How to Increase the Value-added of Controlling: A Guide to an Efficient and Sustainable Management Support 9783110580600, 9783110577839

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Valerian Laval How to Increase the Value-added of Controlling

Valerian Laval

How to Increase the Value-added of Controlling A Guide to an Efficient and Sustainable Management Support

ISBN 978-3-11-057783-9 e-ISBN (PDF) 978-3-11-058060-0 e-ISBN (EPUB) 978-3-11-057800-3 Library of Congress Control Number: 2018952444 Bibliografische Information der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.dnb.de abrufbar. © 2018 Walter de Gruyter GmbH, Berlin/Boston Typesetting: Integra Software Services Pvt. Ltd. Printing and binding: CPI books GmbH, Leck Cover image: Georgijevic / E+ / gettyimages www.degruyter.com

To my beloved son Theodor.

Foreword This book reflects almost 20 years of professional experience in the field of accounting, controlling and corporate management and aims to give new insights and guidance to practitioners and scholars on how to improve the controlling function in multinational production companies. Writing this book and participating in conferences across all over Europe was a big wish which, finally, has come true. I thank my previous employer Dräxlmaier Group for the kind support of this project. I thank Prof. Dr. Petru Stefea, Prof. Dr. Nicolae Bibu, Prof. Dr. Liliana Donath, Prof. Dr. Ovidiu Megan, Prof. Dr. Andrei Pelin and Dr. Diana Gligor from “The West University of Timisoara”, for their guidance and inspiration during the preparation of this book. I also thank Prof. Dr. Eduard Stoica, from the “University Lucian Blaga”, for his hospitality during conferences and for his support in publishing several of my academic papers. My special thanks go to Jan-Norbert Schwetje, my close friend since being fellow students at the “University of Bayreuth”, for his review of the manuscript and the ideas he contributed. Thank you all!!! Dr. Valerian Laval Düsseldorf, September 2018

https://doi.org/10.1515/9783110580600-201

Contents Foreword 

 VII

List of Figures 

 XII

List of Tables 

 XVI

List of Abbreviations 

 XVIII

1

Introduction 

 1

2 2.1 2.1.1 2.1.2 2.1.3 2.2 2.3

Value creation in controlling – definition and terminology  Theoretical framework of controlling   7 The controllers’ mission statement   7 The controlling process-model   8 The role models of the controller   10 The value-added of the controlling function   13 Interim conclusion   18

3 3.1 3.2 3.3 3.4 3.4.1 3.4.2 3.5

 20 Changing expectations in multinational production companies  Analysis of influencing factors   20 Changing expectation towards the controlling role model   23 Implication of the changed expectations for the individual company   27 Development of a structured change model   31 Increasing effectiveness   33 Increasing efficiency and its organizational impact   35 Interim conclusion   36

4 4.1 4.2 4.2.1 4.2.2 4.3 4.3.1 4.3.2 4.4 4.5 4.5.1 4.5.2 4.6

 39 Management reporting – contents and processes  Classification and goals of management reporting   39 Contents of management reporting   39 Analysing the survey on reporting contents   39 Value-added reporting content   52 Processes of management reporting   54 Analysing the survey on reporting processes   54 Improving reporting processes   54 Improving efficiency by IT and shared service solutions   59 Financial statements projection   66 Business case assumptions   66 Sensitivity analysis and final remarks   75 Interim conclusion   76

 7

X  5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.8.1 5.8.2 5.9

 Contents

Operative planning by objectives   77 Involvement of the controller in budgeting and forecasting activities   77 The terminology “planning”, “budgeting” and “forecasting”   78 Problems associated with the planning process   81 Synopsis of concepts and measures to improve planning   86 The influence of strategy orientation on corporate planning   91 Introduction to planning by objectives   93 Solving the trade-off between competing planning objectives   97 Financial statements projection   99 Business case assumptions   100 Sensitivity analysis and final remarks   102 Interim conclusion   103

6.5 6.6 6.7 6.8 6.8.1 6.8.2 6.8.3 6.8.4 6.8.5 6.8.6 6.9 6.10 6.11

 105 Strategic planning of multi-stakeholder initiatives  The role of the strategic planning in controlling function   105 The strategic approach to create added value for stakeholders   107 The interdependency between project layout and added-value   108 Assumption controlling – identifying key trends and their  implication   112 Implementation controlling – determine and evaluate initiatives   114 Performance controlling – connecting strategy and operation   116 Measuring the increased financial performance   118 Financial statements projection   119 Financial parameters base case at low-cost location   120 Financial parameters base case at high-cost location   129 Financial statement projections base case   130 Financial parameters CSR case   131 Financial statement projections CSR case   140 Sensitivity analysis and final remarks   142 Maximizing cluster benefits   146 SWOT Analysis and further recommendations   149 Interim conclusion   150

7 7.1 7.2 7.3 7.4 7.5 7.6 7.7

Enhancement of organization with portfolio-based restructuring  The importance of restructuring projects   152 Overview of restructuring reasons   153 The portfolio of restructuring measures   154 Evaluation and steering of restructuring measures   159 Managing adverse effects   161 Financial statements projection   163 Interim conclusion   166

6 6.1 6.2 6.3 6.4

 152

Contents 

8

Conclusions, contributions and outlook  Outlook   183

Bibliography  Index 

 184

 195

About the Author 

 197

 167

 XI

List of Figures Figure 1.1 Figure 1.2 Figure 1.3 Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5 Figure 2.6 Figure 2.7 Figure 2.8 Figure 2.9 Figure 2.10 Figure 2.11 Figure 2.12 Figure 2.13 Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4 Figure 3.5 Figure 3.6 Figure 3.7 Figure 3.8 Figure 3.9 Figure 3.10 Figure 3.11 Figure 3.12 Figure 3.13 Figure 3.14 Figure 3.15 Figure 4.1 Figure 4.2 Figure 4.3 Figure 4.4 Figure 4.5 Figure 4.6 Figure 4.7 Figure 4.8 Figure 4.9 Figure 4.10 Figure 4.11

Participants by function (survey)   3 Participants by function (reference)   4 Number of participants by activity type   5 Framework of controlling   8 The management control cycle   8 Controlling process model   9 Decision model   10 Controlling role models   11 Role of the controlling in companies   12 Measuring controlling performance   13 Awareness for costs of reporting (survey)   14 Awareness for costs of reporting (reference)   14 Costs exceed benefits (survey)   14 Costs exceed benefits (reference)   14 The measurability of controlling indicators   16 The controlling impact on financial performance   17 Overview of internal and external factors   21 Headcount of controlling depends on company size   21 Percentage of controllers vs. company size   22 Popularity of controlling specializations   22 Reporting lines of the head of controlling   23 Data availability for management   24 Controlling roles at Deutsche Post World Net   25 Priority shift within the controlling function   26 Significance of the business partner role increases   27 Competitors of the controlling function   28 “Competitive challenge of controlling”   28 Shadow controlling   30 Iterative improvement concept   30 WHU controller index 2014   33 Organizational impact of efficiency measures   36 Impact of top management reporting on company success (survey)   40 Impact of top management reporting on company success (reference)   40 Communication purposes of top management reporting (survey)   41 Communication purposes of top management reporting (reference)   41 Major requirements regarding characteristics of top management reporting (survey)   42 Major requirements regarding characteristics of top management reporting (reference)   42 Communication purposes already covered in the current management reporting (survey)   43 Communication purposes already covered in the current management reporting (reference)   43 Most frequently seen improvement areas (survey)   44 Most frequently seen improvement areas (reference)   44 The value of top management reports depends on … (survey)   44

https://doi.org/10.1515/9783110580600-202

List of Figures 

Figure 4.12 Figure 4.13 Figure 4.14 Figure 4.15 Figure 4.16 Figure 4.17 Figure 4.18 Figure 4.19 Figure 4.20 Figure 4.21 Figure 4.22 Figure 4.23 Figure 4.24 Figure 4.25 Figure 4.26 Figure 4.27 Figure 4.28 Figure 4.29 Figure 4.30 Figure 4.31 Figure 4.32 Figure 4.33 Figure 4.34 Figure 4.35 Figure 4.36 Figure 4.37 Figure 4.38 Figure 4.39 Figure 4.40 Figure 4.41 Figure 4.42 Figure 4.43 Figure 4.44 Figure 4.45 Figure 4.46 Figure 4.47 Figure 4.48 Figure 4.49 Figure 4.50 Figure 4.51 Figure 4.52 Figure 4.53 Figure 4.54 Figure 4.55 Figure 4.56 Figure 4.57

 XIII

The value of top management reports depends on … (reference)   45 Number of reporting positions in top management reports (survey)   45 Number of reporting positions in top management reports (reference)   45 Use of comments in management reporting (survey)   46 Use of comments in management reporting (reference)   46 Should strategic initiatives be included in the management reporting? (survey)   47 Related to navigation, management reporting (reference)   47 Adaptability of reporting (survey)   48 Adaptability of reporting (reference)   48 What reporting cycles exist in your top management reports (survey)   48 What reporting cycles exist in your top management reports (reference)   49 Number of ad hoc reports per month (survey)   49 Number of ad hoc reports per month (reference)   49 Workdays until reports are distributed (survey)   50 Workdays until reports are distributed (reference)   50 Use of analysis views (survey)   50 Use of analysis views (reference)   51 Managament reporting in cockpit – storyline,layout & standardization (survey)   51 Managament reporting in cockpit – storyline, layout & standardization (reference)   52 Value-added management reporting   53 Development of KPIʼs used for decision making   53 Improving reporting relevance   54 Existence of a sufficiently detailed documentation of ... (survey)   55 Existence of a sufficiently detailed documentation of ... (reference)   55 Our reporting process steps are … (survey)   56 Our reporting process steps are … (reference)   56 Starting points of the case study   56 Project steps   58 Assign responsibilities   58  59 Detailed process description  System supported commenting process (survey)   60 System supported commenting process (reference)   60 Time spent on the report creation & degree of automation (survey)   60 Time spent on the report creation & degree of automation (reference)   61 Use of following kinds of reporting formats (survey)   62 Use of following kinds of reporting formats (reference)   62 Top Management Reports can be viewed on… mobile devices (survey)   62 Top Management Reports can be viewed on… mobile devices (reference)   63 Popularity of shared service centres   63 Shared-service centre reporting   64 SSC implementation time   65 Chances for SSC efficiency   65 Risks for SSC efficiency   65 Average number of plant controllers per 1000 FTE   68 Average monthly net salary for fresh controllers   68 Average workforce fluctuation rate per year   70

XIV 

 List of Figures

Figure 4.58 Figure 4.59 Figure 4.60 Figure 4.61 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 5.5 Figure 5.6 Figure 5.7 Figure 5.8 Figure 5.9 Figure 5.10 Figure 5.11 Figure 5.12 Figure 5.13 Figure 5.14 Figure 5.15 Figure 5.16 Figure 5.17 Figure 5.18 Figure 5.19 Figure 5.20 Figure 5.21 Figure 6.1 Figure 6.2 Figure 6.3 Figure 6.4 Figure 6.5 Figure 6.6 Figure 6.7 Figure 6.8 Figure 6.9 Figure 6.10 Figure 6.11 Figure 6.12 Figure 6.13 Figure 6.14 Figure 6.15 Figure 6.16 Figure 6.17 Figure 6.18 Figure 6.19 Figure 6.20 Figure 6.21 Figure 6.22 Figure 6.23

Average workforce fluctuation rate by industry   70 Average efficiency increase in controlling process   71 Current competence level of fresh graduates (percentage)   72 Quality of training documentation (1-very poor, 5-very well)   72 Distinction of planning, budgeting and forecasting   79 Important planning contents   79 Synonymous usage of the term budgeting   80 Interaction of planning and budget   80 Time spent for corporate planning by function   82  83 Satisfaction with the planning process  Time spend on planning by company size   84 Expectation gap of corporate planning   85 Suggested improvement measures   86 Precision of the synopsis   89 “Synopsis of planning concepts”   90 “The continuum of planning concepts”   91 Alternative strategy orientation   92 “Characteristics of strategy orientation”   92 Common planning objectives   94 Planning detail as result of objectives   94 Consequences of high level of planning detail   96 The cost of planning detail   96 Alternative ways to improve control   97 Alternative ways to improve prediction   98 Average process shortening by process shortening percentage   101 Creating share-value (CSV)   107 Strategy and measurement   108 “Value diamond of CSR”   109 Prioritizing social issues   110 Competitive context factors   111 Competitive advantage and social issues   111 Influencing factors of employability in Timisoara   112  113 Key trends limiting growth opportunities  Direct targets   114 “Formation of a multi-stakeholder cluster”   115 Curriculum adaption first year   116 Curriculum adaption second year   117 “Connection between financial performance and CSR”   118 “The measurability of educational CSR”   119 Average SSC size   121 Evaluation of current fresh graduates’ competence (percentage)   122 Fresh graduates reach full productivity after   123 Average salary of SAP graduates   126 Training duration of fresh graduates   126 Type of training offered by companies   127 Average cost per training   127 Yearly training after on-boarding   127 Fresh graduate’s average salary   129

List of Figures 

Figure 6.24 Figure 6.25 Figure 6.26 Figure 6.27 Figure 6.28 Figure 6.29 Figure 6.30 Figure 6.31 Figure 6.32 Figure 6.33 Figure 6.34 Figure 6.35 Figure 6.36 Figure 6.37 Figure 7.1 Figure 7.2 Figure 7.3 Figure 7.4 Figure 7.5 Figure 7.6 Figure 7.7 Figure 7.8 Figure 8.1 Figure 8.2 Figure 8.3 Figure 8.4 Figure 8.5

Average SSC efficiency loss percentage due to distance   130 Expected increase in level of each competency area   133 Expected average competency growth   134 Current level and future competence levels   135 Tendency of salary decrease in SAP/IT   136 Workforce fluctuation factors   136 Effect of new study line on fluctuation   137 Sensitivity to fluctuation – graph   144 Sensitivity to salary – graph   145 Project dependent variables   146 University business objectives   147 Internships offered   148 Recognition of CSR involvement   149 Impact on regional competitiveness   149 Common improvement areas   155 “Portfolio based restructuring”   156 Reverse flow methodology   161 Overview of adverse effects   161 Spillover effects   162 Development of German business travels   164 Number of business travels per year   164 Projection of EBIT effects   166 Determinants of the controlling function   170 Competitive challenge of controlling   171 Synopsis of structured change models   172 How to influence the added-value of controlling   174 Planning by objectives   179

 XV

List of Tables Table 1.1 Table 2.1 Table 3.1 Table 3.2 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 4.8 Table 4.9 Table 4.10 Table 4.11 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 5.7 Table 5.8 Table 5.9 Table 5.10 Table 5.11 Table 5.12 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table 6.8 Table 6.9 Table 6.10 Table 6.11 Table 6.12 Table 6.13 Table 6.14 Table 6.15 Table 6.16 Table 6.17 Table 6.18 Table 6.19

Overview of performed interviews   4 Controlling main processes   9 Development of research studies   25 Process table based on IGC process model   34 Controlling main processes   40 Inventory of reporting processes   57 Business case assumptions   66 Observed controller fluctuation Plant A   67 Observed controller fluctuation Plant B   67 Social contribution at the cost in Romania   69 Average monthly gross salary expenses   69 Projected efficiency gains   73 Projected efficiency gains (continued)   74 Projected efficiency scenarios   75 Projected KPI efficiency   75 Controlling main processes   78 Analysed planning surveys   82 Principles of “better budgeting”   87 Principles of “advanced budgeting”   87 Principles of “modern budgeting”   88 Principles of the “Schmalenbach Group”   88 Principles of “beyond budgeting”   89 Cost base after efficiency gains   100 Projected effectiveness gains   101 Projected effectiveness gains (continued)   102 Projected effectiveness scenarios   102 Combined results on KPI   103 Controlling main processes   106 Portfolio of learning curves (base case)   124 Portfolio of employees   124 Overall productivity (base case)   125 Salary expenses for SAP graduates   126 Assumptions low cost location in base case   128 Net salary for SAP graduates West Europe   129 Assumptions high-cost location in base case   131 Financial projection in base case   132 Portfolio of learning curves (base case)   138 Overall productivity (base case)   138 Assumptions low-cost location in CSR case   139 Assumptions high-cost location in CSR case   139 Financial projection in CSR case   140 Impact on Free Cash Flow PV   141 Project dependent variables   142 Project KPI   142 Sensitivity to fluctuation CSR case   143 Sensitivity to fluctuation base case   143

https://doi.org/10.1515/9783110580600-203

List of Tables 

Table 6.20 Table 6.21 Table 7.1 Table 7.2 Table 7.3 Table 7.4 Table 7.5 Table 7.6 Table 7.7 Table 7.8 Table 7.9 Table 7.10

Sensitivity to salary increase – table   145 Sensitivity to knowledge level – table   146 Controlling main processes   153 Restructuring reasons   153 Measure characteristics   156 Measure profile of travel policy   157 Measure profile of offshoring   158 Total portfolio profile   158 Top-down responsibilities   160 German business travels   163 Bottom-up projection   165 Consolidated projection   165

 XVII

List of Abbreviations ABAP Advanced Business Application Programming ASE Academia de Studii Economice, Bucuresti (The Academy of Economic Studies, Bucharest) BAME Business Administration, Marketing and Economics conference BI Business Intelligence BW Business Warehouse CAPEX Capital Expenditure CEO Chief Executive Officer CFO Chief Financial Officer CO Controlling CSR Corporate Social Responsibility CSV Creating Shared Value DWC Deutscher Wirtschaftsclub (German business club) EBIT Earnings before Interest and Taxes ERP Enterprise Resource Planning EUR European currency unit FEAA Facultatea de Economie si Administrarea Afacerilor) (The Faculty of Economics and Business Administration) FCF Free Cash Flow FTE Full-Time Employee HCL High-Cost Location HMS Hybrid Management Systems IBIMA International Business Information Management conference ICV Internationaler Controller Verein (The international group of controllers) IECS International Economic Conference Sibiu IGC International Group of Controlling IT Information Technology KPI Key Performance Indicators LCL Low-Cost Location M Measure MM Material Management n/a not applicable NWC Met Working Capital OPEX Operational Expenditure PV Present Value OLAP Online Analytical Processing P&L Profit and Loss PP Production Planning PPE Property Plant and Equipment PS Project System R&D Research and Development SD Sales and Distribution Sem Semester SQL Structured Query Language SSC Shared Service Centre TIMTED Timisoara conference on “Current Economic Trends in Emerging and Developing Countries” https://doi.org/10.1515/9783110580600-204

List of Abbreviations 

USA USP UVT WHU

United States of America Unique Selling Proposition Universitatea de Vest din Timisoara (“The West University” of Timisoara) Wissenschaftliche Hochschule für Unternehmensführung

 XIX

1 Introduction Very little is needed to make a happy life; it is all within yourself, in your way of thinking. Marcus Aurelius (121–180 AD)

Recent megatrends such as increasing complexity, volatility, internationalization and increased demand for transparency and compliance have changed the expectation towards the controlling function. Recent surveys have indicated that the need for a controller with a data analyst role is decreasing due to modern ERP solutions (Brands and Holtzblatt, 2015; Button 2015). Complementarily, the request towards the controlling function to provide specific decision support as a business partner of the management are increasing (Gräf 2014; Schäffer and Weber 2014a). The idea and urgency for this topic became obvious to the author during various milestones of professional experience in multinational production companies, which have a typical number of maintained controlling specializations and a strategic orientation in the controlling function. During this professional experience, the increased expectations toward the controlling function became obvious, especially from the following perspectives: While working in the corporate controlling department of a major steel company in Germany, the author observed that the management reporting was mainly finance driven and allowed the company no reasonable basis for an operational root cause analysis. Without knowledge about the root causes, there was no basis to set up specific countermeasures to fix the problem. So, instead of fixing the problem, the controlling department spent a lot of energy to analyse and maintain a complicated system of financial KPI including Free Cash Flow bridges between budgets and to forecast as well Economic Value-Added scenarios. It became obvious that such analysis took a lot of time to prepare and to explain to the executive board but creating no significant insight into the business. In consequence, the executive board decided to ignore the financial analysis. These observations inspired to further research on how to optimize the “value-added of management reporting” presented in chapter four. As a general manager of automotive companies in Germany, China and Eastern Europe, the author was deeply involved in corporate planning processes and observed that those companies spent almost half a year in preparing the budget. In the first phase, the planning was prepared bottom-up in the expectation that the corporate headquarter would induce budget rounds for cost-cutting. After that, it often took half a dozen negotiation rounds and budget presentations until the final budget was approved. But, despite spending so much time and energy on the budget, it had only a little connection either with corporate strategy or with the relevant operational KPI. Furthermore, the budget was too inflexible to be changed in case a macroeconomic shock leaving the company “to be driven by sight”. This observation was triggering https://doi.org/10.1515/9783110580600-001

2 

 1 Introduction

the author’s research to improve corporate planning and to develop a model on “operative planning by objectives”, described in chapter five. During that time the author was also involved in strategic planning processes and responsible for public relations. It thereby surprised that those two disciplines were not connected with each other. While companies see the need to include some charity in their public relation, they seldom see a way to connect their social contribution with their strategic goals. Strategic planning does consider external trends but is seldom aware of the aspect that big companies have the possibility to influence and change the society and the business environment in which they operate. During the four years of working in Eastern Europe, the author took an active role in several corporate social responsibility (CSR) initiatives. The supported initiatives included the (re)introduction of vocational education adding and modernizing bachelor and master curriculums at leading universities in Eastern Europe. Based on the experience and insights made participating in these initiatives, the author researched and connected the strategic planning and CSR aspects in a model referred later as the “value diamond of CSR” in chapter five. Being a corporate restructuring manager in an automotive group, the author noticed that the reaction of corporates to crisis is seldom structured in a systematic way. The research on the enhancement of organization with a “portfolio-based restructuring model” proposed in chapter six is a consequence of these observations. The publication reflects the observations of the author described above and aims at contributing new insights on how to improve the controlling function in modern multinational production companies. The following research questions will facilitate this aim: The first research question “What does controlling involve and how can it add value to the company?” will span the field of research by clarifying what controlling means and to determine how the added value can be defined. The answer to this question will clarify a new perspective on the modern understanding of the controlling function and its development. From the results of multiple surveys that have been analysed, it becomes clear that the controlling function, in general, has been increasingly progressing, from a data preparation to a business and to a change management oriented function, highly interconnected with the management of a business organization. The answer to this first research question will be given in chapter two and three. The second research question: “Which factors influence the set-up of the controlling function in a company and how are the expectations towards the controlling function changing over time?” will depict how the requirements towards the controlling function are changing. An analysis will present how the expectation gap can entrap the controlling function due to misalignment with the management needs. To close this gap, change models will be discussed and a new change model will be developed. The answer to the second research question will be given in chapter three. The third research question, “How can the controlling function add value to standard reporting and budgeting activities?” will analyse and illustrate how the controlling function could increase the added-value of its standard activities such as

1 Introduction 

 3

management reporting and operative planning. The publication will outline improvements of standard management reporting activities by focusing on decision usefulness. By taking this approach, the decision-making process becomes more cost-effective. The improvements suggested are based on a survey conducted by the author across companies in 2014; the results are benchmarked with a comparable cross-European survey. A real-life implementation in a multinational production company shall validate the best practices described by using action research methods. In the content of the publication, the optimization of the standard budgeting processes will be outlined using a strategy-orientated planning model. The answer to the third research question will be given in chapter four and five. The fourth research question “How can the controlling function add value to reorganization activities?” will focus on how to use the saved capacity by more efficient and effective standard processes for better management support. Fewer costs for standardized processes can release the capacity for management support aspect of controlling that will have a positive effect on EBIT. Emphasis is placed on research that demonstrates how to improve the alignment between the business strategy and the strategic planning process. In the case study project, the aim is to show the use of the methodology of strategic planning in managing successful CSR projects, thereby improving the financial performance of a multinational production company. The value increased of the controlling function as a provider of management support will be demonstrated by applying its methodology to business-oriented reorganization activities. Furthermore, a portfolio-based model to improve the success of restructuring initiatives will be developed. In closing, a conclusion to the research will summarize the main contributions of this publication as well as provide an outlook for further research. The answer to the fourth research question will be given in chapter six and seven. Surveys: To back up and enrich the theoretical research and the authors’ own observations during business, the author performed two surveys, one made in the year of 2014 and one made in the year of 2016. The first survey “2014 survey” was conducted during December 2014 with 20 finance experts from a global manufacturing company at its seven plants in Eastern Europe as well as in the global headquarters. 45 % of the experts interviewed were in management level positions (see Figure 1.1). Function Employee Controlling/ Accounting Dep. 45 %

55 %

Head of Controlling/ Accounting Dep Figure 1.1: Participants by function (survey). Source: Authorʼs 2014 processing/survey.

4 

 1 Introduction

To better interpret and analyse the 2014 survey, the results were benchmarked with a reference survey (“reference”) conducted by Deloitte Consulting between December 2012 and January 2013. The reference included the same set of questions which consisted out of 30 questions. The reference included 143 participants across different branches, company sizes and company types from 12 countries, with a focus on Denmark, Germany and Netherland (see Figure 1.2). Function 17 %

7%

34 % 43 %

Employee Controlling/ Accounting Dep. Head of Controlling/Accounting Dep CEO/CFO/CIO Other

Figure 1.2: Participants by function (reference). Source: Authorʼs processing based on Deloitte (2013).

In the author´s second survey in 2016, 19 representatives from 15 multinational companies and one educational institution were interviewed, who had the authority to hire and evaluate the graduates and their skills and capabilities (see Table 1.1). Of the total of 19 representatives, ten representatives are owners or CEOs, four are department heads, one is a director and four are specialists in their companies. To reflect the perspective of the educational field, also two professors from the West University of Timisoara were interviewed (see Figure 1.3). Table 1.1: Overview of performed interviews. Company name Dräxlmaier PKF Econometrica SRL Corpstrat Consulting SRL West University of Timisoara Helpline Romania KPMG Timisoara DWC Netex Consulting Accenture Netex

Interview date 10.06.2016 10.06.2016 10.06.2016 13.06.2016 14.06.2016 14.06.2016 14.06.2016 14.06.2016 15.06.2016 15.06.2016 (continued)

1 Introduction 

 5

Table 1.1 (continued) Company name

Interview date

Dräxlmaier West University of Timisoara WERZALIT Lemn Tech S.C.S. INTERPART PRODUCTION Linde Bosch F&F IT Services Mattig Expert Swiss Partners Continental Automotive

16.06.2016 16.06.2016 20.06.2016 20.06.2016 21.06.2016 22.06.2016 22.06.2016 23.06.2016 24.06.2016

Source: Authorʼs 2016 processing/survey.

1;5 % 6; 32 %

4; 21 %

6; 32 % 2; 10 %

Audit consulting bookkeeping Back office/SSC Consulting Education Production of industrial goods

Figure 1.3: Number of participants by activity type. Source: Authorʼs 2016 processing/survey.

Case studies: Beside the surveys, the author performed two major case studies and analysed them for this publication. The first case study, in 2014, was the implementation of a comprehensive process documentation and optimization of controlling processes at a multinational production company. The second case study, in 2015, was the implementation of several CSR projects in universities and professional schools. Interventionist research: A recent review of the studies in management accounting published between 1990–2014 (Malmi 2016) outlined that the opportunities for scientists to engage in interventionist research in this field are extremely rare. This review further stated that the limited access of researchers to the executive level of multinational companies, as well as the limited motivation of such companies to support this type of research, is the main limitations of interventionist research in the field of management accounting. The author estimates that one of the most important contributions of this publication is represented by the fact that it was possible to overcome these research limitations by performing his research reflecting many years of management experience and thereby having the

6 

 1 Introduction

necessary insights and the necessary access to business executives and political decision-makers. While performing the research, the author wrote ten academic papers which all have been published in double-blind reviewed academic journals. The highly practical relevance of this research, as well the inclusion of recent controlling literature, adds to the contribution of this publication.

2 Value creation in controlling – definition and terminology The first part of this chapter, covering the theoretical framework of controlling, is based on a presentation held by the author in May 2015 on the 22nd International Economic Conference – IECS 2015 “Economic Prospects in the Context of Growing Global and Regional Interdependencies” in Sibiu, Romania, presentation that was published in “Procedia Economics and Finance” (Laval 2015a). The second part of this chapter, covering the value-added of the controlling function, was published in the “Bulletin of Taras Shevchenko National University of Kyiv” (Laval 2017b).

2.1 Theoretical framework of controlling According to the current understanding in the business literature and by outlining three different perspectives, the meaning of corporate controlling is perceived as being: (1) the controller’s mission statement, (2) the controlling process model and (3) the role concept in controlling (see Figure 2.1).

2.1.1 The controllers’ mission statement The “Controllers’ mission statement” describes the purposes and the role of the controller. The mission statement was last updated and published by the “International Group of Controlling” (IGC) as follows: “As partners of the management, controllers make a significant contribution to the sustainable success of the organization. Controllers: – design and accompany the management process in defining goals, planning and management control so that every decision-maker can act in accordance with agreed objectives; – ensure the conscious preoccupation with the future and thus make it possible to take advantage of opportunities and manage risks; – integrate an organization‘s goals and plans into a cohesive whole; – develop and maintain all management control systems to ensure the quality of data and provide decision-relevant information; – are committed to the welfare of an organization as a whole.” Source: (IGC – International Group of Controlling 2013). The mission statement, as published in 2013, reflects the increased requirements for the corporate controller function and a proactive role in assisting the management in https://doi.org/10.1515/9783110580600-002

8 

 2 Value creation in controlling – definition and terminology

Mission statement

Process model

Role concept

Figure 2.1: Framework of controlling. Source: Author’s processing.

defining the goals, planning and deploying efficient management control (Losbichler 2013). In the management control cycle (see Figure 2.2), planning is the process of analysis, target setting and defining the measures needed to reach the target. The execution includes the breakdown of the company’s targets to the responsible managers and the formal assignment. The monitoring department controls to what extent the target is reached and determines additional measures in case this is necessary (Gladen 2014).

Control

INFORMATION SUPPLY Transparency Planning Execution Monitoring

Figure 2.2: The management control cycle. Source: ICV and ICG (2013).

What needs to be mentioned here is that planning plays an important role in setting out the detailed and operative path towards the set targets, whilst the execution part of the management control cycle is not mentioned in the mission statement, since it is part of the management’s attributions.

2.1.2 The controlling process-model The “controlling process-model” (see Figure 2.3) was set up by an IGC working group and describes the processes and activities which can be executed to fulfil the purpose that is outlined in the company’s mission statement (IGC 2010). The

2.1 Theoretical framework of controlling 

Generic

 9

Samples

Business process

Level 1

Controlling

Main Process

Level 2

Operative Planning and Budgeting

Sub Process

Level 3

Coordinate and Consolidate Planning

Activity

Level 4

Prepare Data in Databases

Figure 2.3: Controlling process model. Source: IGC (2010).

controlling process model is a hierarchical approach with the business process controlling as level one. The ten “main processes” are displayed as level two. The main processes are split up in sub-processes, as level three, which lead to the activities as level four. The controlling level two processes give a good overview of the portfolio of processes, which make up the controlling function according to the process model (see Table 2.1). As outlined in the introduction chapter, this publication will pursue the given research questions by analysing the processes highlighted in the above table using bold letters. The systematic structure of the table can also serve as a basis to set up and organize the portfolio of activities that are generated by the controlling function. Allocation of resources to the mentioned processes depends on role model present in the specific company and can change over time (Omagbon 2015). The following chapter will outline the development of the role models. Table 2.1: Controlling main processes. 1.

Strategic Planning

chapter 5 and 6

2.

Operative Planning and Budgeting

chapter 5

3.

Forecasting

chapter 5

4.

Cost accounting

chapter 4

5.

Management Reporting

6.

Project- and Investment Controlling

7.

Risk Management

8.

Function Controlling

9.

Management Support

10. Enhancement of Organization, Processes, Instruments and Systems Source: International Group of Controlling (2012).

chapter 6 and 7

10 

 2 Value creation in controlling – definition and terminology

2.1.3 The role models of the controller A role, in general, can be defined as a set of connected behaviours, rights, obligations, beliefs and norms as conceptualized by people in a social situation. It is an expected or continuously changing behaviour and may have a given individual social status or social position (Wikipedia 2017). There is a basic role metaphor that is used in literature to portray the manager as the captain of a ship (company) and the controller as the navigator. While the captain is responsible for the entire ship, the navigator suggests the right course to reach the destination. The manner in which the manager and the controller interact is crucial to the success of the company (Amann and Petzold 2014; Hubert 2015) and there must be a necessary interweaving interaction between the manager and the controller. The decision-making process is the overlapping section between the supportive role of a controller, who is responsible for transparency, methods competence and for providing a third-party perspective on the business and the manager (see Figure 2.4). The distinguishing role aspect of the manager is to bring the judgment, enforcement and the leadership needed to implement the decision in day-to-day business.

Manager

Judgement, enforcement, motivation

Controlling

Decisionmaking

Controller

Transparency, methods competence, third-party perspective

Figure 2.4: Decision model. Source: ICV and ICG (2013).

This basic role model of the controller was further split up to cover the heterogeneous objectives and processes in the controlling function. The literature provides an extensive discussion on the role model, mainly, on how to relate the different processes to different types of role models. (Gleich and Lauber 2013) argue that there are four competence profiles or role models of controlling while (Schäffer and Weber 2014b) or (Ernst and Vater 2006) use slightly different role model types varying in concept and the number of distinguished roles. However, the meaning and underlying foundation is the same. (Gleich 2015; Gleich and Lauber, 2013) established a four role models with a an increasing implementation mandate from left to right (see Figure 2.5).

2.1 Theoretical framework of controlling 

Data Analyst passive role

Performance Monitor

Business Partner

 11

Change Agent active role

Figure 2.5: Controlling role models. Source: Author’s processing based on Gleich and Lauber (2013).

The four roles of the controller include Data Analyst, Performance Monitor, Business Partner and Change Agent and are explained as follows: Data Analyst - Prepares and analyses the business data in a comprehensible manner for the top management. The required competencies focus on the technical and methodical aspects of controlling (Gleich and Lauber 2013). Typical activities of this role include: – preparation of monthly and quarterly management reports; – performance of ad-hoc analysis; – coordination of the planning and budgeting process; – preparation of financial reports and budgets; – collection of operational data; – maintenance of data systems (Schäffer and Weber 2014b). Performance Monitor - Is the “financial conscience” of the company, who has to monitor the operational performance indicators. He has to review documents for decision making and evaluate to which extent they fit into the target system and business strategy of the company. Therefore, the role requires higher analytical competences in comparison to the analyst (Gleich and Lauber 2013). Typical activities for this role include: – setting up of performance reports for top management; – setting up of internal rules and procedures; – controlling the managers’ spending of resources is adequate and justifiable; – controlling that managers respect the requirements of accounting regulations; – evaluating that managers comply with the top management objectives (Schäffer and Weber 2014b). Business Partner – Supports the management activities in the decision-making process, based on reliable analysis. The business partner’s role requires additional business understanding. The business partner also needs good social skills, to interact with the management and team members and needs to have a solution-based approach (Eiselmayer and Kottbauer 2015; Gleich and Lauber 2013). Typical activities of this role include: – developing plans for cost reduction and increased profit; – analysing of product and customer profitability;

12 

– – –

 2 Value creation in controlling – definition and terminology

setting up of measures to reach targets; appraisal of investment opportunities; setting up new strategies (Schäffer and Weber 2014b).

Change Agent – Can be regarded as a business partner who actively initiates change processes. The profile of this role requires an even higher understanding of the business model and organizational change management. The change agent typically works proactively and autonomously. This implies higher needs for people knowledge and cross-functional teamwork abilities. As change processes can lead to difficulties and resistance, the change agent must be able to resolve conflicts using empathy and related social skills (Edlefsen and Pedell 2015; Gleich 2012b; Gleich and Lauber 2013). The controller’s qualification requirements increase in all competence fields continuously, from the data analyst in the direction of the change agent. These qualification requirements cannot be acquired solely by seminars or other forms of theoretical education. To raise the business partners or change agents of the future at some point in time should take and manage their own business responsibility with growing responsibilities and magnitudes. The companies need to find a way to apply this insight to the “life cycle of controllers” in the succession planning of the controlling function (Gleich and Lauber 2013). The actual setting of the role model in a company is driven mainly by the demand of the top management as an internal customer of controlling services. A survey made by Horvath (Heimel 2011a) revealed that the role model observed in various companies is diverse. The management and the self-assessment of controlling are very similar. The assessment of the management tends to be slightly more active than the self-assessment of controlling department. In general, the perceived role of controlling is usually rather active than passive (see Figure 2.6).

No of answers

29 16 1 0

20

4

0

65

20

18 11

21 16

3

... passive Data Analyst Self assessment head of controlling Management assessment Figure 2.6: Role of the controlling in companies. Source: Author’s processing modifying Heimel (2011a).

21

21 14 35 ... active Change Agent

 13

2.2 The value-added of the controlling function 

2.2 The value-added of the controlling function For continuing improvement, the performance of the controlling should be tracked and monitored as this is the data basis needed to increase the performance of the controlling department in the future. Based on a survey from (Heimel 2011b), the performance of the controlling function is measured in only a minority of companies (see Figure 2.7). The performance of the controlling function is 50 %

measured with financial and non-financial indicators

8

compared with benchmarks/best practices

9

aligned with the bonus agreements of the controllers measured at least once a year

24 13 22 26

29

22

24

29

27 23

17 25

21 13

Completely yes

14 18

16 20

Completely no

Figure 2.7: Measuring controlling performance. Source: Author’s processing modifying Heimel (2011b).

According to the survey from (Heimel 2011b) the majority of companies do the measure of the performance of the controlling function at least once a year and align it with bonus agreements. Compared with the percentage of companies who measure, the percentage of companies who have defined financial or non-financial indicators or use benchmarks is significantly lower. In other words, a significant percentage of companies seem to measure without using defined financial or nonfinancial KPI. Value creation is the result of good management decisions. Controlling can support management by identifying, planning and steering decisions which contribute to the added-value of the company (Unrein 2010). The controlling function will add to the company’s value if the value creation of the decision support outweighs the costs of the controlling function:

− =

Value creation by management support Value consumption by controlling costs Value added of the controlling function

In the 2014 survey and the reference, approximately 40 % of the respondents answered correspondingly that they were not aware of the true costs of the management reporting (see Figure 2.8 and Figure 2.9):

14 

 2 Value creation in controlling – definition and terminology

Yes

60 %

No

40 %

Figure 2.8: Awareness for costs of reporting (survey). Source: Authorʼs 2014 processing/survey.

Yes

61 %

No

39 %

Figure 2.9: Awareness for costs of reporting (reference). Source: Authorʼs processing based on Deloitte (2013).

The 2014 survey as well the reference also indicates that there were doubts that the cost of the management reporting exceeds the benefits of the reporting. 30 % of the participants in the author’s survey 2014 (42 % in the reference survey) were of the opinion that the costs exceed the benefit of the reporting. These results indicate the need to improve the efficiency and effectiveness of the management reporting (see Figure 2.10 and Figure 2.11):

No Yes

70 % 30 %

Figure 2.10: Costs exceed benefits (survey). Source: Authorʼs 2014 processing/survey.

No Yes

58 % 42 %

Figure 2.11: Costs exceed benefits (reference). Source: Authorʼs processing based on Deloitte (2013).

Literature has established a broad number of figures to indicate value. The purpose of these value indicators is to express complex situations in an easy figure and therefore give the management an aggregated and fast overview (Ewert and Wagenhofer 2014; Gladen 2014). EBIT and FCF belong to the most common financial performance

2.2 The value-added of the controlling function 

 15

indicator (Barkalov 2015). Both indicators are defined by financial accounting rules (Dillerup and Stoi, 2015). In general, the closer the figures are to the published financial statements, the more transparent they appear and the easier they are to calculate and to communicate. The FCF, in particular, is seen as a very suitable indicator for decision making (Maizi 2014). The Economic Value Added, abbreviated EVA, considers in addition to the above, the cost of capital. The EVA is also referred to as a residual profit concept since the cost of capital is deducted from the profit (Gundel 2012). In contrary to the EBIT, the calculation of the EVA is not regulated by law and the necessary adjustments are to some extent specific to each company (Velthuis 2009). Due to the costs and complexity related to implementing concepts like the EVA, this is predominantly used by larger corporations. To increase transparency, some companies replaced the EVA with the EBITaC (EBIT after Cost of Capital). The EBITaC comes along with fewer adjustments and thus it is a figure closer to the published financial data (Horster and Knauer 2012). The above figures represent absolute value figures, which may be projected for future periods and then discounted to the present time or to the point in time when a decision will be made. The discount rate hereby anticipates the time value of money and the risk of future income in those future absolute values (Fischer and Baumgartner 2014). Apart from these absolute values, there are several relative value definitions that are widely used today, for example, return on investment  or return on sales. Such relative figures support a comparability of figures between different companies or between different time periods (Ewert and Wagenhofer 2014). The preference for the one or other value figures depends on the purpose and object of the evaluation. This purpose can be to analyse a given situation, to prepare a business decision or to motivate and control management. In general, companies combine the advantages of all mentioned value figures in their reporting system. According to the survey of (Horster and Knauer 2012), companies use, in average, four value figures as their top KPI. The logic and methodology described in this publication to improve the value-added of the controlling function are not specific to one particular value figure. The differences in the methodology of calculation will not impact the validity of the suggestions. For the illustration of the proposed methodology in the publication, it seems to be suitable to calculate the value creation using financial projections such as EBIT or FCF as the value indicator. The projections will be discussed over a defined project lifetime to illustrate the present value of the improvement suggestions for a typical mid-sized multinational production company. The value-added and performance of the controlling function can be measured using three kinds of indicators (see Figure 2.12). Input indicators relate to the input allocated to the controlling function such as money or headcount. Output indicators

16 

 2 Value creation in controlling – definition and terminology

Input indicators Use of resources e.g. headcount Process costs

Direct costs

Process indicators - Degree of Standardization - Process Time - Degree of Automatization - Process - Degree of System Integration Loops

Performance drivers

Output indicators Manager satisfaction Keeping deadlines

Indirect effects on profit

Financial Measurability Figure 2.12: The measurability of controlling indicators. Source: Authorʼs graph based on International Group of Controlling (2012).

relate to the quality and relevance of the output such as reports. The third category of indicators are process indicators which give an indication of the efficiency of the controlling processes (International Group of Controlling 2012): All indicators should be measured and benchmarked to continuously improve the controlling function. However, the measurability of the effects on financial results varies (see Figure 2.13). Input indicators such as direct costs have, obviously, a direct financial impact and can be measured easily. However, in many cases, costs should be seen as the result of actions that have taken place before. Actions to change a cost structure normally target to influence performance drivers, which then lead to cost savings. Process indicators are indicators which can be directly influenced during an optimization project. Those indicators relate to performance drivers which have an impact on the financial performance by increasing cost efficiency and decreasing costs. Further, performance indicators relate to the output of the controlling function as discussed in the next paragraph. Output indicators measure, in general, the satisfaction of the management with the support they get out of the controlling function. By definition, the controller is not the one responsible for executing managerial decisions. Despite that fact, the controlling function can influence the behaviour of decision-makers towards effectiveness and efficiency (Hirsch, Nitzl, and Schauß 2015) and can give support to prepare decisions and support their execution (Gleich, Horvath, and Michel, 2011). Higher decision usefulness of analysis and reports provided by controlling can contribute indirectly to the financial performance of the company. However, the connection between good or bad decision support and the companies’ financial performance is very indirect (see Figure 2.13). The contribution of supporting functions like controlling to the financial performance of a company is hardly measurable directly (Hall 2015). Satisfaction surveys with the management to identify the subjective decision usefulness of reporting is a measurable “substitute indicator” (Gladen 2014).

2.2 The value-added of the controlling function 

Input indicators

Process indicators

Direct costs savings

 17

Output indicators

Decision usefulness

Financial performance of company Figure 2.13: The controlling impact on financial performance. Source: Authorʼs graph.

In general, it can be concluded that changes in input indicators represent cost changes which can be measured directly and objectively. The change of process indicators can be translated to cost savings using assumptions regarding the relation between certain process indicators and costs. These relations can be quantified by analysing past data or benchmarking. A change in output indicators has an impact on the satisfaction of management with controlling which can be measured. However, the impact of internal customer satisfaction on corporate financial results can hardly be established. The reduction of costs for standard processes can be achieved by addressing their efficiency and effectiveness: Increased efficiency in standard processes + Increased effectiveness in standard processes = Fewer costs for standard processes = Positive effect on EBIT The free capacity saved out of more efficient and effective standard processes should be used by the controlling department to improve the quality and quantity of its management support. Fewer costs for standard processes = More capacity for management support = Positive effect on EBIT Value-added is the result of good management that has taken the right decisions and performed the right initiatives. The possibilities to do so depend on the specific situation the company faces.

18 

 2 Value creation in controlling – definition and terminology

As soon a standard process understanding is established throughout the company, the process efficiency of the plants can be benchmarked to identify improvement areas. For the benchmarking of those activities, relevant KPI’s need to be defined. Those benchmarks can relate to input KPI’s such as the man-days needed to perform a certain activity or days required to complete the budget process. Also, output KPI’s such as the satisfaction level of the recipient with a specific service provided. It is reasonable to start with the benchmarking of processes which are resource intense and focus the later improvement activities on processes in plants with significant performance under the benchmark. The result of this measuring should be compared with benchmarks or best practices to estimate were the controlling function is positioned within its peer group (Küpper, Möller, and Pampel 2012). If the measuring and benchmarking systematic is established, it is recommended to ailing those systematic in the target setting the bonus regulation of the controllers. Following the above research, it can be recommended to optimize the reporting content, to improve the efficiency of the report preparation in the given set up and, as the third step, to realize further efficiency potentials by implementing a controlling SSC.

2.3 Interim conclusion As there are no legal requirements on how to organize controlling, the actual set up depends on the requirements of the company’s management. This gives controlling the possibility to become oriented towards flexible services in order to meet the operative and strategic needs that the company faces. The content and goals of the controlling function can be specified by following the three perspectives (1) mission, (2)  processes and (3) roles. For each perspective, the controlling function can be organized in the described framework. As outlined above, the controlling function will add to the company’s value if the value creation of the decision support outweighs the costs of the controlling function: Reduction of costs for standard processes can be achieved by improving efficiency and effectiveness in those processes (Eiselmayer and Kottbauer 2015). The standardization on reporting efficiency will be described and measured based on an improvement project performed and implemented by a multinational production company. During the performed implementation, a major increase in reporting efficiency was realized by documenting clear process descriptions and by assigning process responsibilities explicit to individual persons using the above mentioned “inventory of reporting processes”. Further on, measures to increase the effectiveness of the corporate planning process are elaborated by developing concept planning by objectives. The suggested model questions several planning objectives multinational production companies focus on and suggests improvements. The EBIT effects of the measures improving

2.3 Interim conclusion 

 19

efficiency and effectiveness of standard processes were calculated for a representative multinational production company. Lifting management support requires a business related and innovative controlling understanding. In the illustrated innovative cases, the controlling function contributed to the identification, execution and monitoring of the described restructuring projects and contributed to increasing the company’s financial performance. The impact on the financial performance was illustrated by financial projections based on substantial case studies. The described restructuring projects are based on real-life examples observed in multinational production companies.

3 Changing expectations in multinational production companies This chapter is based on a presentation held by the author in June 2015, on the “International Conference Current Economic Trends in Emerging and Developing Countries” (TIMTED) in Timisoara, Romania. Following this conference, the chapter was published in the “Timisoara Journal of Economics and Business” (Laval 2015b).

3.1 Analysis of influencing factors There are no legal requirements how to set up controlling functions in companies or what quality of results this function should deliver (Krings 2012). Because of that, the set up differs from company to company. In the following, the controlling specifics of multinational production companies will be made transparent. Such multinational production companies will be defined as large production companies with more than 20,000 employees operating and producing in multiple countries with an annual sales volume exceeding 1,000 million EUR. The actual set-up of the controlling function is influenced by several internal and external factors (see Figure 3.1). The actual controlling organization will reflect those internal and external factors arguing that there is no ideal controlling setup which would suit all purposes. These contextual factors can change over time, e.g. a company can steadily grow in size and complexity and being or becoming a multinational production company will impose a growing pressure to adapt the controlling organization correspondingly (Küpper et al. 2012). To illustrate this understanding, two important internal factors and their influence on the controlling function will be analysed. The first factor is the size of the company and the second factor analysed are the expectations of the management. The size of a company influences the controlling function in many ways. The survey conducted by Schäffer and Weber (2014b) is analysed to show how the company’s size influences (1) the headcount; (2) the contents and specialization fields and (3) the organization of the controlling function within it. The survey was made with a number of 378 company representatives in 2014. The influence of the company size is a very influential factor in the controlling headcount. According to a survey made by (Schäffer and Weber 2014b) the number of controllers correlates significantly with the number of total employees (see Figure 3.2). The numbers of controllers between 2011 and 2014 remained relatively stable with a slight increase in smaller companies and a decrease in multinational production companies with more than 10,000 employees. Dividing the number of controllers https://doi.org/10.1515/9783110580600-003

3.1 Analysis of influencing factors 

Examples for internal factors are: 1. 2. 3. 4. 5. 6. 7.

Legal type of company Organizational structure Size of the company Level of diversification Technology and business Corporate philosophy Expectation of Management

 21

Examples for external factors are: 1. Sector of business 2. Complexity and dynamic of the business 3. Overall context of competition 4. Sales and sourcing markets 5. Economic, political and social enviroment

Controlling Set Up

Figure 3.1: Overview of internal and external factors. Source: Author’s processing based on (Küpper et al., 2012).

120

Number of Controllers in 2011

100

Number of Controllers in 2014 53

3

2

under 250

3

4

251–500

6

7

501–1000

10 14

20 20

28

1001–2500 2501–5000 5001–10000 over 10000

Number of total employees Figure 3.2: Headcount of controlling depends on company size. Source: Translated by the author from Schäffer and Weber (2014b).

by the number of employees clarifies that the number of controllers per employees decreases significantly in larger companies (Schäffer and Weber 2014b). In smaller companies (up to 250 employees), 2.2 % of the employees are controllers, meaning that there is one controller per 45 employees. In multinational production companies, the percentage drops to 0.3 %, equally, one controller cares per 333 employees. The average overall ratio is one controller per approximately 120 employees (see Figure 3.3). The decreasing percentage of controllers for the total number of employees relates to the observation that the complexity of the company’s business is increasing with the company size in a sub-proportional manner. The reason for this sub-proportional increase is related to economies of scale in financial reporting and analysis; meaning that for example, a report covering double volume sales does not necessarily need double the controlling workforce to create.

22 

 3 Changing expectations in multinational production companies

over 10000

0,3 %

5001–10000

Controllers as % of total headcount in 2014

0,7 %

2501–5000

0,6 %

1001–2500

0,8 %

501–1000

0,8 %

251–500

0,9 %

under 250

2,2 % Ø ~ 0,8% (Equals 1 Controller per 120 employees)

Number of total employees

Figure 3.3: Percentage of controllers vs. company size. Source: Translated by the author from Gräf & Horváth & Partners (2014).

Company size influences also the controlling content: The controlling function of a company can maintain various controlling specializations. The number of controlling specializations differs from company to company and relates to the company’s size. In bigger companies, the average number of specializations is seven, whilst in small companies, it is two and, on average, the controlling functions maintain four specializations. In other words, the bigger the company gets, the more likely it is that more controlling specializations will be in place (Schäffer and Weber 2014b). The most prominent specializations in controlling relates to financial-, sales- and division-controlling (see Figure 3.4). 58% 58%

59% 56% 56% 52% 44%

n na

al ci

Fi

s

S

e al

i

v Di

n

o si

n

tio

c du

o

Pr

45% 45% 42%

v

In

m

t es

t

en

2011 2012 * Not asked in 2011

36%

40% 33% 31% 29% 29% 22% 21% 20%20% 19%

15%

60% 70%

*

HR

k

s Ri

c ur

P

e

s ha

y

ra St

g te

ic

g Lo

t is

e

M

k ar

g

tin

a in

a

st

Su

ty

li bi

*

r

he

Ot

Figure 3.4: Popularity of controlling specializations. Source: Modifying Gräf & Horváth & Partners (2014).

The field of business triggers which specialization is prioritized in a specific company. It is obvious that production controlling has a high significance especially for production

3.2 Changing expectation towards the controlling role model 

 23

companies, while risk controlling has a relatively high significance for insurance companies (Messner 2015). Based on a survey made by Becker, Ulrich and Zimmermann (Becker, Ulrich, and Zimmermann 2012) on 45 company representatives, a correlation between the increase of company size and the increase of importance in strategic orientated tasks was clearly observed. Also, other empirical research studies (Littkemann, Reinbacher, and Baranowski 2012) showed that the majority of controllers in mid-size companies focus on operative controlling tools and that only half of the mid-size companies used strategy oriented tools. Company size influences also the controlling organization: The head of controlling reports is in the majority of cases directly to the CFO. However, in smaller companies, the head of controlling reports to the CEO or the management board as a whole (Schäffer and Weber 2014b). The more levels there are between the head of controlling and the decision-making level of the company, the more indirect the influence of the controlling function gets (see Figure 3.5).

Sales up to 50 Mio Euro

Sales between 50 Mio and 1000 Mio Euro

Sales above 1000 Euro

65%

25%

45% 35% 21% 15%

3% 1% 2% Head of Controlling is member of the board

High direct influence

CEO

19%

18% 7%

22% 15%

4%

To board as a whole

0% CFO

Commercial Director

4%

2%

Other

Low direct influence

Figure 3.5: Reporting lines of the head of controlling. Source: Author’s translation and modification of Gräf & Horváth & Partners (2014).

3.2 Changing expectation towards the controlling role model Recent megatrends such as increasing complexity, volatility, internationalization and increased demand for transparency and compliance have changed the expectation towards the controlling function (Losbichler 2012; Pfläging 2015). Multiple survey indicate that the need for a controller with a data analyst role is decreasing due to modern ERP solutions such as Business Intelligence, SAP HANA or OLAP (Brands and

24 

 3 Changing expectations in multinational production companies

Holtzblatt 2015; Button 2015). Complementarily, the request towards the controlling function to provide specific decision support as business partner of the management is increasing. The chapter aims to analyse the new expectations concerning the controlling role model. The increasing efficiency of ERP is underlined by the survey of (Schäffer and Weber 2014a) which predicts a significant boost in data availability for management without needing the controller to act as a data collector. For 2019, almost 97 % of the survey respondents expect that management can retrieve their company data by some degree of self-service (Schäffer and Weber 2014a). Fifty-three percent of the survey respondents expect even that management will have a full access to all company information with complete drill down function by the year 2019 (see Figure 3.6). 60%

53 %

50%

39 %

40 % 30%

17 %

20% 10% 0%

26 %

0% 1% None of the alternatives

3% No self service

Decreasing Importance

30 % 18 %

13 % Standard information basis

Limited information selection

2012 2019 (expected)

Full information selection

Increasing Importance

Figure 3.6: Data availability for management. Source: Author’s translation and modification of Gräf & Horváth & Partners (2014).

Due to the rising potential of ERP solutions, a shift from report extraction and publication towards report design and adaptation is expected. On the one side, the manual preparation of reports by the controlling department will lose demand (Matyac, Mishler, and Monterio 2015). On the other side, controllers have to adopt the reporting functionalities to cover the changing information needs and to ensure that the reports keep their relevance (Günther 2012). In the controlling literature and surveys from the last years, a clear trend towards an increasing importance of the business partner and change agent role has been noted, while the relative importance of the other roles is decreasing. In this chapter, a variety of illustrative surveys are referred and analysed. The research studies between 2006 and 2014 were selected as long-time research in order to analyse the change in the understanding of the controlling role models in the last decade (see Table 3.1).

3.2 Changing expectation towards the controlling role model 

 25

Table 3.1 : Development of research studies. No. 1 2 3 4 5

Year

Author

2006 2012 2012 2013 2014

Ernst et al. (2006) Schäffer and Weber (2012) Pótsch (2012) Gräf et al. (2013) Schäffer and Weber (2014a)

Source: Author’s table.

(1) The first survey referred to in this chapter was made by Ernst et al. (2006). He examined which of the roles would describe the role of controlling at the German company “Deutsche Post World Net”. The survey indicated that the need for profiles such as “number cruncher”, “administrator” and “policeman” were expected to decrease significantly in the future while profiles such as “business partner”, “challenger” and “internal consultant” are expected to gain importance. This development was expected by the controllers as well as by the internal customers of the controlling service in similar proportion (see Figure 3.7). Controllers

Number Crunches Administrator Policeman Partner Challenger Consultant Architect Interventionist Activist Other

Today In the future

0

50

100

150

200

Internal customers of controllers Number Crunches Administrator Policeman Partner Challenger Consultant Architect Interventionist Activist Other

250

0

50

100

150

200

250

Figure 3.7: Controlling roles at Deutsche Post World Net. Source: Translated by the author from Ernst et al. (2006).

This early survey of 2006 used a comparable differentiated ten-role model that can be understood as a predecessor of the modern four-role model. Nevertheless, the naming of roles (Ernst et al. 2006) already documented an activity level segmentation and indicated a trend towards active roles such as partner, challenger or consultant. (2) The future role of the controller was also analysed in a survey conducted by (Schäffer and Weber 2012). For this survey, the feedback of 448 controllers and board members in the year 2011 have been collected and analysed. Based on this survey, the following three roles and fields of controlling will gain importance for the future: first, the role of reporting on the efficiency of the company, second, the role of organizing the strategic planning and third, the role of the controller as a business

26 

 3 Changing expectations in multinational production companies

partner. Those roles and fields of controlling were addressed by controllers and board members commonly. (3) At Volkswagen AG a corresponding three-step development process of the controlling function was observed by Pótsch (2012): in the first phase, the controlling function mainly fulfilled the function of calculating the cost; in the second phase, controlling was involved in management decision processes by coordinating corporate planning and control systems and as of today, the controllers work as an active consultant to the board of management. (4) A survey of Horváth in 2013 analysed the current and expected importance of selected activities in controlling (Gräf, 2014). Following the survey, the activities “data collection”, “data preparation” “report generation” “plausibility checks” are decreasing in importance while “analysis” and “consulting” are expected to gain importance (see Figure 3.8). Analysis and Consulting

Providing Reports

Providing Data

29 21

2014

20 11

Data Collection

14

18

17 12

13

10

8

Data Preparation

27

Report Generation

Plausibility Checks

Analysis

Decreasing Importance

2019 (expected)

Consulting

Increasing Importance

Figure 3.8: Priority shift within the controlling function. Source: Author’s translation and modification of Gräf (2014).

(5) The results from the Horváth survey in 2013 were confirmed by another survey conducted by (Utz Schäffer and Weber 2014a) with 472 survey respondents. The focus of this survey was to identify the hierarchy level in controlling that provides a business partner role at the moment and which hierarchy level is expected to provide this role in five years. As a result, a significant shift in the hierarchy level of the controllers providing the role of a business partner from 2014 until 2019 can be expected. In 2014, this role was mainly reserved for the “management level” and “selected experts”, each representing 37 % of answers. Until 2019, 46 % of respondents expect that the business partner role will be provided by “all controllers” (see Figure 3.9): This significant shift towards the lower levels of the controlling hierarchy implies a higher number of controllers working as business partners. This observation is

3.3 Implication of the changed expectations for the individual company 

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

37 %

46 % 37 %38 %

 27

2014 2019 (expected)

9% 1% 1% None of the above

12 %

16 %

3%

Not controller Only controller Some act as on management specialists business level act as act as partner business business partner partner

Passive Role

All controllers acts business partner

Active Role

Figure 3.9: Significance of the business partner role increases. Source: Author’s translation and modification of Gräf & Horváth & Partners (2014).

especially valid for the German-speaking European controlling literature, while in the Anglo-American or French literature the data analyst role of the controller still prevails (Möller 2015; Paul and Traber 2015; Shields 2015). However, also in the Anglo-American literature, the trend to a more active, change-oriented management accountants is seen as a new trend (Cokins 2014).

3.3 Implication of the changed expectations for the individual company As analysed above, the expectation concerning the controlling function is changing. If the controlling function does not adapt, the controlling function might not deliver the support requested by the top management needed to make their decisions.

Unless controlling provides a clear basis for the decision-making process of the top management, top managers make their decision not based on controlling analysis but on intuition or, alternatively, rely on the analysis of other functions such as production or business development functions.

The major test and turning point for the future importance of controlling will be conducted by companies in financial distress in particular: either controlling fulfils the ever-growing demands and is able to gain more and more importance or it fails and gets replaced by other functions (Goeldel 2010). There are several internal and external competitors to the controlling function. Following a recent survey by (Utz Schäffer and Weber 2014b), the two main competitors

28 

 3 Changing expectations in multinational production companies

of the controlling function are the external consultants and corporate development followed by the accounting function (see Figure 3.10). Recognized level of competition None External Consulting Companies

Medium 46 %

36 %

Corporate Developement

16 %

50 %

43 %

In-house Consulting

18 %

43 %

41 %

Accounting

High

7%

27 %

56 %

17 %

Investors Relations

70 %

27 %

3%

Other External Providers

70 %

27 %

3%

Internal Audit

73 %

23 %

4%

50 %

Figure 3.10: Competitors of the controlling function. Source: Author’s processing modifying Schäffer and Weber (2014b).

The majority of respondents assigned a high or medium level of competition to the top three competitors. Analysing the implication of the main competitors for the controlling function shows that the controlling function tends to be squeezed from two sides (see Figure 3.11). Providing Reports

Providing Data

Analysis and Consulting 9 29

21

Accounting

2 0 20 1111

Data a Collection Collecttio on

14

7 17 12

Data Report Datta Rep port Preparation Pre epara atiion Generation Gen nerration

13

Plausibility y Checks C heck ks

Decreasing Importance Figure 3.11: “Competitive challenge of controlling”. Source: Author’s processing based on Gräf (2014).

External Consulting

18

CONTROLLING 8

27

Analysis Analyysiss

10

Corporate

Development Consulting Cons nsul

Increasing Importance

3.3 Implication of the changed expectations for the individual company  

 29

All reviewed surveys indicated that the importance of active activities, such as analysing and consulting are increasing. Those activities are the main competence of the controlling function but also strong competencies from external consulting and corporate development. This inherent competitive position makes it difficult for the controlling function to cover these fields despite the increasing importance. On the other side, we see that the amount of data provided by the accounting function is increasing, further propelled by increased external reporting requirements (Wagenhofer 2015). Both trends can lead to the situation in which the controlling function is stuck in the middle (see Figure 3.11). The importance and influence of the controlling within a company depends on the individual controller and the role model and processes he provides. If the controller limits himself to the budget process and commenting P&L positions, the importance is decreasing. Complementarily, the importance of other functions is increasing. For example, the importance of the finance/accounting functions increases if they take responsibility for cash management and liquidity projections. Another complimentary example is the area of corporate development which can build out its stakes in scenario planning and restructuring, if controlling has no sufficient capabilities in those areas (Goeldel 2010). Although controlling has the tools to offer valuable input to the management, it strongly depends on the head of controlling; how he/she can play his/her cards to the top management to maintain the influence of the controlling function. When the strategic aspect of the controlling function is challenged by alternative strategic functions, the controlling function can be reduced to operative reporting topics (Krystek 2012). The more the controlling function gets excluded in the strategy process, the more its capability to contribute to the strategy process as a consequence is eroded (Ernst et al. 2006). The process of slowly substituting the controlling function with so-called “shadow controllers” can be illustrated (see Figure 3.12). Building up shadow controllers might be better than having no fact and figures at all. The solution proposed in this publication, however, is to adapt the controlling function to better provide the support the business requires. The importance of the controlling position in the company can gain momentum if the controller also focuses on the market and business performance aspects and therefore, they get involved in the decision-making process (Goeldel 2010). A complex optimization project can bring formalities and complex project structures, which might not be possible to realize, in a change hostile environment. Without setting up a formal optimization project, it has to be noticed that there are “self-improvement mechanisms” which can be used consciously (see Figure 3.13). This informal implementation approach uses the reverse effect of the cycle with the shadow controller introduced by Ernst et al. (2006): The process is an iterative one that can be described as iteration between the supplied and the demanded controlling products. In literature such iterative approaches are also referred to as “lean change management” (Scheller 2015). The better the

30 

 3 Changing expectations in multinational production companies

Business substitute the missing information and support with “Shadow controllers” “Shadow controlling” implements own controlling systems, tools and information channels

“Official Controlling”can NOT provide the support the business requires

The official controlling does not receive the necessary business insights and know how

The official controlling gets marginalized and left outside when it comes to important decisions

Figure 3.12: Shadow controlling. Source: Translated by the author from Ernst et al. (2006). Business uses information and support of controllers

Controlling improves controlling tools and information channels

Controlling can provide the support the business requires

Controlling receive the necessary business insights and know how

Controlling gets more involved when it comes to important decisions

Figure 3.13: Iterative improvement concept. Source: Author’s processing reversing Ernst et al.

supply of controlling services, the more they will be demanded and vice versa. With this iterative approach, the effectiveness of controlling can be improved and therefore, the relevance and inclusion of the controlling function in the decision-making process can be increased.

3.4 Development of a structured change model 

 31

Despite the expectation of a more consulting-oriented business partner role, a survey made by (Weißenberger, Wolf, Neumann-Giesen, and Elbers, 2012) revealed that the controller normally does not take the position of the business partner role by intrinsic motivation but if the management requests this role from him. This means that the management should clearly address the changed expectation towards the controller and support a structured change process model.

3.4 Development of a structured change model The controller cannot fulfil his tasks successfully without providing services that are personalized to the individual requirements of the company’s management (Losbichler 2013). As literature suggests, unless this adjustment takes place, controlling tends to an over-engineering of its financial tools and reports (Jürgen Weber, 2004). Under everyday circumstances, the management is unable to understand or follow all these sophisticated tools and the controller risks to spend considerable time adjusting the entire set of tools to meet the needs of the decision-makers. Consequently, the controllers have fewer resources to support management performance by providing timely, qualitative information. If controlling wants to maintain an influential function in the company, it needs to adapt to the changed expectations of the management. The necessary actions for this process happen often naturally, in time, by “trial and error”. It is most likely and possible that the actual set up of a controlling function in a given company to have been built without applying a structured and reflective approach (Küpper et al. 2012). However, we can make the assumption that the success rates of a structured approach are higher than the ones of a “trial and error” approach. The building process should be structured to reach optimized results. In order to achieve these desired results, the author has developed a conscious optimization project for the controlling function. In literature, some structured adjustment approaches for the controlling function were proposed. The approaches vary in the titles and number of process steps. Heimel et al. (2009) and Küpper et al. (2012) suggest comparable structured improvement programs for the controlling function. The main difference between those two approaches is that Heimel et al. (2009) split up the implementation phase of the approach in three sub-steps. The fundamental approach described by Krings (2012) is, in comparison, less detailed. Subsequently, in this paper, a new optimization project plan will be outlined and later discussed. The goal of this approach is to score some quick wins easily and early, in order to move towards achieving the objectives by building on the success of the first phases. The optimization project was designed by the author to gain acceptance and without the need to “sell a big project” at the beginning. Hereby, the resistance of the people affected by this project is minimized.

32 

 3 Changing expectations in multinational production companies

For a structured project, it is helpful to understand in which aspects and dimensions such optimization might take place. When reviewing the performance of a controlling organization, there are two questions in focus: 1. whether controlling produces “reports” that have a significant impact on the decision making process and 2. whether the production of those reports is as efficiently organized as possible (Heimel, Meier, and Schmidt 2009). The effectiveness should, in other words, be optimized BEFORE addressing the efficiency. Optimizing processes within controlling can only increase the efficiency of the controlling work. The progress in IT capabilities can lead to an increased efficiency in generating various kinds of reports and numbers and leading to an “ocean of data and options” (Quattrone 2016). By creating all those reports without customer or strategy orientation, the effectiveness of the reports can vanish. This phenomenon is also referred to as “effectiveness trap” (Bernauer 2008). Krings (2012) outlined correspondingly that, for the optimization of the controlling, first, the roles and expectations have to be clarified for acceptance, second, the products of the controlling function can be reviewed for effectiveness and, as last step, the processes shall be reviewed to “produce” the effective products as efficient as possible. All the considerations mentioned above were integrated in the outlined optimization project. The first project steps will involve only a limited amount of resources. Only the later project phases need increasing involvement and effort of the organization to reach the optimization goals. According to the specific situation in which a company finds itself, a decision can be made regarding the group of people that will know the entire project plan from the beginning and if the communication should follow a step by step approach. To perform a customer satisfaction survey, the first step is to clarify the actual and potential customers of controlling services in a company. This might not be clear from the beginning because the customer orientation of a controlling function is seldom so low that controlling has not yet clearly defined their customers. The satisfaction with the controlling function can measured following the “WHUController Index” systematic (see Figure 3.14). This index used in surveys of the “WHU Controller panel” and consists out of 9 questions (Schäffer and Weber 2014b): The scale for responses was from one as minimum up to five as the maximum, with an average response value of 3,8. The results were made transparent, namely that the influence of controlling on management decisions was rated relatively weak. This might be the reason why also the general reputation and the career options were rated lower than the other fields questioned. This scheme and the results of Schäffer and Weber (2014b) can be used as benchmark to better evaluate the satisfaction with the controlling function in a given company. When performing the survey, the answers should be separated for the top management as customer and the controllers as suppliers. This helps to identify the differences between the self-perception of the controllers and the perception of

3.4 Development of a structured change model 

 33

View on the Future

General Judgments

Controller Related Factors

Collaboration ControllingManagement

50% The services of controlling are highly demanded The collaboration with management is open and constructive Controlling has a big influence on mangement decisions

3,9

4,0 3,9

3,4 3,5

Controlling has a good reputation

3,5 3,4

3,9

3,3

4,1

4,0 4,0

2010 2012

3,6

2014

3,5

Controlling provides important contribution to corporate success Controlling has a good standing in the company The general future expectations for the controlling are positive

4,1

3,6

Controlling deals with interesting tasks Controller have good career options

4,0

3,8

3,6

3,9 3,8

3,9

4,0

3,7 3,9 3,8

4,0

4,1 4,1 4,3

Figure 3.14: WHU controller index 2014. Source: Translated by author from Gräf & Horváth & Partners (2014).

the customers of the controlling services. The satisfaction survey can be done in a compact format with a web-based tool. The purpose of the survey is not to identify all weak points in detail but to answer the following two questions before the optimization project is continued: – Is there a true need to continue with the project? – Is there sufficient management support for this project? If the survey indicates a satisfaction level under the predetermined expectation level, this would affirm the need for an optimization project.

3.4.1 Increasing effectiveness If the satisfaction level retrieved from the web-based survey showed improvement needs, the top management and the controlling executives should be prepared and motivated for the next step which is a one-day workshop to specify change areas. The goal of the workshop is to align and synchronize the controlling activities with the management approach and expectations (Heimel et al. 2009). In order for this to be achieved, the “products” of controlling and the underlying controlling processes should be evaluated by the customers, to what extent they match their requirements and if they are in line with the strategic challenges and questions of the company (Bernauer 2008; Langer and Munhoz 2005). Increasing the customer orientation approach and satisfaction will increase the extent to

34 

 3 Changing expectations in multinational production companies

which controlling products are considered in the decision process of the management (Schäffer, Weber, and Strauß 2012). As discussed above, the role of controller can include various degrees of managerial activities. In the first part of the meeting, the management should therefore discuss about the different services of the controlling function and which importance they assign to them. The controlling role models can be a basis to elaborate what kind of controller role the management is willing to appreciate and accept. The general trend is a decreasing importance of data and report providing and an increasing importance of analysis and consulting (Gräf 2014). For the workshop, it is recommended that controlling provide the current allocation of their time on the activities, so that the survey of (Gräf 2014) can be used as benchmark. The above survey illustrates the expected increasing importance of controlling activities related to analysis and consulting. Controlling will not spend the majority of time on data and report generation, but use their energy for value-adding activities. The degree in the individual situation will depend on the abilities of the controller as supplier and the demand of the top management as client. Supportive for the acceptance of the controller as consultant are social skills like empathy and the ability to communicate with colleagues and management (Krings 2012). A supplementary, more detailed approach, is to split up the current and target activities of controlling following the process model of IGC (2010) and to discuss the current and target focus on the level of the ten mentioned controlling processes (see Table 3.2). The mentioned numbers are illustrative in nature and consider the generally observed priority shift in management reporting towards active roles. Table 3.2: Process table based on IGC process model. Main Process Strategic Planning Operativ planning and budgeting Forecast Cost accounting Management reporting Project- and investment controlling Risk management Functional controlling Internal consulting Improvement of processes, tools, and systems

Current* Target* Delta* 5 30 5 5 20 5 2 20 3 5

10 10 10 5 10 10 5 10 25 5

5 –20 5 0 –10 5 3 –10 22 0

100

100

0

* Illustrative figures. Source: Author’s own illustration based on IGC (2010).

The current time allocation should be provided by controlling. To ensure the customer focus in the optimization project, the target numbers should be the result of an

3.4 Development of a structured change model 

 35

agreement with the customers on each process. Here, the accuracy is not so important; the goal of this exercise is more the delta proportion that indicates the need for adaptation in this area. The advantage in using such a process model is that it can be drilled down easily from the process level down to activity levels that will support more structured adaption phases later on. The disadvantage is that a too detailed technical controlling discussion in the workshop could overstrain top management. Therefore, it may be more recommended to follow up with such details on a second meeting or to elaborate such details not with top management but with middle management representatives. As result of the workshop, it became transparent on what activities the controlling should put less emphasis and on which it should place more. The portfolio of unneeded/unappreciated activities can be reviewed. Most likely, those can be found in the processes with indication that they should lose importance. Based on an inventory of products it should be checked if there is an easy way to omit unneeded activities without negatively affecting appreciated products. The time gained by this shortening of unneeded activities can be used to increase the energy on desired activities. In this phase, the project team will not spend time to optimize the efficiency of activities because this is reserved to a later phase.

3.4.2 Increasing efficiency and its organizational impact The efficiency of the reporting process can be increased in many ways, with different level of organizational change effort. Horvath (2012) introduced three key measures to increase efficiency in the controlling field, this measures he refers to as the “industrialization in controlling”: (1) standardization and simplification of processes for forecast, planning and reporting; (2) improving efficiency by using shared service solutions with two subcategories “centre of scale” and “centre of excellence”; (3) improving IT infrastructure. This approach was followed by Schäffer et al. (2012) who added (4) simplifying and shortening the reporting material (see Figure 3.15). It is thus illustrating how such optimization measures affect the organizational set up. To avoid resistance in organizations towards the adaptation, the outlined optimization project addresses the measures one by one, starting with the measure which requires the smallest organizational changes. Systematically, the optimization process can be extended to measures which involve more organizational changes. For the local optimization, an inventory of controlling processes should be set up as described in chapter four of this publication. The inventory should follow the structure of a process model such as the model of IGC (2010) and should include all processes performed, when they are performed, by whom and how much time is needed. Based on the overview, local process descriptions can be set up. The local process descriptions should be discussed within the controlling team to identify inefficiencies

36 

 3 Changing expectations in multinational production companies

Realized economics of scale

Outsourcing Centralization Automatization Standardization

Local Optimization

Organizational Change

Figure 3.15: Organizational impact of efficiency measures. Source: Translated by author from Goltz and Temmel (2014).

and weaknesses. In addition, the data suppliers of the processes should be integrated in this discussion to optimize data interfaces. Based on local optimization, these optimized processes can be rolled out to other plants or functional areas of the company and hereby standardized. During the roll out, the comparable processes of the different plans will be compared with each other, which will challenge the initial standard setting as it will bring new ideas and viewpoints to the existing process documentation. The methodology to optimize the efficiency in management reporting and planning will be illustrated in the next chapter based on a case study. Besides reviewing the existing reports for their effectiveness, controlling should identify measures to improve the value they add by providing internal consulting services. Selected business partnering projects can address consulting needs, as far this is not sufficiently covered. The necessary resources can be gained by shifting the resources from the unneeded tasks to the uncovered needs. To get the support for this business partnering role of controlling, some sample projects should be agreed upon with the top management. Those projects can be first set up on the central level as pilot projects which can be later rolled out through the organization. The required learning and training activities should be provided closely to the projects instead of focusing on formal trainings. Sample projects with focus on restructuring initiatives will be discussed in the last two chapters.

3.5 Interim conclusion The controlling function of the company is influenced by various internal and external factors. It was outlined how especially the size of the company influences headcount,

3.5 Interim conclusion 

 37

specializations and organization of the controlling function. Large companies have a larger controlling team in absolute figures, but the relative number of controllers in relation to the total headcount decreases. The company size correlates with the number of maintained specializations and the strategic orientation of the controlling function. Multinational production companies were defined as large production companies with more than 20,000 employees operating and producing in multiple countries with an annual sales volume exceeding 1,000 million EUR. Based on the surveys analysed, the controlling function in such companies employs, in average, more than 60 controllers or 0.3 % of the total headcount. The number of maintained controlling specializations is seven, with an overweight on production controlling. In comparison with smaller companies, multinational production companies regularly apply strategy oriented planning and controlling tools. In most multinational production companies the head of controlling reports to the CFO (65 % of the companies). The controlling function in a company can take a more passive or a more active role. According to recent surveys, the majority of controlling functions tend to take a rather active role. The activities and services performed by the controlling function are influenced by this role setting and vice versa. Recent megatrends such as increasing complexity, volatility, internationalization and increased demand for transparency and compliance have changed the expectation towards the controlling function. Following all outlined surveys, the focus of the activities within the controlling function is expected to further shift from passive roles such as data preparation to more active roles, such as advising management and initiating change processes. For this, the controlling should further streamline its standard reporting activities to the specific company situation on the one side and increase its consulting support to prepare business decisions on the other side. Multinational production companies are exposed to the enumerated megatrends at a comparable early stage. Therfore, the changed expectations towards the controlling function in such multinational production companies are higher than in smaller companies operating only in regional markets. To increase its added value, the controlling function needs to improve its support in the decision-making process of the management. However, these activities are not exclusively the field of activity of the controlling function but are also provided by competitive functions. The “competitive challenge of controlling” was summarized in a new model. Following this model, the controlling function can be easily squeezed between the accounting function on the one side and corporate development and external consultants on the other side. Therefore, the accounting function would be the one providing the basic data needed for management to make an informed decision. The decision-making process, however, cannot be efficient with only basic data that management may not understand or may not fully comprehend. This role of controlling is taken by external consulting or by the corporate development offering the function of analysis and consulting. This would provide actual information for management to base their decision upon.

38 

 3 Changing expectations in multinational production companies

Having this competitive challenge, the controlling function must show that they can offer the same or even better information than the external consultants, even when they are in-house working, inside the company. The adaptation of the controlling function towards the changed expectations can lead to a complex project with growing change resistance. A “synopsis of structured change models” representing the current state of affairs was set up by the author. Based on this synopsis, as well as the author’s experience as controlling manager, a new adoption model was introduced. The model was designed to be especially successful in change-resistant environments in which a successful optimization project needs to be able to realize quick gains “under the radar” with low involvement from the organization. The study focused on the works of Heimel, Krings, Kupper and Laval. Heimel sustained his change model by having a stable target position and get to it with a clear, structured action plan and continuous improvement. Krings is the adept of acceptance and creating change through improved effectiveness and efficiency. Kupper has a similar view to Heimel`s opinion, defining the target position as a mission statement, analysing the current situation and developing a plan to reach a higher level controlling function. The author proposed a workshop around a satisfaction survey and thinking about how the organization should look like in the future. Having this goal in mind it would be much easier to manage the change process. This new model will be tested and validated in the case study described in chapter four.

4 Management reporting – contents and processes This chapter is based on the presentation of the author in November 2015 at the 26th “International Business Information Management Conference” (IBIMA) in Madrid, Spain, which was published in the “Proceedings of the 26th International Business Information Management Association Conference” and later, in the “Journal of Financial Studies & Research” (Laval 2015c, 2016c).

This chapter will illustrate how the quality and value-contribution of management reporting activities at a global manufacturing company can be analysed, benchmarked and improved. Based on the illustrated benchmarking process the process efficiency, the reporting relevance, reporting volume and the cost/benefit ratio are identified as weak areas with major improvement potential. For these weak areas, improvement recommendations are illustrated and outlined. The proposed improvement process is based on the author’s 2014 survey and compared with the reference survey of Deloitte.

A selection of the original questions/answers in the 2014 survey as well the reference which indicated the highest improvement potential for the management reporting is presented below. The improvement area of process efficiency will be outlined based on an implemented case study. The other improvement areas will be further outlined conceptually.

4.1 Classification and goals of management reporting The management reporting is one of the ten controlling main processes as defined by the International Group of Controllers in the controlling process model (see Table 4.1). According to the controlling process model, “the aim of management reporting is to produce and deliver information relevant for decision-making in the sense of relation to objective/degree of goal attainment, in a recipient-oriented and timely manner for the control of the company. With the information and documentation task, reporting is to ensure company-wide transparency” (Bloomfield 2015; International Group of Controlling 2012).

4.2 Contents of management reporting 4.2.1 Analysing the survey on reporting contents Most of the 2014 survey participants saw a high or very high impact of the top management reporting on the company success. Only a minority of 8–10 % saw a low impact. https://doi.org/10.1515/9783110580600-004

40 

 4 Management reporting – contents and processes

Table 4.1: Controlling main processes. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Strategic Planning Operative Planning and Budgeting Forecasting Cost accounting Management Reporting Project- and Investment Controlling Risk Management Function Controlling Management Support Enhancement of Organization, Processes, Instruments and Systems

Source: International Group of Controlling (2012).

The result of the survey is almost identical with the result of the reference survey confirming that management reporting has a significant impact on company success (see Figure 4.1 and Figure 4.2):

60 %

(Very) high

30 %

Neutral

(Very) low

10 %

Figure 4.1: Impact of top management reporting on company success (survey). Source: Authorʼs 2014 processing/survey. (Very) high

59 %

Neutral (Very) low

32 % 8%

Figure 4.2: Impact of top management reporting on company success (reference). Source: Authorʼs processing based on Deloitte (2013).

The management reporting fulfils important communication purposes within the companies. The results of the 2014 survey and the reference are comparable in the order of the purposes indicating the transparency and early warning signals are the top communication purpose of management reporting Figure 4.3 and Figure 4.4):

4.2 Contents of management reporting 

Providing transparency and early warning signals Encouraging concrete actions based on the results

100 % 70 % 70 %

Driving decision making Allowing assessing the risks we are exposed to Driving strategy execution

 41

55 % 30 %

Enabling internal benchmarking 20 % Other

5%

Figure 4.3: Communication purposes of top management reporting (survey). Source: Authorʼs 2014 processing/survey.

Interpreting and comparing the results of the 2014 survey with the reference, the authorʼs 2014 survey tends to indicate a clearer ranking of the answer options. This tendency to prioritize answers for a clearer result is due to a recommendation to avoid selecting too many results. The answers of the reference survey are in comparison often closer to each other. Providing transparency and early warning signals Encouraging concrete actions based on the results Driving decision making Allowing assessing the risks we are exposed to

84 % 75 % 80 % 65 %

Driving strategy execution

58 %

Enabling internal benchmarking

57 %

Other Figure 4.4: Communication purposes of top management reporting (reference). Source: Authorʼs processing based on Deloitte (2013).

The survey and the reference both confirmed that the focus on key measures and the reliability of the information are the top two reporting requirement. The focus on key measures is of high importance for the budgeting and budget control process because this is where controlling can add valuable feedback to what range the management is on track to reach the agreed performance targets Figure 4.5 and Figure 4.6).

42 

 4 Management reporting – contents and processes

Focusses on key measures

85 %

Reliable

65 %

Comprehensible

55 %

Process efficient

45 %

Timely

40 %

Risk orientated Automated

30 % 25 %

Strategy driven 10 % Cross functional harmonized 5 % Flexible 0 % Figure 4.5: Major requirements regarding characteristics of top management reporting (survey). Source: Authorʼs 2014 processing/survey. Focusses on key measures

96 % 100 %

Reliable Comprehensible

87 %

Process efficient

80 %

Timely Risk orientated Automated Strategy driven Cross functional harmonized Flexible

94 % 87 % 75 % 87 % 78 % 68 %

Figure 4.6: Major requirements regarding characteristics of top management reporting (reference). Source: Authorʼs processing based on Deloitte (2013).

Asking about the current qualities of the management reporting fulfils the communication purposes the 2014 survey and the reference see room for improvement. The main areas for improvement according the survey are in the area of internal benchmarking and a clearer connection with the corporate strategy (see Figure 4.7). Also the reference survey indicated that 75 % of the participants evaluated that not all communication purposes were fully covered (see Figure 4.8).

4.2 Contents of management reporting 

Driving decision making

 43

70 %

Providing transparency and early warning signals

65 %

Encouraging concrete actions based on the results

40 %

Allowing assessing the risks we are exposed to

35 %

Driving strategy execution

30 %

Enabling internal benchmarking

10 %

Other

15 %

Figure 4.7: Communication purposes already covered in the current management reporting (survey). Source: Authorʼs 2014 processing/survey.

All purposes covered

25 %

1 or 2 not covered

3 or more not covered

44 %

31 %

Figure 4.8: Communication purposes already covered in the current management reporting (reference). Source: Authorʼs processing based on Deloitte (2013).

Despite the high impact of the management reporting, the participants of the 2014 survey and the reference saw huge improvement potentials in many areas of the management reporting. Almost all respondents highlighted more than one improvement area. Improvements in the reporting processes were ranked second in the author’s survey and even by most participants of the reference survey (see Figure 4.9 and Figure 4.10).

44 

 4 Management reporting – contents and processes

70 %

Information Quality 40 %

Reporting Processes Reporting Qualtiy

30 %

Reporting Content

30 % 20 %

Delivery Date

10 %

Presentation Quality Reporting systems 0 Other

35 %

Figure 4.9: Most frequently seen improvement areas (survey). Source: Authorʼs 2014 processing/survey. Information Quality

58 %

Reporting Processes

74 %

Reporting Qualtiy

60 %

Reporting Content

71%

Delivery Date

41 %

Presentation Quality

60 %

Reporting systems

59 %

Other 0 Figure 4.10: Most frequently seen improvement areas (reference). Source: Authorʼs processing based on Deloitte (2013).

The value of the reports depends on the right level of detail as well as the relevancy of the information to the audience. The reverence survey is closer to the interpretation that the most important aspect is the decision relevance and that  too  many details could distract top management easily (see Figure 4.11 and Figure 4.12). The right level of detail The relevancy of the covered information to the audience

55 % 40 %

Other 5 % Figure 4.11: The value of top management reports depends on … (survey). Source: Authorʼs 2014 processing/survey.

4.2 Contents of management reporting 

The right level of detail

 45

89 %

The relevancy of the covered information to the audience

92 %

Other

Figure 4.12: The value of top management reports depends on … (reference). Source: Authorʼs processing based on Deloitte (2013).

The number of reporting positions in the authorʼs 2014 survey was significantly higher than in the reference survey (see Figure 4.13). The 2014 survey and the reference present interesting inverse results. Only a marginal indicator in the authorʼs 2014 survey presented short reports with 20 or less reporting positions, while in the reference a majority had short reports (see Figure 4.14). In the authorʼs 2014 survey, 65 % (36 % in the reference survey) of the reports had more than 21 reporting positions: 1 to 10 11 to 20

15 % 20 %

21 to 40

35 %

over 40

30 %

Figure 4.13: Number of reporting positions in top management reports (survey). Source: Authorʼs 2014 processing/survey. 1 to 10 11 to 20 21 to 40 > 40

19 % 22 % 14 %

45 %

Figure 4.14: Number of reporting positions in top management reports (reference). Source: Authorʼs processing based on Deloitte (2013).

This indicates that the management reporting in the companies of the authorʼs 2014 survey could be streamlined to transport fewer but more significant information. A high number of existing positions and a high intensity of analysing financial KPI can lead to an increased workload and stress level within the controlling, but this will not necessarily lead to an increased impact of the controlling (Goeldel 2010). The number

46 

 4 Management reporting – contents and processes

of reporting positions was therefore identified as a significant improvement area. The inventory of reporting positions should be regularly reviewed for decision usefulness. The vast majority of management reports include comments. The survey shows a balance between aggregated level and line item based commenting (see Figure 4.15) while the reference survey indicates that the majority of comments are done on an aggregated level (see Figure 4.16). In general, comments should only be used to point

Comments on an aggregated level

50 %

Comments rather on line item basis

50 %

No comments 0

Figure 4.15: Use of comments in management reporting (survey). Source: Authorʼs 2014 processing/survey.

Comments on an aggregated level

Comments rather on line item basis

No comments

64 %

22 %

14 %

Figure 4.16: Use of comments in management reporting (reference). Source: Authorʼs processing based on Deloitte (2013).

4.2 Contents of management reporting 

 47

out significant actual/plan deviations. The quality of comments for sure is far more important than their quantity. Quality comments include a description of the business origin of a significant deviation as well as a description of suggested countermeasures: In the 2014 survey and the reference, around 85 % of the respondents are convinced that strategic initiatives should be included in the management reporting (see Figure 4.17 and Figure 4.18). However, in the reference survey almost 50 % of the management reports are not used to drive strategy execution:

Yes

No

85 %

15 %

Figure 4.17: Should strategic initiatives be included in the management reporting? (survey). Source: Authorʼs 2014 processing/survey.

…drives strategy execution

54 %

…should be strategy driven

36 %

87 %

(Strongly) agree

Neutral

10 %

9 % 4%

(Strongly) disagree

Figure 4.18: Related to navigation, management reporting (reference). Source: Authorʼs processing based on Deloitte (2013).

The management reporting should be adapted to changing and volatile business environment. As many as 85 % of the survey respondents confirmed this understanding (see Figure 4.19) while in the reference survey 50 % had this opinion (see Figure 4.20). The higher values indicate the willingness as well as the need to adapt the reporting to changed reporting requirements: The reporting should be reviewed regularly if it is in line with the key drivers of the business and if the reporting addresses the right content to the right people, meaning decision-relevant information to those who are in the position to make this decision.

48 

 4 Management reporting – contents and processes

85 %

(Strongly) agree Neutral

15 %

Disagree 0 Figure 4.19: Adaptability of reporting (survey). Source: Authorʼs 2014 processing/survey.

(Strongly) agree

50 %

Neutral Disagree

36 % 12 %

Figure 4.20: Adaptability of reporting (reference). Source: Authorʼs processing based on Deloitte (2013).

Around 90 % of the companies maintain a monthly reporting cycle. In addition, many companies follow a quarterly and yearly reporting cycle (see Figure 4.21 and Figure  4.22). The result of the survey indicates that reports are normally not performed in cycles shorter than the month and the monthly reporting is in quality and volume almost if not completely identical with the reports done at the end of the quarter/the year: Almost all companies do ad-hoc reports in addition to the standard management reporting. The number of ad-hoc reports in the 2014 survey and the reference in the clear majority is between 1 and 20 reports per month (see Figure 4.23 and Figure 4.24).

Daily Weekly Monthly

90 %

Quarterly Yearly Ad hoc Other 10 % Figure 4.21: What reporting cycles exist in your top management reports (survey). Source: Authorʼs 2014 processing/survey.

4.2 Contents of management reporting 

 49

23 %

Daily Weekly

32 %

Monthly

93 %

Quarterly

68 %

Yearly

48 %

Ad hoc

36 %

Other Figure 4.22: What reporting cycles exist in your top management reports (reference). Source: Authorʼs processing based on Deloitte (2013). 0

10 %

1 to 5

45 %

6 to 20

40 %

21 to 40 0 more than 40 5 % Figure 4.23: Number of ad hoc reports per month (survey). Source: Authorʼs 2014 processing/survey.

0 0 1 to 5 0

37 %

6 to 20 0 21 to 40 0

43 % 13 %

more than 40 0 7 % Figure 4.24: Number of ad hoc reports per month (reference). Source: Authorʼs processing based on Deloitte (2013).

The delivery of the reports is done in the majority of cases within 10 workdays after the month’s end closing (see Figure 4.25 and Figure 4.26). A timely reporting correlates positively with the decision usefulness of the management reporting.

50 

 4 Management reporting – contents and processes

≤ 10

70 %

> 10

30 %

Figure 4.25: Workdays until reports are distributed (survey). Source: Authorʼs 2014 processing/survey

≤ 10

> 10

50 %

42 %

Figure 4.26: Workdays until reports are distributed (reference). Source: Authorʼs processing based on Deloitte (2013).

The 2014 survey and the reference indicate the availability of different analysis views. The top three are identical between the two surveys confirming the importance of functions/departments, products and legal entities as common analysis views used in the business (see Figure 4.27 and Figure 4.28).

functions/departments

80 %

products

60 %

legal entities

55 %

processes/vaule chain

30 %

strategic initiatives

15 %

countries/regions

15 %

customers 10 % Others 0

Figure 4.27: Use of analysis views (survey). Source: Authorʼs 2014 processing/survey.

4.2 Contents of management reporting 

functions/departments

71 %

products

56 %

legal entities

57 %

processes/vaule chain

 51

20 %

strategic initiatives countries/regions customers

30 % 46 % 39 %

Others 6 % Figure 4.28: Use of analysis views (reference). Source: Authorʼs processing based on Deloitte (2013).

Standardization of abbreviations and names is seen as a weak point in the standardization efforts of management reporting in the 2014 survey and the reference. While the standardization of visual elements was seen as a weak point in the survey, it was better evaluated in the reference survey (see Figure 4.29 and Figure 4.30).

Management reports have a logical & clear story line

Report layout is well conceived, consistently applied & avoids distracting elements

Company-wide standardized visual elements are applied

Company-wide standardized abbreviations & names are applied

60 %

45 %

30 %

25 %

Figure 4.29: Managament reporting in cockpit – storyline,layout & standardization (survey). Source: Authorʼs 2014 processing/survey.

52 

 4 Management reporting – contents and processes

Management reports have a logical & clear story line Report layout is well conceived, consistently applied & avoids distracting elements

Company-wide standardized visual elements are applied Company-wide standardized abbreviations & names are applied

64 %

57 %

77 %

54 %

Figure 4.30: Managament reporting in cockpit – storyline, layout & standardization (reference). Source: Authorʼs processing based on Deloitte (2013).

4.2.2 Value-added reporting content Value-added management reporting must provide the decision-makers with the relevant information for decision making ensure companywide transparency and establish a clear basis for countermeasures. The management reporting can provide such contribution only if certain requirements are taken into consideration. The requirements for the added value management reporting are the relevance of information consistent with the company specific objectives and goals, being recipient-oriented to be understandable by the decision maker, to be provided in a timely manner and contain an analytical contribution. All reports should be designed in such a way to support the decision makers to take efficient actions. In the field of management reporting the interdependency between requirements, contributions and value-added reporting can be illustrated in the model of “value-added management reporting” (see Figure 4.31). To reach the target of value-added management reporting, the management reporting must provide the decision maker with relevant information in relation to the goals he pursues. Management reporting can only provide this contribution as far as the outlined requirements are respected. To better demonstrate this concept, the requirements for value-added management reporting shall be illustrated. Relation to objective and goals: The reporting content needs to be related to the way the company is steered. The objectives and goal settings of the strategic planning have to be aligned with the operative management reporting and the management reporting itself has to be aligned with the way the operative units are steered.

Target

- Relevant information for decision-making - Company-wide transparency - Basis for countermeasures

Requirements

- Value added management reporting

Contribution

4.2 Contents of management reporting 

 53

- Relation to objective and goals - Recipient-oriented - Timely manner - Analytical contribution

Figure 4.31: Value-added management reporting. Source: Authorʼs processing.

Recipient oriented: The reports need be designed to support the decision maker and not to please the financial organization. An over-engineering of the management reporting and thereby a loss of relevance for the decision maker should be avoided. Analytical contribution: To be a basis for countermeasures, the cause and effect relationships of the reported data need to be separated and made transparent. The causes for an unfavourable development need to be clarified in the report as a basis to identify and manage countermeasures. To increase the value-added does not mean to increase the number of reports and figures reported, but to increase the decision usefulness of the data provided to the decision makers of the company (Bernauer 2008). The survey of Gräf, Isensee, Kirchmann, and Leyk (2013) reveals that especially financial KPI’s are expected to lose their dominance in the decision making process while the non-financial and external information is gaining importance. The effectiveness of reports can, therefore, be increased by aligning them with the KPIʼs required by management for the decision-making process (see Figure 4.32). Assessment of the %

% of KPI's 10 28

62

14 30

56

External Non Finacial Financial

7 40

51 9

Average

Aspired

49

44

Financial Non Finacial

Figure 4.32: Development of KPIʼs used for decision making. Source: Gräf & Horváth & Partners (2014).

1 31

Should be lower Is right

68

External

Should be higher

54 

 4 Management reporting – contents and processes

To be effective, the reporting contents need to follow the business requirements. Important is to focus the reporting on key performance indicators related to the business strategy (Baumgärtner 2014). The decision usefulness of selected key performance indicators will depend on the company business model and on the current situation of the company (Rachfall and Rachfall 2013). To improve the reporting relevance, the management reporting should concentrate on a few decision relevant KPI (Goeldel 2010) which relate to cash and market aspects and focus more on the operative business (see Figure 4.33). Cash Market developments Future Operative business Less

EBIT focus Internal development Past Financial ratios

More

Figure 4.33: Improving reporting relevance. Source: Authorʼs processing following Goeldel (2010).

4.3 Processes of management reporting 4.3.1 Analysing the survey on reporting processes Process efficiency can be obtained by a standardization and simplification of processes (Edlefsen and Pedell 2015). The documentation of controlling and accounting guidelines, as well as indicators, are satisfactory in the 2014 survey and the reference. In the 2014 survey and the reference, the ownership of the indicators and governance procedures for maintaining the indicators is less sufficient defined and is a weak point in the existing documentation work. In the authorʼs 2014 survey, as well as in the reference survey, the level of detail of the reporting process documentation was considered comparable low when it comes to training purposes of new employees (see Figure 4.34 and Figure 4.35). 85 % of the participants in the authorʼs 2014 survey (see Figure 4.36) and 46 % in the reference survey (see Figure 4.37) answered, that the reporting process was not documented in the necessary detail e.g. for training purposes.

4.3.2 Improving reporting processes As the satisfaction with the process documentation in the authorʼs 2014 survey was significantly below the benchmark, the process documentation was chosen as first

4.3 Processes of management reporting 

The companies controlling guideline

 55

65 %

The indicators (e.g. definitions, calculations)

55 %

The companies accounting guideline

50 %

The ownership of the indicators 15 % (e.g. Sales, Finance) Governance procedures for defining and 10 % releasing indicators/measures Analysis structures (e.g. by product, 5% by countries) Other

5%

Figure 4.34: Existence of a sufficiently detailed documentation of ... (survey). Source: Authorʼs 2014 processing/survey. The companies controlling guideline The indicators (e.g. definitions, calculations)

80 % 77 %

The companies accounting guideline The ownership of the indicators (e.g. Sales, Finance) Governance procedures for defining and releasing indicators/ measures Analysis structures (e.g. by product, by countries)

80 % 68 % 54 % 67 %

Other Figure 4.35: Existence of a sufficiently detailed documentation of ... (reference). Source: Authorʼs processing based on Deloitte (2013).

optimization object. The project performed on a group of five plants simultaneously will be illustrated as a case study. Starting points for the improvement process were the time lost during the on boarding of new employees and the lack of clear back up responsibilities (see Figure 4.38): These identified improvement needs lead to a project in order to set up a controlling manual containing work instructions which can be used in the training of the new employees and interns. The project was structured in three working packages:

56 

 4 Management reporting – contents and processes

Clearly defined e.g. with defined deadlines

75 %

Are followed as defined Documented in all necessary detail e.g. for training purposes

60 %

15 %

Figure 4.36: Our reporting process steps are … (survey). Source: Authorʼs 2014 processing/survey.

Clearly defined e.g. with defined deadlines

78 %

Are followed as defined Documented in all necessary detail e.g. for training purposes

70 %

54 %

Figure 4.37: Our reporting process steps are … (reference). Source: Authorʼs processing based on Deloitte (2013).

Non existence of a manual for standard reporting processes

Time was lost during on boarding of new employees

No clear back-up responsibilities

Figure 4.38: Starting points of the case study. Source: Authorʼs graph.

(1) to inventory all relevant processes (2) to describe the processes and (3) to assign responsibilities including back up (see Figure 4.39). The result of the work was a controlling manual which consists out of an inventory of all relevant controlling processes at the five plants. For this, all controlling processes were inventoried while periodicity and the due date were documented (see Table 4.2). The due date here was set as a specific working day of the month. The respective process

Monthly

Monthly

Monthly

Monthly

Monthly

2

3

4

5

6

11

11

11

11

12

Monthly

Monthly

8

9

10 Monthly

11 Monthly

12 Monthly

13 Monthly

11

Monthly

7

10

10

10

10

8

7

Preparing the meeting and the presentation file for the monthly budget meeting

Cost factors calculation for the plant activities

Control the budget for each cost center group, the report planned / performed, analysis of deviations, and proposing corrective measures involved (PiV)

Invest budget comments and analyze the open orders

Record investments for each cost centers: proposals, monthly monitoring of evolution, within budget / request add / financial reallocation

P & L account – analysis, short explanations.

Monthly report for income /costs upload and check figures Hyperion

Telephone conference with corporate headquarter analyzing the cost factor and deviation to budget

Tracking profitability by product category

Monthly report for income as preparation for management report

Support and inform CC responsible about the invest list, the evolution of the investments

BAB_download and preparation of the PIVʼs for cost center groups

EB; GC

n/a

EB; GC

EB; GC

EB; GC

n/a

EB; GC

EB

n/a

n/a

EB; GC

GC

GC

Statistical key figures manually upload personal and QM Involved in processing the monthly personnel controlling

Monthly

1

3

Plant A

No Periodicity WD Brief description of processes

Source: Authorʼs graph.

INVENTORY

Table 4.2: Inventory of reporting processes.

AW; NF

n/a

AW; NF

NF

AW; NF

n/a

n/a

AW; NF

n/a

n/a

AW; NF

AW; NF

AW; NF

Plant C

BC; SC

n/a

BC; SC

BC; SC

BC; SC

BC; SC

n/a

n/a

BC; SC

BC; SC

BC; SC

BC; SC

BC; SC

Plant D

ASSIGN THE RESPONSABILITIES

NF; AW

NF; AW

NF; AW

NF; AW

NF; AW

n/a

n/a

NF; AW

n/a

n/a

NF; AW

NF; AW

NF; AW

Plant B

SC; BC

n/a

SC; BC

SC; BC

SC; BC

SC; BC

VIB

n/a

n/a

SC; BC

SC; BC

SC; BC

SC; BC

Plant E

4.3 Processes of management reporting   57

58 

 4 Management reporting – contents and processes

Clear responsibilities

Training and succession planning

Backup for illness and fluctuation

Figure 4.39: Project steps. Source: Authorʼs graph.

names can be found in the next column. As the illustrated company structure consists out of five plants, it was important to clarify which processes are relevant for each specific plant. If a process was not applicable for a plant, this was clarified with “n/a”. The responsible person for each process was assigned as well as a backup person was defined. The clear definition of responsible persons and backup persons (see Figure 4.40) had certain advantages: Inventory of controlling processes

Process description

Assign responsibilities

Figure 4.40: Assign responsibilities. Source: Authorʼs processing.

Based on the process inventory a detailed process description was set up for each process (see Figure 4.41). By doing this, a common process of understanding between the five plants could be established and the processes between the plants were harmonized following best practices. Other goals achieved were to document the process ensuring high process quality in the execution and to establish training material for the on-boarding of new colleagues and as a reference for the backup person. To reach these goals, the process goals were clarified and the process execution was documented with screenshots and, if applicable, with SAP transaction codes. Special topics or potential conflicts were documented in a special field: The improvement project was concluded and 84 relevant controlling processes were identified, documented and the responsibilities including back up responsibilities were clarified.

4.4 Improving efficiency by IT and shared service solutions 

1 Process Number Process Short Name Key Figures

Prepared by Date

All Plants Company name Time needed in min 30 min

monthly Regularity Due on working day 3rd

 59

EB 08.04.2015

Process Long Name Manually upload personal and QM as statistical key figures Purpose of Process The statistical key figures are needed to run the allocation cycle for the cost centers Information needed and source HR report personalactiv.xls Square meters file based on layout and updated in case of changes together with cost center responsible Description

There are several way to book the statistical key figures: 1. fill in the mandatory fields in the transaction KD31N an after that you just save 2. use a document booked in a previous month and make the necessary changes Special topics If you don’t have changes on key figures you don’t need to make any bookings in the allocation will be taken the last booked figures this rule in not applicable from one year to other If you don’t have anymore statistcal figure for a cost center you have to make a booking with 0(zero) otherwise the previously booked value with be used in allocations Screenshots and transaction codes used Booking KB31N

alternative:

ZCO00UP014

Figure 4.41: Detailed process description. Source: Authorʼs graph.

4.4 Improving efficiency by IT and shared service solutions Most respondents in the survey 2014 and the reference agreed that the system supports the commenting process. The number of respondents who indicated even a strong system supported in the survey 2014 was 30 % (see Figure 4.42). In the reference survey a strong system support was indicated by 44 % of the respondents (see Figure 4.43).

60 

 4 Management reporting – contents and processes

30 %

(Strongly) agree

25 %

(Strongly) disagree Neutral

45 %

Figure 4.42: System supported commenting process (survey). Source: Authorʼs 2014 processing/survey.

(Strongly) agree

44 %

(Strongly) disagree

Neutral

35 %

20 %

Figure 4.43: System supported commenting process (reference). Source: Authorʼs processing based on Deloitte (2013).

Most time is used to create reports and for quality assurance. Only about a third of the time is used for analysing the figures and acting (see Figure 4.44 and Figure 4.45). Due to the rising potential of ERP solutions the percentage of time used for report creation and quality assurance is expected to decrease significantly in the future.

Analyzing figures and acting upon them

Creating regular reports

Quality assurance

39 %

33 %

22 %

Creating ad-hoc reports 6 %

Figure 4.44: Time spent on the report creation & degree of automation (survey). Source: Authorʼs 2014 processing/survey.

4.4 Improving efficiency by IT and shared service solutions  

Analyzing figures and acting upon them

 61

23 %

Creating regular reports

40 %

Quality assurance

18 %

Creating ad-hoc reports

19 %

Figure 4.45: Time spent on the report creation & degree of automation (reference). Source: Authorʼs processing based on Deloitte (2013).

Manually created spreadsheets are still the most used reporting format. But there is a clear trend that the significance of analysis based on OLAP (“online analytical processing” or “data warehouse”) and online dash boards will gain importance in the future (see Figure 4.46 and Figure 4.47). Most respondents confirm that the availability of management reports on mobile devices would be beneficial. However, it is only a minority of companies who have implemented the usage of mobile devices for management reporting at this point in time (see Figure 4.48 and Figure 4.49). The overall trend revealed in the survey indicates that the influence of IT support is assumed to increase significantly soon with positive impacts on the efficiency of data and report generation. The measures discussed above can be implemented on a standalone basis by local optimization, meaning without considering a big organizational change. As introduced in a prior chapter beyond this local optimization, a new level for the optimization of reporting processes can be reached by pooling repetitive and standard controlling activities in controlling shared service centres, abbreviated “SSC” (Lechky and Wiesehahn, 2016; Unrein, 2010). Based on a survey made by Weber and Gschmack (2012), the usage of SSC has a correlation with company size and function analysed. The bigger the company, the more companies use SSC. The following percentage numbers relate to big companies over 1 bn. EUR sales: accounting 53 %, taxes 42 %, treasury 41 %, cost accounting 25 % and controlling 18 % (see Figure 4.50). Regarding the location of the SSC, the mentioned study reveals that 56 % of the SSC were in the country of the corporate centre (in this case, Germany) and only 9 % were located outside the European Union. Triggering aspects for the location of the SSC were the availability of qualified people and the respective salary costs. It helps if the region has already a track record in hosting shared service centre as this increases the likelihood to be able to hire the needed personnel (Steuer and Westeppe 2015). According to the survey, the physical distance to the corporate centre had a lower influence on the decision for location (Weber and Gschmack 2012).

62 

 4 Management reporting – contents and processes

In use OLAP analysis (slice & dice)

Planned

Standarized print reports

35 %

30 %

Online dashboards 10 %

30 %

Manually created spreadsheets Other

60 %

35 %

40 % 15 %

5% 30 %

Figure 4.46: Use of following kinds of reporting formats (survey). Source: Authorʼs 2014 processing/survey.

In use OLAP analysis (slice & dice)

Planned 24 %

29 %

Standarized print reports Online dashboards

47 %

32 %

Manually created spreadsheets Other

11 %

86 %

4%

84 % 23 %

8%

Figure 4.47: Use of following kinds of reporting formats (reference). Source: Authorʼs processing based on Deloitte (2013).

60 %

No but it would be benificial to implement Not needed In use

40 % 0%

Figure 4.48: Top Management Reports can be viewed on… mobile devices (survey). Source: Authorʼs 2014 processing/survey.

4.4 Improving efficiency by IT and shared service solutions  

34 %

No but it would be benificial to implement Not needed

 63

32 %

In use

34 %

Figure 4.49: Top Management Reports can be viewed on… mobile devices (reference). Source: Authorʼs processing based on Deloitte (2013).

0.6

53 %

0.5

42 %

41 %

0.4 0.3

25 % 18 %

0.2 0.1 0

Accounting

Taxes

Treasury

Cost Accounting

Controlling

Figure 4.50: Popularity of shared service centres. Source: Authorʼs processing based on Weber and Gschmack (2012).

The observed popularity of controlling SSC was with 18 % significantly lower than with other finance functions. Arguments for the lower popularity of controlling SSC was that controlling activities were considered to be comparable less standardized in comparison with other financial functions such as the legal requirements driven accounting function (Unrein 2010). Also, the controlling data were seen as more sensitive and confidential than accounting data because of their business and future orientation (Schäffer et al. 2012). These restrictions can be overcome by setting up a “reporting factory”. The reporting factory should clearly separate the following controlling activities: (1) data creation, (2) reporting and (3) analysis and consulting (Kirchberg and Palenta 2012). A similar approach was suggested by Goltz and Temmel (2014) who suggested a shared service centre reporting which centralized data preparation on a corporate level while data generation and analysis commenting should remain on operative levels (see Figure 4.51). Especially the centralization using controlling shared service centres was so far only seldom applied, as the controlling apparently

64 

 4 Management reporting – contents and processes

Data Generation

Data Preparation

Analysis Commenting

Finalization/ Delivery

Corporate Business Area Region Land Figure 4.51: Shared-service centre reporting. Source: Translation of author from Goltz and Temmel (2014).

requires relatively close business knowledge and includes confidential information (Goltz and Temmel 2014). However only pooling the data preparation activities in shared service centre organization can be a smart move which also supports the standardization of reporting within a company. The analysis part of the reporting should remain close to the business where the business understanding is available to provide valuable analysis and commenting (Steuer and Westeppe 2015). Further topics seem suitable for SSC are big data analysis, functional controlling and standard cost accounting tasks (Steuer and Westeppe 2015). To implement a shared-service concept for financial support functions, three different timelines of process standardization can be distinguished (Fritze 2015; Weber and Gschmack 2012): (1) Change-Lift-Drop (= standardization before moving), (2) Lift-Change-Drop (= standardization with moving) and (3) Lift-Drop-Change (= standardization after moving). According to a survey made by the author in 2016, “survey 2016”, shared-services usually take 6 months to reach the cost advantage but the time duration depends on level of the cost in the country. In high-cost countries, however, it might it take up to three years to reach the cost advantage (see Figure 4.52). The efficiency of the finance functions can be increased by bundling capacity in one SSC and in regional hubs (see Figure 4.53). The main chances to increase the efficiency in SSC is based on the standardization of processes (Becker, Ulrich, and Eggeling 2013; Pérez 2009), on automation and on scale effects (Oldiges and Schikor 2013). In addition to the described efficiency gains, a further cost reduction can be realized by offshoring to low-cost locations (Suska, Zitzen, and Enders 2011). Beside the benefits, three risks on efficiency by offshoring need to be considered (see Figure 4.54). The first risk is seen in the insufficient knowledge of employees

4.4 Improving efficiency by IT and shared service solutions  

9% 9%

27 %

 65

18 %

37 %

2 months

6 months

12 months

24 months

48 months

Figure 4.52: SSC implementation time. Source: Authorʼs 2016 processing/survey.

Standardization

Automation

Scale effects

Figure 4.53: Chances for SSC efficiency. Source: Authorʼs processing.

Fluctutation

Figure 4.54: Risks for SSC efficiency. Source: Authorʼs processing.

Knowledge

Distances

in SSC of end to end process, the second risk is due to the distance between the SSC and the operative entity which can reduce the business thinking in the SSC (Kolburg 2013) and the third risk is the high fluctuation of employees in SSC (Alebrand 2013).

66 

 4 Management reporting – contents and processes

As indicated, to obtain the potential benefits of reporting SSC is not easy and without risk. However, if the companies assign the appropriate activities to the SSC and the use a reasonable implementation strategy, a cost reduction by offshoring between 25–50 % of the original cost base seems to be realizable (Suska et al. 2011).

4.5 Financial statements projection The financial statement outcome of efficient process documentation in operative controlling shall be illustrated in a business case simulation. The business case simulation will be based on the observation of the author as general manager of multinational companies as well as the 2016 survey performed in June 2016 with 16 multinational companies in the west area of Romania (Laval 2016a). In the business case, qualitative benefits will not be considered in financial projection but will be discussed separately. The projection time is set to be 10 years, positive effects after this projection are not considered in the scenario. The PV will be calculated using an interest rate of six percent. 4.5.1 Business case assumptions The business case simulation will be based on a set of assumptions which will be discussed upfront. The assumptions can be distinguished in general assumptions and efficiency assumptions (see Table 4.3). Table 4.3: Business case assumptions. General assumptions Number of plants Controller per plant Plant controllers Average salary for controller Salary increase Fluctuation rate Efficiency assumptions General efficiency gain for on boarded FTE Financial gain due to higher efficiency Time-saving during onboarding in months Financial gain due to faster onboarding Source: Authorʼs processing.

4.5 Financial statements projection 

 67

The number of plants/controller per plant: The business case simulation shall illustrate the financial benefits for a multinational production company implementing the suggestions in order to increase efficiency within the controlling function made in this chapter. As typical leverage for the harmonization and standardization, a multinational production company with 20 operational plants primarily in low-cost countries is used for the calculation. This number of 20 plants represents an average mid-sized multinational production group in which the author worked. Each production company is assumed to have three plant controllers. The number of three plant controllers reflects the observation of the author in his last two locations in West Romania (see Table 4.4 and 4.5). Table 4.4: Observed controller fluctuation Plant A. Year

Start

Leaves

Hires

End

Turnover rate

2010

2

0

0

2

0%

2011

2

0

0

2

0%

2012

2

0

0

2

0%

2013

2

0

0

2

0%

2014

2

2

1

1

100 %

2015

1

1

3

3

100 %

2016

3

0

0

3

0%

Average Turnover:

33 %

Source: Authorʼs observation. Table 4.5: Observed controller fluctuation Plant B. Year

Start

Leaves

Hires

End

Turnover rate

2010

2

0

0

2

0%

2011

2

0

0

2

0%

2012

2

0

0

2

0%

2013

2

0

0

2

0%

2014

2

1

1

2

50 %

2015

2

1

2

3

50 %

2016

3

0

0

3

0%

Average Turnover:

17 %

Source: Authorʼs observation.

The number of plant controllers was confirmed by the authorʼs 2016 survey which was described with three plant controllers for typical production plants of multinational production companies (see Figure 4.55).

68 

 4 Management reporting – contents and processes

Financial plant controller Per 1000 FTE

4

Auditing consulting bookkeeping

2

Back office/SSC

5

Consulting

4

Production of industrial goods

3

Figure 4.55: Average number of plant controllers per 1000 FTE. Source: Authorʼs 2016 graph/survey.

In consequence, the number of plants was set at 20 and the controller per plant set at three, for the purpose of the business simulation. The average salary for controllers: The topics covered in documentation cover standard reporting processes which typically fill out a majority of time in the operative plants and are predominantly performed by fresh controllers. The average monthly salary of newly graduated controlling specialist is 412 EUR and tends to increase 10.2 % per year. Production of industrial goods companies offers 466 EUR which is the highest amount but has the lowest increase rate, 5.0 %, among other companies. Audit consulting bookkeeping company offers 342 EUR which is the lowest amount; however, annual increase is 8.3 %. Consulting companies offer 390 EUR per month but offer highest annual salary increase is 12.4 % (see Figure 4.56). To be noted that the starting salary, as well as the salary increase of fresh controllers, differ from one industry to another. The start salary in multinational production companies was in average slightly higher than in other industries. In contrary the

Overall Average EURO

412

10.2 %

Production

of industrial goods EURO

Consulting

5.0 %

12.4 %

466

EURO

390

Average annual increase in salary Figure 4.56: Average monthly net salary for fresh controllers. Source: Authorʼs 2016 processing/survey.

Audit EURO

342

8.3 %

4.5 Financial statements projection 

 69

expected salary increase in consulting outperformed the expectable increase in the other industries. Taking all industries into consideration, the average salary increase of fresh graduates was 10.2 %: Table 4.6: Social contribution at the cost in Romania. 20.8 %

Social insurance

5.2 %

Health insurance

0.5 %

Unemployment insurance

0.15 %

Insurance for work accidents and occupational diseases

0.25 %

Guarantee fund for salary payment

0.5 %

Unemployment insurance

27.4 %

Social contribution at the cost of employer

Source: Authorʼs processing based on Chirigiu (2016).

The monthly salary costs at the level of the employer can be calculated considering a social contribution of 27,4 % (see Table 4.6). To be noted that those costs exclude the costs for office expenses, administration overhead and voluntary social contributions. To calculate the financial impact for a multinational production company, the average net salary for fresh controllers at such companies - according to the survey 466 EUR net per month - was applied to calculate the average monthly gross salary expenses of 689 EUR (see Table 4.7). Table 4.7: Average monthly gross salary expenses. 466 EUR

Average net salary according survey16

541 EUR

Gross salary at 16 % flat tax in Romania

148 EUR

Social insurance contribution at the cost of employer

689 EUR

Gross salary expenses of employer

Source: Authorʼs 2016 processing/survey.

Undergoing the business simulation, the average salary expenses for fresh controllers at the P&L were set at 700 EUR per month, equalling 8,400 EUR per year. The yearly salary increase was set at 5 % per annum. The fluctuation rate: The authorʼs 2016 survey indicates that the fluctuation percentage reaches high levels in the case of most of the interviewed companies. According to the survey, 47 % of the company representatives observed a fluctuation above 15 % per annum. The average fluctuation percentage observed per year was 16.9  % (see Figure 4.57). The authorʼs 2016 survey further indicates, that the average fluctuation differs significantly between the industry sectors. In the field of auditing consulting bookkeeping

70 

 4 Management reporting – contents and processes

Average fluctuation

16.9 %

11 %

16 %

16 % 47 %

10 %

less than 5 %

5–10 %

more than 5 %

no answer

10–15 %

Figure 4.57: Average workforce fluctuation rate per year. Source: Authorʼs 2016 processing/survey.

the fluctuation was 20.0 %, in the field of back office/SSC 23.1 % and at consulting companies the fluctuation rate was 21.0 %. Production industrial goods companies had with 10.8 % fluctuation rate lowest workforce fluctuation rates (see Figure 4.58). The author’s observation of fluctuation at multinational production plants was between 17 % and 33 % (see Table 4.4. and 4.5). For the business simulation, the average fluctuation rate was set at 17 % per annum. General efficiency gain for on boarded FTE: Harmonized and optimized process definitions can increase the efficiency of the controlling department. The optimization can ensure that the processes are performed in the most efficient way. The harmonization enables the implementation of stable and efficient backup responsibilities also between different plants or business units. According to the authorʼs 2016 survey, the majority of the participants stated that the potential increase out of harmonized and optimized process definitions to be between 20–40 % with an average assumed the increase of 41.6 % (see Figure 4.59). Auditing consulting bookkeeping

20.0 %

Back office/SSC

23.1 %

Consulting

21.0 %

Education

5.0 %

Production industrial goods

10.8 %

Figure 4.58: Average workforce fluctuation rate by industry. Source: Authorʼs 2016 processing/survey.

4.5 Financial statements projection 

 71

10 % 10–20 %

42 %

20–40 % 32 %

more than 40 % No anwer

16 %

Average increase of controlling process efficiency

41.6 %

Figure 4.59: Average efficiency increase in controlling process. Source: Authorʼs 2016 processing/survey.

This reflects a very optimistic expectation, which might be influenced by the participants of the survey working in SSC environments. In such environments, harmonized and optimized process definitions are seen as a basic need for operation. In the operative plant controlling the workload is, however, less repetitive, so a lower efficiency should be assumed. For the business simulation, an average efficiency increase of 10 % shall be assumed, which is on the lower end of the survey results. Time-saving during onboarding in months: The current level of competence from fresh controllers in the western part of Romania is quite low. According to the authorʼs 2016 survey, controlling competence is on average only 26 % from the needed 100 % competence to perform the job independently and in a consistent quality (see Figure 4.60). The reason for this exceptional low competence in between fresh controllers is in the fact, that the teaching content appears to be, in some parts, outdated and the teaching approach does not train independent problem-solving techniques. Based on this poor competence level it is quite obvious, that training on the job requires a big amount of time and money to be invested by the multinational companies. The time needed for fresh graduates to reach the full productivity required in controlling depends heavily on the assigned tasks. Easy tasks in controlling can be assigned to fresh controllers after 6 months, to be able to perform the jobs independently and with no full supervision. To fully fill out the job description of a junior controller, however, the training period it is expected to be beyond 12 months. The quality of training documentation varies among the companies (see Figure  4.61). The quality tends to be higher at companies who experience a high number of fluctuations and hereby face a higher and repetitive onboarding need: Approximately 47 % of the companies think that their onboarding training is well documented, 26 % – fair, and 16 % – poorly documented which is due to company size and training type. For example, for small-sized companies the onboarding process is not standardized and individual onboarding is usually arranged. The harmonized process description can play a central role to ease the onboarding of new controllers. The training of complex processes is simplified

72 

 4 Management reporting – contents and processes

1. English language proficiency

75

2. German language proficiency

54

3. Proficiency in Microsoft office...

60

4. SAP and general programming...

27

5. Professional work attitude,...

48

6. Understanding of foreign business...

39

7. Accounting technical knowledge

50

8. Controlling technical knowledge

26

9. Purchasing technical knowledge

28

Figure 4.60: Current competence level of fresh graduates (percentage). Source: Authorʼs 2016 processing/survey.

2

3

4

5

No answer 11 %

16 % 21 % 26 %

26 %

Figure 4.61: Quality of training documentation (1-very poor, 5-very well). Source: Authorʼs 2016 processing/survey.

as the new controller have an overview about the process in its entirety already prior to the training and have the required documents at hand after the training later for review and to reproduce the process on their own. The training for fresh controllers, in the majority of cases, is provided internally in the company with own training material. The harmonized and optimized processes definitions can document and explain easy and repetitive tasks in controlling and hereby can speed up the way of fresh controllers, to perform the easy tasks in controlling. For the business simulation, an average reduction of onboarding time from six months to four months will be assumed. The efficiency gains by implementing optimized and  documented processes can be calculated in a business case (see Table 4.8 and 4.9).

14,280 2016

M EUR

Time-saving during onboarding in months

Financial gain due to faster onboarding

10 %

Source: Authorʼs 2016 projection/survey.

Cost base after efficiency measures

EUR

11 % 2016

% Unit

Cost savings due to increased efficiency 447,888

56,112

Unit EUR

Efficiency effects

Cost savings due to increased efficiency

2

41,832

% EUR

General efficiency gain for on boarded FTE

2016

10

17 %

504,000

5%

8,400

60

3

20

2016

Financial gain due to higher efficiency

FTE Unit

Onboarding to compensate fluctuation

%

Efficiency assumptions

EUR

%

Total salary

EUR

Average salary for controller

Salary increase

Fluctuation rate

FTE FTE

Controller per plant

Plant controllers

Unit plants

General assumptions

Number of plants

Table 4.8: Projected efficiency gains.

470,282

2017

11 %

58,918

2017

14,994

2

43,924

10 %

2017

10

17 %

529,200

5%

8,820

60

3

20

2017

493,797

2018

11 %

61,863

2018

15,744

2

46,120

10 %

2018

10

17 %

555,660

5%

9,261

60

3

20

2018

518,486

2019

11 %

64,957

2019

16,531

2

48,426

10 %

2019

10

17 %

583,443

5%

9,724

60

3

20

2019

544,411

2020

11 %

68,204

2020

17,357

2

50,847

10 %

2020

10

17 %

612,615

5%

10,210

60

3

20

2020

4.5 Financial statements projection   73

EUR

Average salary for controller

2021

EUR M EUR Unit EUR % Unit

Financial gain due to higher efficiency

Time-saving during onboarding in months

Financial gain due to faster onboarding

Efficiency effects

Cost savings due to increased efficiency

Cost savings due to increased efficiency

Source: Authorʼs 2016 projection/survey.

EUR

%

General efficiency gain for on boarded FTE

Cost base after the efficiency measures

11 %

Unit

Efficiency assumptions

571,631

87,048

2025

22,153

2

64,895

10 %

2025

10

17 %

% FTE

Onboarding to compensate fluctuation

643,246

5%

10,721

60

3

20

2021

Fluctuation rate

%

FTE

Plant controllers

EUR

FTE

Controller per plant

Total salary

plants

Number of plants

Salary increase

Unit

General assumptions

Table 4.9: Projected efficiency gains (continued).

600,213

2022

11 %

87,048

2025

22,153

2

64,895

10 %

2025

10

17 %

675,408

5%

11,257

60

3

20

2022

630,223

2023

11 %

87,048

2025

22,153

2

64,895

10 %

2025

10

17 %

709,179

5%

11,820

60

3

20

2023

661,735

2024

11 %

82,903

2024

21,098

2

61,805

10 %

2024

10

17 %

744,638

5%

12,411

60

3

20

2024

694,821

2025

11 %

87,048

2025

22,153

2

64,895

10 %

2025

10

17 %

781,869

5%

13,031

60

3

20

2025

74   4 Management reporting – contents and processes

4.5 Financial statements projection 

 75

4.5.2 Sensitivity analysis and final remarks Besides the described assumptions of the base case, the financial effects of the process documentation shall be analysed for a best and worst case scenario (see Table 4.10). Table 4.10: Projected efficiency scenarios. Projected efficiency scenarios

Unit

Time saving during onboarding in months

month

General efficiency gain for on boarded FTE

%

Best Case

Base Case

Worst Case

3

2

1

15 %

10 %

8%

Source: Authorʼs 2016 projection/survey.

Table 4.11 shows the calculated effects on the financial statements for all scenarios calculated for a project live time of 10 years at six percent discount rate: Table 4.11: Projected KPI efficiency. Projected KPI efficiency Financial gain due to faster onboarding

NPV

Best Case

Base Case

Worst Case

135,875

129,139

122,404

Financial gain due to higher efficiency

NPV

567,454

378,302

302,642

Total financial gain

NPV

703,329

507,442

425,046

Source: Authorʼs 2016 projection/survey.

The goal of the increased efficiency is clearly not to bypass the number of controller positions available in the company but to shift the time saved on consulting tasks in the pursuance of improving the decision making. The increasing expectations towards the controlling functions affect the expected efficiency gains and will, in most cases, not result in the reduction of controlling headcount. It is much more likely and recommended for the controllers to utilize the saved time in the pursuance of providing management support and focus on other value-adding activities. The stability of the controlling organization with established back up roles is valuable all by itself beyond efficiency considerations. Also, process descriptions can support constant performance, despite the fluctuation or other absence of an individual controller. Another effect outside the efficiency considerations is the positive effects of the harmonized processes on the data quality, as a process output. Harmonized processes increase the comparability of reporting’s between business units and regional or functional segmentations.

76 

 4 Management reporting – contents and processes

4.6 Interim conclusion In the field of management reporting, the interdependency between requirements, contributions and value-added reporting was illustrated in the model of “value-added management reporting”. It was illustrated, how to analyse and benchmark an existing management reporting system using action research. Based on this action research, a best practice model for efficient management reporting using the “inventory of reporting processes” was developed. The practical relevance of the above was validated by the implementation of the suggested model in an international manufacturing company. During the performed implementation, a major increase in reporting efficiency was realized by documenting clear process descriptions and by assigning process responsibilities explicit to the individual persons by using the above mentioned “inventory of reporting processes”. Further optimization opportunities for management reporting were discussed to be reached in a changed company set up using controlling SSC. The measuring and monitoring of cost/benefit ratio of the management reporting were described as crucial for the outcome of the improvement process itself. It was analysed, that although the majority of companies do such measuring, only a minority of companies had defined the proper KPI to do so. A systematic overview on suitable KPI was prepared by the author in the figure named “measuring controlling performance”. The effects of the proposed improvements were simulated in a business model based on the authors seasoned business experience in this domain as well a survey made by the author in 2016 with 16 multinational companies and 19 executives in West Romania. The results of the case study indicate that though the controlling function receives more and more interest from multinational companies, the competence level from fresh graduates in the controlling field is with 26 % the lowest competence level out of all skill sets. This happens because newly graduates enter the financial controllers market without the needed skills as the educational system does not prepare them for the actual work. The estimated time for a newly graduate to learn be able to do simple tasks on his own is of six months while for advanced tasks the needed time and training investment for multinational companies is of more than 12 months. The survey revealed that especially the combination of low start competence level and high fluctuation rate is a severe limiting factor for reaching a competitive knowledge level in the multinational companies interviewed by the author in the survey. The projection based on the survey results illustrated how the standardization of processes and better training documentation contributes to speed up the onboarding of fresh controllers and hereby improves the value added of the controlling function.

5 Operative planning by objectives This chapter is based on two presentations held by the author in May 2016 on the 23rd International Economic Conference – IECS 2016 “Economic Prospects in the Context of Growing Global and Regional Interdependencies” in Sibiu, Romania. One paper was published in the “Revista Economica” (Laval 2016b) and the other paper was accepted to be published in the “Studies in Business and Economics” (Laval 2016d).

5.1 Involvement of the controller in budgeting and forecasting activities Following the “Controlling Process-Model” set up by the International Group of Controlling (see Table 5.1), the scope of this chapter relates to process number one “strategic planning”, process two “operative planning and budgeting” and process number three “forecasting”: The chapter aims to illustrate how the controlling function can improve the value added of these three processes and thus to contribute to the success of the company.

The controlling departments nowadays spend a large share of their time on activities related to planning, forecasting and budgeting. Despite the high effort, surveys indicate that many companies are not satisfied with the planning and budgeting process as well as the outcome of these activities. Some major fields of complaints relate to the quality of guidance and decision support out of the planning process as well of the magnitude of resources needed for the planning, which consumes up to 50 % of controlling capacity (Beyer and Reinhard 2014). Several authors have suggested concepts needed to improve the budgeting process. These improvements consist of a bundle of measures, which like recopies shall lead the companies to a modern planning. This chapter will discuss why so many companies are still struggling with their planning activities and why the holy grail of planning still seems to not have been found by all companies. In the first part of the chapter, we will define and distinguish the often synonymously used terms of planning, budgeting, and forecasting and discuss their different goals and contributions. The second step will be to review commonly mentioned inefficiencies and problems in contemporary planning processes based on recent surveys. This chapter will summarize and compare improvement concepts discussed in the literature, such as “better budgeting”, “advanced budgeting”, “modern budgeting” and the “10 theses for planning”. Based on the above, this chapter will analyse how the strategy orientation determines the willingness of the companies to move from traditional budgeting to more improved concepts. It will be outlined why so many companies that pursue a cost leadership strategy are still reluctant to open themselves to improved budgeting concepts. https://doi.org/10.1515/9783110580600-005

78 

 5 Operative planning by objectives

Table 5.1: Controlling main processes. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Strategic Planning Operative Planning and Budgeting Forecasting Cost accounting Management Reporting Project- and Investment Controlling Risk Management Function Controlling Management Support Enhancement of Organization, Processes, Instruments and Systems

Source: International Group of Controlling (2012).

5.2 The terminology “planning”, “budgeting” and “forecasting” Planning, budgeting and forecasting are terms that many actors which are involved, understand to be very similar or even use as synonyms. It is especially easy to mix up the terms “planning” and “budgeting” and the purpose of their usage. For a clearer understanding, the terms and their different purposes shall be defined and distinguished from each other: Planning can be understood as the overall expression for structured processes, defining and setting targets. A plan bridges the current situation to the desired future by specifying measures and actions. Depending on the time-horizon, the short and middle term operative planning can be distinguished from the long-term strategic planning. The operative planning should be based on a defined strategy and a corresponding strategic long-term planning (Rieg 2015; Zimmermann 2014). Budget is one outcome of the planning process and normally includes standard financial reporting formats such as balance sheet, P&L and a cash flow statement. The budget specifies the OPEX amounts that can be spent. Typically, also CAPEX, headcount, order volume, NWC will be included in the budget. Each budget amount is normally assigned to a person who is held responsible for this amount (International Group of Controlling 2012; Zyder 2007). Besides budgets who by definition can only describe financial performance figures, the so-called Hybrid Measurement Systems (HMS) evaluate and monitor in addition also nonfinancial performance figures. One of the most prominent HMS is the balanced scorecard (Gates and Germain 2015; Schäffer 2013). A forecast is a financial projection of the future that is based on objective or subjective methods. Examples of the objective methods are simply extrapolated past values or more complex forecast models. In comparison to these, subjective methods might involve guessing or the gut feeling to prepare a forecast, however, this is not a recommended approach. The forecast figures naturally deviate from the budget, which is a

5.2 The terminology “planning”, “budgeting” and “forecasting” 

 79

result of the planning process. The forecast deals with the question: to what extent the planned targets can be reached (Jessberger and Kappes, 2011)? The discussed terms “planning”, “forecast” and “budget” can be separated from each other (see Figure 5.1).

Financial Projection

Planning

Measures

Non-Financial Targets

Financial Targets

Budget

Forecast

Hybrid Measurement Systems Figure 5.1: Distinction of planning, budgeting and forecasting. Source: Authorʼs processing.

The figure 5.1 summarizes and illustrates that planning is defined as the target setting process which leads to financial and non-financial targets and to measures which are needed to reach those targets. The reflection of the financial targets is the budget. The hybrid measurement systems can widen the target setting and also include nonfinancial targets. The forecast is not the result of a planning process but is the result of a financial projection of the future. In literature and business life, the term “budgeting” is often used synonymously (Günther and Schomaker 2012) on the one hand with “planning” to describe the planning system in its total and on the other hand with the partial activity to prepare “budget” contents such as the balance sheet, P&L and cash flow statement (see Figure 5.2).

Strategy Definition Strategic Targets “Planning”

Operative Targets

– ex. Developments – Measures

“Budgeting”

Financial Budget

Figure 5.2: Important planning contents. Source: Authorʼs processing.

80 

 5 Operative planning by objectives

The synonymous usage of these terms makes a distinct analysis not easier and basically makes one of the terms obsolete (Zyder 2007). The distinct usage of the terms “planning” referring to the overall planning process and the term “budgeting”, when it solely relates to the preparation of the financial budget figures (Schön 2012) would be beneficial in the opinion of the author. However, the term “budgeting” is well established in the common expression of the entire planning process, in practice including the strategic level (Dillerup & Stoi, 2013b).Therefore, both meanings need to be kept in mind, to clearly distinguish in the discussion between the term budgeting as the synonym for the entire planning process and the term budgeting as the synonym for the narrow process to prepare a financial budget (see Figure 5.3). Planning Budgeting

?

Budget Figure 5.3: Synonymous usage of the term budgeting. Source: Authorʼs processing.

Based on the above definitions, each planning process should follow some key steps. The first step is to define the target, defined by the desired outcome. Benchmarking is often used as a method to define such targets. It is common to distinguish the operative targets, which are set for short and medium time spans, from strategic targets, which are basic decisions that indicate the direction the business shall be steered to and which are valid for a longer period of time. In the best case, both targets are related to each other (Hoch and Heupel 2014; Mäder 2015). This means that the strategic plan determines the operative plan on the one hand but also that the operative steps lead consecutively to the realization of the strategic target (see Figure 5.4). Gap Start Situation

ex. Developments Measures Drivers

Operative Targets

Influence

Strategic Targets

Budget

Figure 5.4: Interaction of planning and budget. Source: Authorʼs processing.

Between the starting situation and the strategic target situation normally there is a gap which needs to be bridged (Fineran and Matson 2015; Schäfer 2009). For the bridging, externally induced developments, as well as internally induced measures,

5.3 Problems associated with the planning process 

 81

need to be considered (Hagel 2014a). For example, positive expectations towards the growth of the industry as a whole in many cases have a beneficial effect on the economic growth of the single company. In the worst case such as in the case of a recession, it could increase the gap and thereby make it more difficult for the company to reach its target. Based on the remaining gap, internal measures need to be planned in order to close it. The measures will influence business drivers and business processes such as space and production capacity or marketing efforts which will reflect themselves in the budget figures. The budget can be seen as a financial reflection of the planned operative targets. The planning of the consolidated corporate target in many cases adds up several sub-plans such as sales plan, production plans or investment planning. The planning process should, in general, start with the sub-plan which represents the bottleneck of the planning. The bottleneck is the factor that limits the company from reaching its target situation. In many of today´s competitive markets, the achievable sales volume is a bottleneck limiting the expansion. In such cases, it is recommendable to first start with the sales planning and then to follow by aligning the capacity planning to the sales plan (Benker 2015). Based on the above statements the main planning objectives include “target setting”, “coordination” and “performance measurement”. In practice, those planning objectives are interfered by competing objectives which will be discussed in a later paragraph. From the controller’s point of view, the processes of setting up the budget

are important tasks that need to be performed at the end of the year. The yearly routine is seen as a financial exercise that aims to come to a budget and it is accompanied by budget files and instructions to ensure that the controller fulfils his/her tasks in the manner and the time the business management requests. For this, the doing part of the budget seems normally clear for the controller. By above definition of the planning process, it, however, appears that companies often do not apply rather forecasting methodologies than a full planning process in their budgeting routine. It might be the misconception and the reason why so many companies are deeply unsatisfied with the outcome of the “budgeting process”.

5.3 Problems associated with the planning process Following the definition introduced above, the term “budgeting” will be used when referring to the planning process with the budget, as the financial expression of the planning process. To outline the current application of the planning process, the results of recent surveys regarding the planning process are further analysed (see Table 5.2).

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Table 5.2: Analysed planning surveys. No.

Survey

Year

1

Voußem, Weber, and Rehring

2010

2

Deloitte

2011

2

Deloitte

2013

3

Schäffer et al.

2013

Source: Authorʼs processing.

(1) A 2010 survey (Voußem, Weber, and Rehring, 2010) analysed the time spent during the planning process and differentiated it by managers and controllers (see Figure 5.5). For this, they evaluated 400 responses. 39 % of the respondents were head of controlling and 21 % was head of finance and controlling. 62 % of the companies had a medium size between 50 and 1,000 million EUR, 23 % were of big size above 1,000 million EUR sales volume. Following this study, the majority of controllers spent more than 9 weeks with the planning while the majority of managers spent less than two weeks. The reduced planning time, in comparison with the study from 2013, is due to the mix of company sizes in this analysis of 2010: more than 16 weeks 13–16 weeks 9–12 weeks

35 %

3% 26 %

8% 9%

3–4 weeks

less than a week

13 %

2%

5–8 weeks

1–2 weeks

14 %

1%

25 %

3% 0% time of the controller

41 % 21 % time of the manager

Figure 5.5: Time spent for corporate planning by function. Source: Voußem et al. (2010).

According to this study, the level of dissatisfaction rises with the time spent on the planning process. The increased dissatisfaction level of the controllers with the

 83

5.3 Problems associated with the planning process 

planning process, in comparison with the satisfaction of the management, can therefore be explained by the increased time the controllers typically invest in the planning process. (2) Deloitte conducted a survey in December 2011 with 72 participants, asking for the main drivers of high resource usage for the planning process. For 71 % of the participants, the resource usage was highly correlated with the number of line items. 78 % stated that the necessity of coordinating different planning sub-plans is a driver for the resource usage (Epstein, Witzemann, and Witze 2015). The time needed to fulfil the planning is directly related to the level of detail of the planning package. The level of detail refers to the number of reporting lines on the one hand and the number of reporting periods on the other hand. (3) A second study performed by Deloitte in 2013, with 597 worldwide companies, confirmed these results, stating that in 40 % of the analysed companies the planning process took more than four months (Epstein et al., 2015). In the same Deloitte survey, 37 % of the companies stated that there is an insufficient integration between operative and strategic planning and 61 % stated that the planning was mainly focused on financial KPI. (4) The 2013 survey (Schäffer, Weber, and Mahlendorf 2013) evaluated 441 responses from company representatives, of which 51 % were head of controlling and 22 % were CFO. Half of the companies had a medium size between 50 and 1,000 million EUR, 30 % were big sized, above a 1,000 million EUR sales volume. According to the study, the majority of respondents agreed that the planning process is very important. However, almost half of the respondents were not fully convinced that the current planning process was very efficient. Almost half the managers were not fully satisfied with the budgeting process. Asking the controllers, the level of non-satisfaction rose to above 50 % (see Figure 5.6). Satisfaction with the planning process The budget is very important The budgeting process is very efficient

19 7

Controller are very satisfied with the budgeting 3 Management is very satisfiied

48

21

30

7

The budgeting overall is successful 6

25

32

27

34 35 34

2 6

29

44 41

10

7 12 16

2 3

50% Completely yes

Figure 5.6: Satisfaction with the planning process. Source: Based on Schäffer et al. (2013).

Completely no

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The 2013 study (Schäffer et al. 2013) further revealed that in 44 % of the big companies with sales more than 1,000 million EUR spent more than 4 months for the budgeting process. In medium-size companies this is decreasing but still, 40 % of the companies between 50 and 1,000 million sales spent more than three months per year with the budgeting process. In average, the companies mentioned in the survey, spent 13 weeks for the budgeting process (see Figure 5.7).

more than 16 weeks

12 %

13–16 weeks

10 %

17 % 19 % 21 %

9–12 weeks

25 % 16 %

5–8 weeks 2%

3–4 weeks less than 2 weeks

44 %

21 %

0%

5%

25 %

28 %

30 %

20 %

2% 3%

> 1 bn EUR

5o Mio. –1 bn EUR

< 5o m EUR

Figure 5.7: Time spend on planning by company size. Source: Schäffer et al. (2013).

The general criticism with traditional planning can be summarized with too much time and be a resource consuming for the planning process and thus offer too little guidance as a planning output. The Figure 5.8 summarizes and structures the most common aspects mentioned in the literature (Barkalov 2015; Berens, Berding, and Sommer 2010; Gleich 2015; Horngren 2007; Mäder 2015; Paul and Traber 2015; Pfläging 2015; Wilkens 2015). The expectation gap increases as the industry are moving from the Taylorism orientated industry age of the 19th and 20th century towards the knowledge-based modern industry of the 21st century. In other words, the higher the market dynamic is, the more importance the knowledge and individual local decision making gets and the lower the decision usefulness of central planning gets (Pfläging 2015). The following paragraph will review recent concepts suggested in the literature to increase the value-added of corporate planning and to close the expectation gap.

Too much planning details Too much planning volume Too many process loops Lack of IT support and automatization

Process indicators

Output indicators

Low decision usefulness

Outdated figures Reflection of internal negotiation power rather than strategic or market needs Planning inconsistencies between operative and strategic planning Too little non financial figures while overweighting of financial parameters Focus on yearly budgets instead rolling forecasts Too much focus on costs rather focus on cash flow Patronizing and budgetary slack Functional and resort egoism are promoted over company interests Inhibition of changes and but perseveration of prior years numbers

Expectation gap of traditional corporate planning

Figure 5.8: Expectation gap of corporate planning. Source: Authorʼs processing.

High planning costs

High usage of resources e.g. headcount and time spend High process costs of planning

Input indicators

5.3 Problems associated with the planning process   85

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 5 Operative planning by objectives

5.4 Synopsis of concepts and measures to improve planning Because of the common dissatisfaction with the planning process, several measures in order to “fix the problem” are regularly brought up in literature. According to the survey of Schäffer et al. (2013), 27 % of the participants suggested measures they considered necessary to improve the planning process. According this survey the most prominent suggestions were the shortening and simplification of planning together with the modernization of planning tools (see Figure 5.9).

Preferred improvements 0

5

10

15

20

25

30

35

40

Shortening and simplification New IT and planning tools Change to rolling forecasts New planning methods Alignment with mid term and strategic planning Reduction of planned periods Increased top-down orientation

Figure 5.9: Suggested improvement measures. Source: Translation of the author from Schäffer et al. (2013).

Beside single measures, the literature suggests several improvement concepts which can be understood as bundles of “optimized measures” for improvement. The concepts vary in composition of ingredients and fluctuate due to the intensity of change from traditional budgeting. The concepts which will be further analysed are “better budgeting”, “advanced budgeting”, “modern budgeting” and the “10 theses for planning”. The concept “beyond budgeting” will be briefly reviewed as well, although it does not include any measures on how to improve budgeting. In contrary, it represents a management concept to overcome budgeting. “Better budgeting” is an early concept to improve the efficiency of planning in an evolutionary way. The concept is relatively moderate in measures to improve traditional budgeting and consists out of five principles (see Table 5.3).

5.4 Synopsis of concepts and measures to improve planning  

 87

Table 5.3: Principles of “better budgeting”. 1.

Improved IT support (BI) to reduce redundant work

2.

Improvement of data models used in the budgeting

3.

Harmonization of data used to avoid data inconsistencies

4.

User-friendly planning forms and better training of the people involved

5.

Gently reduction of the budget detail

Source: Based on Gleich, Greiner, and Hofmann (2012) and Paul (2014).

The level of IT support for the planning process depends in many cases on the company size. There are two reasons behind this. Firstly, in smaller companies, the degree of complexity is not seen as high enough in order to set up complex controlling tools. Secondly, due to the small-turn over, the costs for management systems in relation to the sales volume is too high and the smaller companies do not spend the extra costs (Lavia López and Hiebl 2015). “Advanced budgeting” was introduced by Jens Kopp and Jörg Leyk, both consultants of Horvath & Partners, in 2002 (Linder 2003). It studies some of the suggestions of the “better budgeting” concept but includes further measures to increase efficiency and effectiveness of the planning process (see Table 5.4). The main suggestions are: Table 5.4: Principles of “advanced budgeting”. 1.

Usage of global budgets and focus on relevant contents

2.

Replacement of year-end focus with rolling planning

3.

The strategic planning must give specific provisions for the operative planning

4.

Emphasis on all relevant KPI with focus on non-financial KPI

5.

Focus on business processes instead legal entities

6.

Output oriented process focus instead focus on input orientated costs

7.

Set targets based on benchmarks

8.

Usage of self-adjusting relative targets

Source: Based on (Gleich, Kopp, and Leyk 2003).

“Modern budgeting” introduced by the “International Controller Verein” (ICV) relates to the improvement of budgeting from two angles (Gleich, Kraus, and Michel 2009). The first angle refers to processes and structures which include improving the simplicity and the flexibility of planning, as well the promotion of the better integration of strategic and operative planning (Alexander Becker, Leyk, and Riemer 2015). The second angle relates to the contents of the planning. In total the ICV suggests “6 principles” of modern budgeting (see Table 5.5):

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 5 Operative planning by objectives

Simplicity, meaning reduction on decision-relevant planning contents based on limited input data preferable made top-down

2.

Flexibility includes planning with sensitivities and scenarios, usage of relative targets based on benchmarks, rolling forecasts, flexible usage and shifting of resources

3.

Integration of strategy, planning and forecasts. Only a few but related targets. To management, compensation should only be loosely connected to the budget

4.

Organization, explicit targets based on the overall targets, the organization must support short decision processes

5.

Value creation, understanding of the own value chain, the planning should be determined by targets, bottlenecks and restrictions

6.

Transparency, the core ideas of the planning and the responsible persons for implementation have to communicate and the planning iterations should be reduced by top-down targets

Contents

1.

Processes

Table 5.5: Principles of “modern budgeting”.

Source: Based on Gleich (2012a).

“Schmalenbach group” introduced the 10 these for planning (Günther and Schomaker 2012) an be seen as general rules to optimize the planning process (see Table 5.6). Table 5.6: Principles of the “Schmalenbach Group”. 1.

The operative planning has to be connected with the strategic goals using value drivers

2.

The operative planning must follow important strategic trends

3.

No planning without connection to the measures

4.

The planning should follow benchmarks and work with relative KPI instead absolute KPI

5.

The budget planning has to consider the cornerstones of the business model

6.

The budgeting systems need to be integrated

7.

Usage of global budgets and top financial KPI allow a reduction of planning detail

8.

The production cost should be calculated with actual costs unless there are structural changes

9.

Rolling forecasts support a flexible planning

10.

The efforts invested in the planning must be reduced and reallocated between operative and strategic planning

Source: Based on Günther and Schomaker (2012).

“Beyond budgeting” was introduced by Hope and Fraser (2001) and can be seen as an extreme position which replaces the budgeting as part of common management systems with 12 management principles with self-empowerment of the managers. In total 12 “beyond budgeting” principles were identified (see Table 5.7).

5.4 Synopsis of concepts and measures to improve planning  

 89

Table 5.7: Principles of “beyond budgeting”. 1.

“Beat the competition”

2.

Reward team-based competitive success

3.

Make strategy a continuous and inclusive process

4.

Draw resources when needed

5.

Coordinate cross-company interactions through “market-like” forces

6.

Provide fast, open information for multi-level control

7.

Create a performance climate based on sustained competitive success

8.

Build the commitment of teams to a common purpose, clear values, and shared rewards

9.

Devolve strategy to front-line teams and provide the freedom and capability to act

10.

Champion frugality and challenge the value-added contribution of all resources

11.

Organize around a network of teams that dynamically connect their capabilities to serve the external customer

12.

Support transparent and open information systems”

Source: Hope and Fraser (2001).

In contrast to the other concepts discussed, beyond budgeting is not targeting to improve the budgeting process but to introduce a management philosophy to replace budgeting (Schön 2012). Although beyond budgeting principles could be seen as a source of inspiration for the planning process (Schäffer and Weber 2015) it remains relatively undefined on specific improvement measures, which could be compared with the other planning concepts (Becker 2004; Heinzelmann 2015). The concept synopsis had to consider three limiting factors (see Figure 5.10). First, the terminology used is not the same between all authors. Second, some authors mention individual measures explicit while others use more general terms which may or may not imply details. For example, if one author explicitly suggests improving the IT support of planning, this does not imply that other authors would exclude this measure. Third, the level of intensity for implementing the measures might differ. 1. Terminology Precision

2. Explicitly 3. Intensity

Figure 5.10: Precision of the synopsis. Source: Authorʼs processing.

In other words, the recipes cannot be compared in “grams and millilitres” but in more general terms. Despite potential inaccuracies found in details, the following synopsis

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 5 Operative planning by objectives

Schmale nbach

Budgeti ng

ting

2002

2009

2012

2013

x

x x x

x

x x x

x

x x

x

x

x x

x

x x x x

x

x x

x

x x

x

x

Survey

2001

Strategy and business model Integrate mid term and strategic planning Inclusion of non financial KPI Inclusion of measures Usage of benchmarks Output orientation Inclusion of the buiness modell Communication and training Increased top-down orientation Technical aspects Flexibilization using rolling forecasts Improved IT support to automate planning Avoidance of data inconsistencies

d budge

Modern

Aspect of planning detaill Reduce the level of detail Usage of global budgets Self adjusting relative targets

Advance

Year of Introduction

Better B

udgetin g

homogenizes the main measures discussed, in order to reveal the bigger picture of alternative budgeting concepts. The measures were grouped into three aspects which refer to the planning detail, to the strategy and business model and to technical aspects (see Figure 5.11).

x

x x x

Figure 5.11: “Synopsis of planning concepts”. Source: Authorʼs processing.

The above synopsis made transparent, that the concepts have a different degree of impact on the budgeting process. The concepts can be seen as a continuum of from the traditional budgeting on the one side until the concept of the Schmalenbach group with the most measures included in their concept (see Figure 5.12). The analysis further revealed, that all concepts explicitly emphasize the level reduction of details in planning. While analysing it, this paper will determine why this level of reduction in planning is surely one of the hardest measures to implement and how to overcome these difficulties.

5.5 The influence of strategy orientation on corporate planning 

 91

Degree of impact

Advanced Budgeting

Schmalenbach Concept

Modern Budgeting Better Budgeting Traditional Budgeting

Degree of change

Figure 5.12: “The continuum of planning concepts”. Source: Authorʼs processing.

5.5 The influence of strategy orientation on corporate planning By defining optimized planning concepts, some authors imply that there might be a planning concept which would suit all potential companies. However, the reviewed surveys showed, that there is still dissatisfaction with the planning process and despite many concepts in literature it seems very difficult for companies to find and implement a suitable improvement concept (Rateike and Linder 2010). A reason for that is that the planning is a management tool which needs to reflect the demands of the management and the nature of the business. Some questions to be answered are: 1. What degree and method of control do the top management or the owners wish? 2. Who is responsible for what activities and their related costs? 3. What kind of motivation system and bonus system shall be followed? The planning is only one aspect of the management system within a company and therefore it should not be seen isolated but should deliberate several internal and external context factors (Zyder 2007). Such important context factors were described and analysed above in this publication. The factors can change over time, e.g. a company can steadily grow in size and complexity which will later impose a growing pressure to adapt correspondingly measures of controlling within the organization (Küpper et al. 2012). It would be helpful for the further analysis of the planning concept if those context factors could be bundled in one significant trigger. A study made by Gates and Germain (2015) showed, that the basic strategic orientation of the company significantly influences the management and control system and hereby the planning and budgeting process. For this, two basic orientations can be distinguished: first, the cost leadership strategy and second, the differentiation strategy (see Figure 5.13).

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 5 Operative planning by objectives

Strategy Orientation

Cost Leadership

Differentiation

Figure 5.13: Alternative strategy orientation. Source: Authorʼs processing following Gates and Germain (2015).

In the modern complex business environment companies might not purely follow a cost leadership or purely follow a differentiation strategy but mix both strategies to some extent. In such case, it has to be evaluated which of both strategies is overweighed. Companies who pursue a cost leadership strategy often seem to prefer a centralized, standardized and stable budgeting process (see Figure 5.14). This tight and detailed budgeting process is important to realize a cost management and hereby a cost leadership. A focus on non-financial performance indicators for such companies is often seen as not helpful and kind of distracting from the cost control aspect (Gates and Germain 2015). Companies who follow a differentiation strategy prioritize a product/service leadership which requires a focus on activities such as research or product quality. Such companies often prefer a rather decentralized, flexible and less formal and detailed budgeting process with more sophisticated HMS systems (Gates and Germain 2015): Cost Leadership

Centralized Stabil Standardized

Differentiation

Decentralized Flexible Less formal

Figure 5.14: “Characteristics of strategy orientation”. Source: Authorʼs processing based on Gates and Germain (2015).

Centralized planning relates in many cases to a top-down planning approach while decentralized planning considers more decentralized information in a bottom-up planning. Bottom-up planning often supports a planning input that is not aligned with the corporate strategy as well as budgetary slack of avoiding ambitious targets (Epstein et al. 2015; Lingnau and Dehne-Niemann 2015). A change to top-down planning would support the connection between the strategic goals and the operative planning but

5.6 Introduction to planning by objectives 

 93

might lack the operative knowledge needed to set up realistic plans and hereby receiving acceptance by the line managers. The setup of targets by the top management should consider market developments, benchmarks and investors’ expectations. If the top management has the operative knowledge (like in operationally active parent company “Stammhauskonzern”) a top-down approach of planning could be beneficial (Epstein et al. 2015; Heidecke 2010). The strategy orientation, therefore, can be seen as a trigger for the level of planning detail. A high level of planning detail enables the headquarters to sustain a tight cost control and reduce the decentral level of decision freedom. But this increase of centralized control comes with some trade-offs which we will analyse in the following paragraphs:

5.6 Introduction to planning by objectives The desired results of the planning process influence the manner and the content of the planning. Vice versa, the planning process determines the value added to its outcome. The planning can pursue various goals (Dillerup and Stoi 2013a; Heidecke 2010) that sometimes correlate, but sometimes tend to exclude each other mutually. Following the planning principles introduced in the second paragraph, the most significant objectives of a planning process would consist out of: 1. Operative target setting following the strategic planning; 2. Coordination of actions inside the company towards this direction; 3. Performance measurement to support countermeasures. According to the survey’s respondents of Schäffer et al. (2013), the planning put in motion nowadays pursues a wider bundle of objectives, including the objectives mentioned above but also many goals such as prediction and prediction which to some extent interfere might with them (see Figure 5.15). The above survey indicates the numerous objectives associated with the planning. Besides the planning objectives introduced before which are “target setting”, “coordination” and “performance measurement” in practice many additional planning objectives are pursued. The most prominent competing planning objectives are the “control”, “prediction” and “motivation”, which will be referred to as traditional planning objectives later. There seems to be a trade-off between the competing objectives, meaning that not all objectives can be maximized at the same time. For example, the goal to control or predict with a high level of details can exclude the goal to plan fast and flexible. Also, too many details can make it difficult to connect the operative planning with strategy because one might “lose the wood for the trees”. Because of such conflicts of interest, the objectives should be sorted in a reasonable hierarchy to ensure the positive effects for the company´s success. The prioritization of planning goals is seen by the author as one core factor of the planning success. This chapter will outline why and how the focus might be moved from the traditional goals towards the value added objectives in order to increase the

94 

 5 Operative planning by objectives

Control Prediction Operative planning Coordination Internal communication of targets External communication of targets Assurance of liquidity Performance measurement Allocation of resources Intrinsic motivation Extrinsic motivation Delegation of responsibility Development of strategy Reduction of uncertainty Organisational learning Legitimation of rational management Dissolving conflicts Ritual

3

4

5

6

Figure 5.15: Common planning objectives. Source: Based on Schäffer et al. (2013).

value-added of the budgeting for multinational companies. In the following paragraphs, the three traditional objectives “control”, “prediction” and “motivation” will be further analysed. The balancing out depends on the preferences of the individual company and its top management. The negative influence of the objective control and prediction on the planning process is summarized in Figure 5.16.

Control Objective

1. Patronizing 2. Budgetary slack 3. Budget fights

Prediction Objective

High level of detail

Figure 5.16: Planning detail as result of objectives. Source: Authorʼs processing.

To control the spending behaviour of the management is the top-ranked objective of planning. Besides, increasing the level of detail the control objective can lead to several negative “side effects”:

5.6 Introduction to planning by objectives 

 95

(1) The overweighting of the control aspect can reduce ownership e.g. patronize management to defer the necessary expenditures or to accelerate sales at the risk of big discounts to reach the budget at the end of the year. On the other hand, it can motivate the departments to make unnecessary spending, in the case that the cost budgets are not fully used by the end of the year (Horngren 2007; Jonitz and Schäffer 2015). (2) If the control aspect is overweighed, management tends to also increase the number of budget reserves, which might end in a tough budget negotiation round, also referred to as budgetary slack (Douthit and Stevens 2015). (3) Budget fights are the consequence that happens when the budget is seen as a negotiation result made by different functional heads, who are struggling for the same money (McCoanty 2014). When the allocation of funds depends mostly on political influence and negotiation skills, that consumes lots of energy in budget fights. Fighting to gain budget amounts can also lead to a decoupling of the budget amounts and the true drivers of financial performance. The control approach further leads to tough negotiation processes using existing information asymmetries and can lead to conflicts of interests between the subordinates and the superiors (Arnold 2015). If the motivation of managers shall be influenced by connecting the remuneration of managers with reaching budget goals, the magnitude of the described side effects can intensify. Following the 2013 study (Schäffer et al. 2013) 56 % of the participants from big companies said that reaching the budget had a high relevancy for the remuneration of the managers. However, budget performance might not be related to the individual performance but to windfall profit out of external factors such as general economic development. Therefore, motivation and planning should be separated (Stoi, Asenkerschbaumer, and Bley 2015) and the motivation objective should be clearly related to relative performance targets. The prediction objective of the financial figures is empirically the second raked objective in the current business environment, which unfortunately dominates the planning process and outcome in many companies. To increase the prediction quality, companies tend to increase the level of planning detail. As it will be illustrated in the following paragraphs, an increasing level of planning detail unfortunately often undermines the ability of the budget to deliver usable predictions. It is important to use the forecasting methodology to generate usable predictions. In general, the goal of planning should not be to generate exact predictions of the financial future but to set up a consistent and coordinated approach to be prepared for the future (Eisl et al. 2011; Rieg 2015). Both the “control” and “prediction” objective, in practice, often lead to an increasing level of detail in the planning package can have has several unfavourable consequences such as higher planning efforts and longer planning time (see Figure 5.17). According to the surveys analysed above, a high level of detail implies high planning efforts and longer planning time. In consequence, controlling departments often spend a major part of the working time for the planning process. 56 % of the respondents from the 2013 survey (Schäffer et al. 2013) choose not to update the budget during the year.

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 5 Operative planning by objectives

High level of detail

Higher Planning Efforts

Inflexibility

Longer Planning Time

Planning is outdated

Disconnected Planning

Figure 5.17: Consequences of high level of planning detail. Source: Authorʼs processing

Considering the long planning time, budgets become inflexible and, in many cases, it is almost impossible to be adapted to new information during the business year. In case of major external shocks or change of assumptions, a fast reallocation of the budget amounts cannot be performed in order to keep the budget usable. Another negative effect of long planning time is that important planning assumptions might be outdated during the time the planning process is finished. In both cases the planning becomes irrelevant and companies must “drive by sight”. The more the controllers focus on planning detail the easier it gets “to miss the wood for the trees”. This means that the controllers might focus so much on details that they lose the bigger strategic picture out of sight. This leads to a disconnection between the operative and the strategic planning. As an interim conclusion, we can summarize, that the specification of planning level leads to a trade-off (see Figure 5.18). To include more details in the planning

+ Cost control + Prediction + Time spend on planning + Resource consumption

Less Detail

+ Spending flexibility + Ownership + Planning flexibility + Planning efficiency

Figure 5.18: The cost of planning detail. Source: Authorʼs processing.

More

5.7 Solving the trade-off between competing planning objectives 

 97

support the planning objectives “control” and “prediction”. These advantages are offset by disadvantages such as less flexibility, and high resource consumption in the planning process. Especially companies following a cost leadership tend to include too many details in the planning process.

5.7 Solving the trade-off between competing planning objectives The top three objectives: “control”, “prediction” and “operative planning” have a high importance for a company’s top management. However, there is a trade-off between the objectives, meaning that not all can be reached at the same time and there is somehow an “either-or” situation. If companies prioritize goals such as “control” and “prediction”, they should be aware what price tag this implies. The trade-off shall be solved by reviewing if the budget is the appropriate management tool to pursue control and prediction objective, and how these objectives can be reached without misusing the budget. The control objective in modern companies is challenged by shared responsibilities in multidimensional matrix organizations. In many companies, overlapping responsibilities such local responsibilities, regional responsibilities, divisional responsibilities and functional responsibilities lead to detail budget control ad absurdum. Complex organizational setups make it very challenging to assign clear budget responsibilities. After clear responsibilities have been assigned, the control objective can be further enhanced by assigning clear output orientated relative targets as far as possible (see Figure 5.19). Control Objective

? 1. Clear organizational responsibilities 2. Output orientated relative targets 3. Global budgets

High level of detail

Figure 5.19: Alternative ways to improve control. Source: Authorʼs processing.

The figure above illustrates with a red flash, that a high level of detail is a negative consequence from overweighting the control objective in the budgeting process. The alternative ways to reach this control objective outside the budgeting process are illustrated with a green arrow. The question mark in the middle illustrates the tradeoff situation and the decision area of the company’s management how to realize the control objective.

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 5 Operative planning by objectives

Assigning clear organizational responsibilities for measures and budgets is mandatory in the pursuance to ensure that one person has the operative power to influence these measures and budgets. This principle is also referred to as the “controllability principle” (Benker 2015; Rieg 2015). Organizational overlapping of responsibilities and unclear responsibilities contradict the idea of budget control. The bottleneck of efficient cost control, however, cannot be found by increasing the detail level of planning. If the responsibilities are not clear, cost control with budgets remains meaningless. The usage of output orientated relative budget targets (Pfläging 2015), also referred to as “performance-based budgeting”, allocates budget by considering output-oriented performance targets allocated to the budget holder. These performance targets should be in line with the overall company strategy (McCoanty 2014). A problem with output oriented techniques, however, can be that some functions do not create a quantifiable output which can be measured. Assigning global budgets shifts more spending responsibility to the managers. When the planning is too detailed, it can occur that the management needs to justify a budget shift between cost centres or different kinds of costs. Rather than being held responsible for spending each budget amount exactly as planned, managers should be responsible to reach a fixed target within a global budget (Jonitz and Schäffer 2015). The prediction objective of the budget should also be targeted outside the budgeting/planning routine (see Figure 5.20). High-level of fluctuations make the cumbersome budget process too slow and inflexible to adjust. Instead of detailed yearly budgets, the rolling forecast should be implemented (Dworski 2005). This can work with fewer but correlated input variables (Alexander Becker et al. 2015). The most important input variables should be subject to most important scenarios which most likely are sales volume and possibly exchange rates.

Control Objective

? High level of detail

1. 2. 3. 4.

Less but correlated input variables Sensitivity calculation for top variable Base case, best case, worst case Focus on decision relevant KPI

Figure 5.20: Alternative ways to improve prediction. Source: Authorʼs processing.

Less but correlated input variables in the budgeting process help to reach the prediction objective (Böhle 2014). For this to happen, external and internal input variables need to be distinguished. External input factors are factors which cannot be influenced by the company such as currency exchange rates raw material prices. Internal factors can

5.8 Financial statements projection 

 99

be influenced by the company such as production volumes or efficiency KPI´s (Epstein et al. 2015). The selected KPI should be of high significance and should be influential by the management. The main cost drivers should be observed, their measurement should be defined and they should be benchmarked regularly (McCann 2014). For sensitivity calculations, the budget should be seen as the result of business drivers. In driver-based planning models, the budget is the result of mathematical linked relationships between operational drivers such as output units or the number of employees or production utilization rates. Thereby, the number of input variable is lower than in traditional budgeting models and this means it is much easier to calculate the different scenarios. Different scenarios would mean changing certain operational drivers to add to the base case complementary worst case and best case scenarios (McCoanty 2014). However according to Hagel (2014a) 56 % of companies indicated, that they do not include that scenario planning in their planning process. Giving the increased volatilities of today’s markets this neglecting of thinking in scenarios and sensitivities seems dangerous. A high level of details during the planning process often does not lead to higher plan precision. Too many details hinder the focused discussion about the driver for future success (Epstein et al. 2015). Therefore, it is recommended to limit the discussion to the most relevant success factors of the business. The usage of relative KPI´s enables the usage of internal and external benchmarks and it is especially recommendable in dynamic business environments (Dworski 2007; Epstein et al. 2015; Stoi et al. 2015). The planning detail should be focused on the decision-relevant KPI. Increasing  the level of planning details might make it difficult to “see the wood for the trees”. Focusing the planning on the most important operative KPI´s might make it easier to keep the strategic goals in mind and to adjust the planning parameters if needed.

5.8 Financial statements projection The financial statement effect of improved planning effectiveness will be illustrated in a business case simulation. This simulation of planning effectiveness builds on the business case described in the prior chapter. The described considerations target to increase the effectiveness of the planning process and can be seen complementary to the improvements in process efficiencies of standard reporting processes described before. Several of the initiated improvements of effectiveness are of qualitative nature: 1. Increasing planning flexibility; 2. Linking operative planning to strategic goals; 3. Reducing budgetary fights and budgetary slack; 4. Less patronizing but empowering management.

100 

 5 Operative planning by objectives

The above goals are expected to have the positive impact on the financial statements by increasing planning process. However, the effects are rather unspecific to be measured in a financial projection. Beyond that qualitative aspects the proposed concept “planning by objectives ”is expected to contribute to a reduction in planning detail and will hereby lead to less planning effort and hereby to direct savings. The projected time is set to be ten years and positive effects after this projection are not considered in the scenario. The PV will be calculated using an interest rate of six percent. Qualitative benefits will not be considered in financial projection.

5.8.1 Business case assumptions The financial statement effects of effective, shortened and more focused planning processes shall be illustrated in a business case simulation. The business case builds upon the projection introduced in the prior chapter, which focused to increase the efficiency of the reporting processes (see Table 5.8). For the basic assumptions of the business case and the projected cost base after efficiency gains please refer to the prior chapter. Table 5.8: Cost base after efficiency gains. Efficiency effects

Unit

2016

2017

2018

2019

2020

Cost savings due to increased efficiency

EUR

56,112

58,918

61,863

64,957

68,204

Cost savings due to increased efficiency

%

11 %

11 %

11 %

11 %

11 %

Cost base after efficiency measures

Unit

2016

2017

2018

2019

2020

EUR

447,888

470,282

493,797

518,486

544,411

Source: Authorʼs 2016 processing/survey.

The efficiency gains can and should be accompanied by measures taken to reduce the planning detail and thereby the planning volume. One key aspect described by the concept “management by objective” is the reduction of the budgeting volume and time. Following the survey of Deloitte (Epstein et al. 2015), the resource usage is seen to be highly correlated to the number of line items. In many cases, the planning positions could be reduced significantly. The 2013 survey (Schäffer et al. 2013) stated that 44 % of the interviewed companies with sales over one billion EUR spend more than 16 weeks on the budgeting process. The Authorʼs survey 2016 indicates an average potential for shortening the planning volume and hereby the planning time and costs by 17 (see Figure 5.21).

5.8 Financial statements projection 

 101

5% 16%

12.5 15 20

5% 58%

Average planning process shortening

25

5%

17%

No No answer

11%

Figure 5.21: Average process shortening by process shortening percentage. Source: Authorʼs 2016 processing/survey

Other sources in literature see a higher time reduction potential. Bosch could reduce their planning time significantly by 40 % from 26 weeks down to 16 weeks between 2010 and 2012 (Stoi et al. 2015). The experience at Horvath&Partners (Gleich 2015) refers to a realistic reduction in planning time between 20–30 %. Especially in companies with an extensive planning volume, a significant reduction of planning content seems to be recommendable and possible. For the calculation of the base case, a reduction in planning volume by 20 % shall be issued as a base case assumption. The projected effectiveness gains were calculated in a business case (see Table 5.9 and Table 5.10). Table 5.9: Projected effectiveness gains. Unit

2016

2017

2018

2019

2020

Cost base after efficiency measures

EUR

447,888

470,282

493,797

518,486

544,411

Effectiveness assumptions

Unit

2016

2017

2018

2019

2020

Time consumption of budgeting at start

week

16

16

16

16

16

Shortening budgeting volume by

%

20 %

20 %

20 %

20 %

20 %

Effectiveness effects

Unit

2016

2017

2018

2019

2020

Cost savings due to increased effectiveness

EUR

27,562

28,940

30,387

31,907

33,502

Cost savings due to increased effectiveness

%

5%

5%

5%

5%

5%

Efficiency and effectiveness combined

Unit

2016

2017

2018

2019

2020

Total savings efficiency & effectiveness

EUR

83,674

87,858

92,251

96,864

101,707

Total savings efficiency & effectiveness

%

17 %

17 %

17 %

17 %

17 %

Source: Authorʼs 2016 processing/survey.

102 

 5 Operative planning by objectives

Table 5.10: Projected effectiveness gains (continued). Unit

2021

2022

2023

2024

2025

Cost base after efficiency measures

EUR

571,631

600,213

630,223

661,735

694,821

Effectiveness assumptions

Unit

2021

2022

2023

2024

2025

Budgeting time consumption start

week

16

16

16

16

16

Shortening budgeting volume by

%

20 %

20 %

20 %

20 %

20 %

Effectiveness effects

Unit

2021

2022

2023

2024

2025

Cost savings due to increased effectiveness

EUR

35,177

36,936

38,783

40,722

42,758

Cost savings due to increased effectiveness

%

5%

5%

5%

5%

5%

Unit

2021

2022

2023

2024

2025

Total savings efficiency & effectiveness

EUR

106,792

112,132

117,738

123,625

129,806

Total savings efficiency & effectiveness

%

17 %

17 %

17 %

17 %

17 %

Efficiency and effectiveness combined

Source: Authorʼs 2016 processing/survey.

Considering that the planning part is performed not throughout the complete year, a reduction of planning time by 20 % would decrease the overall controlling costs by 5 %. The combination of efficiency and effectiveness measures lead to a calculated reduction of controlling costs for basic activities of 17 %.

5.8.2 Sensitivity analysis and final remarks Besides the described assumptions of the base case, the financial effects of the increasing planning effectiveness shall be also analysed for a best case and a worstcase scenario (see Table 5.11). Table 5.11: Projected effectiveness scenarios. Projected effectiveness scenarios

Unit

Shortening budgeting volume by

%

Budgeting time consumption start

weeks

Source: Authorʼs 2016 processing/survey.

Best Case

Base Case

Worst Case

30 %

20 %

10 %

16

16

16

5.9 Interim conclusion 

 103

The calculated effects on the financial statements for the scenarios to increase of efficiency and effectiveness were calculated for a best case, base case and worst case scenario (see Table 5.12). Table 5.12: Combined results on KPI. Projected KPI efficiency

Best Case

Base Case

Worst Case

Financial gain due to faster onboarding

NPV

135,875

129,139

122,404

Financial gain due to higher efficiency

NPV

567,454

378,302

302,642

Total financial gain

NPV

703,329

507,442

425,046

Best Case

Base Case

Worst Case

355,803

249,257

127,164

Best Case

Base Case

Worst Case

703,329

507,442

425,046

Projected KPI effectiveness Financial gain by shortening budget volume

NPV

Combined KPI efficiency & effectiveness Financial KPI efficiency

NPV

Financial KPI effectiveness

NPV

355,803

249,257

127,164

Total financial gain

NPV

1,059,132

756,698

552,209

Source: Authorʼs 2016 processing/survey.

It is emphasized that the suggested goal of increased effectiveness in standard reporting processes is to generate more capacity for management support. Therefore, increasing the effectiveness will, in most cases, not result in the reduction of controlling headcount.

5.9 Interim conclusion The terms planning, budgeting and forecasting were defined and the “interaction of planning and budget” was illustrated in a model. The existing improvement concepts for corporate planning were analysed and a “synopsis of planning concepts” was developed. The different intensities of the reviewed improvement concepts were illustrated as a model in the “continuum of planning concepts”. The overall influence of the strategy orientation on the existing planning system and the readiness of organizations to appreciate modern planning were summarized in the “characteristics of strategy orientation” figure. Following this model, the companies who pursue a cost leadership strategy, often prefer a centralized, standardized, tight and detailed budgeting process which is seen important to realize the cost leadership. Companies who follow a differentiation strategy, in contrast, seem to prefer a rather decentralized, flexible and less formal and detailed budgeting process and focus on sophisticated HMS systems to reach product/service leadership. Especially companies who follow a cost leadership strategy often face problems because of a high level of planning detail. This model was confirmed by the performed

104 

 5 Operative planning by objectives

survey at a company pursuing cost leadership. The level of detail and the number of reporting positions found at this company was significantly above the benchmark. A regular and consequent review of the level of planning detail is recommended, especially considering the decision usefulness of the planning. As a new model the “planning by objectives” was introduced to illustrate how the planning outcome can be leveraged by taking into account alternative ways to reach certain planning objectives. In general, companies should strive to reach the planning objectives “control” and “prediction” by alternative methods outside the planning process. Budgeting has evolved over time. Traditional budgeting was often seen as too complex and many times not simple and efficient as it should be. That is why new models for budgeting and planning were created, in order to try to simplify and improve the process. The complexity and volatility of most businesses are growing (Forum 2011) and the expectations towards corporate planning hereby increase. Instead of maintaining detail projection and control attitude, planning should start to emphasize more flexibility and strategy orientation. It can be expected that the increasing demands will provide the path to a leaner and business orientated planning system in the future.

6 Strategic planning of multi-stakeholder initiatives The research on business models that incorporates a variety of stakeholders is seen as the most recent trend in the field of management accounting (Bromwich and Scapens 2016). This chapter aims to add new insights to this research and is based on the implementation of two educational CSR projects. The first educational CSR project covered the field of professional education. During this project, a collaboration between vocational schools in Timisoara (Popa 2013; Strinu 2014) and Hunedoara (Avraam 2014; Thiel 2014) was established in order to increase the employability and career perspectives of young Romanian pupils. A second educational CSR project targeted to increase the employability of young Romanian university students. The data presented and analysed in this chapter refers to the second project mentioned. The first part of this chapter was published by the “Academia de Studii Economice din București” (ASE) in the “Review of International Comparative Management” (Laval 2015e). The second part of this chapter, analysing the impact of CSR value contributors on corporate financial performance, was published in the “Revista Economică “ (Laval 2017a).

6.1 The role of the strategic planning in controlling function “The aim of strategic planning is to support the management in safeguarding the company’s existence and increasing its value on a long-term basis. Existing success potentials are to be secured and developed further and new success potentials have to be identified and created” (International Group of Controlling 2012). In other words, strategic planning can support the other business functions with tools and information to take advantages of given business opportunities (Hoffjan 2014). Answering such strategic questions to guide top management decisions gets more and more important (Unrein 2010). The controller can be a vital part of the strategic planning process by contributing their competency in methodology and the evaluation of strategic alternatives (Nevries and Weide 2012). Out of the ten controlling processes (see Table 6.1), the potentials of the first process “strategic planning” to improve financial performance will be illustrated on the management of multi-stakeholder initiatives. The strategic planning process can support the organization to systematically think about their capabilities, strengths and opportunities (Hagel 2014b). The strategic planning consists out of three major working packages (Asenkerschbaumer 2012): https://doi.org/10.1515/9783110580600-006

106 

–

– –

 6 Strategic planning of multi-stakeholder initiatives

“Assumption Controlling” analyses the trends in market and technology and clarify the assumptions of the planning. The strategic planning can be seen as a reasonable strategic reaction of the company to the external developments analysed in the assumption controlling (Gladen 2014; Reimer and Fiege 2010). For this various scenarios should be evaluated; “Implementation Controlling” has to evaluate if the taken measures are consistent with the underlying assumptions; “Performance Controlling” connects the strategic controlling with the operative controlling. The operative developments should be seen and analysed in the context of the strategic developments (Buchholz 2013; Hammer 2014; Krystek 2012).

Table 6.1: Controlling main processes. 1.

Strategic Planning

2.

Operative Planning and Budgeting

3.

Forecasting

4.

Cost accounting

5.

Management Reporting

6.

Project- and Investment Controlling

7.

Risk Management

8.

Function Controlling

9.

Management Support

10.

Enhancement of Organization, Processes, Instruments and Systems

Source: International Group of Controlling (2012).

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” (anonymous author). Seen in the context of corporate planning, this quotation sometimes attributed to Sun Tzu illustrates the role of the strategic planning as a precondition for successful operations. Despite this comprehensible quote on the importance of strategic planning for successful business, 60 percent of companies do not base their budgets on their strategic planning and in only less than ten percent of the employees were aware of the corporate strategy (Kaplan and Norton 2009). The following chapter will analyse the use of strategic planning methodology and connect it to the operative business. One major reason the strategic planning is expected to gain further importance for the business world is the need for professionalization in the CSR management and the inclusion of stakeholders (Reimer and Fiege 2010). The methodology used to do so will be illustrated on a strategic corporate social responsibility project. The innovative methodology describes how to connect strategic planning methodology with CSR and how its financial contribution can be planned and monitored properly.

6.2 The strategic approach to create added value for stakeholders 

 107

6.2 The strategic approach to create added value for stakeholders Corporate social responsibility has been seen as the responsibility – not to say obligation – for companies to give something back to society (Bibu, Năstase, and Gligor 2010; Witkoska 2016). By following this view, companies pursued CSR initiatives primarily from a cost point of view. However, if the company does not have a solid business interest then the motivation to follow through and reach the set goals can fade away over time or get lost between competing for CSR initiatives. Porter and Kramer (2011) therefore established the creating shared-value concept to align social contribution activities closer to the needs of business activities (see Figure 6.1).

CSR Values: doing good Citizenship, philanthropy, sustainability Discretionary or in response to external pressure Separate from profit maximization Agenda is determined by external reporting and personal preferences Impact limited by corporate footprint and CSR budget Example: Fair trade purchasing

CSV Value: economic and societal benefits relative to cost Joint company and community value creation Integral to competing Integral to profit maximization Agenda is company specific and internally generated Realigns the entire company budget Example: Transforming procurement to increase quality and yield

Figure 6.1: Creating share-value (CSV). Source: Porter and Kramer (2011).

To improve the success rates of CSR, a way has to be found to align the CSR initiative to the business strategy so that the project can provide added value to the company (Schulz and Bergius 2014). Relating CSR with the core business of the involved stakeholders implies that the initiative should be planned, measured and managed with the same level of professional like the other core business activities of the company (Brockett and Rezaee 2012; Porter, Hills, and Pfitzer (2011). Not refereeing specifically to the strategic planning, as one core competency of the controlling function (Porter et al. 2011) generates a similar process recommendation to manage CSR projects (see Figure 6.2).

108 

 6 Strategic planning of multi-stakeholder initiatives

Identify the social issues to target

Steer progress 3

1

2

4 Measure results and use insights to unlock new value

Make the business plan

Figure 6.2: Strategy and measurement. Source: Porter et al. (2011).

In the model of M. Porter (Porter et al. 2011), the steps one and two are corresponding with the assumption controlling and the implementation controlling while steps three and four would be allocated in the performance controlling. This comparison illustrates the proximity of the controlling function with other strategic orientated functions such as corporate development. The involvement of the controlling function in strategic initiatives will depend on its ability to prove its competencies and performance at this borderline between strategy and management accounting.

6.3 The interdependency between project layout and added-value In our proposed model (see Figure 6.3 ), the added value of CSR can be illustrated with the surface of a diamond. If the initiative solely focuses on charity with ignoring public relation and business strategy for the company, this initiative will create only limited value for the group of stakeholders as a whole. Although the benefit for the receiving stakeholder clearly exists, there is no direct positive impact for the giving stakeholders as pure charity. This implies merely a reallocation of wealth (Christensen 2016). Hereby the only limited additional value to the stakeholders as a whole can be generated based on the differences in the value reception of the stakeholders. An example for pure charity would be a donation for a child home with no medialization or communication involved. If communication is addressed together with the charity, stakeholders could benefit more from this CSR initiative by improving their public relation (Fifka 2014; Habel, Schons, Alavi, and Wieseke 2016; Mishra and Modi 2015; Schneider and Schmidpeter 2012). To maximize the desired effects on PR the communication contents and distribution channels should be adapted for each stakeholder (Fleischer 2015). There are also CSR initiatives which solely focus on PR but have limited focus

6.3 The interdependency between project layout and added-value 

2

Communication 1

Complexity

Business Strategy

3 Added Value

 109

Charity

Figure 6.3: “Value diamond of CSR”. Source: Author’s graph.

on charity. From the communication point of view, sponsoring public events could be promoted and also somehow contribute to society, however, the charity impact of such events might be disputable. It is important to underline the fact that ”from a strategic approach to CSR initiatives, the image benefit is not the most important benefit created or the ultimate benefit, is it just an additional benefit after reaching other important benefits like improving the competitive capabilities of the business organization or its relationships with the stakeholders” (Gligor-Cimpoieru and Munteanu 2014). To align CSR initiatives with the business strategy of all stakeholders involved can be considered as a masterpiece of CSR management. For this, the business objectives of the other related stakeholders need to be considered and evaluated. The value for all stakeholders involved is maximized by this approach if charity aspects and a professional communication are addressed at the same time. As such initiatives have a high management complexity (Jean 2015) the usage of controlling methodology is recommended. This chapter will describe two successful project examples which follow this third category of CSR initiatives. In the case of educational CSR initiatives, the author noticed that the educational environment produces skilled and trained future employees over years of training in a certain institution, but a given company can hardly compensate years of an ineffective educational environment on its own by providing on the job training. For a substantial as well as a cost-effective initiative, the usage of regional clusters is recommended. The cluster can include hiring companies, educational institutions and other governmental and non-governmental organizations. By collaborating with these stakeholders the companies can influence the quality and quantity of potential employees by contributing to the cluster with the company’s specific knowledge while integrating the others stakeholders’ potential in a symbiotic approach. In some cases, it will be enough to provide the other stakeholders with “a nudge” to adapt their own core business in a direction beneficial for all stakeholders involved. By creating value for the involved stakeholders, the CSR initiative will be more successful and sustainable for all the stakeholders.

110 

 6 Strategic planning of multi-stakeholder initiatives

The contribution of the “strategic planning” methodology for the controlling of CSR projects will be further illustrated on two successfully implemented CSR Case studies. The selection of the right initiative out of thousands of potential projects is as challenging as crucial for the success of an element within the strategic approach of implementing a CSR initiative (Wang, Tong, Takeuchi, and George 2016). Just focusing on the philanthropic aspects will close the window for the opportunity to make it a substantial success for all the stakeholders involved. The social issues and possible initiatives can be organized into “general social issues”, “value chain social impacts” and “competitive context factors” (see Figure 6.4). General social issues

Value chain social impacts

Social Dimensions of Competitive Context

Operational context

Competitive context

Social impact of business

Value impact of CSR

Figure 6.4: Prioritizing social issues. Source: Author’s processing based on Porter and Kramer (2006).

“Generic social issues” have no connection to the company’s business at all. “Value chain of social impacts” are related to the ordinary course of business such as waste, energy consumption or worker’s safety. The “competitive context factors” relate to external aspects which can influence the company’s competitiveness (Porter and Kramer 2006; Rangan, Chase, and Karim 2015). In total four competitive context factors can be distinguished (see Figure 6.5). The highest potential for added value can be found in initiatives related to the company’s value chain or in the competitive context factors (Kotler and Lee 2005; Rangan et al. 2015; Urip 2010). Based on the above, Porter and Kramer (2011) identified the following typical social issues with the closest proximity to the company’s financial performance (see Figure 6.6 ). When selecting one social issue it has to be considered that the strategic challenges for the company may vary in time depending on the maturity of the company and its market environment. For some companies the focus is more on the fight for customers and market share, while for others, it might be on the cost savings within the production structure (Bernauer 2008). Therefore, the bottleneck of the strategy execution and financial performance may change over time. This leads to the observation that not all possible initiatives have a potential to add value for the stakeholders involved.

6.3 The interdependency between project layout and added-value 

Availability of high quality specialized inputs: • Human resources • Capital resources • Physical infrastructure • Administrative infrastructure • Information infrastructure • Scientific and technological infrastructure • Natural resources

• Presence of local policies and incentives, such as intellectual property protection, that encourage investment and sustained upgrading • Presence of open and vigorous local competition Context for Strategy and Rivalry

Factor Conditions

Demand Conditions

Related and Supporting Industries • Presence of capable, locally based suppliers and companies in related fields • Presence of clusters instead of isolated industries

Figure 6.5: Competitive context factors. Source: Porter and Kramer (2002).

ENVIROMENTAL IMPACT SUPPLIER ACCES AND VIABILITY

ENERGY USE COMPANY PRODUCTIVITY

EMPLOYEE SKILLS

WATER USE

EMPLOYEE HEALTH

Figure 6.6: Competitive advantage and social issues. Source: Based on Porter and Kramer (2011).

WORKER SAFETY

 111

• Presence of sophisticated and demanding local customers • Presence of local demand in specialized segments that can served nationally and globally • Presence of customer needs that anticipate those elsewhere

112 

 6 Strategic planning of multi-stakeholder initiatives

It is difficult to influence and change some social issues related to business performance if the company tries to do so alone. “Effective social innovators enlist external stakeholders in their efforts to understand social needs and to execute their strategies” (Hammer 2014; vPfitzer, Bockstette, and Stamp 2013).

6.4 Assumption controlling – identifying key trends and their implication The assumption controlling includes an in-depth analysis of the business environment and the related megatrends as the basis for long-term strategic decisions (Wicharz 2015). This analysis should be done in the first step without direct connection with particular current business activities of the company. In the second step the business implications of the identified trends have to be evaluated (Asenkerschbaumer 2012; Ramachandran 2010; Wulf and Stubner 2012). For the CSR case study of this chapter, the education and staffing environment in West Romania was analysed. According to the author’s survey 2016 (Laval 2016a) the reasons that Timisoara is a good location for IT shared services and activities for Western European countries are especially the language proficiency of employees and the high availability of university graduates (see Figure 6.7). Average Availability of university graduates Low salary costs Language proficiencies of employees IT proficiencies of employees Cluster of employers Tax advantages for IT experts 1 very bad

2 bad

20 %

47 %

33 %

7 % 20 % 7 % 27 % 13 %

40 %

40 %

21 % 3 medium

20 % 33 %

43 % 4 good

3.7 4.3

47 % 53 %

27 % 13 %

40 %

4.1

13 %

36 %

3.9 3.5 4.1

5 very good

Figure 6.7: Influencing factors of employability in Timisoara. Source: Author’s 2016 processing/survey.

Language proficiency is the top reason why Timisoara is a good place for Western European companies. Tax advantages for IT experts, availability of university graduates and IT proficiencies of employees have been also mentioned as important reasons. Cost of low salary and the cluster of employers are mentioned last. Although

6.4 Assumption controlling – identifying key trends and their implication 

 113

junior level specialist’s salary is low, the competitiveness of Eastern Europe is expected to decrease as the salary increase outpaces the level of available qualification. The further analysis revealed two significant key trends in challenging and competitiveness in the future which are (1) increasing educational requirements and (2) brain drain (see Figure 6.8).

Requirements

Brain Drain

Figure 6.8: Key trends limiting growth opportunities. Source: Author’s processing.

(1) Increasing educational requirements – Multinational companies often follow the best cost approach in their global plant site strategy. Cities like Timisoara in West Romania can hardly compete in the field of labour costs for unskilled labour, which can be found cheaper in other areas of Eastern Europe. However, due to the availability of universities, multinational companies could substitute low skilled workplaces more and more with educated workplaces in the areas of engineering, production or high qualified administrative services in an increasing number of shared service centres (“SSC”). As a result, the demand for such higher qualified employees, as well as the desired qualification level continuously increased. At the time of this analysis, the supply of such profiles was not meeting the demand due to university curricula which were partially not well aligned with the demands on the labour market in combination with a regional brain drain. (2) Brain drain, especially of German proficient pupils – In West Romania, the companies of German origin provide a significant number of workplaces, especially in the higher qualified positions the knowledge of German language is considered to be a plus if not required. Despite the fact that in West Romania there are several Germanspeaking high schools, the multinational companies of German origin had big difficulties when recruiting the number and quality of candidates with German language knowledge as they wish to follow their growth strategy. The reason for this gap was analysed by a group of multinational companies identifying the “brain drain” of these pupils after the high school diploma. German-speaking pupils left the country after high school graduation to continue their studies at a university in Germany or Austria. For this purpose, they had two reasons, first to maintain their German language skills and second to get a diploma from a university located in Western Europe. The business implication of the two identified trends to the future business strategy was the lack of qualified people on the labour market, an aspect that limited the growth opportunities. Further consequences are the higher training costs during the onboarding process and higher market prices for the salary of these rare specialists.

114 

 6 Strategic planning of multi-stakeholder initiatives

Thus the trend means a lower financial performance due to on-boarding costs and higher salary as well as limiting factor for the expansion. As a result of the assumption controlling, educational constraints were identified as significant strategic bottleneck

6.5 Implementation controlling – determine and evaluate initiatives The first initiative was to introduce SAP to the IT master curriculum of The West University of Timisoara. Several multinational companies set up IT SSC which provided worldwide support for SAP customizing and ABAP programming. Also, the number of SSC in the field of Financial Services using SAP is steadily growing. While the demand for SAP proficient applicants grew steadily, there was no university in the region who educated employees or future employees in the field of SAP. The growth perspectives for this SSC, therefore, slowed down. The multinational companies started “stealing” employees from each other, thus leading to high fluctuation in this business line (Popa 2014a, 2014b). The second initiative supported the university management to set up a double degree pathway with a prominent German university that was aimed to address the desire for potential students with a diploma from a German university without leaving Timisoara for a longer period. To increase the job chances and, additionally, to promote the success of this program, the curriculum was enriched by highly appreciated study contents such as controlling, purchasing, international accounting standards and a solid SAP knowledge. For this, the faculty curriculum was compared with the curricula of the German partner university of applied sciences in Karlsruhe and the best blend between both universities was created (Tari 2015; Thiel 2015). The initiatives had three direct targets (see Figure 6.9).

1

Improve Education at University

2

Targeted Positive Communication

3

Increase Attractiveness of Local Education

Figure 6.9: Direct targets. Source: Author’s processing.

The first direct target of the initiative was to eliminate the identified educational constraints by improving the quality of education and thereby increasing the quality and quantity of well-educated applicants in the market. The second direct target was to position the participating companies within the local labour market as an attractive employer, by accompanying employer branding. The third direct target was to stop the brain drain of young talents by offering a double diploma in Romania.

6.5 Implementation controlling – determine and evaluate initiatives 

 115

The described goals could hardly be addressed alone by a single multinational company as “firm competitiveness must be shown as a part of territorial and local competitiveness. The economic development is a cooperation process between government, local administration, firms, research institutes and education” (Bibu, Sala, Pantea, and Bizoi 2008; Porter et al. 2011). The formation of a multi-stakeholder cluster was seen as the appropriate way to reach the mutual benefit of society and business (see Figure 6.10). Providing the education needed for the future employment of the students Attracting students to pursue this education and to stay in the region

Offering double diploma pathway without the need to leave the country permanently Complementing the education with technical and language education abroad in Germany

Multinational Companies

Granting of scholarships for talented young people with financial restrictions Offering a Mentoring Program

Organizing the involvement of the companies independently from individual companies or managers

Figure 6.10: “Formation of a multi-stakeholder cluster”. Source: Author’s processing.

Although the goals and motivations of the stakeholders within the cluster are multiple and only partly overlapping, a collaborative strategy can be developed (Dekker, 2016). By sharing the workload with the other stakeholders the multinational companies’ involvement could be limited to the following contributions: – Consulting about modern educational needs from the perspective of the employers; – Providing a train-the-trainer program for the professors to support their future teaching; – Providing financial aid to the university to purchase the necessary IT infrastructure; – Providing jobs and internships as a program will be only considered a success in the long run, if the students will find well-paid jobs after the graduation.

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 6 Strategic planning of multi-stakeholder initiatives

As a result of the implementation controlling the two CSR initiatives determined could address the identified educational constraints and hereby increase the financial performance of the company.

6.6 Performance controlling – connecting strategy and operation Improve education at university – Operative target number one was to improve the quality of education. The performance management of the initiative included the operative project work and breaking down the initiative into subprojects. The subprojects included reviewing and modernizing the curriculum, setting up a train the trainer program for university teachers, support the professors in setting up lecture material and assisting the professors in classes as well as financial support to update the computer laboratories (Popa 2014b; Porter and Kramer 2002). The curriculum was reviewed by a team of experts from the academic and the professional world. This modernization process lead to the replacement of several outdated software solutions with SAP solutions in the first and second study year (see Figure 6.11 and Figure 6.12). To especially increase the practical competencies of the university professors an extensive train of trainers program was set up, which included 1500 hours of training inside the company. “Every teacher has a professional expert who becomes practically their shadow or guides them for four months, teachers become familiar with the system and they are getting help to prepare teaching materials so that our professionals can share with them practical experience” (Popa 2014a). During the first two years’ experts from the multinational company also supported the professors in providing the practical seminars as those seminars require a higher amount of practical experience than the more theoretic classes. The train No.

1.

Year I

Enterprise Information Systems

Sem.I Sem.II C

S

2

1

C

Currently studied Technologies

Updated Technology

7

Theory ERP systems

SAP ERP MM PP SD

Credite

S

2.

ABAP Programming

2

1

7

n/a

ABAP

3.

Advanced Business Information Systems Development

2

2

8

n/a

SAP Solution Manager

4.

Business Intelligence

2

7

Microsoft Access Visual Studio Microsoft

SAP BW & Microsoft SQL

2

Figure 6.11: Curriculum adaption first year. Source: Author’s processing.

6.6 Performance controlling – connecting strategy and operation 

No.

Year II

6.

Advanced business reporting

7

Internship SAP/Business Simulation/Business Modeling

8.

Advanced Enterprise Information Systems

Sem.I

Sem.II

C

S

C

2

1

Currently studied Technologies

7

Google Apps Zoho

SAP BW

20

n/a

SAP ERP/ SAP ABAP/ SAP BW

4

n/a

SAP ERP FI CO PS

S

2

2

Credits

2

 117

Updated Technology

Figure 6.12: Curriculum adaption second year. Source: Author’s processing.

of the trainers program, as well as the support during the classes; were planned and controlled using a project plan with dedicated milestones, specific to a strategic approach to CSR (Popa 2014b; Porter and Kramer 2002). Targeted positive communication – Operative target number two was the communication of the initiative. Communication activities were started to promote the new curriculum and attract students as well as to inform about the support of the corporate involvement. The communication aspect went beyond marketing for individual stakeholders; it became a success factor for the CSR initiative itself. To maximize the impact of the communication efforts, the communication with the various stakeholders had to consider different communication channels and messages (Heinrich 2013). The communication strategy, therefore, involved a press conference with print, online, television and radio, Facebook and internet marketing as well as flyers. The communication channels of the stakeholders were used complementarily. To reach the pupils, a road trip to German-speaking schools in the region was conducted by the university management. Controlling was involved to coordinate the communication activities such as presentations, job fairs and internship opportunities with the staffing planning of the departments in order to hire appropriate candidates in the right amount and quality. Internal communication within the organization of the stakeholders involved was important to getting openness in the pursuance of including the initiative in the strategy of the internal stakeholders as well as for general internal support for the activity. For example, German Wirtschaftsclub meetings and Rotary meetings were used as a vehicle to reach and include these supportive groups. Increase attractiveness of local education – Operative target number three was aimed at reducing the brain drain. This target was addressed by increasing the attractiveness of the study in Romania with a new curriculum and especially by offering a double diploma pathway with a German university.

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 6 Strategic planning of multi-stakeholder initiatives

6.7 Measuring the increased financial performance The assumed cause and effect relationship between the direct targets and the financial performance of the company can be described in a model (see Figure 6.15).

Increased Financial Performance Support Growth of High Qualified Jobs

Reduce Price for Specialized Profiles

Reduce Fluctuation

Reduce Internal Training Costs

Increased Availability of Qualified Workforce Reduce Brain Drain/ Attract Talents

Improve Employer Branding

Increase Attractiveness of Local Education 3

Targeted Positive Communication

Improve Education at University

2

1

Educational CSR Initiatives Figure 6.13: “Connection between financial performance and CSR”. Source: Author’s processing.

The figure illustrates that the targeted increase of financial performance shall be achieved by increasing the availability of qualified workforce in the region. Qualified workforce means young professionals with a developed skill set so close to market demands that a long training on the job becomes obsolete. The goal to increase the availability of skilled workforce shall be pursued by influencing (1) the education at the university by changing the curriculum and training the trainers. This contribution will be used consciously (2) to increase the accessibility of students by targeted positive communication and increased employer branding. By increasing the attractiveness of the local education and communicating the employer’s contribution the (3) attractiveness of the local education shall be increased and hereby the brain drain by leaving the country to study abroad was reduced. Increasing the number of talented students again shall increase the availability of qualified workforce. For measuring and steering the financial impact the controlling function reviewed the headcount planning in the SSC and the desired qualification mix. Based on this, the

6.8 Financial statements projection 

 119

number of potential jobs to be offered to participating students was calculated. For this, a target percentage of the new hires out of the supported education programs was set up. The impact on the financial performance was achieved by four positive factors which were (1) reduce internal training costs, (2) reduce fluctuation, (3) reduce the price for specialized profiles and (4) support growth of highly qualified jobs. It became clear that the measurability bottom up gets less and less measurable, the more indirect the effects are as follows (see Figure 6.14).

Measurability Value Chain Reduce Internal Training Costs

Competitive Context Reduce Price for Specialized Profiles

Reduce Fluctuation

Support Growth of High Qualified Jobs

Figure 6.14: “The measurability of educational CSR”. Source: Author´s processing.

The figure illustrates how the measurability of the financial impact of CSR depends on the measure and to which degree the measure can be considered to be part of the value chain or has the quality of a competitive context factor. As an example, the reduction of internal training costs is close to the value chain and can be measured by costs for external or internal training providers as well the costs for the training time, in which the employees are not as productive as wanted. The reduced price and the specialist’s profiles are comparable but less measurable. It still can be assumed that recruiting comparable skilled young professionals from the university will be possible at a considerably lower price than to steal young professionals from other employees. The reduction of fluctuation felt on the market as the need to steal from competitors as well as generally improved conditions in the labour market can be considered to be competitive context factors. Although the beneficial impact on the financial performance of the company can be argued logical, a specific measuring is relatively unreliable. The initiatives reduced the competition for well-educated specialists in the local job market and thereby reduced the fluctuation and price levels. This represents an indirect benefit that is hard to measure (Reiche and Herrhausen 2010; Schmidpeter and Günther 2013).

6.8 Financial statements projection The increasing complexity of the modern business world leads to increased expectations towards indirect functions such as IT. To maintain its competitive position, the company

120 

 6 Strategic planning of multi-stakeholder initiatives

plans to build up additional capacities in low-cost countries, instead of building up additional capacities in high-cost countries (Kinkel and Zanker 2007; Klingebiel 2005). The case study described the real CSR project implemented by a multinational production company. To support their competitive cost base, the company decided to offshore parts of its IT department to a low-cost location in Eastern Europe. The calculation projected that 70 employees will be hired and trained in the low cost location. The value contribution and the impact of the CSR initiatives on the financial statements of a company shall be analysed by comparing the CSR scenario with a base case scenario. For transparency and clarity of the calculation, the projections contained some simplifications. The projection time was set to be 10 years; positive effects after this projection are not taken into consideration by the scenario. The effects will be calculated to the free cash flow after taxes. The PV will be calculated using an interest rate of six percent. The tax rate is set to be 16 percent. To calculate the added value added of the project, a delta calculation will be applied ceteris paribus. That means all effects not affected by the project will be left out of the calculation. Productivity in percent relates to the productivity of a fully trained employee. The first scenario, described in detail, is a scenario without CSR project. The second scenario is considering positive impacts out of the CSR project. The sensitivity calculation includes, in addition, a best case and a worst-case scenario.

6.8.1 Financial parameters base case at low-cost location The projection needs to consider the qualification levels at the point of hire, the speed of onboarding, the demand for the services to be provided by the SSC and fluctuation (Schaefer and Hinz 2011). Other important parameters for the business case are the productivity level, the salary increase and the training costs: – Employees at the year beginning – Fluctuation rate – Productivity in percent of FTE – Productivity build up in FTE – Salary expense per year/person – Salary increase – Training necessity in weeks – Training costs per week – Number of travels per person – Cost per travel – One time investments per workspace – Other operating expenses – Donation and sponsoring

6.8 Financial statements projection 

 121

Employees at the year beginning: The company hires 70 graduates in a low-cost country with the goal to build up capacity at low cost. The size of 70 employees reflects the size of this kind of shared service centres which was identified during author’s survey 2016 (see Figure 6.15). Average SSC size FTE per SSC

71

Auditing consulting bookkeeping

–

Back office/SSC

80

Consulting

61

Production of industrial goods

75

Figure 6.15: Average SSC size. Source: Author’s 2016 processing/survey.

Fluctuation rate: Following the analysis of fluctuation rate in the prior chapter the average fluctuation rate was set at 17 % per year. Productivity in percent of FTE: Following the results of author’s survey 2016 the base case considers, that young graduates from university start with a significantly lower productivity ratio in comparison with an on-boarded and professional employee. The following graph indicates the result of the survey based on competency fields and industries: Auditing, consulting and bookkeeping companies evaluated the competency of fresh graduates at 50/100 on average. Language proficiency and Microsoft office skills are 60/100, professional work attitude, accounting and controlling technical knowledge 50/100, due to the reason that graduates get theoretical knowledge but are not prepared for the business and the transition from theory to practice is very hard and frustrating for the graduates and students. Back office/SSC companies said that although German proficiency was high, the number of graduates was very limited. Graduates lacked negotiation skill and strategy, purchase knowledge and problem-solving skills. Therefore, controlling and purchasing technical knowledge and professional work attitude and problem solving skills must be and can be improved by internship programs (see Figure 6.16). Consulting companies evaluated the overall competency level of fresh graduates at 25/100. They assessed English proficiency and problem-solving skills were sufficient enough, proficiency in Microsoft office and understanding business culture

122 

Average

50

 6 Strategic planning of multi-stakeholder initiatives

1

2

3

60

60

60

4

5

Audit consulting bookkeeping

6

45

7

8

50

50

9

20

10

Back office/SSC 77 59

55

38

48

45 25

42

25

20

Consulting 91 70

56 25

52 33

21

10

5

Education 65

70

60

55

55

60

61 30

10

10

Production of industrial goods 79

26

23 1

2

3

57

51

44

33 Average

69

4

5

6

7

30

35

8

9

1 - English language proficiency 2 - German language proficiency 3 - Proficiency in Microsoft office applications such as EXCEL, Outlook ... 4 - SAP and general programming proficiency 5 - Professional work attitude, especially punctuality, focus on problem-solving ... 6 - Understanding of foreign business cultures 7 - Accounting technical knowledge 8 - Controlling technical knowledge 9 - Purchasing technical knowledge

Figure 6.16: Evaluation of current fresh graduates’ competence (percentage). Source: Author’s 2016 processing/survey.

6.8 Financial statements projection 

 123

were fair, however, they strongly asserted that German language proficiency, general programming proficiency/SAP, accounting technical knowledge and controlling technical knowledge must be improved. Educational organizations evaluated the overall competency level of fresh graduates at 65/100, which was the highest among other evaluations. Although most competencies are moderate, they agree that low controlling technical knowledge is due to lack of teaching critical thinking and analysis, also, general programming/SAP and purchasing technical knowledge of graduates scores low because the courses related to these subjects were not in the curriculum before. Production of industrial goods companies assessed the overall competency at 33/100. These companies mostly evaluated technical knowledge related competencies such as general programming/SAP (23/100), controlling technical knowledge (30/100), and purchasing technical knowledge (35/100) lower comparing others and implied that these competencies must be improved immediately because the role of purchasers gets more and more important due to the high-cost pressure. Moreover, the German language skill is considered very important and strong attribute due to the difficulty of recruiting German speaking graduate and German plus English would be the perfect combination of business. The overall comparable low rate of 37 % relates to the situation in the base case scenario, that the university education is not linked very much to the needs of the corporate environment and that the training possibilities within the university are comparable limited. Productivity build up in FTE: Due to the internal training measures, on the job, as well as external paid training, the productivity was expected to rise year by year. According to the author’s survey 2016, in complex job profiles, the expected increase in competence is assumed to be 20 % so that based on a competency start level of 37 % a given level of 100 % is reached after three years of training (see Figure 6.17). 8 7

4 1 2 1 6 months

4

2

Production of industrial goods Education Consulting

1

3

1 2 6–12 months

1 1 more than 24 months

Figure 6.17: Fresh graduates reach full productivity after . Source: Author’s 2016 processing/survey.

Back office/SSC Audit consulting bookkeeping Total

124 

 6 Strategic planning of multi-stakeholder initiatives

Fluctuation impact on overall productivity: A high fluctuation rate will have a negative impact on overall productivity. The overall productivity can be understood of the portfolio of learning curves of the employed people. The impact of fluctuation can be assumed to increase as much the replacement of the people leaving has not the same productivity level and requires a relevant onboarding and training phase. In the following the replacement of leaving employees with fresh graduates is illustrated (see Table 6.2). Table 6.2: Portfolio of learning curves (base case). Graduates of:

2016

2017

2018

2019

2020

2021

2022

2016

37 %

57 %

77 %

97 %

100 %

100 %

100 %

37 %

57 %

77 %

97 %

100 %

100 %

37 %

57 %

77 %

97 %

100 %

37 %

57 %

77 %

97 %

37 %

57 %

77 %

37 %

57 %

2017 2018 2019 2020 2021 2022

37 %

Source: Author’s 2016 processing/survey.

The above simulation shows the learning curves of the graduates starting each year at the company. The combination of those learning curves in the pool of employees is triggered by the fluctuation rate. The higher the fluctuation rate the higher is the number of employees at a premature cycle of their learning curve. The following projection indicates the allocation of graduates in the employee portfolio given a fluctuation rate of 17 % (see Table 6.3). Table 6.3: Portfolio of employees. Graduates of: 2016

2016

2017

2018

2019

2020

2021

2022

70

58

48

40

33

28

23

12

10

8

7

6

5

12

10

8

7

6

12

10

8

7

12

10

8

12

10

2017 2018 2019 2020 2021 2022

12

Fluctuation:

Total number of employees:

17 %

70

70

Source: Author’s 2016 projection/survey.

70

70

70

70

70

6.8 Financial statements projection 

 125

The above projection calculates that at a fluctuation rate of 17 % an annual replacement of 12 employees is needed to keep the requested headcount of 70 employees. The overall productivity can then be calculated by multiplying the portfolio of learning curves with the portfolio of employees (see Table 6.4). Table 6.4: Overall productivity (base case). Graduates of:

2016

2017

2018

2019

2020

2021

2022

2016

25,9

33,1

37,1

38,8

33,2

27,6

22,9

2017

4,4

2018

5,6

6,3

6,6

5,6

4,7

4,4

5,6

6,3

6,6

5,6

4,4

5,6

6,3

6,6

2019 2020

4,4

2021

5,7

6,4

4,4

5,7

2022

4,4

Fluctuation:

Total FTE equivalent per year:

17 %

25,9

37,5

47,2

55,2

56,2

56,3

56,3

Source: Author’s 2016 processing/survey.

The above simulation indicates that the FTE equivalent for the employee base of 70 employees will increase from 25,9 FTE in the first year and will reach a constant level of FTE equivalent of approx. 55–56 percent beginning with the fourth year. Salary expense and salary increase: According to the author’s survey 2016 the average monthly salaries of newly graduated SAP/IT specialist is 554 EUR and tends to increase 12.5 % per year, consulting companies offer 608 EUR which is the highest amount and highest increase rate, 13.3 %, among other companies. Audit consulting bookkeeping company offers 417 EUR which is the lowest amount; however, annual increase is 13.0 %. Production of industrial goods companies offers 571 EUR per month but annual salary increase is 11.4 % which is lowest percentage increase among companies (see Figure 6.18). At multinational production companies, young SAP graduates are expected to start with a salary of 571 EUR net per month which is planned to be increased each year by 11,4 %. Following the author’s survey 2016 and the analysis in prior chapters for the business simulation the average salary expenses for fresh SAP specialists at the P&L were set at 10,000 EUR per year (see Table 6.5). Following the author’s 2016 survey the yearly salary increase was set at 10 % per year. This comparable high increase is generated by the learning curve on the one hand side but is driven as well by the local competition on the labour market for IT specialists. Training necessity in weeks: According to the author’s 2016 survey half of the average training duration of fresh graduates is up to three weeks (see Figure 6.19).

126 

 6 Strategic planning of multi-stakeholder initiatives

Overall Average EURO

608

Production of industrial goods EURO

13.3 %

11.4 %

Consulting EURO

554

12.4 %

Audit EURO

417

571

13.0 %

Average annual increase in salary Figure 6.18: Average salary of SAP graduates. Source: Author’s processing/survey 2016. Table 6.5: Salary expenses for SAP graduates. EUR

SAP graduates

571

Average net salary of IT specialists

662

Gross salary at 16 % flat tax in Romania

181

Social insurance contribution at the cost of employer

844

Salary expenses for employer for IT specialists

Source: Author’s 2016 processing/survey.

Training costs per week: In most cases, the company does not hire external trainers but uses internal professionals to deliver the training (see Figure 6.21). The company expects the cost for one week of training to be around 475 EUR per week. In those costs, there is included the salary costs of the trainer as well the 1 day training 1 day 1 week 2 week 3 week 4 week 6 weeks

11 %

11 %

6% 5%

17 % Up to 1 week 28 %

11 % 11 %

3 month 6–24 week

17 %

6 months Up to 4 week 67 %

Figure 6.19: Training duration of fresh graduates. Source: Author’s 2016 processing/survey.

11 %

Up to 2 week 39 % Up to 3 week 50 %

6.8 Financial statements projection 

11 %

 127

21 % Both 5%

External Internal Unanswered

63 % Figure 6.20: Type of training offered by companies. Source: Author´s 2016 processing/survey.

Overall Average EURO

395

Production of industrial goods EURO

Consulting EURO

467

475

Audit EURO

217

Figure 6.21: Average cost per training. Source: Author´s 2016 processing/survey.

trainees and other out of pocket expenses(see Figure 6.23). After the onboarding is completed the volume of continuing training can be assumed to decrease. According to the author’s 2016 survey, the companies continue short-term training after the onboarding of graduates is finalized, usually up to 2 weeks per year. Depending on their activity, most companies prefer on the job learning rather than classroom teaching. For the business simulation, a three-week onboarding training during the first two years and a continuous training of 0.5 weeks per year on average were applied (see Figure 6.22). 16 % 32 %

1 week 2 weeks 2–4 week Unanswered

10 %

42 %

Figure 6.22: Yearly training after on-boarding. Source: Author´s 2016 processing/survey.

Number of travels per person: Further costs for travel to the training locations and to exchange knowledge are needed and were calculated in the business case. In the

128 

 6 Strategic planning of multi-stakeholder initiatives

business case, on average per person,1,5 travels were assumed in the first two years and after that 0,5 travels in average per person and year. Cost per travel: The costs per travel were set to 800 EUR per travel. One-time investments per workspace: For office equipment and servers, one-time costs of 2.000 EUR per workspace were considered. In the P&L those investments were depreciated over a usage time of three years. Other operating expenses: The company assumes operating expenses for utilities, office rent and other consumables of 50 % of the salary expenses. Donation and sponsoring: For sponsoring and small donations the company plans 1,000 EUR per year which to a favourable tax policy can be refunded by a tax credit in the same amount. The assumptions for the low cost location in the base case can be translated into a business case (see Table 6.633). Table 6.6: Assumptions low cost location in base case. Calendar Year

2016

Project Year

2017

2018

2019

2020

1

2

3

4

5

70

70

70

70

70

FTE

25.9

37.5

47.2

55.2

56.2

Salary expense per year/person EUR

10,000

11,000

12,100

13,310

14,641

10 %

10 %

10 %

10 %

10 %

Number of employees

pers.

Productivity build up in FTE Salary increase

%

Salary expenses

EUR

700,000

770,000

847,000

Training necessity in weeks

weeks

2.0

2.0

2.0

2.0

2.0

Training costs per week

EUR

475

475

475

475

475

Training expenses per person/ year

EUR

950

950

950

950

950

Training expense

EUR

66,500

66,500

66,500

66,500

66,500

1.0

1.0

1.0

1.0

1.0

Number of travels per person

931,700 1,024,870

Cost per travel

EUR

800

800

800

800

800

56,000

56,000

56,000

56,000

Travel expense

EUR

56,000

One time investments per workspace

EUR

2,000

Depreciation on PPE/3 year

EUR

46,667

46,667

46,667

Other operating expenses in % salary

%

50 %

50 %

50 %

50 %

50 %

Other operating expenses

EUR

350,000

385,000

423,500

465,850

512,435

Donation and sponsoring

EUR

1,000

1,000

1,000

1,000

1,000

Total additional expense LC

EUR

1,220,167 1,325,167 1,440,667 1,521,050 1,660,805

Source: Author’s 2016 processing/survey.

6.8 Financial statements projection 

 129

Due to the projected fluctuation rates, the capacity build up to low cost is expected to decrease at some point of the project lifetime if no countermeasures are taken. For this reason, the company is able to take multiple measures such as increasing salaries, making workplace more attractive or by hiring new employees and training them.

6.8.2 Financial parameters base case at high-cost location Salary expense per year/person: Based on the author’s 2016 survey the average net salary in high cost for SAP graduates is 2791 EUR per month (see Figure 6.23).

difference €2,238

difference €1,655

2.792 2.100

2.067

554 Investment for Shared Services center

412

Western Europe Romania

Salary of IT/SAP Salary of graduate graduate controllers

Figure 6.23: Fresh graduate’s average salary. Source: Author´s 2016 processing/survey.

Calculating the same social expense calculation as done in the case of the low cost the total salary expenses including social contribution would add up to a little under 50,000 EUR per year for SAP graduates in Western Europe (see Table 6.7). Table 6.7: Net salary for SAP graduates West Europe. 2,792 EUR

Average net salary according survey16

3,239 EUR

Gross salary assuming 16 % tax

887 EUR

Social insurance contribution at the cost of employer

4,126 EUR

Gross salary expenses of employer

Source: Author’s 2016 graph/survey.

Salary increase: In the high-cost location, the salary is expected to rise slightly above the inflation rate with 3 % per year.

130 

 6 Strategic planning of multi-stakeholder initiatives

Number of redundant FTE: Considering the capacity build up in the low-cost location the company can save capacity in the high cost. As mentioned this does not necessarily imply a reduction in absolute figures but might also imply that an otherwise necessary capacity build-up can be avoided. Resilience factor FTE: As there is hardly a 1:1 relationship between the capacity build up in low-cost and the savings in high-cost resilience factor is considered. This considers a delay in capacity savings in high cost or inefficiencies due to more complex communication between the high-cost and the low-cost location. According to the author’s survey 2016, on average, 7.7 % efficiency was lost due to the physical distances to high-cost location (see Figure 6.24).

8,1

8,0

7,7

Consulting

Production of industrial goods

Average

6,0

Back office/ SSC

Figure 6.24: Average SSC efficiency loss percentage due to distance. Source: Author’s 2016 graph/survey.

The percentage of efficiency loss is dependent on the kind of activities performed in the SSC and to what degree an interaction with the headquarters in high cost is required. For consulting and implementation support, the assumed efficiency loss is higher than in operative day-to-day transactions. For the business case, an overall resilience factor of 30 % was assumed for the first year declining to 10 percent starting with the third year. The same resilience factor is planned for other operating expenses. The assumptions for the low cost location in the base case can be translated into a business case (see Table 6.8).

6.8.3 Financial statement projections base case The financial statements of the business case projection show the potential savings in high and the correlated expense in low cost The assumptions for the low cost location in the base case can be translated into a business case (see Table 6.9).

6.8 Financial statements projection 

 131

Table 6.8: Assumptions high-cost location in base case. 2016

2017

2018

2019

2020

1

2

3

4

5

35,000

36,050

37,132

38,245

39,393

Calendar Year Project Year Salary expense per year/person

EUR

Salary increase

%

3%

3%

3%

3%

3%

Number of redundant FTE

FTE

25.9

37.5

47.2

55.2

56.2

Redundant salary expenses

EUR

906,500 1,352,596 1,751,292 2,109,987

2,214,004

Resilience factor FTE

%

Resilient FTE

30 %

20 %

10 %

10 %

10 %

FTE

8

8

5

6

6

Resilient salary expenses

EUR

271,950

270,519

175,129

210,999

221,400

Effective capacity change in HC

FTE

18.1

11.9

12.4

7.2

0.9

Cumulated capacity change

FTE

18

30

42

50

51

Net savings of salary

EUR

634,550 1,082,077 1,576,163 1,898,988

1,992,603

Other operating expenses in % salary

EUR

50 %

50 %

Redundant operating expenses

EUR

453,250

676,298

Resilience factor operating expenses

%

30 %

20 %

Resilient other operating expenses

EUR

135,975

Net savings of other expenses

EUR

317,275

Total cost savings HC

EUR

50 %

50 %

875,646 1,054,993

1,107,002

10 %

10 %

10 %

135,260

87,565

105,499

110,700

541,038

788,082

949,494

996,302

951,825 1,623,115 2,364,245 2,848,482

2,988,905

50 %

Source: Author’s 2016 processing/survey.

According to the tax law in the chosen low-cost jurisdiction, the donations to the university lead to a corresponding 100 % tax credit. Because of this the donation cannot be deducted from the income tax calculation and are added back into the adjusted tax base. For the free cash flow calculation, the depreciation is added back to the cash flow and the one-time payments for infrastructure are considered in the first project year. In the above calculation, there is no significant difference between expense and cash out. Therefore, the net income equals the net income and can be taken as the basis for the calculation of the present value. The present value of the above free cash flows for a 10-year project time at an interest rate of 6 % amount to 5.278.606,42 EUR.

6.8.4 Financial parameters CSR case In the following the assumptions of the CSR case scenario considering positive impacts out of the CSR project are outlined. The main difference to the base case

Other operative expenses

2

–46,667

42,775 1,000

EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR

5. Travel Expense

6. Other operating expenses

7. Donation and sponsoring

8. Depreciation

B. Total expenses low cost (3+…+8)

C. Result before tax (A+B)

D. Adjusted income tax base

E. Income tax

F. Income tax credit

G. Consolidated net income (C+E+F)

H. Adjustments for free cash flow

I.

Source: Author’s 2016 processing/survey.

Free cash flow (G+H)

–1,000

EUR

–317,900

–93,333

–224,567

–267,342

–268,342

–1,220,167

–350,000

–56,000

–66,500

EUR

–700,000

951,825

317,275

634,550

2016

4. Training expense

EUR

EUR

EUR

Unit

3. Salary expenses

Additional expenses in low cost

A. Total cost savings (1+2)

Salaries

1

Cost savings in high cost

No. Income statements items

Table 6.9: Financial projection in base case.

297,783

46,667

251,117

1,000

–47,832

298,949

297,949

–1,325,167

–46,667

–1,000

–385,000

–56,000

–66,500

–770,000

1,623,115

541,038

1,082,077

2017

823,312

46,667

776,646

1,000

–147,932

924,578

923,578

–1,440,667

–46,667

–1,000

–423,500

–56,000

–66,500

–847,000

2,364,245

788,082

1,576,163

2018

1,115,883

0

1,115,883

1,000

–212,549

1,328,432

1,327,432

–1,521,050

0

–1,000

–465,850

–56,000

–66,500

–931,700

2,848,482

949,494

1,898,988

2019

1,116,444

0

1,116,444

1,000

–212,656

1,329,100

1,328,100

–1,660,805

0

–1,000

–512,435

–56,000

–66,500

–1,024,870

2,988,905

996,302

1,992,603

2020

132   6 Strategic planning of multi-stakeholder initiatives

6.8 Financial statements projection 

 133

relates to three parameters which can relate to the productivity level at the hiring time, the fluctuation and the level of salary increase. Productivity in percent of FTE: Following the author’s survey 2016, the productivity level of fresh graduates in traditional education was estimated to be 37 %. The participants of the author’s survey 2016 estimated that the company relevant competencies will increase as a result of the updated curriculum, the internship opportunities and the possibility to participate in the international exchange program. According to the author’s 2016 survey, the companies expect the program to facilitate an 170 % increase in the general programming/SAP skill of fresh graduates, which is the most significant expectation followed by 108 % increase in controlling technical knowledge and 91 % increase in understanding business culture. Moreover, they anticipate the exchange program to have a major effect on improving German language proficiency, professional attitude, problem-solving and other capabilities as well (see Figure 6.25).

Current 1. English language proficiency

75

2. German language proficiency

54

3. Proficiency in Microsoft office...

60

4. SAP and general programming... 5. Professional work attitude, especially... 6. Understanding of foreign business...

48

50 26

9. Purchasing technical knowledge

28

79

66 %

89

39 %

83 72

54 %

74

91 %

39

8. Controlling technical knowledge

Expectancy

6%

170 %

27

7. Accounting technical knowledge

Growth

74

35 %

67

108 % 34 %

54 38

Figure 6.25: Expected increase in level of each competency area. Source: Author’s 2016 processing/survey.

General programming/SAP skill of fresh graduates is expected to increase for most of the companies. Companies answered that the significant expected improvement will be shown in German language proficiency of fresh graduates especially for consulting, education and production of industrial goods companies.

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 6 Strategic planning of multi-stakeholder initiatives

Auditing consulting bookkeeping and production of industrial goods companies are expecting the program to facilitate a better understanding of business culture for fresh graduates and assert that the program will be more effective if it includes more internship opportunities. Companies are expecting less growth in controlling technical knowledge area because they think that one of the reasons could be controlling technical knowledge course is offered as optional course, thus students might not take seriously. However, purchasing technical knowledge course was taken out of curriculum instead internship program in purchasing department is offered. Nevertheless, companies have a positive point of view that the program is the timely launched initiative which will support the preparation of young professional and overcome the shortage of human resource in the future. The participating companies believe that the program offers the possibility to find good practical and relevant education in Timisoara. The exchange program is the best option to be exposed to multicultural environments and to mature for students. It will allow students to focus more on important subjects like controlling, SAP, purchasing which were job profiles not yet covered in education can be addressed now. In overall, the competencies are expected to increase from 37 % in the base case to 65 % in the CSR case (see Figure 6.26). Current overall average

37

Growth 77 %

Future overall average

65

Figure 6.26: Expected average competency growth. Source: Author’s 2016 processing/survey.

Figure 6.27: shows the actual and expected competence level differentiated by the field of competence and industries The reason for the expected increase in the competence levels is the new curriculum that was adapted to the employment needs and the improved training possibilities with trainers from the corporate world as well as new IT laboratories. Salary expense per year/person: The majority of the companies think that since there’s high demand for well-educated workforce, it’s highly unlikely that the salary will decrease. They think if the new study line produces graduates with good quality, the graduates will pull demand and its profiles further and local graduates can take over more advanced tasks in multinational companies. Furthermore, the more successful the graduates are in multinational companies with such advanced tasks, the more Romanian companies will be interested in the study line (see Figure 6.28). For the purpose of the case study, the salary levels will be set in the CSR case in the same amount as in the base case.

6.8 Financial statements projection 

Growth Average

1

2

3

4

5

6

7

8

80

80

50

50

9

Auditing consulting bookkeeping 115 %

80 50

80

80

60

60

75 60

60

75 45

60

40 20

10

Back office/SSC

31 %

58

61 59

91 77

84 55

38

67

65

48

63 45

25

54 42

55 25

35 20

Consulting 93 91

110 %

94

83

81

56

53 25

90 70

82 52

60

50

33

21

10

58

5

Education 53 %

85 65

90 70

95 60

90

80

55

88

90

55

60

80 61

55 30 10

10

Production of industrial goods

60 %

70

80 79

83 69

68

44

33

Average

81

66 51

2

Expectation

3

4

74 57

5

6

46 30

26

23

1

76

7

8

35

9

Current

1 - English language proficiency 2 - German language proficiency 3 - Proficiency in Microsoft office applications such as EXCEL, Outlook ... 4 - SAP and general programming proficiency 5 - Professional work attitude, especially punctuality, focus on problem-solving ... 6 - Understanding of foreign business cultures 7 - Accounting technical knowledge 8 - Controlling technical knowledge 9 - Purchasing technical knowledge

Figure 6.27: Current level and future competence levels. Source: Author’s 2016 processing/survey.

 135

136 

 6 Strategic planning of multi-stakeholder initiatives

42 %

32 % 1 strongly disagree 2 disagree 4 agree No answer 10 %

16 %

Figure 6.28: Tendency of salary decrease in SAP/IT. Source: Author’s 2016 processing/survey.

Fluctuation rate: To understand how and if the new study line could have an impact on workforce fluctuation author’s survey 2016 asked for the most important fluctuation factors. According tis survey the most important fluctuation factors are a higher salary at another employer and the chance for a career step (see Figure 6.29). Average Higher salary at other employer

33 %

Internal conflicts in old company Different level of employer branding Expert knowledge of employee

28 % 44 %

39 % 17 % 11 % 22 %

6% Chance for career step, including 6 %11 % more responsibility

24 %

Cultural aspect, change is seen as career step per se

25 %

To high workload and pressure in the current job

1 no effect

2 little effect

4 high effect

5 very high effect

Figure 6.29: Workforce fluctuation factors. Source: Author’s 2016 processing/survey

1.8

11 % 17 %

3.0

22 % 11 %

2.8

44 %

4.1

28 %

29 %

33 %

3.6

24 % 12 % 12 %

2.6

42 %

2.2

33 %

15 % 23 %

Missing of intrinsic work satisfaction 10 % 30 %

28 %

33 %

Competition between employers/ 11 % 11 %17 % companies are headhunting Missing the feeling of belongingness and feeling valued as person

11 % 6 %

44 %

17 %

4.1

39 %

38 % 50 %

3 medium effect

15 % 8 %

2.8

10 %

2.6

6.8 Financial statements projection 

 137

The strongest factors that affect employee fluctuation are high salary at other employers and companies between employers/companies are headhunting which is considered to be external factors. Change for career step, including more responsibility, is one of the strongest internal factors. Moreover, some factors related to company’s HR management such as different level of employers branding, high workload and pressure in the current job and missing feeling of belongingness and work satisfaction tend to have a moderate effect on fluctuation. 53 % of companies think that new study line will have no correlation or any effect on workforce fluctuation rate. 11 % of the companies answered that the new study line will decrease fluctuation and increase stability. The rationale behind this assumption is that the increase in workforce supply that was generated by new study line will soften the competition between employers and will open the possibilities to bay higher salaries due to the increased competencies. In consequence, these companies assume a decrease the fluctuation by 8.5 % on average (see Figure 6.30). No. of company 2

Decrease Same Increase No correlation No answer

8

Share

Change

11.0 %

8.5 %

42.0 % 5.0 %

1

5.0 %

11.0 %

2 6

32.0 %

Figure 6.30: Effect of new study line on fluctuation. Source: Author’s 2016 processing/survey.

On the contrary, only 5 % of the companies think there will be 5 % increase in fluctuation rate because higher educated workforce will draw competition from outside Romania such as Germany with high salary level. Nevertheless, most the companies think that there will be no change because the new study line will have less effect on changing situation and mentality in the company. Moreover, the number of graduates is quite low to make an impact on fluctuation rate. If the number of graduates per year increases up to 100, then observable effect might be shown. For this reason, the CSR case will operate with the same fluctuation rate as the base case. Fluctuation impact on overall productivity: Based on the survey, the majority of managers in the region do not expect that the new study line will have an impact on the overall fluctuation of the job market due to the small numbers. Therefore, the

138 

 6 Strategic planning of multi-stakeholder initiatives

main impact on the overall productivity comes from the increased competence level and the hereby faster onboarding of the graduates at the given fluctuation of 17 % The portfolio of learning curves illustrates the combined learning curves of fresh graduates at a company (see Table 6.10). Table 6.10: Portfolio of learning curves (base case). Graduates of:

2016

2016

65 %

2017

2017

2018

2019

2020

2021

2022

85 %

100 %

100 %

100 %

100 %

100 %

65 %

 85 %

100 %

100 %

100 %

100 %

 65 %

 85 %

100 %

100 %

100 %

 65 %

 85 %

100 %

100 %

2018 2019 2020

 65 %

2021

 85 %

100 %

 65 %

 85 %

2022

 65 %

Source: Author’s 2016 processing/survey. Table 6.11: Overall productivity (base case). Graduates of:

2016

2017

2018

2019

2020

2021

2022

2016

45.5

49.4

48.2

40.0

33.2

27.6

22.9

2017

 7.7

2018

 8.4

 8.2

 6.8

 5.6

 4.7

 7.7

 8.4

 8.2

 6.8

 5.6

2019

 7.7

2020

 8.4

 8.2

 6.8

 7.8

 8.5

 8.3

 7.8

 8.5

2021 2022 Fluctuation: 17 %

 7.8 Total FTE equivalent per year: 45.5

57.1

64.4

64.4

64.4

64.5

64.6

Source: Author’s 2016 processing/survey.

The simulation shows, that due to the expected higher starting competency and the hereby assumed faster onboarding in the CSR case a starting FTE equivalent of 45 % can be expected which will climb to a constant level of 64 % in the third year (see Table 6.12). Based on the author’s survey 2016 the higher level of FTE equivalent in low cost and corresponding the higher number of redundant FTE in the high-cost location is the only main impact to be considered in the business simulation. The main assumptions out of author’s 2016 survey for the business simulation are summarized in a business case (see Table 6.12 and Table 6.13):

6.8 Financial statements projection 

 139

Table 6.12: Assumptions low-cost location in CSR case. Calendar Year

2016

Project Year

2017

2018

2019

2020

1

2

3

4

5

70

70

70

70

70

FTE

45.5

57.1

64.4

64.4

64.4

Salary expense per year/person EUR

10,000

11,000

12,100

13,310

14,641

10 %

10 %

10 %

10 %

10 %

Number of employees

pers.

Productivity build up in FTE Salary increase

%

Salary expenses

EUR

700,000

770,000

847,000

Training necessity in weeks

weeks

2.0

2.0

2.0

2.0

2.0

Training costs per week

EUR

475

475

475

475

475

Training expenses per person/ year

EUR

950

950

950

950

950

Training expense

EUR

66.500

66.500

66.500

66.500

66.500

1.0

1.0

1.0

1.0

1.0

Number of travels per person

931,700 1,024,870

Cost per travel

EUR

800

800

800

800

800

Travel expense

EUR

56,000

56,000

56,000

56,000

56,000

One time investments per workspace

EUR

2,000

Depreciation on PPE/3 year

EUR

46,667

46,667

46,667

Other operating expenses in % salary

%

50 %

50 %

50 %

50 %

50 %

Other operating expenses

EUR

350,000

385,000

423,500

465,850

512,435

Donation and sponsoring

EUR

30,000

30,000

30,000

30,000

30,000

Total additional expense LC

EUR

1,249,167 1,354,167 1,469,667 1,550,050 1,689,805

Source: Author’s 2016 processing/survey.

The underlying assumptions in the high-cost location stay unchanged by the CSR project with exception of the potential cost savings in high cost due to the financials in high cost are positively influenced as indicated below: Table 6.13: Assumptions high-cost location in CSR case. Calendar Year Project Year

2016

2017

2018

2019

2020

1

2

3

4

5

35,000

36,050

37,132

38,245

39,393 3%

Salary expense per year/ person

EUR

Salary increase

%

3%

3%

3%

3%

Number of redundant FTE

FTE

45.5

57.1

64.4

64.4

64.4 (Continued)

140 

 6 Strategic planning of multi-stakeholder initiatives

Table 6.13 (Continued) Calendar Year

2016

2017

2018

2019

2020

1,592,500

2,059,176

2,389,540

2,461,226

2,537,624

30 %

20 %

10 %

10 %

10 %

14

11

6

6

6

Resilient salary expenses EUR

477,750

411,835

238,954

246,123

253,762

Effective capacity change in HC FTE

31.9

13.8

12.2

0.0

0.1

Redundant salary expenses

EUR

Resilience factor FTE

%

Resilient FTE

FTE

Cumulated capacity change

FTE

32

46

58

58

58

Net savings of salary

EUR

1,114,750

1,647,341

2,150,586

2,215,104

2,283,861

Other operating expenses in % salary

EUR

50 %

50 %

50 %

50 %

50 %

Redundant operating expenses

EUR

796,250

1,029,588

1,194,770

1,230,613

1,268,812

Resilience factor operating expenses

%

30 %

20 %

10 %

10 %

10 %

Resilient other operating expenses EUR

238,875

205,918

119,477

123,061

126,881

Net savings of other expenses

EUR

557,375

823,670

1,075,293

1,107,552

1,141,931

Total cost savings HC

EUR

1,672,125

2,471,011

3,225,879

3,322,656

3,425,792

Source: Author’s 2016 processing/survey.

6.8.5 Financial statement projections CSR case The described assumptions of the CSR case can be translated to financial projections (see Table 6.14). Table 6.14: Financial projection in CSR case. No.

Income statements items

Unit

2016

2017

2018

2019

2020

Cost savings in high cost 1.

Salaries

EUR

1,114,750

1,647,341

2,150,586

2,215,104

2,283,861

2.

Other operative expenses

EUR

557,375

823,670

1,075,293

1,107,552

1,141,931

A.

Total cost savings (1+2)

EUR

1,672,125

2,471,011

3,225,879

3,322,656

3,425,792

6.8 Financial statements projection 

 141

Table 6.14 (Continued) No.

Income statements items

Unit

2016

2017

2018

2019

2020

Additional expenses in low cost 3.

Salary expenses

EUR

–700,000

–770,000

–847,000

–931,700 –1,024,870

4.

Training expense

EUR

–66,500

–66,500

–66,500

–66,500

–66,500

5.

Travel Expense

EUR

–56,000

–56,000

–56,000

–56,000

–56,000

6.

Other operating expenses

EUR

–350,000

–385,000

–423,500

–465,850

–512,435

7.

Donation and sponsoring

EUR

–30,000

–30,000

–30,000

–30,000

–30,000

8.

Depreciation

EUR

–46,667

–46,667

–46,667

0

0

B.

Total expenses low cost (3+…+8)

EUR

C.

Result before tax (A+B)

EUR

422,958

1,116,845

1,756,213

1,772,606

1,735,987

D.

Adjusted income tax base

EUR

452,958

1,146,845

1,786,213

1,802,606

1,765,987

E.

Income tax

EUR

–72,473

–183,495

–285,794

–288,417

–282,558

F.

Income tax credit

EUR

30,000

30,000

30,000

30,000

30,000

G.

Consolidated net income (C+E+F)

EUR

380,485

963,349

1,500,419

1,514,189

1,483,429

H.

Adjustments for free cash flow

EUR

–93,333

46,667

46,667

0

0

I.

Free cash flow (G+H)

EUR

287,152

1,010,016

1,547,085

1,514,189

1,483,429

–1,249,167 –1,354,167 –1,469,667 –1,550,050 –1,689,805

Source: Author’s 2016 processing/survey.

The present value of the above free cash flows for a 10-year project time at an interest rate of 6 % amount to 8,945,237.60 EUR (see Table 6.15).

Table 6.15: Impact on Free Cash Flow PV. Base case

5,278,606.42 EUR

CSR case

8,945,237.60 EUR

Difference

3,666,631.18 EUR

Source: Author’s 2016 processing/survey.

142 

 6 Strategic planning of multi-stakeholder initiatives

6.8.6 Sensitivity analysis and final remarks In the following paragraph, the planned base case scenario and the CSR case are summarized. Furthermore, a worst case and a best case were calculated to complete and illustrate the bandwidth of possible outcomes (see Table 6.16). Table 6.16: Project dependent variables. CSR dependent variables

Unit

Best case

CSR case

Base case

Worst case

Knowledge level in % of FTE

%

70 %

65 %

37 %

30 %

Fluctuation per year

%

10 %

17 %

17 %

20 %

Salary increase LC

%

Donation/sponsoring per year

EUR

8%

10 %

10 %

12 %

30,000

30,000

1,000

1,000

Source: Author’s 2016 processing/survey.

The KPI for all described scenarios was calculated (see Table 6.17) indicating the value added for the company between the base case and the CSR case. Table 6.17: Project KPI. Financial KPI

Unit

Average cost savings

%

Best case

CSR case

Base case

Worst case

38 %

44 %

33 %

32 %

Free cash flow PV

EUR

7,004,785

8,945,238

5,278,606

4,788,784

Cost savings HC

EUR

29,443,732

32,887,875

27,147,407

26,477,524

Additional costs LC

EUR

18,399,296

18,399,296

18,109,296

18,109,296

Consolidated savings

EUR

11,044,436

14,488,579

9,038,111

8,368,228

Source: Author’s graph.

The above-calculated cost savings values would be higher if the project lifetime would not be limited to 10 years and the positive results would consider a terminal value. The further positive potential in the projections depends on how the company will manage the negative financial impacts of the expected fluctuation rates. In total the financial projection illustrated, that the initiative to install a low-cost location is expected to be beneficial and that the positive effects can be increased by CSR. The sensitivity of the CSR case scenario for a change fluctuation was simulated (see Table 6.18). The sensitivity of the cash flow PV of the CSR case scenario will change by 83 KEUR for every one percent change in fluctuation. To better understand the impact of fluctuation, the sensitivity of the base case to a change in fluctuation was calculated (see Table 6.19).

6.8 Financial statements projection 

 143

Table 6.18: Sensitivity to fluctuation CSR case. Simulation Fluctuation Unit

CSR case

CSR case

CSR case

CSR case

CSR case

65 %

65 %

65 %

65 %

65 %

%

0%

10 %

20 %

30 %

40 %

%

10 %

10 %

10 %

10 %

10 %

EUR

30,000

30,000

30,000

30,000

30,000

Financial KPI

Unit

CSR case

CSR case

CSR case

CSR case

CSR case

Average cost savings

%

48 %

46 %

43 %

41 %

38 %

Free cash flow PV

EUR

10,438,414

9,522,841

8,661,101

7,853,193

7,099,118

Cost savings HC

EUR

35,448,651 33,874,763 32,394,483 31,007,810

29,714,745

Additional costs LC

EUR

18,399,296 18,399,296 18,399,296 18,399,296

18,399,296

Consolidated savings

EUR

17,049,355 15,475,467 13,995,187 12,608,514

11,315,449

Knowledge level in % of FTE

%

Fluctuation per year Salary increase LC Donation/sponsoring per year

Sensitivity of Free Cash flow PV to 1 % fluctuation:

–83,482

EUR

Source: Author’s 2016 processing/survey.

Table 6.19: Sensitivity to fluctuation base case. Simulation Fluctuation base case Unit

Base case

Base case

Base case

Base case

Base case

Knowledge level in % of FTE

%

37 %

37 %

37 %

37 %

37 %

Fluctuation per year

%

0%

10 %

20 %

30 %

40 %

Salary increase LC

%

10 %

10 %

10 %

10 %

10 %

Donation/sponsoring per year

EUR

1,000

1,000

1,000

1,000

1,000

Financial KPI

Unit

Base case

Base case

Base case

Base case

Base case

Average cost savings

%

Free cash flow PV

EUR

Cost savings HC

EUR

32,964,976 29,345,241 26,219,768 23,540,588 21,261,465

Additional costs LC

EUR

18,109,296 18,109,296 18,109,296 18,109,296 18,109,296

Consolidated savings

45 %

38 %

31 %

23 %

15 %

8,592,385

6,533,108

4,750,854

3,219,062

1,912,116

EUR 14,855,680 11,235,946

Sensitivity of Free Cash flow PV to 1 % fluctuation: Source: Author’s 2016 processing/survey.

8,110,473 –167,007

5,431,292 EUR

3,152,169

144 

 6 Strategic planning of multi-stakeholder initiatives

The sensitivity to fluctuation for the base case is calculated with 167 KEUR per 1 % increase in fluctuation rate. An increase in fluctuation has in both cases a negative implication to the present value of the free cash flows. However, the impact in the base case is almost at the double of the implication of the CSR case (see Figure 6.31). Simulation Fluctuation Free cash flow PV in M€

12,0 10,0 8,0 6,0

10,4

9,5

7,9

8,6

7,1

6,5

4,0

4,8

2,0 0,0

8,7

0%

10 %

3,2

20 %

30 %

1,9 40 %

Fluctuation per year in % Free cash flow PV CSR

Free cash flow PV Base

Figure 6.31: Sensitivity to fluctuation – graph. Source: Author’s 2016 processing/survey.

The higher the general qualification level, the faster people can be trained to company-specific requirements and the less productivity is lost during the onboarding process. This leads to the observation, that “a higher competence level on the job market can shield companies from the worst effects of fluctuation”. The result of this analysis is shown in the below figure: The other main variable identified was the impact of salary percentage increase per year. Although most participants from author’s survey 2016 expected no change, the impact of an increase or decrease of this variable was calculated (see Table 6.20). The sensitivity of the free cash flow present value to 1 % of salary increase is –449 KEUR. To be noted that the impact of salary increase affects both cases the same, meaning in the base case as well the CSR case and the cost base will be influenced. The sensitivity of the free cash flow present value to 1 % of salary increase remains at –449 KEUR (see Figure 6.32). In the author’s 2016 survey, all participants expected a change in knowledge level as result of the increased collaboration between the university and the business world. The continuum between the different knowledge levels and their effect on the performance of the SSC was calculated (see Table 6.21). The sensitivity of free cash flow to different knowledge levels was simulated and showed a increase from 2.5 MEUR at a knowledge level of 20 % to a 11.5 MEUR at a knowledge level of 100% (see Figure 6.33).

6.8 Financial statements projection 

 145

Table 6.20: Sensitivity to salary increase – table. Simulation Salary

Unit

Knowledge level in % of FTE

CSR case

CSR case

CSR case

CSR case

CSR case

%

65 %

65 %

65 %

65 %

65 %

Fluctuation per year

%

17 %

17 %

17 %

17 %

17 %

Salary increase LC

%

0%

5%

10 %

15 %

20 %

30,000

30,000

30,000

30,000

30,000

CSR case

CSR case

CSR case

CSR case

CSR case

63 %

55 %

44 %

30 %

12 %

Donation/sponsoring EUR per year Financial KPI

Unit

Average cost savings

%

Free cash flow PV

EUR

12,339,367

10,854,707

 8,945,238  6,492,584  3,349,134

Cost savings HC

EUR

32,887,875

32,887,875

32,887,875 32,887,875 32,887,875

Additional costs LC

EUR

12,165,000

14,871,787

18,399,296 22,983,904 28,921,616

Consolidated savings EUR

20,722,875

18,016,087

14,488,579  9,903,970  3,966,258

Sensitivity of Free Cash flow PV to 1 % change in salary: –449,512 EUR Source: Author’s 2016 processing/survey.

Simulation Salary Increase 14,0 Free cash flow PV in M€

12,0 10,0 8,0 6,0 4,0 2,0 0,0

0%

5%

10 %

15 %

20 %

Salary increase per year in % Free cash flow PV

Figure 6.32: Sensitivity to salary – graph. Source: Author’s 2016 processing/survey.

As result of the above business case simulations based on survey 2016 the local business environment expects a positive impact of the new study line to their financial performance.

146 

 6 Strategic planning of multi-stakeholder initiatives

Table 6.21: Sensitivity to knowledge level – table. Simulation Knowledge Level

Unit

Base case

Base case

CSR case

CSR case

CSR case

Knowledge level in % of FTE %

20 %

37 %

65 %

80 %

100 %

Fluctuation per year

%

17 %

17 %

17 %

17 %

17 %

Salary increase LC

%

10 %

10 %

10 %

10 %

10 %

Donation/sponsoring per year

EUR

1,000

1,000

30,000

30,000

30,000

Financial KPI

Unit

CSR case

Base case

CSR case

CSR case

CSR case

Average cost savings

%

19 %

33 %

44 %

48 %

50 %

Free cash flow PV

EUR

2,543,969

5,278,606

Cost savings HC

EUR 22,820,846 27,147,407 32,887,875 35,192,827 36,878,053

Additional costs LC

EUR 18,399,296 18,109,296 18,399,296 18,399,296 18,399,296

Consolidated savings

EUR

4,421,551

8,945,238 10,432,682 11,531,207

9,038,111 14,488,579 16,793,532 18,478,757

Sensitivity of Free Cash flow PV to 1 % change in the knowledge level:

112,340 EUR

Source: Author’s 2016 processing/survey.

Simulation Knowledge Level Free cash flow PV in M€

14,0 12,0

8,9

10,0 8,0

2,0 0,0

11,5

5,3

6,0 4,0

10,4

2,5 20 %

37 %

65 %

80 %

100 %

Knowledge Level in % Free cash flow PV Figure 6.33: Project dependent variables. Source: Author’s 2016 processing/survey.

6.9 Maximizing cluster benefits To maximize not only the financial success of the company but also of the entire cluster the benefit of the other stakeholders has to be kept in focus and maximized (Pfitzer et al. 2013; Porter and Kramer 2002):

6.9 Maximizing cluster benefits 

 147

The university could pursue its business strategy in order to improve their ability to attract students through these collaborations (see Figure 6.34). The key selling point on the market for secondary education was the double degree opportunity in between the universities. The university thereby got a USP in the Romanian education market over competing universities as this program is the only business program in Romania with a double degree in Germany. The second selling point was the business related and attractive curriculum, including modern technologies and German language. Third, the engagement and the proximity of the business environment offered internships and later jobs that were important for the marketing. The scholarships provided by the business environment and ROTARY are the fourth key selling point to increase the attraction of this study programs to potential students. As a result of these aspects the number of students in the Master program doubled in the first year of this collaboration making it the second largest master program of the faculty.

Double Degree as USP

Attracting Students

New Curriculum

Internships

Scholarships

Figure 6.34: University business objectives. Source: Author’s processing.

Besides improving its position in the educational market, the university could increase its political influence by being visible to the political environment (UVT_Timisoara, 2015) as well as other members of the cluster: “Through this initiative, West University of Timisoara strengthens its business relationship with multinationals present in the local market. We answer to their requests for preparation of specialists in computer systems business. It is an added-value brought by the University and is part of an ongoing strategy to develop educational offer” (FEAA Timisoara 2014). The potential future students were mutually benefiting from the four “key selling points of the university” as outlined above. The new programs became a pathway for their future career and by this a core business interest for the students (Popa 2014b). The positive integration of the university program within the requirements of the local industry is reflected by the number of internships offered by the local business environment to the students of the new business line (see Figure 6.35). In fact, in 2016 the number of internships offered by local business environment out passed the number of internship places needed. Each student was offered more than one internship. The fact that the local business environment offers more

148 

 6 Strategic planning of multi-stakeholder initiatives

Total possible internships

Total companies

13

3

1 internship Average monthly salary for interns

41

3

4

3

2 internships

4 internships

5 internships

Full-time intern Euro

Part-time intern Euro

228

123

Figure 6.35: Internships offered. Source: Author’s 2016 processing/survey.

internship places than requested is unprecedented at the university and can be seen as the indication for the improved job chances of the future graduates. The business and philanthropic institutions that were involved coproduced this initiative as part of their core business strategy. The German Wirtschaftsclub “DWC” can promote this initiative as a service for their member companies and thereby increase the importance of the association for its member companies. Further, the DWC could use its involvement to brand itself as a valuable partner in the cluster and thereby gaining access to leading politicians and business representatives. 85  % of companies think that local business environment is attractive in order to draw talented students to study in Timisoara. Although, 46 % heard of Rotary/DWC scholarship for talented students from poor regions, 70 % possible to support joint scholarship program at Rotary/DWC level (see Figure 6.36). At Rotary Cosmopolitan the initiative was a vehicle to fulfil its philanthropic purpose: „The Rotary Cosmopolitan Club of Timisoara would like to contribute to the greatest Romanian capital, namely to the educated and hardworking young man and women that remain in his country. The young generation is the future of the country and here is where we want to be an example and guide for students and university in a successful future!“ (FEAA Timisoara 2015). According to the author’s 2016 survey, the majority of the companies (62 %) believe that the new study line will have a high impact in increasing the competitive advantage of IT shared services in Timisoara. But those who answered that it will have low impact (30 %) think that the number of graduates might be too low to effect. They assert that number of skilled graduates per year should be more than 100 to facilitate the increase (see Figure 6.37).

6.10 SWOT Analysis and further recommendations 

1 strongly disagree

2 disagree

3 neither agree nor disagree

Do you think it would be beneficial for the local business environment to attract very talented German speaking students also from rural areas to come to Timisoara to study in the new study line?

7 % 7 % 14 %

Have you heard of the scholarship program from Rotary/DWC to attract very talented students especially from poor regions and little financial support from home to study in the new line in Timisoara? Would you consider that your company would support a joint scholarship program at DWC level?

5 strongly agree

71 %

38 %

31 %

4 agree

 149

15 % 8 %

8%

38 %

62 %

Figure 6.36: Recognition of CSR involvement. Source: Author’s 2016 processing/survey.

15 %

23 %

5 very high impact 4 high impact

15 %

3 medium 2 low impact

8% 39 %

1 very low impact

Figure 6.37: Impact on regional competitiveness. Source: Author’s 2016 processing/survey.

The suggested usage of strategic planning methodology to manage multistakeholder initiatives could improve the business performance of the stakeholders involved. Beyond that, the projects are expected to support education and job creation and thus, to contribute to regional development in the west region of Romania.

6.10 SWOT Analysis and further recommendations To further develop the efficiency of the program, the representatives of the business environment made the following recommendations in author’s survey 2016:

150 

 6 Strategic planning of multi-stakeholder initiatives

1.

Involving professors and teachers in business culture. It’s important that teachers understand the modern business culture and skill requirements. Therefore, initiating projects that involve teachers directly into business activities for certain time periods will help them update and adapt teaching materials to current and future business requirements. 2. Increasing the sum period of internships. Students will receive practical knowledge from internships. It usually takes a minimum of 2 months to understand the basics of business. 3. Internships can partly compensate missing courses which were made optional or taken out of curriculum, such as purchasing and controlling knowledge. 4. Problem-solving tools and techniques. In business, problem-solving and critical thinking skills are important to make decisions. Therefore, it’s highly beneficial to teach and embed modern problem solving tools and techniques in fresh graduates. 5. Business leader gained valuable experience over the years. Sharing this experience with students will bring many benefits including choosing the direction of their career. Therefore, it’s crucial to initiate projects that include experts from various sectors to share their experience and insight. 6. Increasing number of graduates of new study line per year. The d for educated and skilled workers is high. 25–30 graduates each year is not enough to keep up with this demand. Therefore, expanding the collaboration with other universities and increasing the number of universities that teach in the new study line will support the supply of workforce greatly.

6.11 Interim conclusion The principles of strategic planning can be utilized to improve the competitive position of a company in the long run. A new application of the strategic planning methodology was described in order to manage CSR initiatives; this comes in a way that delivers significant added value not only for the company but for all stakeholders involved. Instead of engaging in CSR initiatives that are not related to their business strategy, the introduced model “value diamond of CSR” illustrates, how the use of strategic planning methodology can leverage the added value of CSR. In this model, the value contribution of charity, communication and business strategy on the stakeholders involved is illustrated. Key success factors of such initiatives are first to align with the business strategy of all stakeholders involved and second to manage the initiative as professional as other core business activities. The proposed method was validated on two highly innovative educational CSR initiatives using action research. The “connection between financial performance and CSR” was described and analysed in a model. The degree with which the financial impact of an initiative can be evaluated depends on the kind of measure. In general, measures which relate to

6.11 Interim conclusion 

 151

the value chain can be measured quite exactly. The more the measure relates to competitive context factors the less exact it`s financial impact is expected to be quantifiable. The concept was illustrated in the model “the measurability of CSR” and was validated during the performed case study. The use of “multi-stakeholder clusters” can help to increase the performance of CSR projects. The implemented CSR projects demonstrated how such multistakeholder clusters can be used to significantly reduce the workload of individual companies engaging in CSR initiatives. Herby the overall performance of the initiative can be increased. An important precondition for the contribution of other stakeholders, however, is to enable those stakeholders to reach their complementary goals in the initiative. Following the performed survey with the representatives of the regional business environment, the new study line implemented as result of the CSR initiative is received by local business environment as a highly significant and timely launched initiative that has potential to overcome the shortage of educated workers with skills. Great increase and growth are expected in fresh graduates’ skills as result of this program, especially in the area of general programming/SAP, German language skill, controlling technical knowledge and purchasing technical knowledge. The described financial projections showed that successful CSR projects can be a true value added for the performing companies. Beyond that, the educational CSR projects can support education and job creation and thereby contribute to regional development. By using strategic planning, any company increase financial performance in the long run while giving back to society. The effect is more powerful than improving brand recognition as employees will be happier with their work, shareholders will be proud of the company they invest in and profits will be increased on the long run thanks to these factors. There are many reasons why good CSR will lead to increased profits and financial performance and the University example shows it best. By improving the education at the university, the employer improves his branding and has positive communication which leads to an increased desire for people to work there. By reducing brain drain and attracting talents the same effect is created. This leads to a decrease in training costs of personnel and a lower salary expectation for a given level of specialization. Other positive effects include a reduced personnel fluctuation and a growth in highly qualified jobs.

7 Enhancement of organization with portfolio-based restructuring This chapter is based on presentation from the author in November 2015 on the 3rd “International Conference on Business Administration, Marketing and Economics” (BAME) in Bratislava, Slovakia which was published in the “International Journal of Economics and Statistics” (Laval 2015d).

7.1 The importance of restructuring projects Following the “Controlling Process-Model” set up by the International Group of Controlling (see Table 7.1) the scope of this chapter can be primarily allocated to the process ten which covers the “enhancement of organization, processes, instruments and systems. Besides the general management support, the controlling function can contribute its specific competencies out of other controlling processes such as “forecasting”, “cost accounting” or “project and investment controlling” to make restructuring projects a success. Also the knowledge of processes such as “strategic planning” or “operative planning” add to the expertise of the controlling department that offers its support in restructuring projects. On the other hand, it has to be pointed out, that the controlling department does not have a monopoly to provide such support to the top management, but that it stands in an internal and external competition. The chapter aims to contribute to the understanding of how the controlling function can apply its competencies to play an influential role in restructuring situations. The volatile business environment and the constantly increasing global competition are forcing companies to regularly strengthen their competitive base.

Companies who do not review their cost structure risk to slowly eroding their competitive position. The chapter will outline how the performance of restructuring projects can be increased by combining potential measures in an optimized way. For this, the chapter will introduce six characteristics to evaluate restructuring measures and explain how to balance them to the specific restructuring needs of the company using portfolio management techniques. Evaluating the performance of restructuring projects is a second important aspect discussed in this chapter. A reliable evaluation is needed to steer the project as efficiently as possible to reach the desired results. The chapter outlines that quality of the evaluation depends on a reliable bottom-up the planning of the measures and a proper consolidation of the measures in the financial statements. Consolidating the measures in the financial statements requires a transparent reference cost base from which one time effects and other nonrepetitive effects are eliminated beforehand. The chapter will discuss adverse https://doi.org/10.1515/9783110580600-007

7.2 Overview of restructuring reasons 

 153

Table 7.1: Controlling main processes 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Strategic Planning Operative Planning and Budgeting Forecasting Cost accounting Management Reporting Project- and Investment Controlling Risk Management Function Controlling Management Support Enhancement of Organization, Processes, Instruments and Systems

Source: International Group of Controlling (2012).

effects which can disrupt the evaluation and which should be considered by the controllers to improve the accuracy during the planning and steering of restructuring projects. The main contribution of this chapter is to integrate portfolio management techniques to design tailored restructuring programs and to illustrate how to better evaluate and steer the performance of restructuring projects. The chapter is expected to have high relevance for multinational companies seeking to maximize the short and long term result of their restructuring projects.

7.2 Overview of restructuring reasons For the purpose of this chapter, two major group of restructuring reasons shall be distinguished (see Table 7.2). The first group are the external induced “macroeconomic shocks” with a rapid loss of sales volume such as during the last economic crisis of 2009. The second group are the internal induced “corporate declines” due to growing operational internal inefficiencies or false strategic moves made by the company’s management (Meyer et. al. 2004; Schmitt 2009; Krishnamurti and Vishwanath 2008). Table 7.2: Restructuring reasons

Origine Occurrence Required reaction Visibility

Macroeconomic shock

Corporate decline

External Suddenly and unpredictable Immediate action needed Clear visibility

Internal Slow and steady process Sufficient time to react Remains often unclear

Source: Author´s table based on Kley (2012).

154 

 7 Enhancement of organization with portfolio-based restructuring

Both groups of reasons increase the pressure on companies to improve their competitive position and their cost base but they do it in a different way. The first group “macroeconomic shock” in many cases comes fast without warning and requires a rapid reaction. Because of this surprise effect, the need for action is obvious for the majority of managers. The internal “corporate decline” as the second group is in comparison a slow process which gives the companies more time to react. But because the decline comes slowly and quietly it can be overseen easily and some companies are not conscious enough to realize the need to act at an early stage of the decline (Kley 2012). Restructuring projects can be a proper tool to adapt the company to the changing business environment and thereby strengthening or regaining the competitive position of the company (Baur, Kantowsky, and Schulte 2015; Zilka 2010). The following paragraph will describe how to compose a portfolio of restructuring measures to address the specific restructuring needs that a company can face.

7.3 The portfolio of restructuring measures The above paragraph illustrated, that the origin of the restructuring need influences the scale and timeline of the restructuring. In case of a macroeconomic shock, a fast reaction to save cash is important to ensure a going concern, while in cases of a steady corporate decline there is more time available and the measures do not need to focus in this magnitude on cash but should rather focus on long-term profitability. Like a doctor who should adopt the medical treatment depending on the root course of the symptoms, the controlling manager should adopt the restructuring measures based on the reasons for the missing financial or operational performance. Prioritizing the right restructuring measures based on the restructuring need is imperative for the success of the project and often for the going concern of the entire company. Benchmarks are commonly used for a first overview which processes have the potential for cost reductions or improvements. A lack of performance in the reviewed processes points out potential areas for improvement and cost reduction. The functionality of the department or function has to be ensured despite the cost reduction. In general, the potential for improvement and cost reduction can be found in one or in a combination of the three improvement areas “work cancellation”, “organizational change” or “process improvements” (see Figure 7.1). Work cancellation relates to a reduction of services or services that are not vital to the company´s success (Booz Allen Hamilton Inc. 2003). Organizational change describes an efficiency gain by optimizing organizational structures for example by merging correlated departments and thereby eliminating double work or interfaces. To leverage such potentials, a process-oriented view can contribute to valuable

7.3 The portfolio of restructuring measures 

 155

Work Cancellation

Process Improvements

Organizational Change

Figure 7.1: Common improvement areas Source: Author´s processing.

insights rather than a functional or cost centre orientated analysis angel (Belobokov, Heppelmann, and Wetzel 2009). Process improvements include efficiency gains by improving the workflow or the capacity usage (Jacquemont, Maurus, Jameson, and Geiger 2014; Kley 2012). The improvement area and it´s expected effect should be documented for each measure in the planning phase of the restructuring project. The result of this benchmarking leads to a long list of potential restructuring measures (Belobokov et al. 2009; Vance 2010; Zilka 2010). This chapter will not further elaborate this well-known benchmarking approach but will examine how the long list of measures can be analysed and prioritized. A classic method to classify the identified measures is in strategic and operative measures. According the concept of the Roland Berger Strategy Consultants, for example, operative measures target to ensure the short time survival of the company by measures in order to secure liquidity and short-term profitability. Strategic measures in the contrary target to improve the long term competitive position by reassessing the strategic positioning (e.g. redefining the core business) and structural and processual improvements (Bamberger and Wrona 2012). This classification, however, gives not much guidance on how to prioritize such measures in a specific restructuring situation. In the following a method to systematically prioritizing restructuring measures through the usage of portfolio management technique will be developed. A starting point for this technique is to understand that the long list of measures most likely consists of measures with different cost/benefit ratios. According to the proposed model four possible cost/benefit ratios can be distinguished (see Figure 7.2). The measures in the upper left corner represent measures which promise a high benefit/low cost ratio. Such measures are illustrated with a “smiley” meaning that such measures should enjoy the highest priority and should be realized under almost all circumstances. In contrary, on the lower right side, there are measures with a low benefit/high cost ratio. Those measures are illustrated with a “sad smiley” as they are in most circumstances least favourable and should have the lowest priority. The other two groups of measures have an average attractiveness. They have either a low benefit/low cost ratio as shown in the lower left corner or have a high benefit/high cost ratio that is shown in the upper right corner. The prioritization of

 7 Enhancement of organization with portfolio-based restructuring

Benefit

156 

Cost Figure 7.2: “Portfolio based restructuring” Source: Author´s graph.

such measures is in general below the highest prioritized smiley and the lowest prioritized sad smiley. A more differentiated illustration of those groups of measures with an average prioritization is to describe as a low benefit/low costs measures with a “feather” and high benefit/high costs with a “weight” symbol. The optimized prioritization of these measures with average attractiveness needs to contemplate a more specified understanding what the terms cost/benefit means when doing restructuring projects. Each measure has a unique signature of cost/benefit characteristics. The aspect benefit includes characteristics, such as the expected quantitative EBIT impact of the measure, the durability of cost saving and the timeline to achieve the expected net cost saving of a measure. The characteristics of the costs include the resistance and political opposition that measure might provoke the complexity and business risks of the measure and the (potential) negative impact on long-term competitiveness (see Table 7.3). Table 7.3: Measure characteristics Benefits

Costs

Quantitative impact Durability of cost saving Timeline for net cost saving

Political opposition Complexity and business risks Impact on competitiveness

Source: Author´s processing.

This concept shall be illustrated with a typical low benefit/low cost “feather” measure, such as the relatively common measure to cut travel costs by tightening the travel policy. The quantitative impact describes the potential EBIT effect of the measure. In the case of travel expenses, the impact of a measure will be moderate in comparison with the total costs of the company. In general, superficial measures tend to have a lower impact potential than measures which deeper influence the business model.

7.3 The portfolio of restructuring measures 

 157

The durability of cost saving describes to which extent the measures are reversible or not. Revising the travel guidelines will be comparable easy. For a long lifetime of the measures, the changes, therefore, should be of robust and irreversible nature. The timeline for net cost saving can be operational or of a strategical nature. Operational short-term measures such as tightening the travel policy can be realized quickly and they normally come with no relevant offsetting costs. However, such operational measures most likely cannot solve structural deficits of the cost structure. Strategic restructuring would, in contrary, include long-term measures with a tendency to change the core business model and, in consequence, it often can improve the cost structure substantially and sustainable. Such long-term measures often need more time for implementation which frequently comes with offsetting costs. This can diminish or even overcompensate the cost savings within a certain timeline. Changes to company processes and structures can induce resistance and political opposition. The resistance can be expected to increase, if the restructuring involves changes in the way people should work or if the number of available workplaces decreases. The business risk correlates with the complexity of a measure. Complex restructuring measures which include many participants, business processes or locations, impose a higher business risk for the company as simple operative measures (Jacob 2014). Changing the travel policy has a comparably limited complexity and will, therefore, impose only a comparable low business risk. The different impact on the competitiveness of measures needs to be considered. Measures which might reduce the competitiveness of the company such as postponing R&D, important investments or training should be prioritized differently than measures which target redundant costs that were caused by inefficient processes or obsolete activities (Gleich, Schneider, and Schmidt 2012). Based on the above, a typical low benefit/low cost measure such as the example measure “travel policy” can be described with a the measure profile (see Table 7.4). Table 7.4: Measure profile of travel policy Benefits

Low benefit

Quantitative impact Durability of cost saving

Low-cost saving Perishable savings

Timeline for net cost saving

Short payback period

x

Costs

Low costs

1

Political opposition Complexity and business risks Impact on competitiveness

Low resistance Low complexity Redundant costs

Source: Author´s processing.

1

2

3

4

5

x x

X

2 x x

High benefit High-cost savings Structural improvements Long payback period

3

4

5

High costs High resistance High complexity Necessary costs

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 7 Enhancement of organization with portfolio-based restructuring

To increase the company’s competitiveness in the long run, an overbalancing of the apparently easy operational but superficial measures should be avoided. For this, the company can add some measures with complementary characteristics in order to balance out the portfolio of measures in the direction of sustainable and structural improvements to the cost structure. An example of complementary high benefit/high cost ratio “weight” measure would be to offshore administrative services from highcost location to a low-cost location. As illustrated, this measure promises high benefits as well as high costs (see Table 7.5). Table 7.5: Measure profile of offshoring Benefits

Low benefit

Quantitative impact Durability of cost saving

Low-cost saving Perishable savings

Timeline for net cost saving

Short payback period

Costs

Low costs

Political opposition Complexity and business risks Impact on competitiveness

Low resistance Low complexity Redundant costs

1

2

3

4

5

x x x 1

2

3

4 x

x

High benefit High-cost savings Structural improvements Long payback period

5

High costs

x

High resistance High complexity Necessary costs

Source: Author´s processing.

The total profile of the restructuring project can be understood as a portfolio of all measures with their characteristics. It is important for the company to balance the portfolio of measures in a way which appropriately addresses the current restructuring needs. Adding up the portfolio of the two introduced measures under the simplifying assumption of equal weighting, the total portfolio of measures would a balanced profile (see Table 7.6). Table 7.6: Total portfolio profile Benefits

Low benefit

Quantitative impact Durability of cost saving

Low-cost saving Perishable savings

x x

Timeline for net cost saving

Short payback period

x

Costs

Low costs

Political opposition Complexity and business risks Impact on competitiveness

Low resistance Low complexity Redundant costs

Source: Author´s processing.

1

2

3

1

2

3

x

x x x

x

4

5

High benefit High-cost savings Structural improvements Long payback period

4

5

High costs High resistance High complexity Necessary costs

7.4 Evaluation and steering of restructuring measures 

 159

The characteristics and interdependencies of the long list of potential measures have to be considered when composing the measure portfolio in the restructuring phase. The portfolio of selected measures can be set-up according to the financial targets to be achieved in each affected period. During a restructuring project, the acceptable risk level should be balanced to an acceptable level by combining low risk/low reward measures with high risk/high reward measures. In general, it is not recommended to overweight “problematic” measures such as approaching too many complex restructuring measures at the same time or focusing on measures with expectable intense political opposition. Special situations of the company may require a temporary overweighting of some characteristics of the portfolio. If the company is threatened by illiquidity the characteristic of immediate cash saving might outweigh the target to improve the structural cost situation. In this situation, the prioritization of measures can be adjusted to realize quick wins with a higher priority and to advance more complex problems with more patience. In any case, structural measures should be started as soon as possible and should not be forgotten or left behind when the financial situation and the restructuring pressure eases. Prioritizing only easy measures which have no significant impact will not be sufficient in most cases to improve the structural competitive position of the company in the long run. The financial results of the discussed measures are further evaluated in the next paragraph.

7.4 Evaluation and steering of restructuring measures Besides balancing out the measure portfolio to the desired corporate benefit/cost profile, the evaluation and steering of the measures is the second important success factor which will be discussed in this chapter. Restructuring the cost structure of a company in order to strengthen the competitive position requires a structured approach with high-cost transparency in the planning of such projects and during the ongoing evaluation of the project performance (Pricewaterhouse Coopers 2015). The evaluation phase emerges immediately after the project starts and has to be continued during the entire project until the final end of the project and the release of the project team. At the beginning of a restructuring project, the timely set-up point needs to be defined. The set-up point is the benchmark to plan and evaluate the performance of restructuring projects. If the restructuring project should start within the actual year, the set-up point would be the actual costs of the year. If the restructuring project should start in the next year, the next year’s budget would be a reasonable set-up point. The set-up point needs to be adjusted by eliminating prior one time

160 

 7 Enhancement of organization with portfolio-based restructuring

effects which are unlikely to occur during the phase of the restructuring project (Kley 2012). The definition of the cost-cutting target should consider the hierarchical level of the managers involved. As the cost centre manager has, in many cases no influence on the output volume, it makes sense to give them absolute cost reduction as main targets but to adjust those targets based on secondary targets considering changing output units. For the company as a whole a consolidated financial target such free cash flow or EBIT is recommended (see Table 7.7). Table 7.7: Top-down responsibilities. Responsible

Target

Measurement

Top management Middle Management Cost centre responsible

Consolidated financial targets Relative cost targets Absolute cost targets

Free Cash Flow/EBIT Costs per output unit Cost on a certain cost centre

Source: Author´s processing.

Conflicts of responsibilities between the line organization and the project organization should be avoided. For this, it has to be defined ahead on how to share responsibility between the cost centre manager in the line organization of the company and the project organization. Following the existing organizational structure during restructuring projects should help to minimize conflicts of responsibilities between the organizational structure and the project structure. If the company is normally steered by cost centres, this way of responsibility should be used for restructuring projects as well. The project manager is then the person to suggest such measures, calculate their plan and actual impact and evaluate their progress. The enforcement and the responsibility for achieving the target cost structure thereby remain with the cost centre responsible. The consolidated financial targets have to be defined for the complete company based on the financial urgency of the restructuring. The measures should be planned using a reverse flow methodology. This reverse flow means to set up consolidated financial targets first, then to plan measures bottom up and then to consolidate financial effect of the measures with the financial planning of the company in order to evaluate if the financial targets can be reached. The financial planning including a clear responsibility for each measure needs to be approved and regularly reviewed by the steering committee (Kley 2012; Vance 2010). During the restructuring project, the bottom-up data for each individual measure has to be tracked and evaluated. The individual measures have to be added up in order to track the overall process and to consolidate the effects to the overall financial statements. Both points of view are seen from the bottom up measure view as well as the consolidated financial view should be subject for a regular plan/actual evaluation within the steering committee (see Figure 7.3).

7.5 Managing adverse effects 

Set up consolidated financial targets

 161

Consolidate the financial effect of the measures

3

1

2

4 Evaluate the results and use insights to unlock new value

Plan measures bottom up

Figure 7.3: Reverse flow methodology. Source: Based on Porter et al. (2011).

7.5 Managing adverse effects Despite a precise evaluation of the restructuring measures, the expected cost reduction might not show up on the cost centres and the sum of the individual measures might not add up to the actual EBIT figure in the consolidated financial statements. In other words, measures evaluated with 1+1 might not bring the expected 2 in the corporate income statement but perhaps only a 1,5 or even less. It is a quote of a blue chip CFO “When I add all the measures up I would expect an EBIT of x but the actual EBIT is much worse”. Such expectation gaps can be caused by adverse effects which contradict the measures so that the overall financial targets cannot be achieved. This paragraph will discuss potential adverse effects which interfere with the evaluation of the project performance. The fluctuation of output, unforeseen costs and spillover are the most common adverse effects (see Figure 7.4). Fluctuation of Output

Unforeseen Costs

Spillover

Figure 7.4: Overview of adverse effects. Source: Author´s processing.

A fluctuation of output occurs especially during macroeconomic shocks, when the full impact of the economic crisis is neither foreseeable nor plannable. Additional

162 

 7 Enhancement of organization with portfolio-based restructuring

volume or price erosion can make the EBIT target not reachable with the planned set of absolute measures allocated to the individual cost centres. To have this under control, relative targets considering fluctuation of the output should be set a second target category to the cost centre owner. It has to be agreed in beforehand that in case the relative cost target is endangered, the absolute cost target of the cost centre owner needs to be readjusted with additional measures. Unforeseen costs can increase the costs on the cost centre despite cost savings out of the performed measures. Such unforeseen costs can be the loss of a preferred supplier, a machine breakdown or other unforeseen adverse effects not included in the planning. Spillover effects arise when a measure is successfully implemented but the actual impact on the financial statement is diluted in time, in location or in kind. Spillover effects can occur in three different forms, which are time, cost centre and cost category (see Figure 7.5). Spillover Effects 1

Time

2

Cost Centre

3

Cost Category

Figure 7.5: Spillover effects. Source: Author´s processing.

Timely spillover effects describe a time delay. For example, reduction of personnel costs by reducing headcount might not be realizable in the planned period and might have impact only in a later period. Cost centre spillover effects occur when a cost reduction in one cost centre creates additional or unexpected high costs in other cost centres. For example, the concentration of services in a shared service centre reduces the cost in the transferring cost centre, but might create unforeseen costs in the receiving cost centre. Cost category spillover effects occur when a cost decrease in one cost category might create additional costs in other cost categories. For example, lowering the percentage of purchase parts reduces material costs but also create additional production costs. These spillover effects can make it more difficult to evaluate the performance of restructuring projects. However, for a high project transparency, it has to be ensured that the planning of the measures includes all potential spillover effects. The understanding of the introduced adverse effects can help the project management to plan and evaluate the measures with a high precision. Before the planning of the restructuring is finalized, a critical review on the potential adverse effects will improve the evaluation and steering of the restructuring projects and thereby increase their success rates.

7.6 Financial statements projection 

 163

7.6 Financial statements projection The travel cost is a very common measure to react to an external induced macroeconomic shock. This can be illustrated by the impact of the last economic crisis on business travels. The last economic crisis began slowly at the end of 2007 but became visible to the broader public in September 2008, when the investment bank Lehman Brothers went bankrupt (Elliott 2011). The impact on business travels will be illustrated by reviewing the business travelling activities in the years before and after the last economic crisis (VDR 2011, 2016). It becomes clear that the crisis immediately leads to a reduction in the number of travels by 6,5 % and even a higher reduction of the total travel costs which decreased by 11,2 %. This indicates that the travels were not only cut in quantity but also in quality (see Table 7.8). Table 7.8: German business travels. 2007 Travels in Million Costs in Million EUR Cost per travel in EUR

2008

2011

2012

26 24.3 24.6 26.6 3.2 % –6.5 % 1.2 % 8.1 % 9,600 9,800 8,700 8,500 9,000 2.1 % –11.2 % –2.3 % 5.9 % 381 377 358 346 338 –1.1 % –5.0 % –3.5 % –2.1 %

2009

28.5 7.1 % 9,800 8.9 % 344 1.6 %

25.2

2010

2013

2014

2015

28.6 29.5 30.8 0.4 % 3.1 % 4.4 % 9,900 10,400 11,100 1.0 % 5.1 % 6.7 % 346 353 360 0.7 % 1.8 % 2.2 %

Source: Author´s table based on VDR (2011, 2016).

The furthermore analysis shows that those savings were only temporary in their nature and that the swing back in quantity was initiated shortly after, in 2010, while the swing back in costs per travel started in 2012 (see Figure 7.6). The observations will be illustrated in the case study. The numbers were aligned to the business reality of a multinational production company observed by the author. The higher costs are comparable to the VDR survey (VDR 2011, 2016), as the figures of the case study relate to intercontinental travels performed in business class. The bottom-up planning of each measure can start with a rough planning of the key performance indicators. In the case of the travel costs, these key performance indicators of the measure could be the number of travels and the average cost per travel. The number of business travels depends on the position of the traveller within the company. Based on the author´s survey 2016 it can be concluded that the number of travellers relates directly to the level of responsibility and to the involvement in corporate projects. In general, employees working on projects as well as employees in management position, have a higher travel exposure than the average employees (see Figure 7.7).

164 

 7 Enhancement of organization with portfolio-based restructuring

20,0 % 15,0 % 10,0 % 5,0 % 0,0 % –5,0 %

2008

2009

2010

2011

2012

2013

2014

2015

–10,0 % –15,0 % –20,0 %

change in number of travels

change in travel costs

Figure 7.6: Development of German business travels. Source: Author´s processing based on VDR (2011, 2016). 20 %

20 %

No travel 2–3 travel more than 10

60 % Figure 7.7: Number of business travels per year. Source: Author´s 2016 processing/survey.

In the following, the pre-crisis, crisis and post-crisis situations will be illustrated. The number of plants and the other assumptions are based on the case study that was revealed in prior chapters, the quoted surveys as well as the author’s observation: The target cost saving of this measure is the arithmetic result of the number of travels and the average cost per travel. The calculated cost reduction per travel in the illustrated restructuring situation is higher than in the survey due to the high price difference between business class and economy class (VDR 2011, 2016). As indicated by the changing of the travel policy, the number of travels as well their costs can be reduced quickly. However, measures like changing the travel policy often swing back after the restructuring phase is over. Also, in the case study, the travel costs reached the level before the crisis after three years (see Table 7.9). The illustrated calculation of restructuring the IT cost by setting up a low-cost location was discussed in the prior chapter. The comparison of this structural restructuring measure with travel expense the financial projections from the base case were used. After the measures are planned bottom up, the measures can be integrated into the financial planning of the company as a whole. The next step is to transfer this

7.6 Financial statements projection 

 165

Table 7.9: Bottom-up projection. Per Year Number of plants % of plants abroad Number of plants abroad Number of functions visiting Visits per function Total number of intercontinental visits Visits of the plant in headquarter in % Visits of the plant in headquarter Total visits Thereof business class Number of business class flights Number of economy class flights Cost per ticket business class Cost per ticket economy class Total travel costs Net savings

2015

2016

2017

2018

2019

20 67 % 13 10 2 267 30 % 43 310 70 % 217 93 2,700 1,200 696,750

20 67 % 13 10 1 133 30 % 23 156 10 % 16 141 2,700 1,200 211,050

20 67 % 13 10 1 133 30 % 23 156 10 % 16 141 2,700 1,200 211,050

20 67 % 13 10 1 133 30 % 23 156 10 % 16 141 2,700 1,200 211,050

20 67 % 13 10 2 267 30 % 43 310 70 % 217 93 2,700 1,200 696,750

0

485,700

485,700

485,700

0

Restructuring phase Source: Author´s projection.

bottom-up calculation into the structure of the financial statements to illustrate the impact of the above introduced restructuring travel guideline and the restructuring of the IT to a low cost location (see Table 7.10). Table 7.10: Consolidated projection. No. Income statements items

2015

2016

2017

2018

2019

2020

0

0

0

0

0

0

0

485,700

485,700

485,700

0

0

–268,342

297,949

923,578 1,327,432 1,328,100

Revenues A.

Impact on turnover Expenses

1 2 B. C. D.

Impact restructuring travel guideline Impact restructuring IT low cost Earnings before interest and taxes Income tax Net Income (B+C)

0

217,358

783,649 1,409,278 1,327,432 1,328,100

0 0

–34,777 –125,384 –225,484 –212,389 –212,496 182,581 658,265 1,183,794 1,115,043 1,115,604

Source: Author’s simulation.

As outlined before, tightening the travel policy will have a fast net impact while the offshoring to low cost has a transition period and might even lead to additional costs

166 

 7 Enhancement of organization with portfolio-based restructuring

in the beginning, due to onboarding costs and potential severance payments in the high-cost location. The consolidated effect of both restructuring measures however is more balanced (see Figure 7.8). Consolidated Restructuring Effects

1500 1000 500 0 –500

2015

2016

2017

2018

Impact restructuring travel guideline

2019

2020

2021

Impact restructuring IT low cost

Consolidated Restructuring EBIT Figure 7.8: Projection of EBIT effects. Source: Author´s processing.

7.7 Interim conclusion The face the growing international competition companies should review their competitive position and cost base regularly. The controlling function has important competencies to contribute to the success of restructuring projects. There are two types of restructuring reasons to be treated separately, the fast macroeconomic shocks and the slow corporate decline. The restructuring reason determines the necessary magnitude and speed to improve the competitive base of a company. To balance the performance of restructuring projects a “portfolio based restructuring” model was developed. The purpose of this model is to combine potential measures in an optimized way and to balance them according to the specific restructuring needs of the company applying portfolio management techniques. The precise management and evaluation of the restructuring initiatives can be contradicted by various effects. This chapter introduced the fundamentals how to better steer restructuring projects using controlling methodology. A full-scale financial projection for improving the competitive cost base of a company for the long run was presented.

8 Conclusions, contributions and outlook This chapter is based on a presentation made by the author for the 14th International Symposium in Management, held in 27–28 of October 2017 in Timisoara, Romania. Following this conference, contents of this chapter were published in Elsevier’s Procedia – Social and Behavioural Sciences Series (Laval and Ştefea 2018). Recent megatrends such as increasing complexity, volatility, internationalization and increased demand for transparency and compliance have changed the expectations towards the controlling function. During his professional experience, the author observed the increased expectations towards the controlling function. If controlling is to maintain its influence in a company, it needs to adapt to the changes in management expectations. To outline “how to increase the value added by the controlling function in multinational production companies”, four research questions were addressed and answered. The questions which were answered were “what does controlling involve and which factors influence the set-up of the controlling function in a company”, “how are the expectations towards the controlling function changing over time and what is its value contribution”, “how can the controlling function add value to standard reporting and budgeting activities” and “how can the controlling function add value to reorganization activities”. Along with the answers to these questions, the publication defines the controlling function and describes its development in modern multinational production companies. In response to the research questions, an extensive literature review was performed and multiple surveys were analysed to provide the reader with the detailed concepts regarding the controlling function and the factors which can contribute to its improvement in multinational production companies. To back up and enrich the theoretical research and the author’s own business observations, the author performed and analysed two major case studies for this publication. The first case study, in 2014, was the implementation of comprehensive process documentation and the optimization of controlling processes in a multinational production company. The second case study in 2015 was the implementation of several CSR projects at universities and professional schools. In addition to these two case studies, the author performed two surveys, one in the year 2014 and one in the year 2016. The 2014 survey was conducted in December 2014 with 20 controllers and finance managers from a global manufacturing company at its seven plants in Eastern Europe as well as at the global headquarters (see Figure 1.1: Participants by function). In the author´s second survey in 2016, 19 representatives from 15 multinational companies and one educational institution were interviewed (see Table 1.1: Overview of performed interviews). The answers to the research questions are concluded in the following sub-sections of the conclusion part. The first research question “What does controlling involve and which factors influence the set-up of the controlling function in a company” aimed to span the field https://doi.org/10.1515/9783110580600-008

168 

 8 Conclusions, contributions and outlook

of research by clarifying what controlling consist of and how controlling operates in multinational production companies. As there are no legal requirements on how to organize controlling, the actual set up depends on the requirements of the company’s management. This provides the controlling department with the possibility as well as the responsibility to adapt its services in a flexible manner to the operative and strategic needs that the company faces. In this publication, multinational production companies were defined as large production companies with more than 20,000 employees operating and producing in multiple countries with an annual sales volume exceeding 1,000 million EUR (see Figure 3.2: The headcount of controlling depends on company size). Based on the surveys analysed, the controlling function in such companies employs on average more than 60 controllers or 0.3 % of the total headcount. The number of maintained controlling specializations is seven, with an imbalance towards production controlling. In comparison with small companies, multinational production companies regularly apply strategy-oriented planning and controlling tools. In most multinational production companies, the head of controlling reports to the CFO (65 % of the companies). It becomes clear that such average figures, however, do describe the controlling function only on the surface. To further analyse the content and goals of the controlling function three perspectives, namely (1) mission, (2) processes and (3) roles were applied. For each perspective, there is a framework in which the controlling function is described and organized. The mission statement of the controller (see chapter 2.1.1) includes the definition of goals, of parameters for planning and of applicable management control. Controllers should support decision makers with reliable and relevant information so that every decision maker can act in accordance with agreed objectives. The processes, as summarized in the controlling main processes (see Table 2.1: Controlling main processes), can be described as the activities which are executed to achieve the purposes that have been defined in the mission statement of the company. The processes are further divided into sub processes and a hierarchical process structure is implemented. The central processes are strategic planning, budgeting and operative planning, forecasting, cost accounting, management reporting, project and investment controlling, risk management, management support and the enhancement of organization, processes, instruments and systems. These processes need sources and the allocation of the sources is carried out according to the needs of the company and can be changed over time. The controlling roles are the third perspective on the controlling function (see Figure 2.5: Controlling role models). A role, in general, can be defined as a set of connected behaviours, rights, obligations, beliefs and norms as conceptualized by people in a social situation. It is an expected or continuously changing behaviour and may possess a given individual social status or social position. According to the controller’s mission statement, the controller shall support the manager to keep

8 Conclusions, contributions and outlook 

 169

the company moving towards the defined objectives, to achieve the vision and the mission statement of the company and to make the right management decisions. This general understanding of the role can be broken down into four distinct roles a controller can take. These roles are data analyst, performance monitor, business partner and change agent. The data analyst role includes the preparation of the monthly and quarterly management reports, a collection of the operational data and many others. The performance monitor role includes the review of the manager’s spending of resources and setting up of the performance reports for top management. The business partner role includes the evaluation of investment opportunities, development of plans for cost reduction and increased profit. The change agent role, in addition, involves the initiation of the change processes. The controlling role in companies (for example, see Figure 3.7: Controlling roles at Deutsche Post World Net) is company specific. The controlling function at multinational companies is diverse as the controlling function in a specific company reflects various internal and external influencing factors. In the following it was therefore analysed, how the controlling function in a specific company is influenced by various internal and external factors (see Figure 3.1: Overview of internal and external factors). The most obvious factor is the company’s size as especially the size of the company influences headcount, specializations and organization of the controlling function. Bigger companies have a larger controlling team in absolute figures but the relative number of controllers in relation to the total headcount decreases. The company size has a positive effect on the number of maintained specializations and the strategic orientation of the controlling function. Other important influencing factors are among others the expectations of the management and the field of business the company is doing. In addition to the described factors, the strategy orientation influences the controlling function (see Figure 5.14: Characteristics of strategy orientation) was identified as a key trigger influencing the controlling function. It became quite clear that companies that follow a cost leadership strategy naturally focus on cost control while companies following a differentiation strategy regularly include more strategic aspects in their controlling. Based on this analysis, the determinants of the controlling function were concluded in the following model (Figure 8.1). The described internal and external factors as well the strategy orientation influence the role setting of the controlling function which can take a more passive or a more active role. The activities and services performed by the controlling function reflect this role setting. Vice versa, the activities performed by the controlling factor will influence the role that controlling will play in a specific company. The second research question “How are the expectations towards the controlling function changing over time and what is its value contribution” aimed to define how the requirements towards the controlling function are changing. The determining factors and therefore the observable work and role of the controlling function are not

Controlling Set Up

Cost accounting Management Reporting Project- and Investment Controlling Risk Management Function Controlling Management Support Enhancement of Organization, Processes, Instruments and Systems

4.

5.

6.

7.

8.

9.

10.

Figure 8.1: Determinants of the controlling function. Source: Author´s processing based on Gates and Germain (2015), Gleich and Lauber (2013), International Group of Controlling (2012) and Küpper et al. (2012).

Operative Planning and Budgeting Forecasting

3.

Business Partner

Decentralized Flexible Less formal

Differentiation

Change Agent

Strategy Orientation

2.

Strategic Planning

Performance Monitor

1. Sector of business 2. Complexity and dynamic of the business 3. Overall context of competition 4. Sales and sourcing markets 5. Economic, political and social environment

Examples for external factors are:

1.

Data Analyst

1. Legal type of company 2. Organizational structure 3. Size of the company 4. Level of diversification 5. Technology and business 6. Corporate philosophy 7. Expectation of Management

Examples for internal factors are:

Centralized Stabil Standardized

Cost Leadership

170   8 Conclusions, contributions and outlook

1% 1%

3%

12 %

37 % 38 %

11

7 17 13

73%

Internal Audit

18

9 29

Plausibility Pla ausibilityy Checks Check ks

Corporate

Development Consulting Cons nsul

10

External Consulting

27

Increasing Importance

Analysis Analyysis

CONTROLLING

12

Data Report Datta Rep port Preparation Pre eparration Generation Gen nerration n

14

2 0 20

70%

Other External Providers

Analysis and Consulting

70%

56 %

43 %

41 %

36 %

50 %

27 %

50%

43 %

46 %

Medium High

23%

27%

17 %

7%

16 %

18 %

27%

Recognized level of competition None

Investors Relations

In-house Consulting

Accounting

Corporate Developement

External Consulting Companies

Providing Reports

2019 (expected)

2014

Decreasing Importance

Data a Collection Colllectio on

Accounting

21

8

Active Role

All controllers acts business partner

16 %

Providing Data

Not controller Only controller Some act as on management specialists business level act as act as partner business business partner partner

Passive Role

None of the above

9%

37 %

46 %

Figure 8.2: Competitive challenge of controlling. Source: Author´s processing based on Gräf (2014) and Schäffer and Weber (2014b).

50 % 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5% 0%

4%

3%

3%

8 Conclusions, contributions and outlook   171

172 

 8 Conclusions, contributions and outlook

stable over time but changing. The above model “Figure 8.2: competitive challenge of controlling” analyses two key elements of this change and their consequences. The first key element is a priority shift within the controlling function (see Figure 3.8: Priority shift within the controlling function). According to all reviewed surveys during the research of the publication, the focus of the activities within the controlling function is expected to further shift from passive roles such as data preparation to more active roles such as advising management and initiating change processes. In consequence, the significance of the business partner role increases (see Figure 3.9: Significance of the business partner role increases). The second key element is the understanding that supporting the preparation of business decisions is not exclusively the field of activity of the controlling function. Also, other functions provide such services. Especially external consulting companies, corporate development, accounting, and in-house consulting are the competitors of the controlling function (see Figure 3.10: Competitors of the controlling function) regarding decision support. On the other side, due to increasing external reporting requirements, the accounting function is pushing into the data analysis and presentation aspects of controlling. The “competitive challenge of controlling” (see Figure 8.2: Competitive challenge of controlling) was summarized in a new model. Following this model, the controlling function can be easily squeezed between the accounting function on the one side and corporate development and external consultants on the other side: To maintain its relevance and to avoid the rise of shadow controlling (see Figure 3.12: Shadow controlling) within a company, the controlling function needs to adapt to the changed expectations. The adaption of the controlling function towards the changed expectations can lead to a complex project with growing change resistance. A “synopsis of structured change models” that concludes the current state of the art in this field was set up by the author (see Figure 8.3). (Heimel et al., 2009)

(Krings, 2012)

(Küpper et al., 2012)

(Laval, 2015b)

Set a target position

Acceptance

Mission statement

Satisfaction survey

Analyze current Controlling

Workshop

As is analysis Positioning Determine the measures Action plan Continuous improvement

Effectiveness Efficiency

Develop target controlling

Increasing effectiveness

Implementation plan

Efficiency in target organization

Figure 8.3: Synopsis of structured change models. Source: Author’s processing.

Efficiency in current organization

8 Conclusions, contributions and outlook 

 173

According to the model proposed by Krings, the change should be created through improved effectiveness and efficiency. Küpper and Heimel have the similar view that the target position should be defined as the mission statement, the current situation should be analysed and then an implementation plan should be developed. Based on this synopsis as well as the author’s experience as a controlling manager, a new adoption model was developed. As the requirements towards the controlling function differ from company to company, the author suggests a 360-degree satisfaction survey with the controlling function in which the company specific requirements need to be defined. The controlling organization can be aligned to the identified management priorities using a process table based on the IGC process model (see Table 3.2: Process table based on IGC process model). As a result of this alignment, the effectiveness of the controlling function will increase. After the priorities have been defined, efficiency can be increased. For this, a two-step approach is suggested starting with efficiency measures realizable in the current organization in the first step and thereafter implementing measures to improve efficiency in the target organization. The model was designed to be especially successful in change-resistant environments in which a successful optimization project needs to be able to realize quick gains “under the radar” with the low involvement of the organization. One key point in every improvement attempt is the understanding how controlling can add value to a company and how this value can be measured. According to surveys reviewed in the publication, only 32 % of the companies so far have a clear understanding how to measure controlling performance (see Figure 2.7: Measuring controlling performance) and only 22 % compare the results with benchmarks/best practices. In the 2014 survey and the reference survey made by Deloitte, approximately 40 % of the respondents answered correspondingly that they were not aware of the true costs of management reporting (see Figure 2.8: Cost reporting – survey). The 2014 survey, as well as the reference survey, also indicated that there were doubts that the cost of the management reporting exceeds the benefits of the reporting. 30 % of the participants in the author´s 2014 survey (42 % in the reference survey) believed the costs exceeded the benefits of the reporting. Creating value is the result of good management decisions. Controlling can support management by identifying, planning and steering decisions which contribute to the value added by the company. The added value of controlling can be measured with three kinds of indicators which are (1) input indicators, (2) process indicators, and (3) output indicators. The measurability of controlling indicators differs between these three categories (see Figure 2.12: The measurability of controlling indicators). While input indicators can be measured directly by the costs attributed to the controlling function, output indicators can be measured only indirectly by assessing management satisfaction with controlling. Process indicators measure the efficiency of processes, for example by evaluating the degree of standardization, automation or by measuring process times.

174 

 8 Conclusions, contributions and outlook

The impact on financial performance (see Figure 2.13: The controlling impact on financial performance) differs between the three categories of indicators as well. Process indicators can be influenced directly but will increase the financial performance only indirectly by changing related input or output indicators. Input indicators and output indicators can directly influence the financial performance of a company but should be leveraged themselves via improvements on the process level. In consequence, the value added by controlling can be increased by decreasing the costs of the controlling function for standard processes (= controlling input) and increasing the value of management support (= controlling output). Management Support Less VALUE More Standard Processes Figure 8.4: How to influence the added-value of controlling. Source: Author´s processing.

The controlling function will add to the company’s value if the value created through the decision support outweighs the costs of the controlling function. How to decrease the costs of the controlling function for standard processes is analysed in chapter four and chapter five and can be achieved by increasing the effectiveness of controlling output by more focused standard reporting thus increasing the efficiency of controlling standard processes. Thereafter, the publication introduces two models to increase the management support of controlling. The first model describes how to better align CSR initiatives with strategic planning as described in chapter six. The second model is a portfolio based restructuring model described in chapter seven. The third research question, “How can the controlling function add value to standard reporting and budgeting activities” intends to find out how the controlling function can increase the added value of its standard activities such as management reporting and operative planning. Per the 2014 survey, 60 % of the participants believe that the management reporting has a high impact on company success (see Figure 4.1: Impact on company success). To reach this goal, per the 2014 survey, the respondents outlined the following reporting requirements (see Figure 4.5: Reporting requirements – survey). 85 % of the respondents said that reporting must focus on key measures, 65 % said it must be reliable and 55 % said it must be comprehensible. The main improvement area (see Figure 4.9: Improvement areas – survey) was according

8 Conclusions, contributions and outlook 

 175

to 70 % of survey respondents the information quality, followed by 40 % naming reporting processes and 30 % reporting quality. Based on the results of the survey, the author’s professional experience and literature review the interdependency between requirements, contributions and value-added reporting were illustrated in the model of “value-added management reporting”. Value-added management reporting (see Figure 4.31: Value-added management reporting) must provide the decision makers with the relevant information for decision making, ensure company-wide transparency and establish a clear basis for countermeasures. Management reporting can provide such contribution only if certain requirements are taken into consideration. The requirements for the added value management reporting are the relevance of information consistent with the company-specific objectives and goals, being recipient-oriented to be understandable by the decision makers, to be provided in a timely manner and contain an analytical contribution. All reports should be designed in such a way to support the decision makers to take efficient actions. As a next research step, the process quality and efficiency were analysed. 85 % of respondents of the 2014 survey said that the reporting process steps (see Figure 4.36: Reporting process steps) were not documented to the necessary level of detail, e.g. for training purposes. 46 % of the reference survey had the same opinion. In the 2016 survey, about half of the participants confirmed that their training and process documentation (see Figure 4.61: Quality of training documentation) is well documented but especially smaller companies tend to have deficits in this area. It was thus illustrated how to analyse and benchmark an existing management reporting system using action research and a case study. Starting point of the case study (see Figure 4.38: Starting points of the case study) was the nonexistence of a manual for standard reporting processes. During the action research, a best practice model for efficient management reporting using the “inventory of reporting processes” (see Table 4.2: Inventory of reporting processes) was developed for four production sites of a multinational production company. The inventory included all controlling processes including due date and a person being considered responsible for every process along with a backup person. To assign responsibilities (see Figure 4.40: Assign responsibilities) is important not only for the training and succession planning but also to have a backup for illnesses and fluctuation. A detailed process description was also set up for every process and, with the help of this, a common process could also be established. The inventory of reporting processes helped to establish and apply efficient and stable processes within the four controlling departments. The financial impact of the improvements was calculated based on parameters identified in the 2016 survey. The most important parameters to calculate the effect were the average number of plant controllers (see Figure 4.55: Average number of plant controllers per 1,000 FTE) which was four, the average monthly gross salary expenses for fresh controllers (see Figure 4.56: Average monthly net salary for fresh controllers) which was 689 EUR including social contribution, the average work force

176 

 8 Conclusions, contributions and outlook

fluctuation (see Figure 4.57: Average workforce fluctuation rate per year) which was 16.9 % per year. Further influencing factors to determine the financial impact were the time saving during onboarding and the expected efficiency increase in controlling (see Figure 4.59: Average efficiency increase in controlling processes) through process optimization and improved training material. Based on the 2016 survey, the impact of process optimization and training documentation on the financial statements was found to be especially high in companies or regions with a low entry qualification level and a high level of fluctuation. Especially for SSC with repetitive workload, optimized process descriptions and training are a key factor for success or even a precondition for a profitable operation. The participants of the 2016 survey estimated the average increase of efficiency due to process optimization in SSC to be as high as 41.6 %. For multinational production companies, which have typically less repetitive processes and a lower fluctuation level, the achievable efficiency gain was seen to be between 10–20 %. For the financial projection, the effect was split up in a higher general efficiency of 10 % and speeding up the onboarding by two months by having proper training materials in place. Based on these verified assumptions the financial impact of process optimization for a multinational production company with 20 factories will contribute about 507 KEUR as NPV at 6 % discount rate. Further opportunities to increase the efficiency of management reporting were discussed to be reached in a changed company set up using controlling shared services centres. Following a survey, the popularity of shared SSC (see Figure 4.50: Popularity of shared service centres) differs. While 53 % of multinational companies have set up SSC for accounting, only 18 % of these companies set up a SSC for controlling. SSC for reporting (see Figure 4.51: Shared service centre reporting) can include four major important work packages of management reporting which are data generation, data preparation, analysis commenting and finalization. SSC can promote technical innovation, such as in big data analysis, and provide standard analysis such as functional controlling and standard cost accounting tasks. Based on surveys, such a reporting SSC can help the organizations to reduce the cost of management reporting by 25–50 % of the original cost base by increased standardization and usage of low cost locations. Following the author’s 2016 survey, the cost advantage can often be realized within an implementation time (Figure 4.52: SSC implementation time) of six months depending on the project setup, the availability of suitable employees in the regional job market and the labour cost advantage of the SSC location. The operative planning was also identified as a major leverage to increase controlling performance. To investigate possible room for further improvement of the operative planning methodology, recent surveys (see Table 5.2: Analysed planning surveys) regarding the planning concepts were reviewed and summarized as the expectation gap of corporate planning (see Figure 5.8: Expectation gap of corporate planning). In this model, common planning constraints were categorized following the indicator categories input, process and output. In consequence, the sum of

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the summarized planning constraints represents the expectation gap of corporate planning. To close this expectation gap, the existing improvement concepts for corporate planning were analysed and compared in a “synopsis of planning concepts” (see Figure 5.11: Synopsis of planning concepts). While preparing this synopsis, it became clear that the analysed concepts represent different blends out of one pool of measures but that they differ in intensity due to the different number of measures they suggest. The different intensities of the reviewed improvement concepts were illustrated as a model in the “continuum of planning concepts” (see Figure 5.12: The continuum of planning concepts). The analysed concepts have a different degree of innovation compared with the traditional budgeting process. On a continuum from traditional budgeting concepts, there is an increase in the degree of impact from better budgeting, modern budgeting and advanced budgeting and finally, the Schmalenbach concept. The author decided not to propose another blend of those measures but to add a new perspective to this discussion. For this, it was important to first clearly define the terms planning, budgeting and forecasting and to distinguish (see Figure 5.1: Distinction of planning, budgeting and forecasting) them from each other. While the budget is the financial reflection of the planned operational targets, the forecast is not the result of a planning process but a financial reflection outside the planning process. Planning, in principle, must bridge the gap between the starting situation and the strategic target which can be closed by the externally induced development and by the internally induced measurements (see Figure 5.4: Interaction of planning and budget). Based on the established systematic the prioritized objectives of planning should include target settings, coordination, and performance measurement. However, based on surveys about common planning objectives (see Figure 5.15: Common planning objectives) it is empirical that other objectives dominate today’s operative planning efforts. In practice, the control and prediction objective is prioritized. The author outlines in the following that the prioritizing of planning objectives represents one key to develop and implement an optimized planning methodology. Following the survey, it is empirical that the control objective often is the topranked objective of planning to control the spending behaviour of the management. The imbalance towards the control aspect can reduce the ownership of management and management tends to increase the amount of the budget reserves. Budget fights are the consequence which usually happens when the budget is the result of negotiations between the different functional heads (see Figure 5.16: Planning detail as result of objectives). The prediction objective of the financial figures is empirically ranked as the second objective in the current business environment and it dominates the planning process and outcome in many companies. The control and the prediction objective in practice lead to the increasing level of detail in the planning package which has

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unfavourable consequences attached to it. In consequence, a high level of planning detail (see Figure 5.17: Consequences of high level of planning detail) can lead to the inflexibility of the budget and most of the times it becomes impossible to be adapted to new information during the business year. At a high level, a planning detail can lead to the unfortunate situation that the budget is not finalized until the beginning of the planned year. Another consequence is that when the controllers focus too much on the details they lose the bigger strategic picture which leads to the disconnection between the operative and the strategic planning (see Figure 5.18: The cost of planning detail). To overcome the dilemma, it was analysed how the control objective and the prediction objective could be reached by alternative measures and outside the classic budgeting process. Alternative ways to improve control (see Figure 5.19: Alternative ways to improve control) and prediction (see Figure 5.20: Alternative ways to improve prediction) were proposed. Reducing the level of detail is a measure proposed by all analysed modern planning concepts but the reviewed survey indicates that many companies face difficulties in the implementation of this idea. As a new angle of analysis, the influence of the alternative strategy orientation (see Figure 5.13: Alternative strategy orientation) of the planning system and the readiness of the organizations to appreciate modern planning was summarized in Figure 5.14: Characteristics of strategy orientation. Companies which follow a differentiation strategy tend to prioritize a product/service leadership which requires focusing on activities supporting research or the product quality. Such companies prefer the decentralized, flexible and less formal and detailed budgeting process with a more sophisticated HMS system. On the contrary, companies which follow the cost leadership strategy seem to prefer a more centralized, standardized and stable budgeting process as a tight and detailed budgeting process is a valuable tool to understand the cost management and the cost leadership. Companies, especially those who follow a cost leadership strategy often face problems because of a high level of planning detail. According to the 2014 survey, companies pursuing a leadership showed a level of detail and the number of reporting positions significantly above the benchmark. A regular and consequent adjustment of the planning detail is recommended, especially considering the decision usefulness of the planning. A new model, the “planning by objectives” model, was introduced to illustrate that there is a trade-off between competing planning objectives. The prioritization of planning objectives is a central factor to maximize the outcome of corporate planning (see Figure 8.5). In consequence, to maximize the outcome of corporate planning, traditional objectives such as control, prediction, and motivation should be targeted by alternative methods outside the planning process. Especially in companies with an extensive planning volume, a significant reduction of planning effort seems to be possible. The author’s 2016 survey indicates an average potential for shortening the planning volume and therefore the planning time by 17 % (see Figure 5.21: Average process

Inflexibility Inflexibi ilit lityy

3

4

1. Less but correlated input variables 2. Sensitivity calculation for top variable 3. Base case, best case, worst case 4. Focus on decision relevant KPI

Disconnected D Disco Dis i con on nne nec ected d Pl Pla Planning ann ann nin ing ng g

Longer Lon on nge ger er Pl P Planning la anning anni ann in ng g Ti TTime Tim i

Planning Pla ann nning nni ng iss out outd outdated dat d dated

Higher Planning Efforts

High igh level of detail

?

?

1. Clear organizational responsibilities 2. Output orientated relative targets 3. Global budgets

Prediction Objective

Control Objective

Differentiation

Figure 8.5: Planning by objectives. Source: Author´s processing based on Gates and Germain (2015) and Schäffer et al. (2013).

Cost Leadership

Strategy Orientation

Control Prediction Operative planning Coordination Internal communication of targets External communication of targets Assurance of liquidity Performance measurement Allocation of resources Intrinsic motivation Extrinsic motivation Delegation of responsibility Development of strategy Reduction of uncertainty Organisational learning Legitimation of rational management Dissolving conflicts Ritual

5

6

8 Conclusions, contributions and outlook   179

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 8 Conclusions, contributions and outlook

shortening by process shortening percentage). Comparable surveys of Horvath indicate a realistic reduction in planning time on a similar level between 20–30 %. A case study at the multinational company BOSCH describes that the planning time could even be reduced as high as 40 %. The range of potential gains between 17 % and 40 % can be explained by the fact that that potential gains from such measures depend on the grade of improvement effort as well the quality of the planning process at the beginning of the improvement project. Refocusing the planning process on the most relevant planning objectives can not only increase its decision usefulness but also contribute to cost saving. For the calculation of the financial impact of shortened planning, the financial data about plant controlling from the prior chapter was used as a basis. Per the reviewed surveys, 44 % of multinational companies spend more than 16 weeks for the planning process. Based on the result of the 2016 survey and other surveys reviewed, a process shortening of 20 % was seen reasonable and was calculated for these 16 weeks. The pure cost saving of this measure over a 10-year project time would lead to discounted cost savings of 249 KEUR. The fourth research question, “How can the controlling function add value to reorganization activities” analysed how to use the capacity released through more efficient and effective standard processes for better management support. Less cost for standard processes will lead to more capacity for management support that will have a positive effect on EBIT. For increased management support two research directions, strategic planning and portfolio based restructuring, are further analysed in the following. Strategic planning can be utilized to improve the competitive position of a company for the long run. Per literature, the aim of strategic planning is to support the management in safeguarding the company’s existence and increasing its value on a long-term basis. Existing success potentials are to be secured and developed further and new success potentials should be identified and created. One field of strategic planning hardly considered in literature so far is the strategic planning of CSR. Depending on the strategic challenge a company faces CSR can be a highly efficient tool to develop success potentials. The introduced model “value diamond of CSR” (see Figure 6.3: Value diamond of CSR) but to align the initiative with the business strategy of all stakeholders involved. This alignment will increase the added value of such initiatives for the company and also add some degree of complexity regarding the selection and management of the CSR initiative. The usage of “multi-stakeholder clusters” (see Figure 6.10: Formation of a multi-stakeholder cluster) can help to boost up the performance of the CSR projects by leveraging the cost-benefit ratio of CSR initiatives of the companies which are participating in the CSR ingenuities. The proposed model was developed and validated on a highly innovative educational CSR initiative using action research. The case study included the collaboration between regional multinational companies and a university to support education in the field of business administration and IT, later referred to as case study 2015.

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 181

Starting points were increasing educational requirements and a brain drain of talented young people which were identified as key trends limiting business growth opportunities (see Figure 6.8: Key trends limiting growth opportunities). The increased educational requirements of the multinational companies were not fulfilled by the current competence level of fresh graduates (see Figure 4.60: Current competence level of fresh graduates). The special points of constraint were the competencies in German language, SAP and general programming knowledge, the understanding of foreign business environments and the technical controlling knowledge. The overall competence level was as low as 37 % compared with the educational requirements which lead to high onboarding costs and a low work efficiency and a general constraint when it comes to the creation of high paid jobs in this region. The case study of 2015 targeted to overcome these constraints and hereby not only to contribute to society but also to the competitive position of the companies doing business in this region. The “connection between financial performance and CSR” (see Figure 6.13: Connection between financial performance and CSR) can be drawn by aligning the curriculum to the demands of the regional job market, implement measures to reduce brain drain and utilize employer branding methods which all, in consequence, can increase the availability of a qualified workforce in the region. The author’s 2016 survey discussed these assumptions with business representatives and representatives of the university involved. Most survey participants did not expect a reduction in average prices for specific job profiles. A tendency of salary decrease (see Figure 6.28: Tendency of salary decrease in SAP/IT) in SAP due to increased supply was only seen by 10 % of the survey participants while 48 % assumed a stable or increasing salary development. Regarding the fluctuation, the average noticeable observation was 17 %. The workforce fluctuation factors (see Figure 6.29: Workforce fluctuation factors) were discussed with the participants. Most companies expect that the study line will have no effect on the work force fluctuation (see Figure 6.30: Effect of new study line on fluctuation) and that it will stay at 17 % per year. On the other hand, the impact of the CSR project on competence levels was significant. All participants, however, expected a competency growth amongst the graduates. According to the author’s 2016 survey, the level of professional competence of future graduates is expected to increase from 37 % up to 65 % (see Figure 6.26: Expected average competency growth and Figure 6.27: Current level and future competence levels). The survey contributed to the understanding that “measurability of CSR” (see Figure 6.14: The measurability of educational CSR) or the degree in which the financial impact of an initiative can be steered and evaluated depends on the targeted measure. Measures which can be considered to relate to the value chain can be measured quite exactly. An example of a measurable cost saving close to the value chain is the reduction of internal training costs by hiring better-educated graduates or cooperating in the postgraduate education programs that the job represents. The more the measure

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relates to the competitive context factors the less exact its financial impact is expected to be quantifiable. Examples of competitive context factors harder to influence and to measure are the impact of educational CSR on average salaries for specific job profiles or on the reduction of fluctuation. Especially in areas with high fluctuation such as SSC, such an increase of competence levels will lead to an increase in the average competence within the organization. Assuming the results of a 17 % fluctuation are filled up with university graduates, the simulation shows that a starting competence of 37 % will mathematically lead to a stable average competence level of 80 %. A starting competence level of 65 % will in comparison lead to a stable average competence level of 92 %. Using scenario calculations, the sensitivity of the projection to a change of parameters such as competence level, fluctuation and salary levels was analysed. The higher the general qualification level, the faster people can be trained to company-specific requirements and the less productivity is lost during the onboarding process. The sensitivity of the free cash flow calculation of the business case to a 1 % change in fluctuation was calculated to be 167 KEUR in the base case and 83 KEUR in the CSR case. In other words, “a higher competence level on a regional job market can shield companies from the worst effects of fluctuation”. The financial impact on the collaborating companies was calculated by the author applying the results of this survey in financial projections for an average SSC with 70 employees. The expected increase in proficiency would support to leverage the profitability of a SSC over a project lifetime of 10 years from 5,278 KEUR to 8,945 KEUR. The key driver for this increase in profitability is the opportunity to shift more qualified work from the high-cost location to the low-cost location, also referred to as wage arbitrage. In the prior chapters, various suggestions to restructure processes in controlling or how controlling can support complex restructuring projects including CSR initiatives were suggested. In the last chapter seven, a portfolio-based restructuring (see Figure 7.2: Portfolio-based restructuring) model was developed to prioritize and better understand how such projects contribute to the risk-and-rewards profile of a company. Restructuring projects can be a proper tool to adapt the company to the changing business environment and thereby strengthening or regaining the competitive position of the company. Important restructuring reasons to determine are the macroeconomic shock and the corporate decline. Restructuring projects normally consist of a bundle of measures. The purpose of the portfolio based restructuring model is to combine the potential measures in an optimized way and to balance them according to the specific restructuring needs of the company by applying portfolio management techniques. The key to the portfolio-based restructuring model is to understand the specific cost-benefit mix of different measures (see Table 7.5: Measure profile of offshoring). Restructuring benefits include the quantitative impact, the durability of cost saving and the timeline for net cost saving. Restructuring costs consider, in addition, the

Outlook 

 183

likelihood of political opposition, the complexity and business risks as well the impact on competitiveness. One measure illustrated was a policy to restrict corporate travel and the other measure was to move corporate functions to a low-cost offshore location. In the publication, it was simulated how these illustrative measures with complementary cost-benefit mixes can be combined to optimize the EBIT development of a company. To better evaluate and steer the performance of the overall restructuring initiatives, an “overview of adverse effects” was presented. The answer to the last research question illustrated how a precise balancing and management of the restructuring measures can significantly leverage the restructuring success.

Outlook The publication outlined the principles that aim to improve controlling in a way to deliver true value to the company. Although the principles to do so might have become clear, a major source of back through will be the recruiting and development of controllers capable to understand the business to the extent that it enables them to become true business partners or even change agents. To develop valuable controllers, the professional development path cannot be limited to many years inside the controlling function but should include phases of cross-functional responsibilities. In multinational companies, such developments should possibly include also business responsibilities abroad. These functional or regional transitions can add to the potential value contribution of controlling managers. However, a reintegration of such experienced managers into the controlling function in many cases is not successful. It will be interesting to observe how companies will better manage this challenge of releasing and reintegrating future top controllers in and out of the controlling function.

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Index Added value 2, 13, 37, 53, 107–112, 120, 147, 150, 173–175 Advanced budgeting 77, 86, 87, 177 Adverse effects 161–162, 183 Assumption controlling 106, 108, 112–114 Benchmark 3, 4, 13, 16–18, 32, 34, 39, 42, 54, 76, 80, 93, 99, 104, 154, 155, 159, 173, 175, 178 Better budgeting 77, 86, 87, 177 Beyond budgeting 86–89 Brain drain 113, 114, 117, 118, 151, 181 Budgeting 2, 3, 11, 41, 77–81, 83, 84, 86–92, 94, 97–100, 103, 104, 167, 168, 174, 177, 178 Business objectives 109, 147 Business partner 1, 11, 12, 24–27, 31, 36, 169, 172 Change agent 11, 12, 24, 169 Cluster benefits 147–149 Common planning objectives 94, 177 Competency area 133 Competitive challenge of controlling 28, 37, 171, 172 Continuum of planning concepts 91, 103, 177 The controllers mission statement 7–8 Controlling indicators 16, 173 Controlling performance 13, 76, 173, 176 Controlling process-model 7–9, 39, 77, 152 Controlling specializations 1, 22, 37, 168 Corporate planning 1, 18, 26, 82, 84, 85, 91–93, 103, 104, 106, 176–178 Corporate restructuring manager 2 Corporate Social Responsibility (CSR) 2, 3, 5, 105–110, 112, 116–120, 131–140, 142–144, 149–151, 167, 174, 180–182 Corporate strategy 1, 42, 92, 106 Cost accounting 61, 64, 152, 168, 176 Cost efficiency 16 Cost leadership strategy 77, 91, 92, 103, 169, 178 Cost savings 16, 17, 110, 139, 142, 156, 157, 162, 164, 180–182 Creating Shared Value (CSV) 107 https://doi.org/10.1515/9783110580600-010

CSR. See Corporate Social Responsibility (CSR) CSV. See Creating Shared Value (CSV) Data analyst 1, 11, 12, 23, 27, 169 Data availability for management 24 Decision usefulness 2, 16, 46, 49, 53, 84, 104, 178, 180 Determinants of the controlling function 169, 170 Differentiation strategy 91, 92, 103, 169, 178 Direct costs 16 Documentation 5, 36, 39, 54–56, 66, 68, 71, 72, 75, 76, 167, 175, 176 Economic Value Added 1, 15 Educational CSR 105, 109, 119, 150, 151, 180–182 Effectiveness 14, 16–19, 30, 32–36, 38, 53, 87, 99, 101–103, 173, 174 Efficiency gains 64, 70, 72–75, 100, 154, 155, 176 ERP solutions 1, 23, 24, 60 Expectation gap of corporate planning 85, 176, 177 Financial parameters 120–140 Financial performance 3, 15–17, 19, 78, 92, 95, 105, 110, 114, 116, 118–120, 145, 150, 151, 174, 181 Financial statements projection 66–75, 99–103, 119–146, 163–166 Fluctuation 65, 67, 69–71, 75, 76, 98, 114, 119–121, 124, 125, 129, 133, 136, 137, 138, 142–144, 151, 161, 162, 175, 176, 181, 182 Fluctuation impact 124, 137 Forecasting 77–79, 81, 95, 103, 152, 168, 177 FTE equivalent 125, 138 Function Controlling 9, 40, 78, 106, 153, 170 Headcount 15, 20, 21, 36, 37, 75, 78, 103, 118, 125, 162, 168, 169 Impact on financial performance 17, 174 Implementation controlling 106, 108, 114–116 Information relevance 39 Input indicators 15–17, 173, 174

196 

 Index

Internal consultant 25 Inventory of reporting processes 18, 57, 76, 175 Key trends 112–114, 181 Life cycle of controllers 12 Local optimization 35, 36, 61 Low cost location 64, 120–130, 139, 142, 158, 164–165, 176, 182 Macroeconomic shock 1, 153, 154, 161, 163, 166, 182 Management expectations 167 Management reporting 1, 2, 13, 14, 34, 36, 39–76, 168, 173–176 Multinational production companies 1, 2, 18, 19, 20–38, 66, 67, 125, 167, 168, 176 Number cruncher 25 Operative Planning and Budgeting 77 Operative planning by objectives 1, 77–104 Operative target setting 93 Optimization project 16, 29, 31–35, 38, 173 Optimized planning concepts 91 Organizational impact 35–36 Output indicators 15–17, 173, 174 Output of the controlling function 16 Performance controlling 106, 108, 116–117 Performance drivers 16 Performance indicators 11, 15, 16, 54, 92, 163 Performance measurement 81, 93, 177 Performance monitor 11, 169 Philanthropic institutions 148 Planning by objectives 1, 18, 77–104, 178, 179 Planning detail 90, 93–96, 99, 100, 103, 104, 177, 178 Planning process 1, 3, 18, 77–89, 91, 93–97, 99, 100, 104, 105, 177, 178, 180 Policeman 25 Portfolio based restructuring 2, 152–166, 174, 180, 182

Portfolio of employees 124, 125 Portfolio of learning curves 124, 125, 138 Process indicators 16, 17, 173, 174 Project and investment controlling 152, 168 Project layout 108–112 Public relations 1, 108 Recent megatrends 1, 23, 37, 167 Regional competitiveness 149 Reorganization activities 3, 167, 180 Reporting content 18, 39–54 Reporting lines 23, 83 Reporting process 18, 35, 43, 54–58, 61, 68, 76, 99, 100, 103, 175 Restructuring 2, 3, 19, 29, 36, 152–166, 174, 180, 182, 183 Risk Management 168 Role models of the controller 10–12 Satisfaction of the management 16, 83 Sensitivity analysis 75, 102–103, 142–146 Set-up of the controlling function 2, 20, 167 Shadow controlling 30, 172 Shared service centre 61, 63, 113, 121, 162, 176 Shared service solutions 35, 59–66 SSC efficiency loss 130 Standard reporting 2, 37, 68, 99, 103, 167, 174, 175 Strategic approach 107–110, 117 Strategic planning 1, 2, 3, 25, 52, 77, 78, 83, 93, 96, 105–151, 152, 168, 174, 178, 180 Strategy orientation 32, 77, 91–93, 103, 104, 169, 178 Structured change model 31–36, 38, 172 SWOT Analysis 149–150 Synopsis of planning concepts 90, 103, 177 Theoretical framework of controlling 7–12 Training documentation 71–72, 76, 175, 176 Value creation 7–19 Value diamond of CSR 2, 109, 150, 180

About the Author Dr. Valerian Laval (born in Aachen, Germany, in 1975) studied business administration at the university of Bayreuth, Germany, from 1994 till 1999 and graduated as Diplomkaufmann in 1999. He joined the auditing company ArthurAndersen where he qualified in 2001 as CPA in Illinois, USA. In 2005, Valerian became German tax consultant at the auditing company Deloitte and passed the German pubic auditor qualification. The same year, Valerian began his industry career and joined the German blue chip company ThyssenKrupp as project manager for corporate restructuring. In 2007, he was promoted to become finance director for the ThyssenKrupp stainless operations in the USA. From 2010, Valerian worked in leading positions in the German automotive industry such as General Director in China and Eastern Europe. In 2016, he took the role as business unit CFO in the French industry group Zodiac Aerospace. His field of research lies in the field of management accounting and controlling.

https://doi.org/10.1515/9783110580600-011