FINANCE AND STRATEGY PRACTICE

CFO EXECUTIVE BOARD™

™
January 2011

Intelligent Growth
Delivering Profitable Growth in an Unpredictable
Recovery

Presented by Dennis Gannon, Senior Research Director

dgannon@executiveboard.com
 CFOs are facing a
dilemma to grow while
THE COST-GROWTH TRADE-OFF
managing increased cost
pressures; historically, Revenue CAGR, S&P 500
excellence in cost cutting 1994–2008
has come at the expense
of top-line growth.

■
15%
On average, Elite Cost
Cutters—those companies
that beat peers in yearly 12%
margin improvements—
achieved top-line growth
~3.5 percentage points lower
than their non-elite peers
over the 1994–2008 period.

Elite Cost Cutters Other Companies

n = 102. n = 378.

The Question We Heard Most Often from CFOs in 2010

“How can I control costs and grow at the same time without sacrificing the
discipline that we’ve achieved in the past 12 months? To what degree can I
expect to achieve both in this unpredictable environment? ”

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of the FINANCE AND STRATEGY PRACTICE
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5 1
 Only 9% of the largest
500 organizations in
INTELLIGENT GROWTH = HIGH-VALUE GROWTH
North America have
achieved balanced growth TSR Premium1 Over Industry Median, Intelligent Growth Companies Versus Control Group,
over the past 20 years; Sustained Cost Leader and High-Growth Companies
1990–2008, North American Dataset
they earned outsized
returns versus industry
5.6%
peers.

■ While high total shareholder

return (TSR) was not a
screening criteria used in our
study, the Intelligent Growth Intelligent
 = 5.3 Growth
companies significantly
outperform their peers, Companies
delivering more value to
shareholders than industry
peers that focus only on
margin or sales growth over
0.3%
extended time periods.

(0.8%)
(1.2%)
Control Group Companies That Companies That Companies That
of Companies Surpassed Industry Surpassed Industry Surpassed Industry Peers
Peers in EBITDA Peers in Sales in Sales Growth and
Margins Only Growth Only EBITDA Margins with
More Than 10 Balanced
Cost/Growth Years

n = 46 North American Intelligent Growth companies versus 454 North American industry peers.
1 TSR Premium: Each company’s compound annual TSR in excess of its industry group‘s median
compound annual TSR for 1990–2008.

Note: Additional information about methodology and the full list of North American,
From the CFO EXECUTIVE BOARD™ EMEA, and APAC Intelligent Growth companies is located in the appendix.
of the FINANCE AND STRATEGY PRACTICE
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6 2
 Above-average TSR
performance starts with
INTELLIGENT GROWTH COMPANIES KNOW THEY
“intelligent growth” in ARE IN A “VALUE CREATION HOT SPOT”
the economic trough:
a period when you are
more likely to achieve Total Shareholder Return Premium1 Generated Across the Four Stages of the Economic Cycle,
Intelligent Growth Companies Versus Everyone Else
competitive advantage.
1990-2007, North American Dataset Analysis

■
Value Creation Hot Spots
Intelligent Growth
companies create
considerable TSR advantage
Intelligent Stable Growth Peak Recession Trough
in these early postrecession Growth Company
years and continue beating (3–5 Years) (1 Year) (1–2 Years) (1–2 Years)
Performance
their industry peers in value
created in the stable growth
1990–2000 Cycle +2% TSR Above +11% TSR Above +4% TSR Above +5% TSR Above
and peak years.
Industry Median Industry Median Industry Median Industry Median

2001–2007 Cycle (1%) TSR Above +4% TSR Above +1% TSR Above +5% TSR Above
Industry Median Industry Median Industry Median Industry Median

0% TSR
Above Industry
Everyone Else Median

n = 46 North American Intelligent Growth companies versus 454 North American industry peers.

1 TSR Premium: Compound annual TSR in excess of the industry group’s median compound
annual TSR for the time period of each respective phase of the economic cycle.

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10 3
 While the timing of
the next recession
CYCLE DISCIPLINE
is unknown, winning
companies’ actions will Intelligent Growth Company Focus in Each of the Four Phases of the Economic Cycle
be influenced more by
what they need to do to
thrive in the next phase
Stable Growth Peak Recession Trough
of the cycle, not just
(3–5 Years) (1 Year) (1–2 Years) (1–2 Years)
today.

■ Cycle Discipline: Only
Intelligent Growth
companies (9% of the
companies in the study)
exhibit what we refer to
as “cycle discipline,” or the
tendency to pull forward
preparations for the next
economic phase of the
business cycle.
■ Reduce exposure to ■ Strengthen the balance ■ Protect capex and SG&A ■ Make high-return growth
cyclical market changes sheet. investments that are key investments.
by diversifying markets for future growth from
■ Review the plan for ■ Build consensus around
and products. stringent cost cuts.
handling the next how the customer has
■ Achieve high efficiency recession. ■ Use scenario planning changed.
sales growth through to create optionality in
■ Divest underperforming ■ Maintain cost discipline
COGS discipline. business unit operating
assets. plans. while allowing sales-
driving costs back
in selectively.

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11 4
 The challenge of efficient
growth after a recession
THREE CHALLENGES TO INSTILLING CYCLE DISCIPLINE
is tackled at three critical
levels by Intelligent
Growth companies.

The Cycle Discipline Problem

“How do I instill sufficient financial
discipline to grow efficiently in a
weak growth phase?”

1. How do I screen in 2. How do I encourage 3. How can I ensure that the

and screen out growth the business to be more business brings back the
investments with greater disciplined about preparing for right costs?
confidence? the next economic challenge?

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12 5
INSTILLING CYCLE DISCIPLINE

I II III
Reducing Growth Adapting Plans and Performance Reintroducing Costs
Investment Regret Management to Execute Critical to Sales Growth
in the Recovery

1
2010 Force of Ideas Winner
Behaviors for Today
(The Trough)
Extend the residual control you Allocate your personal time Reintroduce costs based on
have over deployed capital. to create a new “theory of the their direct link to sales growth.
customer” and use it to improve
the plan for the recovery.

Behaviors for All Phases

of the Economic Cycle Define “losing” as clearly Create improved awareness
as “winning” when you make of market economics in
growth investments. the business by instituting
issue-driven planning.

1 Pseudonym.

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13 6
 Elevated project failure
rates and the possibility
FAILURE, REGRET, HESITANCY
of a worsening economy
have caused many Q: In the Past 12 Months What Percent Q: In the Past 12 Months What Percent of
executives to regret of Growth Projects Do You Regret Growth Projects Did You Not Approve That
recent growth investment Shutting Down? You Wish You Had?
July 2010 July 2010
decisions and hesitate
about future ones. 46% 19%
24% 1%–5% of Projects More Than 20%
More Than 20% 26%
of Projects 1%–5% of
■ For example: IT project of Projects
Projects
failure rates have reached 14%
13%
unprecedented highs 11%–20%
11%–20%
during this recession due of Projects
of Projects
to shrinking technology 41%
17% 6%–10% of Projects
budgets, key staff layoffs, 6%–10% of Projects
and more governance red
tape slowing down viable Average 18% Average 16%
initiatives. of Projects of Projects

n = 60 global financial planning professionals.

Source: CFO Executive Board research.

IT Capital Project Performance1

2006

35% 2009
32%

24%
19%

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Successes Failures
n = 400.
1 Companies were also asked to designate what percentage of projects they would describe as “challenged.” 46% of
respondents labeled projects as challenged in 2006, compared to 44% in 2009.
Source: Standish Group Research, “Recession Causes Rising IT Project Failure Rates,” (July 2009).

14 7
 Our research into
exemplary growth
LOW REGRET INVESTING
investment management
found that “riskier” Maximum Impact of Investment Approaches on Investment Regret
portfolios, up-front Regression Analysis, Three Dependent Variables = Regret (July 2010)
documentation of Increased Regret
assumptions, and longer The Four Things That Matter
Reduced Regret
residual control over
deployed capital lead to Up-front Financial Assumption Documentation 11%
Longer
reduced regret. Control Midcycle Reviews Assess On-Time,
11%
Over Growth On-Budget Execution
Projects Midcycle Reviews Assess Emerging Risks 9%
to Project Success

Long-Term Payout Projects 24%

Large Capex Projects 10%

How Do You Know If Your
Chunkier, High-Risk Projects 10%
Portfolio Is Good? Riskier
Just as product quality is Growth Bets Low-Risk Projects (10%)
measured by the absence of
defects, portfolio decision- Small Capex Projects (10%)
making integrity can be defined
Short-Term Payout Projects (24%)
as the absence of investment
regret.

Working Definition Scenario or Sensitivity Analysis 10%

Scenarios
of Investment Regret: Used to
Cash Flow Forecast and Capital Commitments (10%)
We tested correlation of 34 Set the
Growth Fixed Increase/Decrease YOY
capex management techniques
Budget Percentage Targets (24%)
with low investment regret. We
define regret as experiencing
the negative effects of past Risk-
Dedicated Finance Support for Project Sponsors 9%
decisions or anticipating future Sensitivity
Assumption Ability to Manage Project Risks Is Assessed in
negative effects of current 9%
Testing Portfolio Trade-Off Decisions
investment decisions.

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n = 69 global financial planning executives.
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15 8
 Intelligent Growth
companies allocate
FIRE AND FORGET
analytic resources beyond
the front end of the Analytic Resources Dedicated to Each Stage of the Capital Investment Life Cycle
investment cycle to capture Illustrative
information on why
High
projects succeed or fail. Intelligent Growth Companies

Control Group Companies

 Greater Residual
Control over
Deployed Capital

Dedicated to Task
Analytic Resources
Low
Business Investment Capital Mid-Cycle Post- Asset
Case Screening Deployed Reviews Completion Utilization
Creation Audit Checks
Stage of Asset Life Cycle or Capital Evaluation Process

Do You Use These Capital Project Management Techniques?

July 2010

Use Mid-Cycle Reviews to Isolate Emerging 35%

Risks to Project Success

Use Mid-Cycle Reviews to Assess Validity of 31%

Original Project Assumptions

Share Projects’ Progress Broadly Among Managers 29%

Set Risk/Opportunity Triggers for Project Intervention 29%

From the CFO EXECUTIVE BOARD™

of the FINANCE AND STRATEGY PRACTICE Schedule Project Intervention at Preset Milestones 27%
www.cfo.executiveboard.com

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All Rights Reserved. CFO6584410SYN n = 64 global financial planning executives.

16 9
 BNSF’s managers are
encouraged to take
educated risks and to
share what they learned
about their missteps.
■ Tip: By randomly choosing
one project from a category
of initiatives, BNSF avoids
the burden of conducting
postaudits on all initiatives
while maintaining a healthy
sense of accountability
among all business
managers.
“These reviews are
structured as learning
opportunities for
project sponsors and the
organization at large, not a trial
by jury. Because investment
decisions are not made in a silo,
everyone has skin in the game to
improve the quality of future
decisions.”
Director, Corporate Planning
BNSF Railways
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SAFE-TO-FAIL LEARNING CULTURE
BNSF’s Randomized Postaudit Review Process
1 2
Corporate Finance assembles a list of significant A senior leadership committee assembles
capex projects initiated in the past 10 years and to review the quality of original financial/
selects projects from categories that have not non-financial assumptions and the drivers
been reviewed recently. of performance outcomes for each project.
Projects Under Postaudit Review Postaudit Review Committee
Consideration CEO, CFO, Corporate Audit, Board of Directors,
Project BU VP, Original Project Sponsor
Criteria: One to two years post-completion;
$5 million threshold Original Assumption Testing
■ Was our risk sensitivity analysis on track?
Project Categories up for Review ■ How did we fare against our original financial
Dispositions xx xx xx xx performance projections? Why were we off
Track Programs xx xx xx xx track?
Marketing Programs xx xx xx xx ■ What are the risks we were good at
Equipment Purchases xx xx xx xx managing? Bad at managing?
M&A, Alliances xx xx xx xx ■ How can we improve our approach for this
type of project in the future?
3
Postaudit Review Round Results Finance develops
a short list of new
1. Need to improve x, y, z risk management capabilities. considerations
and potential
best practices
2. Do not underestimate competitors’ ability to shift their schedules and pricing to
that should be
reduce BNSF’s premium-price position; incorporate in future risk sensitivity analyses. shared broadly to
improve success
3. Share best practices a and b that were developed by the team in the course of rate of similar
this rollout. projects in the
future.
4. Analyze marketing spend requirements using x criteria in future projects.
Source: BNSF Railways.
21 10
 1
Company Beta uses mid-
cycle project reviews
REVALIDATING ASSUMPTIONS MIDCYCLE
to provide an early-
warning mechanism Quarterly Project Review Process
for identifying and
mitigating project risks. 1a Benefits Contract 1b Risk 2 Distressed Project 3a Recommitment
Affirmation Reassessment Review of Project Funds

■ Projects of more than $2.5 Sponsor Revisit projects

million require quarterly recommits highlighted as 3b Proactive
reviews to determine to ROI high risk Termination
ongoing funding, based on
detailed risk assessment Unused project
criteria. funds are returned
to the business.
■ The S.C.O.R.E. report
highlights problem projects Risk Ratings Scale Definitions
in need of greater scrutiny,
Very High Risk High Risk Moderate Risk Low Risk Very Low Risk
particularly those over- 1 2 3 4 5
running budgets by the
S Scope Numerous scope Major increases in Scope changes with Consistent history of Minimal scope changes
allowed variance of 10%. Management changes (> 30%) scope (10–30%); major 5–10% impact on costs small changes to scope
These at-risk projects are impact project functionality changes < 5% of costs
(functionality, schedule,
subject to an independent or cost)
review conducted by the
investment committee, Clarity of Business benefits Major areas of benefits Most benefits Most benefits Most benefits
C
which includes business unit Business unquantified and quantified but not quantified but little quantified; medium quantified; high
Benefits not verifiable verifiable confidence in benefits confidence in benefits degree of confidence
CFO, business unit COO, capture capture in benefits capture
and head of the business
division. On-Time Delays > 40% of Delays 20–40% of Delays 10–20% of Delays < 10% of On-time delivery
O
Delivery lead time for major lead time for major lead time for major lead time for major
deliverables deliverables deliverables deliverables

R Remaining on Costs > 20% higher Costs 15–20% higher Costs 5–15% higher than Costs up to 5% higher On-budget delivery
Project Budget than planned than planned planned than planned

E Engagement of Initiative not project Initiative not project Initiative not project Initiative primary Full-time business
Business Leaders owners’ primary owners’ primary owners’ primary responsibility of operations and
responsibility; sporadic responsibility; responsibility; steering operations, IT, and IT owners; 100%
business attendance leadership team attends committee meeting business owners; attendance at steering
at steering committee majority of steering attendance high 75–100% attendance committee meetings
meetings committee meetings (75–100%) at steering committee
From the CFO EXECUTIVE BOARD™ (< 50%) (50–75%) meetings
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1 Pseudonym.
© 2010 The Corporate Executive Board Company.
All Rights Reserved. CFO6584410SYN Source: Beta Company.

23 11
 Leading companies
ensure that capital
management processes
place as much value on
disinvesting wisely as
investing wisely.
A NOTE ON LOSER PICKING
Percentage of Companies That Have Growth Q: Of the Growth Projects in Your Current
Projects in Their Portfolio That Should Be Portfolio, What Percentage Should Be
Shut Down Shut Down?
July 2010 July 2010

■ Two-thirds of companies
we surveyed in 2010 believe
that, on average, 13% of Average 13% of projects
projects in their growth
portfolio should be shut
down and capital reallocated 34% 66%
to other opportunities. Companies Companies 13%
with No with More Than 20%
Current Current of Projects
Investment Investment
Regret Regret 30%
1–5% of
Projects

20%
11–20% of
Projects

37%
6–10% of Projects

n = 61 global financial planning executives.

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24 12

Gamma diagnoses
businesses at risk by
CRITERIA FOR FAILURE
articulating specific
divestment triggers for Five Portfolio “Winner” and “Loser” Picking Criteria
key metrics and business
driver assumptions.
Category
Strategic Fit
Is this business aligned
to our long-term strategy?
Financial Attractiveness
Does this business have
long-term growth potential?
Brand Alignment
Can we grow this business
by leveraging our brand
without diluting its strength?
Value Enhancement Potential
Can this business contribute
to growth across all our
platforms?
Scalability
Can we scale this business
to achieve our top- and
bottom-line targets?
DO: Outline criteria for failure
prior to making the investment.
From the CFO EXECUTIVE BOARD™
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1 Pseudonym.
© 2010 The Corporate Executive Board Company.
All Rights Reserved. CFO6584410SYN Source: Gamma Company; Marketing Leadership Council research.
Metrics
■ Geography and Customer
Coverage
■ Brand Leverage
■ Speed of Technology
Adoption
■ Accretion to Long-Term EPS
■ ROIC
■ Free-Cash Flow
■ Alignment with Brand
Promise
■ Brand Differentiation
■ Brand Preference
■ Impact on Portfolio
Performance
■ Asset/Competency Vitality
to Other Businesses
■ Potential to Enter New
Markets or Launch New
Products
■ Total Market Size
■ Current Market Share
■ Market Projection
■ Competitive Intensity
Major Assumptions
■ Technology platforms
will remain on par with
competition.
■ Product time to market
is synchronized with
consumption patterns.
■ Consumer spending will
return as income levels
revert to historical norms.
■ Pricing power and strong
cost control will help sustain
ROIC.
■ Brand strength can be
leveraged uniformly across
all extension opportunities.
■ Content success will create
revenue streams across
platforms.
■ Nascent market is recession-
resistant and will continue
to grow.
■ Steep learning curve will
inhibit local competition.
1
Triggers for Disposition
■ Consumer consumption
patterns are no longer
aligned with media format.
■ Proliferation of digital media
breeds “want it now culture.”
■ Unbudgeted marketing and
advertising spend, necessary
to gain wallet share, erodes
margins and invalidates
project’s ROIC assumptions.
■ Diversifying customer
segments deviates products
from brand promise.
■ Noncore extension
negatively impacts customer
perception.
■ Noncore brands fail to
generate leverage across
other businesses.
■ Changing customer
economics limits market
growth potential.
■ Intense competition from
entry of Chinese/Indian
companies keeps market
share under check.
25 13
 FINANCE AND STRATEGY PRACTICE
INTELLIGENT GROWTH SUITE

For additional information, contact:

Johanna Robinson
Phone: +1-571-303-6260
E-mail: stevensonj@executiveboard.com

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 FINANCE AND STRATEGY PRACTICE
CFO EXECUTIVE BOARD™

New York
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