When John Hrudicka set out to transform finance at cabinetry and plumbing products maker Elkay Manufacturing Co., he wasn’t going to settle for a few minor upgrades. Hrudicka, now Vice President of Finance, launched a total renovation that included profitability analytics, customer relationship management, a rolling forecast, and a Balanced Scorecard.
Steve Player: The thing I find most amazing about what your team is doing is the sheer number of initiatives that you’re attacking, and we’ll come to that. First, would you give me a quick overview of Elkay? John Hrudicka: Elkay Manufacturing is a 90-year-old company that spans the housing industry and some commercial markets. We manufacture and sell sinks, which is where we began and represents the roots of our company. We also sell faucets, cabinetry, countertops, and water coolers, as well as food service equipment, which is a business that we recently entered into. Historically, our company has been divided into two major divisions: kitchen cabinetry and plumbing products.
At present, under our new CEO, we’re planning to evolve our go-to-market strategy to become more synergistic and become a solutions provider to better serve our customers’ needs. For example, if somebody sets out to remodel their kitchen, we’ll provide tools to assist them in configuring a complete kitchen based on their style preference and utility needs. We bring efficiencies to our commercial customers and projects by providing them complete solutions through a single source partner. Our ultimate objective is to provide solutions that the customer wants, as opposed to selling them the individual products that we provide.
SP: Tell me a little about the Elkay management system, which anchors all of this … JH: It consists of four primary components and related business practices which, when integrated, provide for greater transparency, knowledge, and guided analytics. The result is real-time, strategically aligned, business decisions made by every employee in the company. I’ll also characterize the system this way: It drives knowledge and analytics down to those in the trenches making business decisions.
It starts with our strategy framework; we have adopted the Balanced Scorecard. We’ve also implemented a Balanced Scorecard best practice by formalizing an office of strategy management to ensure our commitment to strategy execution. The core of the Elkay management system [EMS] is our strategy, with an emphasis on monitoring and measurement to ensure execution.
The second component, business performance management (BPM), describes the business planning application we utilize to plan our business and to monitor and measure our performance against our objectives. It enables us to identify change relative to our initiatives and desired outcomes, in order to develop the appropriate actions to achieve our goals.
The third component is what we call discrete product costing (DPC), its foundation being time-driven, activity-based costing. We utilize Acorn Systems for our application. DPC is a cost assignment methodology that produces very rich profitability analytics. It’s been an integral component for us in driving behavior and creating a culture of awareness and understanding around the profitability profile of our customers, segments, products, and activities. We’ve had a great deal of success; we were named customer of the year by Acorn Systems, and we recently completed a Harvard case study, authored by Dr. Robert Kaplan, that’s being taught at Harvard Business School.
The fourth component is customer relationship management. CRM provides a holistic view of our customer in terms of, one, what they buy; two, how they buy; and three, their customer care issues and profitability to Elkay. It provides a formal guide to help us track our selling processes in real time with complete transparency. We’re in the midst of implementing phase one, which will be completed soon, and we plan to complete our companywide implementation later this year.
SP: How do the parts integrate? Is it all one big system? JH: Relative to the existing technology platforms, it’s a bit disparate. The technology pieces we’re building into the system tend to be best-of-breed. We believe technology has matured to the point where you don’t need to buy a fully integrated suite that possibly forces you to sacrifice functionality that’s necessary to meet a business need. You must be able to trace back any initiative, technology investment, or resource assignment to the distinct purpose of alignment and execution against a business objective — or else why are you doing it?
We’ve already integrated DPC, our profitability analytics, with our scorecards and dashboards. Soon, we’ll integrate DPC with our CRM application to complete a 360-degree view of the customer.
DPC will provide a lot of the data points for the measurements in the Scorecard, but we also want to make the DPC P&Ls more readily available to our sales teams and management by integrating the P&Ls and associated guided analytics into CRM.
We will also, by the end of this year, eliminate standards-and-accounting-based reporting P&Ls and will utilize DPC “simple-language” P&Ls as our single P&L source, serving both financial reporting and business-decision support needs in a Lean Accounting environment.
SP: How do the simple-language P&Ls work? JH: I’ll give you an example. We manufacture sinks, and we apply a finish to these sinks; our P&L for this particular business actually contains a line called “finishing.” So when a plant manager reviews that P&L, he has a direct connection to that P&L line and its representation of an activity in his plant. That’s why we refer to it as simple language; it provides intuitive P&L lines that represent actual activities. It’s not accounting-based — no standards, no variances, no accounting jargon — it’s simple descriptions of P&L lines that surface questions for which we need to provide the answers or actions.
SP: How long have you been here at Elkay? JH: Three years, but feels like ten relative to the amount of change in our company!
SP: How did you develop your initial action plans? JH: Aside from the traditional “threshold” finance activities, everything we do in the finance function ultimately has to align back to business strategy to ensure that we’re working on the right stuff.
When I first arrived — in fact, it was during the interview process — the VP of sales literally sat me down in a chair and said, “Your costs suck.” I connected the dots quickly: Our costs were inaccurate, he didn’t trust them or any analysis they supported, and therefore he was unable to make good business decisions. This is a basic and fundamental need of any business, so I concluded during the interview process that this would be my number one priority in aligning to and supporting business needs.
Another thing I understood quickly was the need for a new planning solution. We just recently completed our budget for 2010, and we stated to the board that this would be our last. We’re committed to the elimination of the budget.
This wasn’t a difficult choice for our company. By continuing with the budget management system, we’d be in direct conflict with our strategy framework. Strategy is perpetual, whereas the budget has a distinct start and stop, which produces value-destructive behaviors.
SP: That’s a fairly bold strategy. How did you tell the board, and what was their reaction? JH: What’s interesting is that, while I think that Tim Jahnke, our CEO, may have thought it was a little bold, I didn’t think that it would be. I’ve been in enough Board meetings to experience their frustration at our inability to predict the future. They didn’t trust our predictions or our process, and they were ready for something new.
The old management system was based on the ability to predict the future, but there are no crystal balls; this economy has certainly provided proof of that. We’re committed to developing a process that allows us to respond to changes in our business on a real-time basis, thereby negating the need for a budget.
SP: So you told them that you’re not going to budget anymore. What did you tell them that you were going to do instead? JH: I described continuous planning, which is our term for the Beyond Budgeting concept, and its alignment to our Balanced Scorecard framework.
We provided a sports analogy to talk through the concept. In my opinion, business is very analogous to sports; accomplishment and winning is through the team. I described an excerpt of an ESPN documentary on Kobe Bryant, arguably the best player in the NBA. Kobe said, “There’s so much intelligence in the NBA; there are no surprises. Everybody knows what’s coming: the other team’s offensive and defensive schemes, their players’ strengths and weaknesses, etc. The ability to win, to look up at the scoreboard at the end of the game and have more points than the other guy, depends on the ability to execute against what you already know is coming.”
He took it further and said, “The triangle offense we run is the most well recognized offense in the NBA; it was run by Michael Jordan and the Chicago Bulls, and now it’s used by the current world champion Los Angeles Lakers. Every team understands the intricacies of this offense inside and out. What they attempt to do is to introduce change to confuse us; they’ll change the coverage schemes, for example. Our success depends on our ability to identify that change in a timely manner, assess it, adapt, and execute.”
This is the essence of strategy execution in business. You can be certain of one thing: The hypotheses and assumptions that you formed and utilized in developing your strategy were wrong at the time or will be wrong in the future because things will change, and you must adapt in order to win.
SP: Our Business Finance survey last year proved that. By 4 to 6 months into the year, two-thirds of respondents said that their budget numbers didn’t make sense anymore. JH: I’m actually surprised that it’s not higher!
SP: So you’re basically leaping off, eliminating your budget without a pilot, and replacing it with what — a rolling forecast? JH: Right, we’ve implemented that. We’re not good at it yet, but that wasn’t the point; the point was for us to get started so that we could drive the mind-set of the people who needed to support this new environment. When they think about where they’ve got to be 18 months out relative to looking at the business, what do they need to do to support this extended view of the business? Already, even with our first rolling forecast, our demand planning people are extending their window from 12 to 18 months in their demand planning tool. We’ll continue to evolve this process and chunk out the other elements of continuous planning.
SP: Very interesting approach. I like the idea of not trying to get it perfect the first time. You learn something, and you move forward. JH: Just to elaborate: For what we’re attempting to do, there’s no model for our team to follow. There is no script or recipe. Certainly, within any one component of the management system, there’s some guidance out there and people available to help you. But to integrate this in the manner that we’re doing, we don’t have anything to copy or emulate. Because of this approach, we readily accept that we’ll stumble, we’ll make mistakes, but we’ll be very diligent in identifying the lessons and modifying and evolving our path forward.
SP: What got you interested in the Beyond Budgeting concept? JH: We do a lot of research. I don’t care how far you are in your career, you never know everything, and there’s always something new on the horizon. We started with the business strategy, the business needs, the business problems, and then we researched and pursued solutions that address these areas through technology, process, and people. I didn’t learn about the concept of continuous planning until I attended a BBRT [Beyond Budgeting Round Table] conference.
The budget — and I think I probably speak for most managers — is perhaps the most frustrating part of the job relative to effort and value realized. Most finance people will tell you, “I don’t know where the value comes from in this process.” It takes entirely too long, and there’s direct conflict with strategy execution. As a finance professional who is business-partner minded, I’m acutely aware of this challenge. When you discover an alternative that may enable you to do this more effectively and align the process to strategy execution, you need to pursue it!
In my education and with my current level of understanding of the concept, I can’t imagine not pursuing this. We’re committed to ridding ourselves of the budget and its inherently destructive behaviors. We’ve taken the position that we literally have no choice, due to our adoption of the Balanced Scorecard strategy framework.
The budget is perhaps the most archaic management system in corporate America; it breeds command-and-control, and it doesn’t support the desired behaviors and cultures that companies aspire to if they want to drive long-term, sustainable results.
SP: How did you get people started with these big changes, and how do you get them to stay the course? JH: One of the things that we’ve talked about, and that I believe we have a fair amount of consensus around, is that if you’re going to introduce this much change, you should do it now during this economic downturn and when business is down. When the economy recovers, we don’t want to be in the mode of working on this; we want our efforts focused on our customers’ needs. I don’t actually think that there could be a better time than now to do this.
The inherent conflict in all of this is the investment you’re making, because when the economy is down and you’re trying to be frugal and conserve cash, it’s probably not the most opportune time to ask for investment in these solutions. But I’d say that’s a testament to the company I work for. Elkay is privately held, family-owned, and it has a much better balance of short-term vs. long-term views. We have a stated value that we are in business forever, so I’m better positioned to influence the company around making investments that have a longer-term return.
The first big change I talked about was the costing need. What we actually delivered was something much more than a costing methodology; we delivered a robust profitability analytics tool. This solution has driven significant bottom-line value and a profit mind-set culture. I’ll tell you that it was 5 months in play of perseverance in influencing the company to invest in this solution, which was an unknown relative to its ultimate value. When we made the investment and started to realize value, there was a natural gravitation to it. This success bought us a lot of credibility for the follow-on solutions that we continued to pursue to further build the management system.
SP: Tell me about finance’s involvement with the CRM product. That’s not the one you usually see people hitting. JH: No, you don’t. Prior to Elkay, I worked for a healthcare company, and I took a step out of finance into a business role. I was vice president of business operations, and we implemented CRM. This was for a company that was very successful, with a tenured sales force that thought that they didn’t need this tool to be successful. The only reason we were able to invest in the tool and implement it was because our president decided that we were not going to run our sales organization by the seat of our pants and on the back of spreadsheets anymore. But I had a bull’s-eye on my back … nobody wanted to do this!
Once it was implemented and the sales team experienced how it enriched their productivity and performance, we couldn’t keep up with the requests from the salespeople: “Can it do this, can it do that?” It was a tremendous success, and it drove significant bottom-line improvement in the first year of implementation.
I brought this story to Elkay and described the integration that we would achieve with the other elements of the management system that we’ve implemented. We discussed the 360-degree view of the customer that the CRM vendors preach, but which they really don’t possess; they have everything but customer profitability. We said, “We’re going to complete that 360 view by integrating DPC into the CRM tool to provide customer profitability.” They had already bought into DPC, so once we said that we would bring it into CRM, this solidified the merits of pursuing this solution.
SP: What challenges do you still have? JH: I think that continuous planning is going to be a challenge, not from the standpoint of buy-in, but in how effective we are, the pace at which we develop the implementation plans, and how well we influence on some of the more challenging aspects — incentive compensation is a prime example.
Another area of contention is that I’m constantly challenged to lead with process and then select and apply technology. I have a strong belief that you do this in parallel, because sometimes you’ll choose technology or implement it in such a way that you enable process elements or innovative capabilities that you wouldn’t have thought of otherwise.
We have more technology pieces that we need to build into our system, and the timing and the choices we make are going to be somewhat challenging to ensure that they’re balanced to achieve the desired outcome.
SP: Are manufacturing and distribution, the nonfinancial parts, also under the Elkay management system? JH: Yes, and again I’d say that we’re in our beginning stages; we’re definitely more mature in some areas than others. The reason I don’t think that it’s perceived as a finance initiative or a finance-owned initiative is that we have sponsorship at the very top levels of the company. The CEO and the presidents of the divisions have all embraced this, and not from a finance perspective but from a business perspective. I’ll give you one example: DPC might very easily be perceived as a finance initiative, a finance system, or a finance application. The reason why it’s not is that as we went through the implementation, we involved all of the functions of the business. In fact, every function signed off on the model before we actually put it into play.
What does that do for us? Prior to DPC, when we sat around the table and were reviewing analysis that required us to take a business action, invariably people would resist the action. They would opt out by saying that they didn’t believe the numbers, and so escape accountability for action. People can’t do that now because they were part of creating and validating the numbers. The only thing left for them to do is to address the action we’re going to take.
SP: I think that action orientation is a key piece of this. People support what they help to create. JH: We just presented our scorecard and dashboard technology to the board of directors. We thought that it was critically important that they didn’t walk away thinking that this was just a slick reporting tool. We wanted them to associate this with guided analytics that lead to a specific action.
We purposely held off the demonstration of the scorecard measurement alignment to the end. We talked them through it: “If you aren’t meeting the scorecard objective target, you can view the initiatives that support the desired outcome for that particular measurement. Are you not executing well on the initiative? Is it the wrong initiative? Does it need modification? If you’re not achieving your targeted performance, what do you do? What’s the alternative action?” So we were able to get the board to view the reporting tool as a means to an end to get to the underlying root causes of performance and, more important, to identify the appropriate action to take.
SP: I’m hearing people talk a lot more these days about their entire management system; they’re realizing that it’s not just, say, a customer profitability tool — it’s a tool that operates within a broader system. JH: And this lends itself very well to our influence for future investments, because we position and describe the management system as a holistic system, consisting of integrated components that drive value well beyond the individual elements. When we continue to add to the system, I’m never asking for a new singular solution. We have commitment for the Elkay management system, so now when we present the need for these additional pieces, I’m already halfway to approval.
It’s been interesting, since we started doing this — you know, you tell a story here and a story there about the behavior changes we’re experiencing, and the momentum of interest in what we’re doing continues to grow. Every time we tell our story, people get excited: “I haven’t heard of anyone else doing this.” They can connect with it and follow how it’s all going to work together.