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 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

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 of Business-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 want to 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.

When you are a Company of Business-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.

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?” - SAI’s 1997 Reference Point survey

“Our employees understand how the work they perform relates to the company’s financial performance.” - SAI’s 1997 Reference Point survey

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 of Business-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.

Developing Accountability and 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...” - SAI’s 1997 Reference Point survey

“Our employees believe that their job security is based on individual job performance.” - SAI’s 1997 Reference Point survey

“Our employees view their job responsibilities in terms of their job descriptions.” - SAI’s 1997 Reference Point survey

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.

When you are a Company of Business-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.

“Performance-based compensation for all of our employees... exceeds 20% of total compensation.” - SAI’s 1997 Reference Point survey

“Our employees know... bonuses and profit-sharing before the numbers come in at the end of the year.” - SAI’s 1997 Reference Point survey

“We believe employee stock ownership is a relevant issue for our company.” - SAI’s 1997 Reference Point survey

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) , or by at A download version of this PowerPoint presentation will be available on the SAI website at