1. Gérard Naulleau, 2006 1 Management Control Management Control Systems and Procedures MBA 2006 Gérard Naulleau

2. Gérard Naulleau, 2006 2 Session objectives 1.Get familiar with key management planning and control procedures 2.Discuss current trends and developments in management control

3. Gérard Naulleau, 2006 3 2 years as a junior consultant : KPI for productivity analysis and Management Information Systems Implementation 10 years as a trainer in the banking sector for profitability analysis and implementation of planning, budgeting and reporting procedures ESCP (1984 -1991) + EAP (1992-1999) + ESCP-EAP (2000 …) Consultant for the French Ministries of Finance and Defence on the implementation of performance contracts (Implementation of the new law on resource allocation) Academic Director of ESCP-EAP MS “International Project Management” Current fields of interest : (1) inter-organizational collaborative performance (2) implementation of performance driven cultures Gérard Naulleau

4. Gérard Naulleau, 2006 4 “Provide information to support decisions and guide managers and employees behaviour towards the organization’s strategies and goals “ Kaplan, 2002 Management Control ? “Process by which managers ensure that resources are used effectively and efficiently to attain organizational goals” Anthony RN & Dearden J, 1976 Defining the scope of Management Control What Gets Measured Gets Managed !

5. Gérard Naulleau, 2006 5 “ A management planning and control system can be defined as the set of processes and practices used to align and control an organization” Management planning and control systems include the procedures for : aligning strategies between business units and corporate level, setting goals and objectives, setting capital and operating budgets, forecasting financial expenses, revenues and results measuring and rewarding performance reporting progress to senior management conducting performance review meetings Kaplan, Harvard Business Review, 2006 What Management control systems should cover …

6. Gérard Naulleau, 2006 6 Strategic Planning Financial Budgeting Performance Review/Analysis Reporting Management Control Support Key Processes

7. Gérard Naulleau, 2006 7 Resources Operational Process Outcome Measurement Feedback Analysis References : Objectives Past performances Comparable performances Objectives Influence on resources allocation Influence on process Influence on planning 2 3 1 4 The management control loop

8. Gérard Naulleau, 2006 8 1880/1920 Division Profitability Divisional Costing and Ratios Divisional Costing and Ratios Decentralization Profit Centres and Direct Costing Profit Centres and Direct Costing Resource Allocation Process Planning and budgeting Planning and budgeting 1930/1940 1950/1975 Phase 1 : The Foundations

9. Gérard Naulleau, 2006 9 1980 … Total Quality Management Business Process Reengineering Key Performance Indicators Key Performance Indicators Balanced Scorecard Activity Based Costing / EVA Activity Based Costing / EVA 1995 … 2000 / Strategic Control Phase 2 : The “Add-ons”

10. Gérard Naulleau, 2006 10 1) A relevant Management Control Information System 2) Clear Areas of Accountability : “Profit Centers / Cost Centers / Processes ” 3) Well understood / accepted “Planning, Budgeting and Reporting Procedures” Management Control : What it needs to be effective 3 Requirements

11. Gérard Naulleau, 2006 11 (1) The fundamentals of a Management Control Information Systems 1) Profitability Calculations 2) Key Performance Indicators 3) Quarterly and Monthly Reports and Scorecards including Planned / Actual Comparisons

12. Gérard Naulleau, 2006 12 SALES EBITDA : Earnings Before Interests Tax Depreciation and Amortisation (+- French EBE) EBIT : Earnings Before Interests Tax (+- French RBE) Operating Margin (EBIT/Sales) NOPAT : Net Operating Profit After Tax Net Result Reporting Structure of Profitability Calculation

13. Gérard Naulleau, 2006 13 Business Unit ….. Sales Operating Margin : (EBIT / sales) ROA : (EBIT/Assets) ROCE : EBIT / Capital Employed ² EVA : NOPAT * - (WACC x Capital Employed) * For internal reporting, EBIT or EBITDA more relevant than NOPAT (Net Operating Profit After Tax) ² Capital Employed = Fixed Assets + Current Assets - Current Liabilities WACC : Weighted Average Cost of Capital (between cost of equity and cost of loans/debt) Value is created when ROCE > WACC 3 4 5 Key Economic Ratios 2 1

14. Gérard Naulleau, 2006 14 Key Performance Indicators Customer Satisfaction Churn Rate Revenue per Mile per Seat Average Capacity Utilization Rate Quality Indicators (number of incidents …) Productivity per employee Revenue / Cost per Unit Sold Time to Market Employee Absenteeism Employee Turnover Social Climate

15. Gérard Naulleau, 2006 15 Reporting Additional Information Typical BU indicators required for corporate reporting Period Key Points (faits marquants) Orders Sales Work Load Inventories Activity (Production, R & D, Investments) Headcounts Finance (cash position, working capital) Working Capital Free Cash Flow  (Cash flow – (Capex + increase in WC)) Currency Position

16. Gérard Naulleau, 2006 16 An integrative framework to support Management Control Information : The Balanced Scorecard

17. Gérard Naulleau, 2006 17 Objectives Measures Targets Results Balanced Scorecard model Green : on target Yellow : below target but better than last period Red : below target and worst or not better than last period Strategic Focused Metrics

18. Gérard Naulleau, 2006 18 The challenge of Management Information : Seven functions attached to Management Control Information ! Look ahead and prepare Look back and understand Cascade down goals and targets Compare and Learn Motivate and Align Compensate Source : M W Meyer Rethinking Performance Measurement, Cambridge University Press, 2002 Roll up initiatives and action plans

19. Gérard Naulleau, 2006 19 (2)Clear Areas of Accountability Are measurement in line with delegation ? Cost Centers ? Profit Centers ? Investment Centers ? Processes ? Are compensation in line with strategic objectives and budget results ?

20. Gérard Naulleau, 2006 20 Cost Centers Accountability on Costs :  either in VALUE (Expenses Budgeted)  or linked to VOLUMES (Cost per Unit) Where Support Centers (Back Office / Logistics …) Structure Centers (Administration, Public Relations …)

21. Gérard Naulleau, 2006 21 Profit Centers Accountability on Margins : ROS (Return on Sales)  Delegation on COSTS (Volume of Inputs/Resources)  Delegation on REVENUES (Volume and possibly Price) Where Business unit Regional Sales / Retail unit Manufacturing or servicing unit selling at transfer prices (market or price less based)

22. Gérard Naulleau, 2006 22 Investment Centers Accountability on ROA and or ROCE  Delegation on COSTS  Delegation on REVENUES  Delegation on INVESTMENTS (Assets) Where Business Units

23. Gérard Naulleau, 2006 23 Processes Accountability on Costs + KPI or ROS + KPI  Delegation on COSTS  Delegation on REVENUES  Delegation on Operational Performance Criteria (KPI) Where Companies organized with Processes/Programs Examples : Procurement, Customer Support, Product Development

24. Gérard Naulleau, 2006 24 Accounting methods for transfer price calculation Actual costs Cost plus (cost + margin) Standard costs Price less (Market price - discount) Market price COST PRICE

25. Gérard Naulleau, 2006 25 APPLIX Case Study