How to strategically evaluate commercial opportunities as a business partner and decision maker

Kym Williams

www.thebrsblog.comwww.brsresults.com

Email enquiries@brsresults.com for presentation slides & content

Session Overview

The importance of commercial acumen and how this skill is critical for any leader within an organisationHow to understand your key cost, business and revenue drivers and how to utilise this information in making better commercial decisionsWhat commercial skills executive, operations and management personnel are seeking from financial business partnersWhat commercial acumen is and isn’t and how it differs from financial skills.

Commercial Acumen – a lost art?

What is commercial acumen?Being able to think like a business owner or a CEO when making decisions

Having an understanding of the cost drivers on your businessEnsuring your decisions are aligned to strategyKnowing how to achieve value for money outcomes for your organisationUnderstanding the importance of developing strong business relationships.

Why is commercial acumen important?

Stakeholders expect greater value for money and more from less

We all operate in a competitive environment where we need to constantly improve

Organisations need to deliver commercial outcomes

More commercial partnerships

Private sector and competitors more commercially astute

Greater public scrutiny

Greater outsourcing of services

Greater project complexity.

Key competency for future leaders

Source: LGC survey 2014, UK, Hay Group

Contract management

Balancing Risk and CommercialsAre you getting the right balance between risk and reward?

Is risk aversion driven by personal risk or organisational risk?

Does the commercial model match the desired outcomes and key risks?

Who can best manage the risk – you or the client?

Environment

Stakeholders

Quality

Innovation

Schedule

Cost

Agendas

Injury

Litigation

Non Compliance

Politics

Budget certainty

Embarrassment

Uncertainty

FearPerformance

Avoidance

Capability

OUTCOMES

RISKS

Mindset is the keyYou’ll never develop a culture of cost consciousness unless:

Leaders take ownership of their costsThey also understand the link between commercial management, procurement and cost consciousness Personnel at all levels have the skills to manage costs.

Embed at all levels There is a difference between financial and commercial acumen

Educate - Your technical and non technical staff on your commercial practices and cost driversExplain the why – How we make our money and what costs drive our businessTransparency – Be as open as possible about costs and financial performance - Trust is keyCommercial acumen – Give people the skills to make the right decisions.

Commercial training to…Promote ownership of costs at all levels in the businessUnderstand cost and profit driversUnderstand strategic priorities and where to focus resourcesIdentify the full cost of labour and cost of timeCorrectly stage and scope projects, and manage variations

Understand when to use different procurement models

Understand contract pricing strategies used by contractors

Design the right commercial conditions from the start.

Three concepts management need to be clear on:

1. Efficiency and effectiveness

2. Allocative efficiency

3. Cost Culture and Accountability

Efficiency and effectivenessEfficiency usually refers to technical or process efficiency, i.e. the relationship between inputs and outputs

The more efficient of two processes will generate more outputs for the same inputs (i.e. lower unit cost), or use less resources to produce the same outputs, which means lower unit costs and also that it is cheaper in absolute terms as well

Effectiveness = the ability to satisfy the needs of the client.

Allocative efficiencyAre your resources being used towards the most important goals?

The ability to respond to the changing needs of the market by applying resources and effort to address these needs in a timely and efficient manner.

Cost Culture and Accountability

Management must be able to show their proficiency in managing costs

Show they are diligently making every possible effort to reduce costs, and not

simply avoiding the hard work and expecting clients to foot the bill

Role model this behaviour across their teams

Cost control should be embedded as a process and a ‘way of life’. Constant focus on the 1 %. Continuous improvement as

opposed to reactive.

Understanding your costsLeaders need the tools to play their roleKnowledge

What are the major costs? e.g. Salaries, Contracts, Plant & Equipment, Consumables/Fuel etc.What drives the major costs? e.g. Head count, contract scope, asset utilization, etc.

Systems, Processes and StructuresProduce forward estimates

Present current year data in context – past performance & forward estimates

Monthly Cost Review MeetingsStructured approach to cost review meetings Actions and accountability documented & tracked.

What are your top three costs?

Wages & Salaries Depreciation Waste Management Contract

0%

10%

20%

30%

40%

50%

Cost Driver Tree Example - Salaries

Contract Costs

Commercial Efficiency & VFMRecognise contractors need to make a profit

Links contract price and variations to contractors cost structureReduces risk + contingency for contractorRemoves hidden margins for council

Openness and transparency

Contract price

Variable Costs

Fixed Costs

Profit

Recovered

Recovered but not over-recovered

Fair and reasonable

2007/08

2008/09

2009/10

2010/11

2011/12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

2013/14

2014/15

2015/16

2016/17

2017/18

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

$45,000,000

Wages and Salaries

ForecastActuals

Time Period

Spen

d ($

m)

Show past trend plus forward estimates

Cost Reduction ProgramsSet targets for all management team:

Communicate the bigger picture and the end result

Make necessity the mother of invention – the burning platform!

Focus on top 3 costs and implement cost controls measures linked to cost drivers

Annual program of service and cost reviews

Monitor progress and act where necessary

Account for effort and outcomes

Engage staff

Set a target

Targets focus attention and effortSet a target for annual savings in operating expenses e.g. 3% annuallyTarget should be meaningful, challenging and relevant

Twelve month change in prices (2011/12)

Adelaide CPI 2.6%

Local Government Price Index 3.7%

Focus on Top 3 Costs

Top 3 costs cut across functions and apply to all managers

Supplement efforts by focusing on specific activities or functionsAgree a prioritised program with Audit Committee or governance functionDriven by commercial outcomesFocussed on driving towards your targets.

Agree an annual program of service and cost reviews

Agreeing priorities – the value/ease matrix

Publish forward estimates of costs and revenuesUse the forward estimates to set annual budget and business plan targetsCost management must be a standing item on agendas for leadership team/management team meetings.

Monitor costs and report progress

Base Salary Costs Salary Increment Increases

Vacant Positions (resignations and

redundancies)

Overtime and addi-tional hours

New Positions CPI increases Total Salary Costs$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$22.08m

$38.81m

$2.23m ($1.5m)$0.93m

$5.23m $0.8m

Monitor costs and report progress

Accountability/Action Plan

Item Action (what)? Who? Measure (when)? Savings ($)

A communication plan

Account for effort and outcomesEnsures accountability

Engage staff

Clarify roles and responsibilities around commercial outcomes

Understanding which costs can be removed and streamlined from the

business without impacting long term success

Areas to targetOverheads – needs to be right sized to size of business – average revenue and benchmark information is matched against actual.

Understand fixed vs. variable costs. Ideally make overheads variable where possible/ efficient.

Centralisation of functions – streamline duplication in all areas.

Large operating contracts – mandatory vs desirable scope definition – reduce $.

Outsourcing non-critical activities – what can be done better outside of the business?

Compliance activities – what is really necessary? Be practical, use common sense.

Risk Appetite - consider stakeholders appetite for risk.

Areas to targetLean – do we really need to do this? Does it add value or is it just comfortable? Challenge the norm!

Capital expenditure – is it truly aligned to our goals and targets? What is must have?

Contractors – remove but ensure you are still flexible for the future.

You still need to invest for the future – but on those items that are critical.

Technology opportunities – significant and often untapped.

Consider JV arrangements for key areas rather than staffing up.

DO LESS – CHALLENGE BEING BUSY! SIMPLIFICATION! LESS IS MORE!

1. What business are you in? What business are you really in? 2. What business will you be in the future, based on the current trends?3. Who is your customer? Your ideal customer? Your perfect customer for

what you offer? Link to ratepayers.4. What does your customer consider as value?5. What do you do especially well commercially?6. What are your cost drivers? Commercial targets?7. What are the constraints on your business today?8. What are the 20% of the activities that can account for 80% of your

commercial results?9. Based on your answers to the above questions, what commercial plan of

action should you take immediately? What should you do now? Link to procurement planning?

Get back to first Principles?

Role of FinanceWhat is your underlying purpose in your organisation?

How are we seen externally?Finance Teams generally seen as very introverted and compliance focused by Business Leaders?

Number of reasons for this:

A large volume of finance work by necessity is compliance based.

Finance people can feel more comfortable with task rather than people.

Finance workloads are every increasing with frequent changes to internal systems and regulatory requirements.

Competing demands - Challenge for finance personnel to be technically competent as well as have strong business partnership and commercial skills.

Finance Skills vs Commercial

FinanceTaxStatutory ReportingAuditSystem GovernanceInternal ControlsConsolidationFinance SystemsManagement ReportingBudgeting

CommercialContract NegotiationContract ReviewsBusiness AnalysisBusiness Case DevelopmentCost ReviewsPlanning / ForecastingBusiness Performance ScorecardsPerformance ImprovementProject ManagementExecutive AdvisoryChange Management/ Influencing

Inside Cat vs Outside Cat

3 Pillars of Finance FunctionCompliance

Ensures you comply with financial reporting, Tax, audit, and corporate governance requirements.Need to be strong technically.Critical function in building trust with stakeholders.Generally task focused and high integrity.Be careful here that the ‘tail does not wag the dog’. Don’t let compliance drive your business.

Management AccountingProvide information to support resource planning.Assist with cost reporting, budgeting, forecasting, cost allocation etc.Have a service provider role to support leaders.Need to have strong process discipline and co-ordination skills.Need to have excellent business partnering skills.Need to be careful here that they don’t overstep role and that management retain accountability for managing costs.

CommercialPart of management team and may not report to the CFO.Aim to maximise profitability and support executives to make decisions.Negotiate contracts, review cost drivers, prepare business cases, perform business analysis, review contract performance.Need to be strong leaders and influencers, as well as have good strategic/analytical skills.

Joint ResponsibilityEffective commercial management is a joint partnership between Finance, Line management, and Commercial Managers.

Line management need strong commercial acumen as they make day to day, as well as strategic decisions which impact on costs. They manage the resources.

Finance play a key role in the overall governance of costs across the business ensuring the right reporting, systems and structures are in place to hold managers accountable and ensure transparency.

Commercial managers/ business analysts can also play a critical leadership role in analysing performance, planning and budgeting, influencing change and advising executives.

Any questions?

Any questions?

www.thebrsblog.comwww.brsresults.com

Email enquiries@brsresults.com for presentation slides & content