OpEx

IES will optimize your OpEx investments in sales and marketing

·         OPEX (Operational Expenditures):  The current practices associated with viewing discretionary operational expenses as a part of a company’s Corporate Portfolio Management process is described in

o        Sanwal’s article “OpEx as Investment: How to Spend More Strategically,” “Performance Management Magazine,”, Penton, March, 2008 (http://bpmmag.net/mag/opex_investment_spend_strategically_0308/index.html)

o         Sanwal, Optimizing Corporate Portfolio Management, Wiley, 2007

o        Sanwal’s presentation to the 2008 Business Performance Management Summit, “Generating Value through Visibility,” October 27-28, 2008. (See 2008 BPM Summit)

                The current practice is summarized with the following quotes from all three references.

“Yet many organizations still manage large portions of their business in outdated and suboptimal ways. One area stuck in a time warp is the management of operating expenses (OpEx). Capital expenditures (CapEx), with their large multiyear budgets and fancy Gantt charts, get a lot of attention. CapEx is what managers often talk about when they discuss optimizing investments. Meanwhile, they budget for OpEx by growing each line item by a set percentage year over year; then, when times are tough, they cut certain expenses to hit a somewhat arbitrary number. Organizations put substantial effort into rolling up OpEx line items in the corporate budget but do little, if anything, to strategically manage the allocation of resources that OpEx represents. The entire process fails to account for the fact that discretionary OpEx investments in marketing, sales, operations, people, and other areas of the business deliver the results that sustain the enterprise (italics, bold added)  and ultimately determine the winners and losers in an industry.”

“Reframing discretionary OpEx as investments requires modeling, when possible, the returns associated with these investments. So creating standardized cost-benefit analyses is critical, especially once the company begins comparing prospective investments against one another. Standard driver-based models in which the drivers and certain business assumptions are controlled at some central level are required to drive consistency of valuation and ensure parties believe comparisons.”

“In this (optimization) phase, your company will make decisions about resource-allocation trade-offs within the portfolio.”

“Techniques and Tools to Optimize your Corporate Portfolio”…The following discuss ion provides an adaptation of a framework that was developed by the Working Council for Chief Investment Officers… methods ..have been selected for their unique approach…and to demonstrate the diversity of techniques available… ROI/Payback Period, NPV/IRR, Sensitivity Analysis/Monte Carlo Simulation, Prediction Markets, Stage Gate Decisioning, Real Options Analysis”

“Applying CPM to Functional Areas within the Organization

•          Marketing/Advertising and Promotion:  During the last several years, marketers have been challenged with the prospect of quantifying their efforts with a push to evaluate marketing as more of a science than an imprecise art (See Marketing Accountability)…many of these quantification efforts are dubious at best…more disconcerting is the fact they are backward looking…The idea of quantifying the value of marketing is one that CPM will not solve… with the additional rigor CPM provides, advertising executives and managers have better information to make decisions and to introduce an element of competition for marketing resources..the beauty of CPM is that it can be leveraged across all marketing channels, making it a highly adaptable capability for marketing executives and the entire organization.’’

•          Sales Force: CPM would enable you to determine what opportunities your sales force has before them and also whether they are of sufficient value…More generally, CPM can help determine whether building up your sales organization with new salespeople would be beneficial.” ,

Study conducted by Brilliont Consulting

•          900 mid and large cap companies from 2002 –June 2008

•          Evaluated their mix of strategic vs. non‐strategic expenses

o        Strategic expenses are projects and investments that drive customer acquisition, loyalty, growth and acquisition

§         For example: marketing, sales, advertising, R&D, innovation

o        Non-strategic expenses are those expenses that while potentially critical for day‐to‐day functioning of the organization do not drive company growth.

§          For example: finance, real estate, HR, legal/GCO, IT infrastructure, operations infrastructure

 RESULTS:   Strategically, spend more and Total Shareholder Return (TSR) goes up

        high                            

% growth of

non strategic

expenses

                        low

                                    low                                                                                        high   

                                                        % Annual Growth of Strategic Expenses

§         IES Benefits: How it compliments and extends  OpEx Portfolio Management functionality

o        Compliments CPM Functionality

§         “Moving toward corporate portfolio management requires changing the decibel- or personality-driven, siloed, and suboptimal approach to spending that is inherent in the typical budgeting process.”

·         IES is necessarily cross-functional.  It builds a holistic model of ALL operating expenses (i.e., the client’s “profit chain”) and  optimizes it, simultaneously.

§         “You must set up a standardized means for capturing actual investment results….capturing costs and deliverables, then holding people accountable for them, is a good idea for all investments, but it is critical for projects without an obvious return metric.”

·         IES, using unique variance analysis techniques, analyses the actuals as they occur and, as appropriate, modifies the response curves to keep the “profit chain’s” resources always focused on the maximally profitable demand.

o        Extends CPM Functionality

§         CPM for Marketing/Advertising and Promotions

·         “The idea of quantifying the value of marketing is one CPM will not solve”

o        IES quantifies the value of sales and marketing expenditures by mathematically determining the most profitable forecast those expenditures can achieve

§         CPM for the Sales Force

·         More generally, CPM  can help you determine whether building up your sales organization with new sales people would be beneficial

o        IES defines, precisely, the size of the maximally profitable sales force.  It also allocates it across channels, customers and products.