This document discusses improving a company's capital project evaluation process. It recommends using net present value (NPV) and payback period as key financial metrics to evaluate all investments using discount rates tailored to each business unit and project type. The discount rate is calculated as the cost of capital plus additional risk premiums for business and project risks. It evaluates several approaches to determining the cost of capital component, including the capital asset pricing model (CAPM) and market-derived methods. The document concludes by recommending using CAPM initially but evaluating empirical approaches over time, and focusing on proper implementation across the organization.
OKRs and driver based plans by lamorte - aug 2014 san franciscoBen Lamorte
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To learn more, secure your seat or to take advantage of group discounts visit www.loras.edu/bigdata.
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Learn a best practice methodology where financial plans incorporate assumptions about business activities which are modeled to drive financial data such as revenue projections, headcount, spending and capital requirements.
Best Practices in Financial Planning and Analysis | 2013 Business Analytics S...Cartegraph
Loras College is proud to present our annual Business Analytics Symposium on March 27, 2014 at the Grand River Center in Dubuque, IA. Industry experts will share their insights about the evolving field of business analytics opportunities. Learn about everything from best practices when analyzing data to the importance and benefits of building a culture of analytics within your organization.
To learn more, secure your seat or to take advantage of group discounts visit www.loras.edu/bigdata.
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One reliable way to transform your budgeting process is to integrate the modeling that budget contributors typically do on spreadsheets to deliver driver-based planning and budgeting. With benefits such as being able to rapidly reforecast with minimal effort, having operational capacity always aligned, and better decision making that comes from having a deeper insight into variances, it has obvious appeal. So why is it not more widely used?
View these slides from our webinar with Forrester Research and Proformative and watch the full webinar here: https://www.anaplan.com/webinars/driver-based-budgeting/
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In my presentation, I focused on Driver-based forecasting and rolling forecast.
“Traditional annual budget process is often seen as a time-consuming exercise, with limited value, whose underlying assumptions are quickly outdated. In a time of increasing competition and fast changing environment, there is a need for a more agile way to predict the future. In the presentation, we will discuss the opportunity to introduce a more flexible approach based on driver-based forecasting and rolling forecast. We will consider the impacts of such a move on the organizations.”
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In this session, you will learn best practices for optimizing the planning process including how to adopt a driver-based model, efficiently manage rolling forecasts, embrace “what if” scenario modeling and provide more meaningful reporting and analysis to impact decision making. You will gain insights from comprehensive industry research recently conducted with hundreds of financial professionals around the world in order to understand key industry trends and best practices that are working for leading edge organizations today. In addition to the research, subject matter experts will share numerous practical steps for improving performance management processes in your organization. You will come away with real-world methodologies to help you improve and shorten your budgeting process and will also enable better decision making and organizational alignment that will help you to optimize performance.
Speaker: Tony Ard, Director of Solutions Engineering, Axiom EPM
Presentation delivered at ProformaTECH 2014 - http://www.proformatech.com
Track: Operational Advantage | Session: 5
The Future of Financial Planning and AnalysisSAP Analytics
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Speakers: Eileen Tobias, Sr. Director of FP&A, NetSuite
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Presentation delivered at ProformaTECH 2014 - http://www.proformatech.com
Track: Operational Advantage | Session: 4
Given the rate of change and budget pressures today, many organizations do not invest the time or resources to develop a traditional strategic facility plan. However, an agile management approach can be used to leverage available information so executives and facility staff can be confident that they have the right facilities in place and they are making good investment decisions.
Financial planning and analysis (FP&A) is the process of forecasting a company's future financial performance and managing its financial resources to meet those forecasts. FP&A professionals are responsible for creating accurate financial models, developing budget proposals, and analyzing past financial performance in order to identify trends and recommend improvements.
Genpact helps leaders of some of the largest enterprises
transform and run their processes and operations, including
the very complex and industry-specific. We help enterprises to be more competitive by becoming more intelligent: adaptive, innovative, globally effective and connected by enabling tighter management of costs, risks, regulations, and supporting growth.
Strategic and Tactical Planning in Workforce Managementseamsltd
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At our breakfast event in Kuala Lumpur on November 6, attendees joined us to hear from industry leaders how insurance companies such as Aviva use Anaplan to solve the challenging problems of using Excel for actuarial modelling, budgeting, reporting and forecasting. They also learned how adoption of an agile planning application can transform the actuarial modeling and planning process in just a few days.
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Bjarte Bogsnes, Vice President Performance Management Development at Statoil - Beyond Budgeting - A management model for new business and people realities; the Statoil implementation journey spoke at the CFO Event UK 2013
Making driver-based planning and budgeting workAnaplan
For Finance departments to best navigate through the twists and turns of today’s fast moving marketplace, a haphazard, once-a-year budgeting process just doesn’t cut it. To survive and thrive in this environment, this process needs to change to be more agile, align around a consistent set of resources, and attain a trusted level of accuracy.
One reliable way to transform your budgeting process is to integrate the modeling that budget contributors typically do on spreadsheets to deliver driver-based planning and budgeting. With benefits such as being able to rapidly reforecast with minimal effort, having operational capacity always aligned, and better decision making that comes from having a deeper insight into variances, it has obvious appeal. So why is it not more widely used?
View these slides from our webinar with Forrester Research and Proformative and watch the full webinar here: https://www.anaplan.com/webinars/driver-based-budgeting/
From annual budget to rolling forecast - Karine CochetKarine Cochet
On April 18 & 19, 2013, I participated as a speaker at the FP&A Innovation Summit in Hong Kong,
Organized by IE. (Innovation Enterprise), the Financial Forecasting & Planning Innovation Summit brought together CFO and FP&A Directors from all around Asia.
During 2 days, we, Finance executives, were able to share our experience and discuss around the 2013 Summit Topic: “Today companies rely on a solid FP&A process, this requires the ability to access, collect and analyze both financial data and forward-looking non-financial measures such as trends in customer demand or commodity prices”
In my presentation, I focused on Driver-based forecasting and rolling forecast.
“Traditional annual budget process is often seen as a time-consuming exercise, with limited value, whose underlying assumptions are quickly outdated. In a time of increasing competition and fast changing environment, there is a need for a more agile way to predict the future. In the presentation, we will discuss the opportunity to introduce a more flexible approach based on driver-based forecasting and rolling forecast. We will consider the impacts of such a move on the organizations.”
Proven Techniques for Optimizing Your Financial Planning & Analysis ProcessProformative, Inc.
In this session, you will learn best practices for optimizing the planning process including how to adopt a driver-based model, efficiently manage rolling forecasts, embrace “what if” scenario modeling and provide more meaningful reporting and analysis to impact decision making. You will gain insights from comprehensive industry research recently conducted with hundreds of financial professionals around the world in order to understand key industry trends and best practices that are working for leading edge organizations today. In addition to the research, subject matter experts will share numerous practical steps for improving performance management processes in your organization. You will come away with real-world methodologies to help you improve and shorten your budgeting process and will also enable better decision making and organizational alignment that will help you to optimize performance.
Speaker: Tony Ard, Director of Solutions Engineering, Axiom EPM
Presentation delivered at ProformaTECH 2014 - http://www.proformatech.com
Track: Operational Advantage | Session: 5
The Future of Financial Planning and AnalysisSAP Analytics
CFO Research conducted a global survey of 335 senior finance executives, Sponsored by SAP, and sought to gain a better understanding of how finance leaders aspire to support business decision-makers in the pursuit of value creation—and how leading-edge financial planning and business analysis capabilities factor into those aspirations. Here we present key findings from that survey.
Delivering Value with Financial Performance: Leading FP&A Practices of High-G...Proformative, Inc.
The FP&A organization along with the rest of finance is undergoing a transformation, with increasing responsibilities and their accompanying challenges, all of which have to be undertaken with limited resources. FP&A leaders, like their peers in other finance groups, are being asked to elevate their focus and extend their reach across the organization, while still delivering on traditional blocking and tackling activities. Hear from FP&A leaders who have created significant company value while navigating high growth business environments. Learn how best practices – on KPIs, planning cycles, rolling forecasts, and other techniques – have enabled high performance, both for their functions and for their overall business.
Speakers: Eileen Tobias, Sr. Director of FP&A, NetSuite
Eric Zimmerman, Manager of Financial Planning and Analysis, Infusionsoft
Presentation delivered at ProformaTECH 2014 - http://www.proformatech.com
Track: Operational Advantage | Session: 4
Given the rate of change and budget pressures today, many organizations do not invest the time or resources to develop a traditional strategic facility plan. However, an agile management approach can be used to leverage available information so executives and facility staff can be confident that they have the right facilities in place and they are making good investment decisions.
Financial planning and analysis (FP&A) is the process of forecasting a company's future financial performance and managing its financial resources to meet those forecasts. FP&A professionals are responsible for creating accurate financial models, developing budget proposals, and analyzing past financial performance in order to identify trends and recommend improvements.
Genpact helps leaders of some of the largest enterprises
transform and run their processes and operations, including
the very complex and industry-specific. We help enterprises to be more competitive by becoming more intelligent: adaptive, innovative, globally effective and connected by enabling tighter management of costs, risks, regulations, and supporting growth.
Strategic and Tactical Planning in Workforce Managementseamsltd
The challenges and benefits of implementing strategic and tactical planning processes. Exploring how the principles of effective demand planning underpin a business’s strategy in meeting the needs of its stakeholders, employees and customers!
At our breakfast event in Kuala Lumpur on November 6, attendees joined us to hear from industry leaders how insurance companies such as Aviva use Anaplan to solve the challenging problems of using Excel for actuarial modelling, budgeting, reporting and forecasting. They also learned how adoption of an agile planning application can transform the actuarial modeling and planning process in just a few days.
PMO for Supply Chain - Setting Up a Project Mangement Office for Non-ITChief Innovation
Built this top level structure for a client, am hashing out details, so only a few pages so far. I may add to it, not sure yet, but wanted to build something since most PMOs are IT focused, I wanted one that wasn't.
Bjarte Bogsnes, Vice President Performance Management Development at Statoil ...Global Business Events
Bjarte Bogsnes, Vice President Performance Management Development at Statoil - Beyond Budgeting - A management model for new business and people realities; the Statoil implementation journey spoke at the CFO Event UK 2013
The Time is Now - Beyond Budgeting in the EnterpriseIntel Security
Agile does not equal agility! To expand business agility in our organizations, we need a more meaningful language. Beyond Budgeting is a set of principles that help organizations adapt to change and avoid the trappings of plan-driven, top-down management.
Projects may look attractive for two reasons:1) There are some errors in forecast 2)The company genuinely expects to earn excess profits.
So increase odds in your favor by moving in areas of competitive advantages.
Look at economic rents and where even advantage is absent or entry of competitors will push prices down or costs up, don’t enter .
When you have the market value of an asset use it..rather then over analysis…gold, real estate..airplanes etc…
PV calculations may vary and subject to error …that’s life!!!!!
AgendaComprehending risk when modeling investment (project) de.docxgalerussel59292
Agenda
Comprehending risk when modeling investment (project) decisions
Standalone Risk
Market Risk
1
1
Project Risk
Standalone Risk: Risk based on uncertainty of a projects cash flows
Sensitivity
Scenarios
Breakeven
Simulations
Market Risk: Risk of the project as seen by a well diversified investor
Beta
2
Sensitivity, Scenario, and Break-Even
Each allows us to look behind the NPV number to see how stable our estimates are.
Breakeven: sales required to breakeven
Accounting break-even: sales volume at which net income = 0
Cash break-even: sales volume at which operating cash flow = 0
Financial break-even: sales volume at which net present value = 0
Sensitivity: how sensitive a particular NPV calculation is to changes in an input variable holding all other assumptions are held constant
Scenario: examine impact on NPV given a confluence of factors
When working with spreadsheets, try to build your model so that you can adjust variables in a single cell and have the NPV calculations update accordingly.
3
3
Monte Carlo Simulation
A more sophisticated variation of the scenario analysis is Monte Carlo simulation.
In a Monte Carlo simulation, analysts specify a range or a distribution of potential outcomes for each of the model’s assumptions.
Pick a probability distribution for each input variable (units, price, variable costs, etc).
The computer program will pick a random value from each input variable, calculate the NPV and store the result. This is a trial.
Repeat the process many times, saving the input variables and the output (NPV).
End result: Probability distribution of NPV based on sample of simulated values.
4
Example
5
6
When a firm with both debt and equity invests in an asset similar to its existing assets (business), the WACC is the appropriate discount rate to use in NPV calculations.
In conglomerates, the WACC reflects the return that the firm must earn on average across all its assets to satisfy investors, but using the WACC to discount cash flows of a particular investment leads to mistakes.
Any project’s cost of capital depends on the use to which the capital is being put—not the source.
Therefore, it depends on the risk of the project and not the risk of the company.
When a firm invests in an asset that is different from its existing assets, it should look for pure-play firms to find the right discount rate.
6
Finding the Right Discount Rate
6
You are a financial analyst at General Electric and are preparing a cost of equity estimate for a project analysis using NPV:
CAPM = Risk Free Rate + Beta * Market Risk Premium
9.5% = 3.0% + 1.1 * 5.9%
Lines of Business
Financial Services
Power Generation
Aviation
Transportation
Health Care
Consumer Goods
When evaluating a new power generation investment for GE, which cost of capital should be used?
Capital Budgeting & Project Risk
7
Beta
1.8
0.6
1.2
1.3
0.8
1.1
7
17
Capital Budgeti.
Sheet4Assignment 1 LASA # 2—Capital Budgeting Techniques
Sheet1
Solution
:-A) Computation of WACC:-Cost of equity (Ke) will be calculated using dividend discount model which is as under:-Price of share (P0) = D1/(Ke-g)Ke = (D1/(P0*(1-f))) + gWhere,D1 = D0*(1+g)F = Flotation costKe = ((2.50*(1+6%))/(50*(1-10%))) + 6%Ke = 11.89%i) Equity financing and debt financing are two different sources of financing being used by the organizations to procure funds. Equity and debt are two different sources of financing, equity financing represents internal source of finance whereas debt financing represent external source of finance. Mixture of both is always used by the business organizations to procure funds and is most commonly known as target ratio or capital structure ratio. This ration varies from industry to industry and company and company depending upon various circumstances, equity financing can be raised only through issuing shares in market by the help of initial public offer whereas debt financing can be raise from many sources such as bonds, long term loans, money market instruments etc.Equity Financing has following advantages:1. The total cash flows generated can be used solely for investment purpose, rather than paying back the investors.2. Funds can be raised in shorter time as compared to other sources of funds.However, in equity financing, dilution of ownership easily occurs and more investors can lead to loss of Control.Cost of debt (Kd) will be calculated as follows:-Kd = Market rate of deb*(1-tax rate)Kd = 5%*(1-35%)Kd = 3.25%Debt is a more common source of finance used by most of the organizations, the reason for the same is as follows:-a. Debt is cheaper source of finance as compared to equity the reason being the cost associated with issuing the common stock like. Underwriters commission, legal expenses, various registration charges, issuing of prospectus, printing of various documents etc.b. Debt financing provide leverage to the company which will increase the Earning per Share (EPS) which in turn leads to increase in market value of share, this helps organization to maximize its market capitalization.However, if the expansion venture does not work in favour of the company, then these obligations of repayment of principal and interest may turnout to be a burden to the company. WACC = (Ke*We) + (Kd*Wd)WACC = (11.89%*70%) + (3.25%*30%)WACC = 9.30%B) Computation of NPV of project A:-Depreciation = Cost of the asset – salvage value Life of the asset = 1,500,000/ 3 = 500,000Calculation of cash flows:Revenue – 1,200,000Less Cost – 600,000Less Depreciation – 500,000Profit - 100,000Less taxes (35%) 35,000Profit after taxes .
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2. Agenda
• Structuring Discount Rates: A Practical Perspective
• COC
• Business Risk
• Project Risk
• Capital Allocation
• Linkages to Strategy
• Portfolio Optimization
• Summary
3. Objectives
• Make decisions about future investments based on the fundamental economic
principle that value is created by earning more than the cost of capital.
– Focus on cash investment and return
• “It’s cash flow that counts, not how you count it”
• “Until a business returns a profit greater than its cost of capital, it operates
at a loss” Drucker
– Use net present value and payback as key financial decision criteria for all
investments.
• Provides a common financial measure for comparing investments across
the company.
– Use discount rates that reflect risks specific to BU’s and project types
– Allocate capital to strategic priorities
• Rationale
– Investor expectations for future value
• NPV measures the incremental value an investment adds to the company
– Better understanding of the financial impact of strategy
– Increased visibility into business for top management
– Improved expense control
4. Discount Rate = COC + Bus Risk + Project Risk
Discount Rates Have 3 Components
Corporate Required Rate of Return
Discount Rate: Cost of Capital: Business Risk: Project Risk: The
minimum rate of return
The rate used to The average cost of The minimum rate of
required for a specific
calculate the NPV a firm’s debt and return required on the
project. The hurdle
of all expected equity capital. entire portfolio of
rate should take into
inflow and outflows capital projects.
The COC equals the account the corporate
of an investment
rate of return that a At a minimum, the required rate of return
= company must earn
+ acceptable rate of
+/- plus any project
in order to satisfy the return should equal specific risks. The
demands of its the cost of capital. hurdle rate is used to
owners and creditors compare with a
project’s internal rate
of return.
At the corporate level, the returns for the entire portfolio of capital projects should exceed
the COC in order to create economic value.
At the BU level, the return on an individual project may be less than the discount rate
depending on the BU strategy.
Hurdle rates may be higher than the required rate of return depending on the likelihood of
the project being completed as planned and generating the results which were used to
justify the investment. Hurdle rates may be differentiated across BU’s or project types
5. Discount Rate = COC + Bus Risk + Project Risk
Business & Project Risk Methodology
Business Unit Business Risk
– Management
Project Risk
– Predictability
– Competitive Factors
Risk Defined: Risk Points
Completion: Likelihood
of a project being
completed as planned. Risk COC
Outcome: Likelihood
that project will generate +
the results which were
used to justify the Corporate COC
investment.
=
Discount Rate Specific to
BU and Project Type
6. Discount Rate = COC + Bus Risk + Project Risk
Cost of Capital Methodologies: CAPM
• Cost of capital is first of 3 components in the discount rate: average cost of
a firm’s debt and equity capital.
• Defined
– Cost of equity is a function of risk-free rates, plus a premium to reflect
the extra risk of an investment
– Premium is the historical difference between the risk-free rate and the
rate of return of the stock market as a whole multiplied by an number
reflecting volatility of the stock (beta)
• Advantages
– Used for over 40 years essentially unchanged
– Accepted broadly in industry as the standard measure of cost of capital
• Disadvantages
– Lack of empirical data proving this rate is used by the market to
discount a company’s projected cash flows to a present value.
– Market risk premiums are assumptions and vary by firm (e.g., Goldman
equity premium is 350 basis points, Accenture uses 500 basis points)
– Beta is a historical measure, and not a forward looking measure of a the
risk to the future cash flows of a company.
– Many bankers and executives find beta an unreliable estimate of a
stock’s risk:
• 1998: before Steve jobs returned, Apple cost of equity of 8% vs.
IBM 12%
7. Discount Rate = COC + Bus Risk + Project Risk
Non CAPM Approaches: Market-Derived Capital Pricing Model
• Defined
– Cost of capital reflects three types of risk:
• National confiscation risk: country policies (e.g. confiscation,
inflation = Government bond rate for a given time period
• Corporate default risk = premium above corporate bonds that
corporations pay
• Equity returns risk = traded prices of equity options which reflect
best market estimates of future price volatility.
• Advantages
– Theoretically appealing as a better solution than CAPM
• Incorporates market’s best estimate of future price volatility instead
of using historical data.
– Discount rates can be more intuitively realistic than CAPM rates
• Disadvantages
– Methodology created by Pacifica Strategic Advisors
– Not widely accepted
– Lack of empirical data proving this rate is used by the market to
discount a company’s projected cash flows to a present value.
8. Discount Rate = COC + Bus Risk + Project Risk
Non CAPM Approaches: Empirical
• Defined
– Discount rates used by the market to discount expected future cash
flows of a company.
– Rates can include both market and company-specific rates
– Examples include Cash Flow ROI and Warranted Value model by
HOLT/CSFB, Attive Research (formerly Callard & Madden).
• Advantages
– Empiric evidence that these rates are used by markets, both US and
international, to discount future cash flows.
– Applies equally to all companies regardless of business model or asset
intensity.
• Disadvantages
– Variety of different approaches, most tied to proprietary valuation
models.
• Maintenance of market and company-specific data requires
significant expertise and resources to continually update data on
market and company discount rates.
– Approaches less applicable to early stage/fast growth companies
– Rely on unique methods of projecting cash flows that require involved
calculations:
• Requires focused corporate staff training
• Implementation issues.
9. Discount Rate = COC + Bus Risk + Project Risk
Approach
• Adopt CAPM to calculate the Corporate cost of capital.
– Update semi-annually to reflect changes in risk-free rates and beta.
– At some point evaluate empirical approaches.
• In high growth companies, you will miss the boat by debtating
whether a project exceeds the COC by 1 or 4 points
– This is what happens in mature companies in mature industries where
the major opportunity for value creation is in improving profitability.
• Focus on implementation
10. Agenda
• Structuring Discount Rates: A Practical Perspective
• COC
• Business Risk
• Project Risk
• Capital Allocation
• Linkages to Strategy
• Portfolio Optimization
• Summary
11. Discount Rate = COC + Bus Risk + Project Risk
Business & Project Risk Methodology
Business Unit Business Risk
– Management
– Predictability
Project Risk
– Competitive Factors
Risk Defined: Risk Points
Completion: Likelihood
of a project being
completed as planned. Risk COC
Outcome: Likelihood
that project will generate +
the results which were
used to justify the Corporate COC
investment.
=
Discount Rate Specific to
BU and Project Type
12. Discount Rate = COC + Bus Risk + Project Risk
Qualitative evaluations drive quantitative risk modifiers to cost of capital
• Identify risk factors which differentiate the likelihood of a project being completed as
planned and generating the results which were used to justify the investment
– Business Risk: Differences between BU’s
– Project Risk: Differences between types of projects
– Determine weightings for Business and Project Risk
• Business Risk 70%
• Project Risk 30%
• Qualitatively rate BU and Business Priority Area risk and assign risk points.
BU Risk Points BPA Risk Points
Low Risk 0 0
Mod Risk 10 4
High Risk 20 8
• Quantitatively translate total risk points into a modifier which is added to Corporate
COC to calculate a discount rate specific to BU and Business Priority Area.
• Discount rate applied to any project capped at 220% Corporate Cost of Capital.
Total Risk Points Discount Rate
0-3 16%
3.1-6.0 19%
6.1-9.0 22%
9.1-12.0 26%
12.1-14.9 29%
15.0-17.9 32%
18.0 + 35%
13. Discount Rate = COC + Bus Risk + Project Risk
Business Risk: Factors
• Business Risk is the second of 3 components in the discount rate,
and measures the risks of:
– Completion: Likelihood of a project being completed as planned.
– Outcome: Likelihood that project will generate the results which were
used to justify the investment.
• Business Risk is specific to a business unit within the company and
how its risks of compare to other BU’s (relative), not other
companies (absolute):
– Internal: Management (Completion)
– Internal: Predictability (Completion, Outcome)
– External: Competitive Factors (Outcome)
14. Discount Rate = COC + Bus Risk + Project Risk
Business Risk: Management
• Right Leader
– Strategic vision and ability to get team enthusiastic
– Teambuilding skills
– Enabler
– Industry experience
– Commitment to and practice of management development
• Right Direct Reports
– Top notch skills and experience
– Business acumen
– Ability to motivate
– Ability to delegate
• Right Team
– Trust in senior management team by employees
– Team coherence and experience together
15. Discount Rate = COC + Bus Risk + Project Risk
Business Risk: Predictability
• Key Metrics: actual vs. plan/approved forecast
• P&L: actual vs. approved forecast
• Meet deadlines
• Understand customer requirements and how these rapidly change
• Impacted by BU and corporate business processes and ability to measure
and forecast key metrics and business results.
– For example, strong confidence in forecasting process can increase
certainty in a forecast and reduce the risk of making future investments.
16. Discount Rate = COC + Bus Risk + Project Risk
Business Risk: Competitive Factors
• Competitive strength:
– Degree to which BU leads the industry: Is it #1 or #2?
– Gaining or losing market share?
– Degree of reliance on external partnerships (positive/negative potential
impacts)
• Pricing Stability
– Degree to which BU is woven into competitors’ business model and
process
– Barriers to entry
– Competition basis: price, quality, reliability
– Contract length
• Smart competitors or dumb competitors
• Rate of change
– Customer needs
– Products
– Technologies
– Product obsolescence
17. Discount Rate = COC + Bus Risk + Project Risk
Business Risk
• Risk factor weighting
Management 50%
Predictability 25%
Competition 25%
Total 100%
18. Discount Rate = COC + Bus Risk + Project Risk
Business Risk: Risk Points
Risk Factors
Internal External
Competitive RISK
Management (50% Predictability (25% Advantage (25% POINTS
Weight) Weight) Weight) (Weighted)
Rating Points Rating Points Rating Points
BUSINESS UNIT
Division A
BU 1 Low Risk 0 Mod Risk 10 Mod Risk 10 5.0 (1)
BU 2 Mod Risk 10 High Risk 20 Mod Risk 10 12.5
Division B
BU 1 Mod Risk 10 Low Risk 0 Low Risk 0 5.0
BU 2 Low Risk 0 Mod Risk 10 Low Risk 0 2.5
BU 3 Mod Risk 10 High Risk 20 Low Risk 0 10.0
Division C Mod Risk 10 Low Risk 0 Mod Risk 10 7.5
0
Corporate
Functional Area 1 Low Risk 0 Mod Risk 10 NA 2.5
Functional Area 2 Low Risk 0 Low Risk 0 NA 0.0
Functional Area 3 Low Risk 0 Low Risk 0 NA 0.0
Functional Area 4 Low Risk 0 Low Risk 0 NA 0.0
(1) .50 x 0 + .25 x 10 + .25 x 10 = 5 Risk Points
19. Agenda
• Structuring Discount Rates: A Practical Perspective
• COC
• Business Risk
• Project Risk
• Capital Allocation
• Linkages to Strategy
• Portfolio Optimization
• Summary
20. Discount Rate = COC + Bus Risk + Project Risk
Project Hurdle Rates: Factors
• Project Risk is the third of 3 components in the discount rate, and reflects
the likelihood of a project being completed as planned and generating the
results which were used to justify the investment.
– Certainty of Completion.
– Certainty of Outcome
• Identify risks specific to the nature of the project and how its risks of
compare to other types of projects.
21. Discount Rate = COC + Bus Risk + Project Risk
Project Hurdle Rates: Risk Points
PROJECT TYPE
1.0 Market 2.0 Productivity & 3.0 Quality &
Development Cost Improvement Reliability 4.0 Facilities 5.0 IT
Rating - Draft
Certainty of Completion High Risk Mod Risk Mod Risk Low Risk Low Risk
Certainty of Outcome High Risk High Risk Mod Risk Low Risk Mod Risk
Risk Points
Certainty of Completion 4.0 2.0 2.0 0.0 0.0
Certainty of Outcome 4.0 4.0 2.0 0.0 2.0
Total 8.0 6.0 4.0 0.0 2.0
22. Discount Rate = COC + Bus Risk + Project Risk
Business & Project Risk Matrix: Total Risk Points
PROJECT TYPE
1.0 Market 2.0 Productivity & 3.0 Quality & BU Risk
Development Cost Improvement Reliability 4.0 Facilities 5.0 IT Points
BUSINESS UNIT
Division A
BU 1 13.0 (1) 11.0 9.0 5.0 7.0 5.0
BU 2 20.5 18.5 16.5 12.5 14.5 12.5
Division B
BU 1 13.0 11.0 9.0 5.0 7.0 5.0
BU 2 10.5 8.5 6.5 2.5 4.5 2.5
BU 3 18.0 16.0 14.0 10.0 12.0 10.0
Division C 15.5 13.5 11.5 7.5 9.5 7.5
Corporate
Functional Area 1 10.5 8.5 6.5 2.5 4.5 2.5
Functional Area 2 8.0 6.0 4.0 0.0 2.0 0.0
Functional Area 3 8.0 6.0 4.0 0.0 2.0 0.0
Functional Area 4 8.0 6.0 4.0 0.0 2.0 0.0
Project Risk Points 8.0 6.0 4.0 0.0 2.0
(1) 5 Business Risk Points + 8 Project Risk Points = 13.0 Total Risk Points
23. Discount Rate = COC + Bus Risk + Project Risk
Using Risk Points to Calculate Discount Rates
• Total BU + Project Risk Points used to calculate a Risk Rate Modifier
which is applied to Corporate COC.
– Highest discount rate allowable is 220% of Company COC.
• Discount Rate Table:
Total Risk Points Risk Rate Modifier VRSN COC Risk COC Discount Rate
0-3 0% 16% 0% 16%
3.1-6.0 20% 16% 3% 19%
6.1-9.0 40% 16% 6% 22%
9.1-12.0 60% 16% 10% 26%
12.1-14.9 80% 16% 13% 29%
15.0-17.9 100% 16% 16% 32%
18.0 + 120% 16% 19% 35%
24. Discount Rate = COC + Bus Risk + Project Risk
Business & Project Risk Matrix: Discount Rates
PROJECT TYPE
1.0 Market 2.0 Productivity & 3.0 Quality &
Development Cost Improvement Reliability 4.0 Facilities 5.0 IT
BUSINESS UNIT
Division A
BU 1 29% (1) 26% 22% 19% 22%
BU 2 35% 35% 32% 29% 29%
Division B
BU 1 29% 26% 22% 19% 22%
BU 2 26% 22% 22% 16% 19%
BU 3 35% 32% 29% 26% 26%
Division C 32% 29% 26% 22% 26%
Corporate
Functional Area 1 26% 22% 22% 16% 19%
Functional Area 2 22% 19% 19% 16% 16%
Functional Area 3 22% 19% 19% 16% 16%
Functional Area 4 22% 19% 19% 16% 16%
(1) 13 Total Risk Points = 13.0% Risk COC + 16% VRSN COC = 29% Discount Rate
25. Discount Rate = COC + Bus Risk + Project Risk
Distribution of Discount Rates Appears Reasonable
Distribution of BU and Corporate Discount Rates
14
# of BU/Project Combinations
12
10
8 BU & Corporate
6 BU Only
4
2
0
16% 19% 22% 26% 29% 32% 35%
Discount Rate
• BU & Corporate distribution appears reasonable
– Standard distribution
– BU projects have more risk than corporate projects, and also has a standard distribution
• Opportunities to make investments in a broad range of risk categories
26. Agenda
• Structuring Discount Rates: A Practical Perspective
• COC
• Business Risk
• Project Risk
• Capital Allocation
• Linkages to Strategy
• Portfolio Optimization
• Summary
27. Strategy Focused Organization
2. TRANSLATE STRATEGY 1. MOBILIZE CHANGE THROUGH
TO OPERATIONAL TERMS EXECUTIVE LEADERSHIP
• Create a corporate scorecard • Create a climate for change
Strategy Map • Create the Leadership Team
Measures • Create the vision and strategy
Targets • Create team accountability
Initiatives • Change the culture
3. ALIGN THE 5. GOVERN TO MAKE
ORGANIZATION STRATEGY STRATEGY A CONTINUAL
TO THE STRATEGY PROCESS
FOCUSED
• Create business/shared (VSS) • Link budgeting and planning to
services unit scorecards ORGANIZATION strategy
• Create sub-business/shared • Conduct Strategy Review Meetings
services unit scorecards • Actively manage initiative portfolios
4. MOTIVATE TO MAKE
STRATEGY EVERYONE’S JOB
• Communicate the strategy
• Align HR Programs to strategy
Source: Balanced Scorecard Collaborative
28. Using VPM to Manage Strategy Execution
Longer Term (3-5 year) View Shorter Term (Annual) View
Vision Strategy and Map Resource
Mission Objectives Measures Targets Initiatives Milestones Accountable Budget
Alloc
Financial
• Grow high- • % revenue • ‘04 xx%
F1
margin from high-
To provide top-notch healthcare to our
• ‘05 xx%
margin
Be the community hospital of choice
service
F2 services • ‘06 xx%
Customer
• Provide • Customer • Develop • Survey drafted • Mkg. • $ xxxx
• ‘04 xx%
personalized satisfaction organization- by 6/04 Team
C1 •
community
care survey rating ‘05 xx% wide survey
• ‘06 xx%
• Keep patients • Service level • Electronic • Complete by • Dept. Chairs • $ xxxx
Internal
P1 informed spot check • ‘04 xx% notes project 2004
P2 rating • ‘05 xx% • All patients
• ‘06 xx% logged in
Learning
• Provide • % new • ‘04 xx% • Learning • Deadline • HR • $ xxxx
technology technology • ‘05 xx% assessment met Committee
& resources used by staff project
L4 • ‘06 xx%
Strategy “Leadership” Tactics “Management”
Source: Balanced Scorecard Collaborative
29. Resource Allocation: Where the Rubber Meets the Road
Strategic
Objective
Each objective is measured to track
performance and facilitate strategic discussion.
Measu
re
Each measure receives a target to determine
the level of performance required to succeed.
Target
Each Objective is supported by initiatives
(activities, projects, and resources) to ensure
that the organization is capable of delivering on
the targets that underpin the objective.
Initiatives
Source: Balanced Scorecard Collaborative
30. Internal
People &
Financial
Customer
Knowledge
Perspective
resources
Partnering
Objectives
performance
management
development
development
Source: Balanced Scorecard Collaborative
Price performance
Integrate and align
People and change
Individual and team
Sales and customer
Focused technology
Perfect manufacturing
Economic value added
Strategic competencies
Pick the winners globally
Customer sensitive culture
Create new market demand
sev t a ti n t nerr u C
i i i
ng se der t ne m r uc o P
i e r Be the lowest cost producer
y ge art s s ekr a mgn g e m
t t i r E
sr e nn w e h hi wr e n r a P
i t t t
e nac rr uh dna L & Wdna ces se R
i
not ac fi t ne d s dee n y il a u Q
i i i t
m e es uac t oo r o c o p y il a u Q
il r f r t
n ot a u m o e R
i l r f
se tili ca / not az l a cr e mm c VS
i f i i i o
o p gn kcart t n a p m c r e m t s u C
r i i l o o
s p hsr e n r a p PV ml e d S
i t / a i
objectives
serving no
2 initiatives
n a hc e u av n t ne m c na hne T
i l i e I
not a ne ml p m P OCS
i t e i
mA
b
CS B e dacsac po eve D
/ l
no s v e a c nu m m C
i i t i o
se tili ca not a m o er a s A
i f i r f i
t ne m gl a y ge art s T
ni t I
v o p m ssec o p kr o w r par c S
r i r e
m r go pt ne m v o p m d e Y
a r e r i l i
e dar gpu se tili ca F
i
r e C. g mn ser AN 20009 OS
f i I
s mt sys t r e px E
e
ml p mt ne m o eve d s d a w R
e i/ pl r e
s not ac nu mm cl a bo G
i i o l
sli ks c ge art s gn n ar T
l i t i i
Managing Initiatives Can be a Demanding Manual Process
No initiatives
9 initiatives
for this objective
for 1 objective
31. Agenda
• Structuring Discount Rates: A Practical Perspective
• COC
• Business Risk
• Project Risk
• Capital Allocation
• Linkages to Strategy
• Portfolio Optimization
• Summary
32. Imperative to Improve Ability to Allocate Capital and Other Resources
in Complex Environments
▪ Business models are becoming increasingly complex.
– Acquisitions, geography, customer needs
– Clear and concise linkages between strategy, financial plans, and daily
operations is key to executing a growth strategies
▪ With many opportunities for investment, the more important it t becomes to
use standardized, enterprise-wide processes that allow initiatives & projects
to be identified, evaluated, and ultimately managed across BU’s and
geography.
– Optimize investments across BU’s
– Move towards real-time planning
• Need for ongoing evaluation and reallocation of resources to
respond to the competitive environment
33. Comprehensive Initiative Management
Demand to Completion
Corporat Corporate Mission & Strategy
e
Strategy
Corporate Objectives
Initiative Management
Portfolio
Demand
Measures & Mgmt
Management Program Management
Targets
Stratex Project Management
Non Project
Specific Resource Management
Resources
• Provides direct link between strategy & projects • Standard financial baseline, track spending and
• Executive visibility/dashboard to all portfolios, resources
programs and projects • Consolidation capability of all programs and projects
• Single portfolio/program and project repository • Captures investment regardless of GAAP classification
• Standard and consistent processes,
expense/capital
methodologies and flowcharts at the macro
levels • Standard of project performance and linkages to
strategy across the company for resource allocation
34. Demand and Portfolio Management Overview
Demand
Management Approved
New Product
Approved Existing
Approved
Infrsastructure
Product Ideas
Ideas Ideas
Idea Prioritize & Approve
1st Gate Approval
Business Ops
Council Approved
Proposals
Proposal Review High Level Approve Refine Estimates/
Business Business Case Submit for
Case Planning
Architecture & Standards
Board
Manage Portfolio
Costs, Budgets,
Benefits
Develop
Portfolio Portfolio
Portfolio Options Scenarios
Management Resource
Supply vs.
Demand
Steering
Approved
Committee
Projects
Approval
Value vs.
Risk
Risk
Value
35. Demand/Portfolio Management
Demand/Portfolio Management
Enter Proposal for New Project
Capture Estimated Cost
Capture Estimated Resources
Drive the Evaluation Process
Provide Visibility through a Real Time
Dashboard
Out-of-the box templates to capture project
proposals, value and risk rating,
processes, business case, ROI and more.
Templates can be configured to capture
information unique to customers.
36. Demand/Portfolio Management
Enter Proposal for New Project
Capture Estimated Cost
Capture Estimated Resources
Drive the Evaluation Process
Provide Visibility through a Real Time
Dashboard
Configurable scoring criteria to evaluate
project proposal values and risk.
Adjustable weights for each scoring
criteria.
41. Agenda
• Structuring Discount Rates: A Practical Perspective
• COC
• Business Risk
• Project Risk
• Capital Allocation
• Linkages to Strategy
• Portfolio Optimization
• Summary
42. Governance Process - Not the Tool - is Key to Managing Initiatives
• PMO Director, PMO
– Strategic, centralized
– Process ownership Portfolio Managers
– Project Managers report functionally to PMO
– Aligned to business by portfolio Program/Project Mangers
• Governance Organization
– Enterprise Portfolio Hierarchy Business Analysts
– Steering Committee
– Membership formalized
• Key functions included Governance
– Align BU – IT – Process Board
• Business Relationship Approval Authority
Managers
• Standards Committee
Project Review Board (PRB)
Prioritization, Budget, Technical,
– Governance
Staffing and Schedule Review
– PLC
Project Life Cycle (PLC) Teams
EXECUTION
43. Strategy Focused Organization
2. TRANSLATE STRATEGY 1. MOBILIZE CHANGE THROUGH
TO OPERATIONAL TERMS EXECUTIVE LEADERSHIP
• Create a corporate scorecard • Create a climate for change
Strategy Map • Create the Leadership Team
Measures • Create the vision and strategy
Targets • Create team accountability
Initiatives • Change the culture
3. ALIGN THE 5. GOVERN TO MAKE
ORGANIZATION STRATEGY STRATEGY A CONTINUAL
TO THE STRATEGY PROCESS
FOCUSED
• Create business/shared (VSS) • Link budgeting and planning to
services unit scorecards ORGANIZATION strategy
• Create sub-business/shared • Conduct Strategy Review Meetings
services unit scorecards • Actively manage initiative portfolios
4. MOTIVATE TO MAKE
STRATEGY EVERYONE’S JOB
• Communicate the strategy
• Align HR Programs to strategy
Source: Balanced Scorecard Collaborative
Editor's Notes
Identification, Prioritization, and Alignment of Initiatives The real benefit from the Initiative Mapping process come from allocating resources to initiatives that most directly affect its ability to achieve the strategy. Without prioritization, all initiatives continue as usual, with no alignment to strategy. The task here is to create a “screen” to be able to determine strategic initiatives from nonstrategic initiatives.