Kathleen B. Allen has led a remarkable transformation of the budgeting and planning processes at Millipore Corp. Drawing from the experiences and resources from the Beyond Budgeting Round Table, Allen directed the efforts that have eliminated Millipore's traditional annual budget process.
A growing $1.26 billion global public company in 2006 and member of Standard & Poor's 500 Index, Millipore provides products, services and enabling technologies to pharmaceutical and biotechnology manufacturing companies and clinical, analytical and research laboratories. Since revamping its planning processes, Millipore is well positioned for future growth.
Allen spoke with Steve Player, North American programming director of the Beyond Budgeting Round Table, about Millipore's transformation initiatives.
Steve Player: What started you thinking about breaking free from the traditional budgeting process?
Kathleen Allen: I joined Millipore 23 years ago and was appointed CFO in 2000. What stands out is that in 2002, we had just gone through the establishment of the 2003 budget, which was just an awful process. I kept thinking that the budget process would somehow look better and be less painful from a more senior vantage point. But even as CFO I disliked the budget process more than ever. It was a waste of time. It was gamesmanship and represented an enormous amount of time and effort. I liked the methodology developed through the Beyond Budgeting Round Table because it gave us a framework to reassess our budgeting and planning processes.
SP: How did you make it happen?
KA: Two years ago [2005] our new CEO came on board. After giving him a few months to meet and greet and figure his way around, I suggested to him that his arrival might be a good time to introduce some needed process changes, including changing the way we do financial planning. Perhaps it came as no surprise his memories of the budgeting process were less than fond ones. He was receptive to the idea of beyond budgeting immediately.
With our new CEO, we refreshed our corporate strategy. As part of the strategic review, the executive team discussed the importance of establishing processes that would ensure we followed through and implemented our new strategic vision. So we asked ourselves: 'How do we make this happen? How do we make sure that we have an aligned organization? How do we make sure that we're measuring and funding the right things?'
As a result of this fundamental thinking, we brought together many of the concepts that we're using today -- the strategy map, the balanced scorecard, and the beyond-budgeting concepts: rolling financial forecasts and dynamic resource allocation.
In June of 2005 we launched our Growth Performance System, or GPS, and that's how it all started.
SP: It sounds like you were able to move ahead pretty quickly.
KA: We moved quickly on the front end, building and articulating the strategy and breaking it down into executable pieces. That whole strategy map concept at the beginning was like a foreign language for many of us. However, once we brought people through the training process, it started to pick up enormous momentum.
At the same time we started to wean people away from the concept of bottom-up, every-quarter budgeting. We recognized that we needed some technology to enable it -- a centralized financial planning tool, if you will. We relied heavily on Excel spreadsheets, so we needed a solution that would facilitate both a system and a process change initially for the finance organization but ultimately for line management as well. We didn't want to have to rethink our budgets every quarter. The goal was to put a system in place to allow us to identify trends, make high-level changes and get back to running the business.
SP: You've grown from an $850 million to a $1.26 billion company in the last couple of years.
KA: We went from three years of 6 percent growth -- which in some of those years actually wasn't too bad in the industry that we're in -- to 12 percent in 2005. The business is performing very well with continued strong growth in 2006.
SP: How has that manifested itself -- what you're doing today versus what you used to do?
KA: I would say the biggest and most obvious change started with our board of directors and cascaded from there. It's all-around governance and execution that is aligned with our strategy. We've been able to discuss the concepts around driving incremental performance improvement with the board. Our directors now talk more about continuous improvements, trending our performance against our competitors. This is a board that's always been keenly interested in relative competitive performance, so the metrics we've derived as a result of our transformation are consistent with their interests.
SP: How does the board work with your annual operating plan?
KA: Well, in some ways, it's the budget with different branding. They approve the annual plan, the capital expenditure plan and so forth -- that's their fiduciary responsibility. What's different now is that we're doing a much better job putting it in the context of the business. When I first became CFO, budgeting was a very numbers-intensive discussion, a year-over-year numbers game. Now our operating plan is structured so that it's a logical output of our strategy discussion and our five-quarter rolling financial forecast. We're measuring how well we're executing our strategy by defining 'this is where we are on our path, and this is what has gone well. This is where we need to course-correct, this is what we funded, and this is what it translates into our P&L, our balance sheet and our cash flow for the next year.'
SP: How does the board react to that, when the numbers are kind of the end result?
KA: They would rather spend time talking about the business. They'd rather talk about our markets, our competitors, our technologies and our innovations -- all of those things. When the financials are presented in context, the numbers make sense.
SP: You mentioned the board looks at relative performance. How does target-setting work now?
KA: Target-setting continues to be a challenge. We don't have a continuous trajectory of growth, due to our acquisitions. In the short term, our targets are driven by our acquisition financial models. However, we have a stated goal to double the value of the company by 2009. That's the growth trajectory we're plotting, which helps us set our targets.
SP: How do you align your organization internally? What role does incentive compensation play?
KA: We're evolving to a new model. Our incentive plan includes three financial components: sales growth and profitability, improvement relative to prior periods, and how we're doing relative to our competitors. We have taken incentive compensation out of the divisions and created one plan for the entire company. So everyone's in this together. We have one company-level set of metrics that really levels the playing field.
SP: How do you define the measurement of comparison to your competitors?
KA: We look at multiple financial measures, such as revenue growth, profitability, inventory turnover, total shareholder return and cash earnings per share.
SP: How do you execute on your plan?
KA: We do trickle-down goals. Through our strategy maps, we keep track of how we're progressing in terms of financial as well as operating results. The CEO has goals that he's communicated to the senior executive team. I'm in the process of writing up my goals, which will go to my staff. It's a cascading process.
We have an integrated, aligned business model. It's what our GPS has brought to us. We know where our weak spots are. We know the investment decisions and where we're investing and where we're going to invest when the next million dollars becomes available.
SP: How often do you look at investment optimization and prioritization?
KA: On a quarterly basis, our executive team will review the future forecast and discuss the prospect of pulling forward some programs. Now it's an informal "wish list," if you will. One of our goals for GPS this year is to add more structure. We'll be working to put together a portfolio of initiatives -- with all the numbers -- so that we can either accelerate them or slow them down, depending on the circumstances.
SP: What about other resource allocation, for example headcount? Is your headcount included in your annual operating plan?
KA: At the executive level we don't really talk a lot about head count, per se. Head count is a cost driver in the forecast, not a target. Instead we talk about programs, initiatives, metrics and our general trend-level of investment. Of note, though, is how our approach to staffing considerations is undergoing change. We're increasingly appreciative of the need to have HR drive the skills and leadership development initiatives required to implement our strategy. Our new vice president of HR has brought in a much more integrated approach to the staffing and financial plans. We're not fully there yet, but in 2007 I think we'll find finance and HR more wired to each other.
SP: How do you control all this?
KA: It's very important to have a project management team in place to keep track of these changes and to educate the organization. We have a vice president of strategy management, Christophe Couturier, who is responsible for the overall GPS implementation project. The mind shift takes time. With one of our acquisitions, you can see the contrast in their thinking from classical budgeting to our approach now -- and the difference is startling. But you need a team to educate people about how we do things and why it's okay if they switch and plan differently. The mantra is 'Give us your best estimate of what you're going to spend' so that we'll have funds available to spend in other places. Resource reallocation across the organization works when there is alignment on the strategic priorities. Certainly, it takes a few quarters to build trust and to break the hoarding habit. But we've become very adept at identifying the fat cells within the organization.
Regarding financial controls, when you compare what we're doing now in the financial planning process to the past, it's important to remember that you don't get a lot of benefit from what isn't an accurate set of numbers anyway. When budgeted expenses are high and revenues are low, what difference does it make when you've got it all organized in cost centers? How much internal control are you actually getting? The better control vehicle is analyzing the trends in the actuals when you have that organizational mindset that innately understands what your spending should be, relative to initiatives, profitability and competitive factors, among other considerations. These kinds of controls are more valuable to the organization than simple headcounts or total project spending.
SP: Do you have any advice for fellow CFOs who, like you, are wrestling with a budgeting and planning process, thinking 'There's got to be a better way'?
KA: All revolutions start with a champion who raises the idea, gains support from senior managers and together implement change. Certainly, that's where you start. But over time the transformation resembles more of an evolution than a revolution. Process changes like these take time. You need senior management's long-term support and project management focus that's fully committed to working and implementing the changes. We're fortunate to have both.