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BY INVITATION

Value-based management at Banpu

CFO says equipping business units with the proper analytical tools is a challenge worth accepting

Somrudedee Somphong

For many years Banpu had been attempting to instil a shareholder value culture into our organisation. We had hired human-resources and other consultants and had even begun the process of implementing a balanced scorecard approach. We then decided to ask L.E.K. Consulting to conduct a shareholder-value audit of Banpu's organisation from both an internal and an investor perspective.

The insights gained from this audit led to the decision by the board and senior management to undertake a full-scale value-based management (VBM) implementation programme. This decision was not taken lightly, as it required considerable company resources, both in time and money.

Indeed, Banpu viewed the decision to implement VBM in the same way we view other large capital expenditure projects _ the investment must be justified by the expected return in terms of cultural transformation, capital efficiency, financial performance and organisational clarity and accountability.

Cultural transformation: The transformation in our organisation as a direct result of our decision to implement VBM has been significant. Senior executives, business unit heads and corporate personnel have developed a greater understanding of the concept of shareholder value and how it relates to their particular area or function. Even line operating managers, unfamiliar with financial concepts, have begun to understand how their operating decisions affect Banpu's shareholder value.

At the same time, management tools have become more refined and standardised across the business, making my life at the corporate centre much easier.

Banpu has always believed that business unit managers have the best perspective and understanding of the market and competitors. However, as an organisation we lacked a consistent framework that units could use to share their ideas, while also providing the financial analysis required by the corporate centre.

VBM has provided this framework. The integration of our deep business unit knowledge with shareholder value tools allows business managers to fully understand the financial ramifications of their strategic decisions. Embedding this framework across the entire Banpu Group was challenging on many levels. First, there was resistance from some managers or units who were concerned about changes to the old way of doing business and the difficulties they might encounter under a new system.

Second, executives, managers and analysts had to invest considerable time and effort to learn and then apply the VBM frameworks. Finally, there was the challenge of using the dynamic financial models, based on data collected and analysed from several sources for each business unit. Despite these challenges, the new process has resulted in genuine change for the better.

An internal capital market: One of the major changes within the organisation is that the corporate centre has become a de facto referee for capital, with clear value-based guidelines. The strategic plans submitted by business units are treated as prospectuses for capital with a required return on capital embedded into those plans.

Often, these plans contain multiple options around investments and cashflow returns. The corporate centre decides which option within each plan it wants to fund based on an assessment of the Group's total portfolio, as well as an understanding of the risk and return trade-offs associated with each option.

Business unit managers concentrate their efforts on preparing facts and analyses to support their belief of how value is to be generated from a particular investment or strategy. The emphasis of the strategic plans is to convince the corporate centre that they will create enhanced or sustain existing competitive positions in their respective markets to generate future cashflows.

As CFO, I can now plan the capital resource allocation much more effectively. Once a unit's plan is approved, I immediately know both the projected capital required and the free cashflow generated for the next three to five years _ and in some cases beyond.

By having detailed business unit level economic models, should the competitive environment change significantly we can quickly test any new market assumptions and see how they affect the capital investment and free cashflows of a particular business unit. The result is that I am able to quickly adjust my capital allocation plan as well as understand the implications for Banpu's overall performance.

Accountability and responsibility: The VBM implementation also helped clarify responsibilities across the entire organisation: between the corporate centre and the business units and between the business units themselves. Business unit heads, supported by our central planning group, now take full ownership of their strategic plans.

This sense of ownership is both broad and deep. Broad in the sense that each unit goes through a process of reviewing a large, practical set of stra tegic options about its business. Deep in the sense that detailed operating and financial drivers behind forecast assumptions are hotly debated and documented to ground the underlying analyses. This exercise leads to fact-based and bottom-up strategic plans.

The operating and financial results that come out of these strategic plans are then linked directly to senior management's incentive compensation. The result is a fully integrated process from planning to execution to delivery that ensures that everyone's motivations are properly aligned to maximise the value of the entire business.

New challenges aside, the benefits of VBM have clearly outweighed the difficulties of implementation. A consistent internal approach now ensures that Banpu is responsive to the dynamic and ever-changing external markets. Shareholder value tools and principles have been institutionalised across the organisation, from strategic planning to resource allocation to incentive compensation, with the result that our team now thinks in value terms, works closely together across the organisation and is committed to delivering operating targets linked to value.

* Somruedee Somphong is the chief financial officer of Banpu Plc, e-mail:somruedeec@banpu.co.th