MitchMax Driver BasedPlanningWorkshopBBRTApr2012

WORKSHOP
Building Driver-Based Plans and Forecasts using Time-Driven Activity-Based Costing Frameworks Mitch Max
2012 Virtual Prot Solutions. All rights reserved
About Mitch Max

Founder and CEO,Virtual Prot Solutions Deep and proven consulting expertise, focused on delivering measurable performance improvement Works with leading, innovative organizations to improve their performance through innovative Performance Management solutions: advanced planning and forecasting improved customer, product and channel protability integrated performance management Frequent speaker, author and workshop leader in innovative nancial management practices Formerly, Director Financial Services Interest Group, BBRT Regular contributor to AMIfs Journal of Performance Management Senior Fellow, ASMI
Banking
Insurance
Brokerage
Other
SESSION OBJECTIVES
Learn how to identify the most nancially - impactful drivers for business planning and forecasting Learn how to leverage the connection between Drivers, Activity-Based Costing and Planning to help create a more adaptive planning process based on mathematical models
SESSION OUTLINE
Introduction to Effective Driver-Based Planning & Forecasting [DBPF] Principles
Identifying and Linking Drivers (including Case Study I)
Building DBPF using cost information and TD-ABC models
Linking DBPF to ABC models and capacity simulation (Case Study II)
Integration Strategies and Wrap-Up

4
TYPES OF FORECASTS
Driver-Based
+ calculations based on relationships between driver volumes, resource levels and nancial lines
Rolling
+ extends beyond current scal year, includes projection elements
Consolidation
includes some level of inter-line nancial calculations
BUILDING A FORECAST
History / Trends
Revenues - product - segment

Growth
Expenses - Business Unit - Financial Lines Balance Sheet - Assets - Cash Flow - Debt
Resources - People - Equipment - Capital Measures - EPS / growth - ROA/ROE - Market Share
Drivers
Ratios
DRIVER-BASED PLANNING / FORECASTING

1. Focus on Inputs, not Outputs
Business Volumes Input Costs Sales Volume Net Income Revenues Expense Increases
2. 3. 4. 5. 6.
Understand costs based on Activities, not Resources [Cost Centers / Accounts] Premise: a small number of items can account for 70-80% of the variability in nancial projections Materiality is critical Focus efforts on improved forecasting of key business volumes Different treatment based on variability: a) Resource variability b) Activity variability
7.
Understand the drivers of variability and the relationship between them

7
5 DRIVER CATEGORIES
External / Economic!
Interest Rates! Commodity Prices! Competition! Growth / Retention! Market Share! Customer Penetration! Mix/Substitution! Price!
Business Volumes!
Service Model!
Activity Intensity! Channel Utilization! Service Level! Quality!
Efciency!
Productivity! Rates! Capacity Utilization!
Programs!
Spending Initiatives! Capital Investment! Benets! Product Development!
TESTING THE DRIVER RELATIONSHIPS

Gut Feel drivers are a good start but are often not reliably correlated with results Results should be tested against multiple variables using statistical analysis Measure and adjust on an ongoing basis; look for new drivers
GROUP EXERCISE #1
In
groups: Pharmaco Case Study - Pages 1-2 Drivers chart
Read
Complete Prepare
to discuss
10
GROUP EXERCISE 1
Area Revenues Cost of Materials Packaging Shipping Sales Marketing External / Economic Business Volumes Service Model Efciency Programs
11
LEVERAGING ACTIVITY-BASED INFORMATION
12
THE CAM-I CROSS

ABC
Resources: The elements used to perform work (e.g. people, machines, facilities). Includes all organizational costs.
(Customer Operations)
Resource
Resource Drivers: A measure of the use of resources by activities
Resource Driver (Time Spent)
Activities reect the work performed day-to-day in support of products and clients. Activities may be grouped into processes.
ABM
(Productivity, Accuracy, Training)
Cost Drivers
(Answer Inquiries)
Activity
Performance Measures
(Cost per Inquiry, Staff Retention)
Cost Drivers: The qualitative factors that affect the cost of an activity
Activity Driver
(# Inquiries)
Activity Drivers: A measure of the frequency and intensity of demands placed on activities by cost objects. This enables costs to be assigned to cost objects.
(Product X / Customer Y)
Cost Object
Cost Objects consume activities. Examples include Customers, Products and Channels
13
ACTIVITY-BASED PLANNING
ABP
Resource
What level of resources are needed to support the required activity levels?
(Answer Inquiries)
Activity
Activity Driver
What level of activity is required to produce the needed level of output?
(# Inquiries)
Cost Object
14
TYPES OF ACTIVITIES
Costs vary based on level of output:
VolumeSensitive
Business volume (# widgets) Service volume (# of payroll checks) External measures (# of business days)
VolumeInsensitive
Costs vary based on level of input:

Perform the activity? (Yes/No; Scope) Level of resources (e.g., marketing costs)
15
1. CLASSIFY COSTS BY ACTIVITY TYPE

Fixed Run/ Grow Resources Activities Variable Volume Sensitive Projects Change Incremental Change Not Volume Sensitive
2. APPLY VOLUMES TO VOLUME-SENSITIVE ACTIVITIES

Fixed Run/ Grow Resources Activities Variable Sales Minutes / Order Order Entry Minutes / Order Fulllment Minutes / SKU Minutes / Return / SKU Not Volume Sensitive
Projects Change
Notes: Time Standards and Intensity vary by Cost Object Staff Cost per Minute varies by Cost Center Resources may not be innitely variable
x
Incremental Change # Orders SKUs per Order Returns / SKU/ Order
3. PLAN COST LEVELS FOR OTHER ELEMENTS

Fixed Run/ Grow Resources Activities Variable Volume Sensitive Projects Change Incremental Change Not Volume Sensitive
DRIVER-BASED PLANNING USING ABC

Volume Sensitivity No
Resource Variability Variable
Yes Operations / Staff Costs
Finance / Staff Costs
Fixed
Rent
n/a
19
DRIVER-BASED PLANNING USING ABC

Volume Impact; Service Mix; Capacity Changes Change Activity Levels
No Volume Sensitivity Yes Operations / Staff Costs
Resource Variability
Variable Fixed
Finance / Staff Costs
Rent
n/a
Rate changes; Strategic Decisions

20
DRIVER LINKAGE FRAMEWORK

Economic Indicators Competition Commodity Prices
External Drivers
U.S.)Light)Vehicle)Miles)Driven)&)Lt)Vehicle)Industry)Tires)Shipped)#)12#Month)Moving)
Millions)
3.04%%
3.02%%
12#Month)Moving)Miles)Driven)
3.00%%
19.0% 18.5% 18.0% 17.5%
2.98%%
2.96%%
2.94%% 120Month%Moving%Miles%Driven% 2.92%% Forecasted%Miles%Driven% 120Month%Moving%Tires%Shpped% 17.0% 16.5% 16.0%
Vehicle'miles'driven'(in'millions).''Source:''U.S.'Energy'Informa<on'Administra<on'
2.90%%
Strategic Decisions
Volumes | Investments | Growth | Rates
Sales Close Rates Product Mix Service Channel Mix Driver Linkage Factors
Transformations Conversion) Conversion Mix) Mix
Jan 007 % r00 7% y00 7% Jul 007 Se % p00 7% v00 7% Jan 008 Ma % r00 8% Ma y00 8% Jul 008 Se % p00 8% No v00 8% Jan 009 Ma % r00 9% Ma y00 9% Jul 009 Se % p00 9% No v00 9% Jan 010 Ma % r01 0% Ma y01 0% Jul 010 Se % p01 0% No v01 0%
Ma
Ma
No
12#Month)Moving)Lt)Vehicle)Tires)Shipped)
Predictive Model
20.0% 19.5%
Millions)
20.5%
Predictive
Business Activity Volumes Linked Driver Volumes Service Activity Volumes
Input Volumes
Financial Model
Input Rates
Mathematical
Price Unit Costs Input Costs
Resource Requirements
Activity Costs
Financial Results
LINKING DRIVERS TO EXTERNAL ECONOMIC INDICATORS

U.S.)Light)Vehicle)Miles)Driven)&)Lt)Vehicle)Industry)Tires)Shipped)#)12#Month)Moving)
Millions) Millions) 12#Month)Moving)Lt)Vehicle)Tires)Shipped)
3.04%%
20.5% 20.0% 19.5%
3.02%%
12#Month)Moving)Miles)Driven)
3.00%% 19.0% 2.98%% 18.5% 18.0% 17.5% 2.94%% 120Month%Moving%Miles%Driven% 2.92%% Forecasted%Miles%Driven% 120Month%Moving%Tires%Shpped% 17.0% 16.5% 16.0%
M
2.96%%
Vehicle'miles'driven'(in'millions).''Source:''U.S.'Energy'Informa<on'Administra<on'
2.90%%
00 7% ar 00 7% M ay 00 7% Ju l00 7 Se % p0 07 No % v0 07 Ja % n0 08 % M ar 00 8% M ay 00 8% Ju l00 8 Se % p0 08 No % v0 08 Ja % n0 09 % M ar 00 9% M ay 00 9% Ju l00 9 Se % p0 09 No % v0 09 Ja % n0 10 M % ar 01 0% M ay 01 0% Ju l01 0 Se % p0 10 No % v0 10 % Ja n
Courtesy Larry Williams, Integrated Business Planning (used with permission)

22
WHERE DO DRIVERS COME FROM?

Resource Costs
# of staff x cost per staff # of PCs x cost per PC # of s.f. x cost per s.f.
Activity Costs
Volume x Unit Rate
# sales hours x cost per hr # of shipments # of cases packed ABC Tools can help
23
x x
cost per shipment packing cost per case
PLANNING WITH ABC

Activity Costs
Volume
Service Model!
Unit Rate
# sales hours x cost per hr # of shipments # of cases packed x x cost per shipment packing cost per case
Programs!
External / Economic!
Business Volumes!
Efciency!
24
USING A DRIVER CHAIN WITH FACTORS

Driver Chain Illustration
Example: Credit Card Processing

Measured Drivers
# Cards in Force # New Cards Issued
Factors
Payment Frequency
Transactions per Account
# Inquiries per Account
# Adjustments per Tansaction
Fraud Rate per Transaction % non-EFT
Minutes per call per Call Type
Consumption Calculated Measures Rates
# Card Transactions # Manual Payments
# Fraud Cases
# Call Minutes
# Cards Issued
Mins per Payment
IT Cost per Payment
Hrs per Fraud Case
3rd Party Card Costs
Activities
Payment Processing
Transaction Processing
Fraud Handling
Customer Inquiries
Adjustments
Card Issuance
25
TIME BASED ADVANTAGE

Traditional ABC
Time Based
Resource
% of Effort
% of Time
(Answer Inquiries)
Activity
% of Volume
Activity Driver
(# Inquiries)
Volume x Unit Time
Cost Object
26
TRADITIONAL COSTING
LOC Dept! Underwriting!
Salaries & Related! Credit Processing!
Fulllment!
Salaries & Related! Mailing!
Resources
Resource Driver
Salaries & Related" Facilities" Other!
35%!
40%!
25%!
Activities
Activity Driver
Receive LOC Requests!
Process Credit" Checks!
Setup and" Complete!
Other!
# Requests!
# Checks!
# Approved" LOCs!
Cost Objects
Prod A!
Prod B!
Other Prods!
THE$EVOLUTION$OF$ABC$
Stage&3:&Time,Driven&Activity,Based&Costing&
TIME-BASED COSTING
Activity Trans&Type Unit&Time Receive)Request Via&Fax Via&Web Via&Phone Credit)Check Manual Rush Bureau Setup #1 #2 Accounts #3 #4 #5 Total&Time
Resources(
Resources
Resource Driver
Resource( Driver(
8 3 10
! ! ! ! !
16 6 20 42
Activities
Ac*vity( Activity Driver( Driver
Ac*vi*es(
3 5 10
! !
! ! ! ! !
6 15 20 41
New&Cust All&Cust
5 2
! !
! !
20 4 24
Total)Time
21
20
28
25
13
107
Objects
Cost(Objects( Cost
28$
June,$2011$
$2011$Virtual$Prot$Solutions.$All$rights$reserved$
ADVANTAGES OF TIME-BASED FOR PLANNING
For volume-sensitive activities:

Explicitly identies resource requirements for given level of output Unit costs remain constant with volume change; impact is on capacity utilization Helps to quantify go-away costs Simpler to model and explain
For non-volume sensitive, not as critical

29
THE MATH
Metric Std Basic Gold Platinum Total FTE by Group Basic Gold Plat Total Cost/FTE Cost ($000)
Cards in Force - BOM 2 Annual Growth Rate 3 # New Cards [month] 4 Cards in Force - EOM 5 Card Mix
1
1,000,000 15% 12,500 1,012,500 47.7% 125% 40% 25 0.008% 0.5% 40% 60% 40% 25% 506,250 25,312,500 1,898 2,025 3,038 810 759 0.5 30
700,000 12% 7,000 707,000 33.3% 90% 35% 40 0.001% 0.5% 50% 50% 45% 70% 222,705 28,280,000 283 1,768 1,768 795 1,237
400,000 10% 3,333 403,333 19.0% 95% 25% 75 0.001% 0.5% 60% 40% 60% 80% 95,792 30,249,975 302 1,210 807 726 645
2,100,000 22,833 2,122,833 100%
Payment Proc Fraud Cust Svc
33.8 7.6 2.7
14.8 1.1 2.2
6.4 1.2 1.5
55.0 9.9 6.4 71.4
45,500 58,500 48,750
2,502 581 314 3,397
74% 17% 9% 100%
Payment Frequency % non-EFT Payments 8 Transactions per Account 9 Fraud Rate per Transaction
6 7
# Inquiries per Account Transaction queries 11 Payment issues

10
Key Planning Variables

824,747 83,842,475 2,484 5,002 5,612 2,331 2,642 4.0 2.5 5.0 1.0
% adjs per Inquiry Transaction queries 13 Payment issues

12
# Manual Payments # Card Transactions 16 # Fraud Cases 17 # Transaction inquiries 18 # Payment inquiries 19 # Transaction adjs 20 # Payment adjs
14 15
Observed / Adjusted
Minutes per: Manual Payment 22 Fraud Case

21
Minutes per Call by type: Transaction queries 24 Payment issues 25 Transaction adjs 26 Payment adjs
23
29
Minutes/FTE/Month
7500
30
MAPPING REVENUES, COSTS AND THE DRIVER-BASED RELATIONSHIPS

Economic / External Factors
Business Drivers
Rate per Hr Services Sold Hrs Delivered Good Sold Units Sold Unit Price
Revenues
[by product, region, etc.]
Run the Business Costs Run the Business Costs
Change the Business Change the Business Costs Costs

Sales Expansion Compliance R&D
"Fixed" Overhead Staff-related Volume-Insensitive

!" !" !" !" !" LT Leases Depreciation Fixed IT Mgmt etc... Salaries, Benefits, Computing, T&E, etc.
# FTE Acquisition Fulfillment Customer Service Operations Activities / Processes
Cost Improvement
Direct COS Volume-Sensitive Third-Party Variable IT Marketing
Consumption Rates
31
PLANNING SCENARIOS

Demand Changes
Product Volume Product / Service Mix Major adds/deletes (unprotable products/customers) New contracts
Hiring Freeze Acquired personnel Redeploy excess capacity
Resource Changes
Process Improvements
Productivity improvements / New technologies Redundant tasks eliminated Substitute automated process Outsourcing / Off-shoring
32
GROUP EXERCISE #2
Read What How
Part 2 of the Case Study are the most signicant driver volumes?
can the drivers be linked? is the impact on cost of a 5% annual increase in orders? more staff be needed?
33
What
Would
ABB CLOSED LOOP METHOD

Shortage or Excess
Resource Capacity
Operational Balance
Adjust Capacity Resource Requirement Consumption Rates Adjust Consumption Activity Requirement
Resources
Adjust Resource Cost
Cost Assignment Activities Cost Assignment Products & Services Adjust Price
Consumption Rates
Adjust Demand
Demand Financial Requirements Results
Target Results
Copyright @2001, CAM-I
34
CLOSED LOOP EXAMPLE CALL CENTER

Outbound marketing calls for promotional campaigns Annual time period Financial target of 12% return on revenue Consumption rates based on current ABC information For simplicity:
Assumes a homogeneous product Demand peaks already included in hours per person
35
CURRENT YEAR
36
SCENARIO 1
37
SCENARIO 2
38
SUMMARY / TAKE-AWAYS
1. Effective Rolling / DBPF requires a different approach 2. Focus on material drivers of variability 3. Plan for resource needs: what drives the level of resourcing 4. Costing models provide the missing link 5. Dont guess or extrapolate relationships; Measure them! 6. Plan for capacity linked to driver volumes 7. Costing and Protability provides the framework for integrated planning and performance measurement
39
PLEASE CONTACT US!

Follow us on... Twitter: @rapidabc LinkedIn (email) Blog: http://www.virtualprotsolutions.com/blog
40

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WORKSHOP

2012 Virtual Prot Solutions. All rights reserved

About Mitch Max

2012 Virtual Prot Solutions. All rights reserved

2012 Virtual Prot Solutions. All rights reserved

Introduction to Effective Driver-Based Planning & Forecasting [DBPF] Principles

Identifying and Linking Drivers (including Case Study I)

Building DBPF using cost information and TD-ABC models

Integration Strategies and Wrap-Up

2012 Virtual Prot Solutions. All rights reserved

Revenues - product - segment

DRIVER-BASED PLANNING / FORECASTING

Understand the drivers of variability and the relationship between them

Activity Intensity! Channel Utilization! Service Level! Quality!

Productivity! Rates! Capacity Utilization!

Spending Initiatives! Capital Investment! Benets! Product Development!

2012 Virtual Prot Solutions. All rights reserved

TESTING THE DRIVER RELATIONSHIPS

2012 Virtual Prot Solutions. All rights reserved

groups: Pharmaco Case Study - Pages 1-2 Drivers chart

2012 Virtual Prot Solutions. All rights reserved

2012 Virtual Prot Solutions. All rights reserved

LEVERAGING ACTIVITY-BASED INFORMATION

2012 Virtual Prot Solutions. All rights reserved

THE CAM-I CROSS

Resource Drivers: A measure of the use of resources by activities

Resource Driver (Time Spent)

(Productivity, Accuracy, Training)

2012 Virtual Prot Solutions. All rights reserved

Resource Driver (Time Spent)

What level of activity is required to produce the needed level of output?

2012 Virtual Prot Solutions. All rights reserved

Costs vary based on level of input:

2012 Virtual Prot Solutions. All rights reserved

1. CLASSIFY COSTS BY ACTIVITY TYPE

2012 Virtual Prot Solutions. All rights reserved

2. APPLY VOLUMES TO VOLUME-SENSITIVE ACTIVITIES

2012 Virtual Prot Solutions. All rights reserved

3. PLAN COST LEVELS FOR OTHER ELEMENTS

2012 Virtual Prot Solutions. All rights reserved

DRIVER-BASED PLANNING USING ABC

Yes Operations / Staff Costs

Finance / Staff Costs

DRIVER-BASED PLANNING USING ABC

Finance / Staff Costs

Rate changes; Strategic Decisions

DRIVER LINKAGE FRAMEWORK

19.0% 18.5% 18.0% 17.5%

2.94%% 120Month%Moving%Miles%Driven% 2.92%% Forecasted%Miles%Driven% 120Month%Moving%Tires%Shpped% 17.0% 16.5% 16.0%

Transformations Conversion) Conversion Mix) Mix

Business Activity Volumes Linked Driver Volumes Service Activity Volumes

LINKING DRIVERS TO EXTERNAL ECONOMIC INDICATORS

20.5% 20.0% 19.5%

Courtesy Larry Williams, Integrated Business Planning (used with permission)

WHERE DO DRIVERS COME FROM?

cost per shipment packing cost per case

PLANNING WITH ABC

USING A DRIVER CHAIN WITH FACTORS

Example: Credit Card Processing

Transactions per Account

# Inquiries per Account

# Adjustments per Tansaction

Fraud Rate per Transaction % non-EFT