scenarios?
group discussion
ParCon Learning Module: October 7, 2014
Advanced modeling and reportingare powerful tools for planners & executives who are asked to make strategic decisions on a comprehensive strategy that optimizes shareholder value and minimizes risk.
Evolving from a single, static financial view to one that allows easy evaluation of multiple options and variables helps leaders evaluate the impact of their choices on financial outcomes
We prefer a design that supports modeling of revenues, costs, profits, cash flows & risks across a broad spectrum of options and variables
We find that creating a control panel that non-financial executives find easy to use helps to create deeper insights
By building forecasts from the BU level up, planners can add or eliminate various BU results to evaluate the overall impact on the business portfolio and shareholder value
Allowing planners to quickly model major choice (e.g. acquisitions, initiatives) create insight into what drives key results
Finally, we have found that reporting & powerful visuals are key tools in both assessingand communicatingthe chosen strategy
Empower Your Planning Team
Growth Options:Add or remove, change start dates, adjust costs
Strategic Initiatives: Add or remove, modify kick-off, impact, funding and resource impacts
Reporting:Quick add or remove business units, risks, and various revenue streams (e.g. acquisitions)
Global Variables:Modify costs of capital, return thresholds, overhead rates, labor costs, etc.

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A Financial Architecture for Long-range PlanningGroup discussion on the process described
What questions do you have about this approach?
What have you found historically that has worked well for your firm?
Where have you experienced breakdowns?
What can you do going forward to improve your internal processes?
Five Building Blocks of Our Strategy Forecasting Architecture (SIM)
Baseline Forecasts
1
Growth Options
2
Strategic Initiatives
3
Risk Assessment
4
Modeling & Reporting
5
Failures in Process group discussion

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SECTION FOUR
Fully Realizing Results by Sustaining the Effort
Addressing challenges with implementation

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Fully Realizing Strategic ResultsLinking strategy with your existing operational systems
Successful execution requires you to link & align…
Organizational Structure: Leaders, people, management & information systems
Goals & Objectives: Aligning annual revenue, profit & efficiency goals with a well considered roll-forward budgeting approach
Initiative Impact:Determining how active initiatives should be integrated into company & departmental operating goals & periodic performance results
Investment: Making consistent investments in high priority initiatives (StratEx)
Resources: Assign the right people & recognize the impact on utilization & profit, delegate existing workload and discontinue lower value activities to free up time
Performance Systems: Integrate strategic performance into PM systems with appropriate rewards & consequences
Risk Management: Insure that strategic risks are integrated into internal ERM reporting and mitigation efforts
Operating Plans
Strategic Forecast
?Linkage ?

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Fully Realizing Strategic ResultsBuilding muscle memory in the execution of strategy
Supporting strategy execution as a priority…
MOS Integration: Integrate strategy processes (planning, review, refinement, funding) into existing annual management calendars & operating systems.
Strategy Governance:Build a disciplined governanceprocess that focuses executive, planners & leaders on reviewing & assessing your current strategy and focusing on the “big picture” during periodic reviews
Honest Evaluation & Review: Focus strategy reviews on learning & decision making coupled with an honest assessment of both progress(achievements, milestones, wins) & impact (quantitative improvements)
Strategy Refinement: Your strategic planis not an “end” but a way of looking at the world, prioritizing resources and testing your hypothesis. Ongoing refinement is important to help balance strategic focus with operational agility
Learning Loops:Companies that learn faster and translate insights into concerted action have a distinct competitive advantage. Creating “learning loops” linked to disciplined execution is challenging but increasingly critical
Importance
Urgency
-
+
+
-
Covey’s Time Management Matrix
The core issue is that strategy represents Quadrant 2 work
30%
40%
20%
10%

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Fully Realizing Strategic ResultsOwning and leading organizational change
Harness the full power of your organization …
Leadership: Success in strategy (or change) requires activeand visibleleadership and frequent engagement. It cannot be delegated and it can’t be relegated.
Engage High Performers: Change efforts require resources and a commitment of substantial time, focus and effort. The quality of the people on these teams has allot to do with the success of your major initiatives. Reward success…
Consistent Communication: Keeping your strategy and successes top of mind across the firm helps create a shared feeling of progress & inertia, helps overcome cynicism and can get the critical “60%” off of the fence
Strategic Filters: Great leaders use strategy as a tool for helping make important decisions. They then take the time to link their decisions back to strategy so people develop an understanding of how strategic plans, decisions & outcome tie together.
Strategy as a “Day Job”: Today, high performing companies have found unique ways to “manage” the business while simultaneously “changing” their business. They’ve done this by making strategy a part of everyone’s “day job.”
Leadership>Strategy