World class financial engagement in R&D and Corporate Development organizations

1. Integrating the Financial
Perspective into M&A and R&D
Activities
2010 Life Science Financial
Forum
May 10, 2010
Phoenix, AZ
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2. Agenda
What is “World Class FP&A” and why is it so darn important?
Case Studies
1. Unilever
2. Johnson & Johnson – Ethicon Endo Surgery
3. Corning
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3. • A "world-class" finance organization is one that enables
operating management to be truly proactive. In order to be
proactive, the FP&A group must foresee the effects of
different management choices and provide useful advice
about those choices.
• The "world-class" FP&A group is constantly tuned-in to the
company, to the industry and to the customers in order to
proactively advise operating management about the financial
impact of their decisions.
Source: Howard Fowler CFO, TransForce, Inc
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4. Strategic Role of Finance
Source: McKinsey
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5. FP&A in Current Economic Environment
Source: McKinsey
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6. Strategic Relevance and Priority of Finance Issues
67%
How do I drive more efficiency and automation in finance?
61%
53%
How does finance become a more effective business partner?
57%
Ensuring a successful ERP implementation and/or realization of the value of our ERP 57%
application platform 51%
45%
How can finance contribute to improving planning processes in the organization?
49%
Adding more value and becoming more strategically relevant to the broader organization 55%
from a stakeholder perspective 49%
62%
Aligning strategic priorities with financial outcomes
48%
43%
How do I drive greater performance and deliver more value through talent management?
42%
43%
How do I design and deploy effective data warehousing, BI and analytics solutions?
41%
Gaining credibility and acceptance of the Shared Service Centers and Centers of 31%
Excellence 40%
35% Priority
How do I plan for and manage globalization of service delivery in the finance function?
38% Strategic Relevance
4 out of the top 10 issues are focused on becoming a more effective business partner
Source: Hackett Group, 2009
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7. Case Study: Unilever
“Finance of the Future”
Source: Hackett Group, 2007
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8. Source: Hackett Group, 2009
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9. Case Study: Unilever
“Innovation Funnel” - Select best versus just good practices
Considered Not Considered
“broad applicability “observed to add
and significant value and can be
impact on decision used within the
making and is either finance units at their
mandated or own discretion”
strongly
recommended”
Brand Launch – clear advice on leverage of brand development investments
Customer Development – evaluation of likely impact on sales promotions
Innovation – decision making toolkit for probability analysis
Source: Hackett Group, 2007
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10. Case Study: Unilever
Transition Finance Professionals to Business Partners
• More time analyzing, less time gathering and correcting
• Ensure right people become business partners
• Move transactional accounting to out-sourced or shared services
• If it does not require in-depth understanding of the market – outsource it.
Percent of
analysts
considered
partners with
operational
managers
Source: Hackett Group
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11. FP&A: COE or Outsource?
• Trend from “concierge” FP&A in current economic environment
• Consolidate/centralize or outsource transactional activities
• Create COE’s for analytical decision support activities
Source: Deloitte, 2009
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12. Case Study: Ethicon Endo-Surgery
Situation Analysis
• Circa early ’90’s
• New J&J operating company
• Highly competitive environment
• Rapid adoption and growth of endoscopy
• Decentralized management
• Inefficient use of resources
…… need to transform Product Development / R&D / Business Development
to succeed in rapid growth, competitive market
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13. Case Study: Ethicon Endo-Surgery
Team Based Model
• “Teams” redefined! – no easy task
– Many organizational challenges
• Multifunctional
– EVERY function part of team
• Empowered
– Governed by business plan, team contract
• Co-located
– Multi-functional Team Centers
• Self-managed Finance work group
– Very first in J&J
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14. Case Study: Ethicon Endo-Surgery
Product Development
Business Development
Advanced Tech
Quarterly Leadership
BAM’s • rapid
Present & Business Assessment Models deployment
Prioritize (mini business plans)
• efficient use of
• Multi-Functional • Strategic Intent
resources
• Competitive Analysis
•Strategic Fit • sound financial
• Regulatory
• ROI • Valuation – Financial Model rationale
Scheduling Team
Team Contract
Resource Planning Assignment
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15. Case Study: Ethicon Endo-Surgery
TEAM ROSTER
R&D VALUATION MODELS
Production Eng EXPENSE BUDGET
Finance
CAPITAL BUDGET
Marketing
Quality/Regulatory
SALES FORECAST
Supplier
Management
SCHEDULE
Clinical Affairs
TEAM
CONTRACT
• Fully empowered multi-functional team
• Governed by team contract
• Co-located in team center
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16. Case Study: Ethicon Endo-Surgery
It wasn’t easy !!!
• Requires “C” level drive
• Restructuring with layoffs
• Build team culture
• Eliminate or De-emphasize traditional reporting structures
• Minimize fears of being on a team – what’s next?
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17. Case Study: Corning, Inc.
Situation Analysis
• Circa 1999 - 2001
• Telecom Industry Boom
• Strategy to Expand beyond fiber optics into components
• Skyrocketing Multiples - New Economy Mentality
• White hot M&A environment
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18. Case Study: Corning, Inc.
• Execution of Strategy Became Entirely Dependent Upon M&A
• Self feeding M&A environment: “Corning Cash”
• P/E trading as high as 147x
• Valuations +200x Revenue common
• Environment of “nervous optimism”
• Value = Growth Rate + Quality of Earnings
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19. Case Study: Corning, Inc.
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20. Case Study: Corning, Inc.
The music stopped – Nortel Earnings
Announcement
• Stock dropped 30% overnight
• Share price went from high of $109.25 to $60.13 in 2 months
• Didn’t stop there. Dropped to $1.33 by October 2002
• Erased over $85 BILLION of market capitalization
• Over 18,000 workers laid off with major plant closures
• Wrote off $3.5 BILLION impaired goodwill
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21. Case Study: Corning, Inc.
Key Learnings !!
NEVER EVER EVER ignore valuation fundamentals
RUN FAST from words “new economy”
ALWAYS Ensure a Valid Strategy & Business Plan
NEVER let Investment Bankers dictate value to Exec
Management
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22. Questions?
Special thanks …..
Thomas Davoren
The Hackett Group
P: 312-421-4504
C: 312-560-9161
tdavoren@thehackettgroup.com
www.thehacketgroup.com
“ Enabling executives to achieve World-Class enterprise performance”
Robert C. Helfrich
Director of Business Development
Welch Allyn, Inc.
(315) 685-4684
helfrichr@welchallyn.com
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