Rapid, sustainable results

PIP
SPEAK
THE NEWSLETTER OF
Partners in Performance

IN THIS ISSUE:
Pages 1-4
Focusing Business Improvement

Focusing Business Improvement

The words execution and follow-up are synonymous with PIPs reputation for delivering
sustainable results. But thats only part of our story. The other closely related source of value
creation is prioritising.
Too many times we see companies putting
immense effort into initiatives that, even
if executed well, do little to improve the
economics of the business.
In our experience, a common characteristic
shared by underperforming companies is
that they do not have enough understanding
of where to focus, or what is driving their
results. When they ask themselves questions
like why have costs risen 20% over the
past three years?, or how is it that we
consistently produce at only 50% of our
theoretical capability? they dont have a way
to readily nd out.
In the worst cases, we hear the mantra its
the suppliers fault or some other external
factor like exchange rates or price cycles.

The reality is managers need to be looking

inside their business, not outside, for sources
of business improvement.
Whether its looking back to understand what
drove results, or looking forward to identify
how to meet difcult targets, understanding
the critical levers that drive a business
performance should always be the starting
point.
The ideal tool for this is the Value Driver Tree.
Value Driver Trees are basically a visual
picture of the gears that power a business. A
well designed Value Driver model represents
the issues in a business, is economically
correct, and models driver sensitivities and
trade-off decisions.

Diagram 1 - Total Cost Driver Tree

Actual

Last Year

$/t
2,000

Volume Sensitive Costs

15,00
$/k
Total Volume Sensitive Cost
20,000

1,000
5,00
0

15,000

M J J A S O N D J F M A

10,000
kt

5,000
$/k
40,000

Total Cost

15
M J J A S O N D J F M A

30,000

10
5

20,000

10,000
0

Production

M J J A S O N D J F M A

$/k
25,000
20,000
15,000
10,000
5,000
0

M J J A S O N D J F M A

Period Costs

M J J A S O N D J F M A

Partners in Performance

Accounting representations, including

Costing models, do none of the above.

Activity-Based

Value driver trees can help to more effectively analyse

trends, sensitivity, variance analysis and results over time
or against budget. Diagram 1, above, is an example of
a Value Driver Tree being used to quickly identify trends
in total costs and the relative impact of multiple levers.
Additional trees are added for each lever so that underlying
drivers can be identied. This understanding is then used
to highlight the source of change.
Value Driver Trees can also help in the Planning Process
and the Control Process. The tool is used to review recent
results, and can highlight which drivers had the most
signicant impact. A single integrated model can link the
activities of an operator in the line with nancial outputs
that are critical to the General Manager.
Diagram 2, below, is an example of how to represent the
relative impact of different change drivers.
Furthermore, Value Driver Trees are used to help break
down a business into logical components (the different
stages of a value chain) and then establish appropriate
accountabilities.
Every PIP engagement begins with two questions: Where
is the opportunity? How big is the opportunity?
To answer these questions we interview all relevant client
personnel to get their perspective. Too often the answers
we get reect a gut-feeling rather than facts and as a
result they are often wrong. Its only when the driver trees
are developed and the data is reviewed that the real
value creation levers are uncovered and behaviors begin
to change for the better.
Following are two excellent examples of how Value Driver
Trees were used to change behaviors in an organization.

COAL MINE
Context
This integrated coal facility has both mining and processing
operations. While primarily an underground mining operation,
additional coal is also brought through the processing facility
from surface mines, coal dumps, and external sources.
As an old mine, life-of-mine issues were pushing up costs,
while prices were falling. Margins were being squeezed, and
the situation was expected to get worse.
Management was given the task of identifying ways to lift
prots by increasing throughput and reducing costs per
tonne. They knew which levers mattered, but didnt know
how to prioritise. Moreover, they needed to quickly compare
a number of scenarios.

What we did
Developed a detailed Value Driver Tree for the business
Performed trend and sensitivity analysis to test
management assumptions regarding which levers
mattered
Developed scenario models for the business as a whole
(i.e. how to meet our cost targets)
Implemented a review structure based on dramatically
increased levels of accountability driven from clarity on
key business drivers

Results
Identied and commenced implementing ideas worth
$34 million EBIT
Re-congured the sources of coal to extract more coal
at higher EBIT
Enabled management to focus on the highest priority /
highest value ideas

Diagram 2
$k
100,000

Plant at Equilibrium - Impact of Drivers since 2001

Impact on Total Cost

90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0

Conc Related
Mining Vol
Sensitive Costs Volume Sensitive
Costs

2004 [Y/SOV Impact]

Production

Engineering &
Site Services=

Commercial
Total{}

Mining Period
Costs

Smelting Period
Costs=

Processing
Period Costs=

Recoverable Zn /
tonne Ore{}

Bal: Total Cost

Total Cost
[Y/SOV Impact]

Rapid, sustainable results

ENERGY DISTRIBUTION

APPLICATIONS DEVELOPMENT

Context

Context

This retailer and wholesaler of energy bought the raw

energy product from third parties as well as from in-house
production facilities. Energy was then delivered to the city
gate via independently owned transmission networks. The
intra-city distribution was done via a substantial distribution
network which was owned and maintained by the
distributor.

Services company providing skilled labour as an

outsourced solution to other (mainly service) clients

Parts of the network had been around for many decades

and in places needed repair. In other areas new suburbs
and higher consumption required new, expensive network
infrastructure. In order to compete in a deregulating market
and take advantage of expansion options, the client needed
to invest more broadly in distribution assets.
Management needed to nd a way of acquiring expensive
assets with limited funds.

What we did
Developed a detailed Value Driver Tree for the business
Identied major risks between different stages of the
value chain and how to price these

Employees typically worked in excess of the 7.5 hours

that they habitually logged - and this habit was reinforced
by timesheet system defaults
Company had not historically validated that the hours
people were working were being (i) logged and (ii)
charged to clients
The company was entitled to charge more hours per
planned resource day than it was currently charging
Poor information and unwillingness to discuss fees with
clients meant that contractual caps (on hours that could
be charged without client agreement) caused further
unnecessary revenue leakage, as additional hours that
were logged were typically given away to the client
The issue was recognised within the company, but seen
as too complex to address - particularly as it cut across
operational and commercial areas of the business

Established a basis through the Value Driver Tree for

breaking down the business into logical components
Implemented an accountability-based organization
Performed trend and sensitivity analysis to test
management assumptions regarding which levers
mattered

Results
Established a new model for utility ownership that has
since been replicated by others
Separated the Distribution Infrastructure asset consistent
with risk, pricing and accountability frameworks.
Subsequently sold for double the initial valuation.

Partners in Performance

What we did
Drew up the driver trees to disaggregate the problem,
identify the key levers on performance and set targets
for the key accounts
Instigated training throughout the organisation to educate
all levels on the importance of logging actual hours
Set up a spin cycle approach with appropriate KPIs for
monitoring compliance with the prescribed logging (and
billing) process
Cascaded the KPI monitoring down to the individual
employee and tracked progress at all levels
Determined the degree to which worked hours that were
now being captured could/should be passed on to the
client
Developed work-arounds for the systems and processes
that reinforced inappropriate behaviours

Results
Fundamental shift in the approach to logging and
reconciling hours worked at all levels of the organisation
Increased accountability for managing account
protability in operational and commercial areas of the
business
5%+ increase in billed hours (revenue) achieved within
2 months for each account in which the spin cycle
approach was tried - AT NO EXTRA COST (US 9m
annual savings)

Hours Logged Driver Tree

Partners in Performance
Partners in Performance is a rm that builds better businesses. We deliver rapid performance improvements in industrial,
resource, manufacturing and service companies, using specialist teams and a hands-on approach to lower costs and
increase revenues.
PO Box H52, Australia Square, Sydney NSW 1215 Australia
Phone: +61 (0) 2 9321 0800 Fax: +61 (0) 2 9321 0888
Email: info@pipint.com

www.pipint.com