New York, NY December 13, 2000 HOT SERVICE OFFERING DISCUSSION This document is confidential and is intended solely for internal use Strategically Aligned.

New York, NY

December 13, 2000

“HOT SERVICE OFFERING” DISCUSSION

This document is confidential and is intended solely for internal use

Strategically AlignedBusiness Model

Booz Allen Hamilton

2Booz Allen Hamilton

Whether you call it SABM, SAO, NBM or WEF, the core team closest to this concept believes we are on to something powerful

It is differentiated–others are saying some of these things, but we see no one else doing it all

It is CEO-relevant–impacting organization and strategy

It is timely–many visible companies struggle with these issues

It is naturally transformational (consistent with our aspirations) …

… Yet flexible– It can be applied successfully across many different client situations …– … And can enter through a number of different “doors”

It is a complete offering– We know how to do it– We have done it across clients/industries– We have adaptable marketing and selling materials– It complements and integrates thinking from our other I/C (e.g., WEF, Centerless

Corporation, Shared Services)


It starts with the observation that, while a sound strategy is essential, in many industries it is no longer sufficient for success

A more complete picture of what drives organizational performance is required

The occasional “breakout strategy” is responsible for some highly publicized successes. But sustained performance is much

more frequently the (less publicized) result of strong execution of an otherwise

unremarkable strategy

Strategy Is Not EnoughStrategy Is Not EnoughStrategy Is Not EnoughStrategy Is Not Enough

Strategies quickly become public and can be copied

Strategies must be dynamic as the environment changes

Strategies are often very similar; therefore, not a source of differentiation

In practice, many strategies are simply glorified aspiration statements that offer little real direction to individuals in the organization


This perspective focuses our efforts on helping clients build the environments that encourage and support the appropriate behaviors

By providing a context which supports and guides

individuals to make choices and tradeoffs that promote the

overall goals, organization design fundamentally drives

organization performance

Individual Actions

Objectives

Roles & Responsibilities

Organization Structure

Information

Coordination

Boundaries

Measures Incentives

Decision Rights

StrategyStrategy Organizational Performance

MechanismsOrganizational Environment

Conflict Resolution


Information

Conflict Resolution

CoordinationMechanisms

Boundaries Incentives Measures

Roles &Responsibilities Objectives

OrganizationStructure

DECISIONDECISIONSS

Leadership System

How Are Key Business

Trade-Offs Made?

The key is decision rights and the organizational model to support them—organization structure is just the tip of the iceberg


While the economic principles behind this concept are well known, very few companies get it right

Straightforward Economic Principles ...

Individuals are by and large rational, and respond to incentives (financial and non-financial)

Market-like mechanisms are effective ways of allocating scarce resources

Clearer accountability and better information generally lead to better decisions

Central planning tends to leave profit opportunities on the table

Entrepreneurial environments are better than bureaucracies at exploiting untapped opportunities

Like countries, large organizations need the rule of law

... Require Extremely Complex Application

While individual human rationality is bounded, the problem is infinitely complex Thousands of design details Multiple interacting systems Elaborate feedback loops

Only a few at the top see the big picture... Individuals’ perspectives are inherently biased

by the particular piece of the puzzle they see Those in a position to see the big picture tend to

be very senior, and hence very busy

...And there is an almost irresistible tendency to over-simplify With focus, any one aspect can be improved But without adequate system-level

understanding, unintended consequences arise


Clients don’t naturally identify their issues “this way”—we need to stay flexible and leverage multiple entry doors

Client Entry DoorClient Entry DoorClient Entry DoorClient Entry Door

Transformation CoordinationTransformation Coordination

Where ApplicableWhere ApplicableWhere ApplicableWhere Applicable

In environments that are, or should be, decentralized

In environments where multiple factors are driving change

In environments that are, or should be, decentralized

In environments where multiple factors are driving change

Leadership ChallengesLeadership Challenges

A new CEO trying to drive change and break down functional “silos”

Developing organizational leadership (WEF)—achieving alignment while maintaining/enhancing adaptability

A new CEO trying to drive change and break down functional “silos”

Developing organizational leadership (WEF)—achieving alignment while maintaining/enhancing adaptability

People ChallengesPeople Challenges

Demotivated workforce/high turnover

“Weak bench” syndrome

Required skill levels cannot be hired or retained

Demotivated workforce/high turnover

“Weak bench” syndrome

Required skill levels cannot be hired or retained

Change In Industry Structure or DynamicsChange In Industry Structure or Dynamics

Move towards a solutions business requiring complex, decentralized trade-offs

Restructuring value chain

Move towards a solutions business requiring complex, decentralized trade-offs

Restructuring value chain

Profit ImprovementProfit Improvement

Overhead reduction that will “stick”—creating a bias against creeping cost increases

Shift to profit centers

Improving execution across a dispersed organization

Overhead reduction that will “stick”—creating a bias against creeping cost increases

Shift to profit centers

Improving execution across a dispersed organization


The approach to this type of work is fundamentally different than much of the work done within Booz•Allen or by our competitors

Less Of This ...Less Of This ...Less Of This ...Less Of This ...

Defining the right thing for the client to do (“process maps”)

Defining the right thing for the client to do (“process maps”)

… … More Of ThisMore Of This… … More Of ThisMore Of This

Designing the organization that wants to do the right thing (“decision rights”)

Designing the organization that wants to do the right thing (“decision rights”)

One big idea (“solution”) One big idea (“solution”) Lots of executional details involved in getting it right (“trade-offs”)

Lots of executional details involved in getting it right (“trade-offs”)

Designing to a static optimum (“central planning”)

Designing to a static optimum (“central planning”)

Designing the organization to approximate dynamic optima (“market system”)

Designing the organization to approximate dynamic optima (“market system”)

Optimizing one measure (e.g., cost or inventory level)

Optimizing one measure (e.g., cost or inventory level)

Optimizing the entire “system” to produce better results Optimizing the entire “system” to produce better results

Dictating specific actions from the center Dictating specific actions from the center Encouraging innovation throughout the organization Encouraging innovation throughout the organization

Measuring process adherence Measuring process adherence Measuring results, using a common metric Measuring results, using a common metric

Treating resistance as ignorance, and managing it primarily through education

Treating resistance as ignorance, and managing it primarily through education

Treating resistance as rational, and managing it through structure, measures, incentives and training (where required)

Treating resistance as rational, and managing it through structure, measures, incentives and training (where required)


Our approach typically follows five steps

1. Understand the Organizational Context

1. Understand the Organizational Context

2. Translate the Strategy into Key

Activities

2. Translate the Strategy into Key

Activities

3. Assess Organizational

Barriers to Performance

3. Assess Organizational

Barriers to Performance

4. Create a High-Level

Design for a New Business

Model

4. Create a High-Level

Design for a New Business

Model

5. Complete the Detailed Design and

Implementation Plan

5. Complete the Detailed Design and

Implementation Plan

Diagnostic Effort

Typically 3-6 months4-12 months

Understand how the firm creates and captures value

Identify the key leverage points in the business and translate them into organizational imperatives

Understand how the organization has evolved over time

Identify perceived flaws in the current organization

Identify the root causes which are impeding organizational effectiveness

Build the case for changes

Identify resource requirements and potential gating factors

Develop roll-out plan

Develop a conceptual design for the new business model

Build senior management ownership for the design

Methodology


This approach differs from the “typical” consulting project in several ways

Managers are rational actors

Fixing the system is just as important as improving near-term performance

There is no silver bullet, many design levers must be worked in concert

KeyKeyAssumptionsAssumptions

Seeks input from a broad cross-section of client staff – especially “front-line” employees

Encourages and values dissent – resistance to change is usually rational and must be understood

Shares findings and potential solutions are early and often – to test understandings, build support, and learn how to tell the story in the client’s language

ProcessProcess

Starts with a relatively senior team – which is versed in the underlying theory, able to calibrate the natural biases of the respondents, and has good instincts about likely key issues

Uses a small team to conduct most of the interviews – to stay integrated and avoid falling into the client’s functional silos

Expands the junior team during the blueprinting phase – when the high-level business model has largely been established

StaffingStaffing


Finding the right organization model is inherently a highly custom, iterative process, but some “tricks of the trade” are emerging:

Wherever possible, make managers accountable for the impact of their decisions on both cost and revenue

Use multiple, overlapping views of profitability to eliminate potential “externalities” across organizational boundaries

Carefully craft management processes and decision rights to ensure all relevant stakeholders have a voice

Establish clear decision boundaries and then let the organization optimize within those constraints–focus on the short list of “thou shalt nots,” not the long list of “nice to haves”

Use market-like mechanisms to allocate scare resources–capital, management attention, etc.

Develop a planning process that is transparent–perceived fairness is more important than precision(different from many budgeting exercises)

For complex, data-intensive decisions, use centralized tools to support decentralized decision making, not supplant it (i.e., embed complexity in the institution, not the individual)

Establish executive forums that visibly reinforce the established principles


We have used these concepts successfully (usually transformationally) across a variety of clients and have many of the resources in place to take it to the next level

US Sugar

Chrysler

Volvo

JCI Automotive

Nestlé Canada

JCI Controls

Handleman

S&B article (November 2000)–reprints available

Leader to leader article–reprints available in January

Industry- or application-specific mini-articles in process(Tier 1 supplier, customer teams, solutions provision)

Multiple client-ready decks and letters– Reflecting multiple “hooks”– Tailored to specific industries (AAI, C&H, FSG)

Longer internal and methodology decks

Case studies

A growing group of practitioners

ABB

Siemens

Snap-On

GE Aircraft Engine

Caterpillar

Bangkok Bank

United Airlines

Clients Where These Concepts Have Been Used

Marketing/Selling Resources


. . . But we want to do more . . .

A core group of us are passionate about this concept, as it is – Exciting– Powerful– Differentiated – Fun

Those who have internalized this concept find these opportunities almost everywherethey look …

… And when we introduce this at a client the track record is very positive– Better answers– Extended relationships– Powerful transformations

But we can’t put it “in a bottle”– It is not (and may never be) a packaged product– We have not been successful selling “this” as “this”


Nestlé Canada Case Study: The Approach

Identification of key cost drivers: Management overhead Warehousing Order processing IT …

Identification of root causes Extensive interview program (close to 40

executives) Analysis of incentive program Assessment of decision making process

Assessment of organizational alignment/ adaptability

Leadership survey

Detailing and hand-over of specific cost reduction opportunities Outsourcing of warehousing Consolidation of order processing center …

Design of a New Business Model around three key principles: Decentralized decision making Defined decision rights Common performance metric

Detailed definition of decision rights and coordination mechanisms for sales and marketing

Design of new incentive system based on adjusted contribution measures

Definition of new leadership approach and of role of executive committee

Phase II: Developing The New Business ModelPhase I: Sizing The Opportunity

10-2

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7 Weeks 26 Weeks


New Business Model

— Coordination Mechanism—Example: Brand/Channel Coordination

Brand Management

Profitability Maximize contribution ofFocus: brand across all channels

Trade-offs: Level of support of any channel in terms of:- Promotions/trade-spend- SKU portfolio- PFME- …

Measurement: Profit contribution (Sales - (Trade-spending + standard product cost + advertising)

Incentive: Yearly - fixed percentage of contributionLonger term - based on market share and growth

Channel Management

Profitability Maximize contributionFocus: of channel across all brands

Trade-offs: Level of support of any one brand category in terms of:

- Attention ofcategory account

Measurement: Profit contribution (Channel sale - (Trade-spending + standard product cost + sales force cost)

Incentive: Yearly - fixed percentage of contribution

Longer term - based on share of wallet and growth

The Result: A Self Regulating Coordination Mechanism

• Profit maximization objectives will focus attention on most profitable brand/channel intersection

RPCL182_049_056F.ppt

Agreement: Sales Promotion/trade-spend SKU portfolio PFME support Level of sales focus on brand ...

Review of sales

Corrective actions

Yearly:

Monthly:

Nestlé Canada Case Study: The result, a New Business Model


For US Sugar, cost reductions and efficiency improvements were the only viable strategy for retaining profitability in a period of price volatility

Actions Required Strategic Insights Product is a commodity with prices

dependent on trade policy and market dynamics

The intrinsic value of the business is driven by the quality of the land

The company failed to capture the full value ...

Too many resources spent trying to influence price

Had expanded beyond the very best land

… And appeared to be running a high cost business

70 years of “cost center behavior” Benchmarks confim operations are

“gold-plated” relative to independent farmers

Reduce overhead and general administrative costs Lower SG&A costs Reduce Ag administrative expenses

Implement best practices across farms to reduce product costs Reduce labor and machine costs by

reducing frequency of farm activities Improve harvester utilization and

reliability

Reduce support activities and Ag support departments Match Engineering shop performance to

service requirements Improve efficiency of support services

Implement new technology Commercialize new planting techniques Reduce losses by improving field logistics


Three initiatives were integral to strategically transforming them into a world-class competitor

“FARMS AS

BUSINESSES”

Defines generous bonus structure for business unit performance that exceeds target levels

Ensures farm and support service managers make the correct cost/yield trade-offs to maximize profitability

Encourages managers to develop, support and implement new technologies and practices that improve profitability

Defines generous bonus structure for business unit performance that exceeds target levels

Ensures farm and support service managers make the correct cost/yield trade-offs to maximize profitability

Encourages managers to develop, support and implement new technologies and practices that improve profitability

Incentive System Defines the profitability and performance targets

for farms and support services

Ensures farm profit targets are consistent with corporate profitability requirements

Provides fairness and transparency for the incentive system

Targets are based on best-practice activity levels and are unique for each farm and support service

Defines the profitability and performance targets for farms and support services

Ensures farm profit targets are consistent with corporate profitability requirements

Provides fairness and transparency for the incentive system

Targets are based on best-practice activity levels and are unique for each farm and support service

Performance Targets

Defines the farm manager as the business leader accountable for farm profitability

Defines fixed pricing and charging mechanisms for support services to encourage efficiency improvements

Allows reduction in overhead and supervisory costs

Performance accountability supported by incentive system

Defines the farm manager as the business leader accountable for farm profitability

Defines fixed pricing and charging mechanisms for support services to encourage efficiency improvements

Allows reduction in overhead and supervisory costs

Performance accountability supported by incentive system

Organizational Structure

Three Initiatives In The Strategic-Based Transformation Process


Target Setting And Incentive SystemTarget Setting And Incentive System

The ratio of variable pay to fixed pay was increased significantly to roughly 67% of base

Total Farm Manager compensation was increased for 2 reasons:

The position’s level of responsibility was significantly increased

By changing the variable compensation percentage with sugar price, Farm Managers were taking on more risk in managing their farms as businesses

Target performance or profitability levels were set for each Farm Manager based on farm-specific workload drivers, e.g., :

Total acres planted Availability of land

Farm Managers would be paid a bonus based on the actual profits earned by their farm, with increasing rates eared as targets were met or exceeded

Since profits are highly variable with sugar price, annual targets were adjusted as average annual realized sugar prices fluctuated

Performance targets and incentives with a high variable bonus component were integral to creating these “Farms as Businesses”

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

PA

YO

UT

Bonus Payount at Different Performance Levels and Sugar Prices

$.21

$.20

$.19

$.18

$.17

$.16

$.15

$.22

Sugar Price

Farm Profitability

New York, NY December 13, 2000 HOT SERVICE OFFERING DISCUSSION This document is confidential and is intended solely for internal use Strategically Aligned.

Documents

strategy x

issues x

aspirations x

improved x

powerful x

organization slide

x individuals perspectives

number of different