More than a decade ago, Georgia-Pacific Co., in Atlanta, signed up with Stern Stewart & Co. and began measuring financial performance with Economic Value Added. It started making incentive payments to managers based on the EVA numbers. Then, before any thought could be given to extending the program to the rest of the workforce, dissatisfied executives pulled the plug.
Today, it's a part of Georgia-Pacific lore why the $13 billion maker of pulp, paper, and building products dropped EVA about a year after introducing it. Most managers, says Suzanne McFadden, senior director, corporate planning and development, didn't understand how the new measure was calculated. More important, they couldn't figure out themselves how to use EVA as a guide to affect corporate financial results, let alone how to explain it to the rank and file. A diagram of the EVA calculation presented in a one-hour training session looked, adds one consultant, like the wiring pattern for a Boeing 747.
Given all the good press EVA has received, companies might not be blamed for getting the impression that rolling out EVA is as easy as making microwave popcorn. But, in reality, there are many ways to stumble in adopting value-based metrics, whether the Stern Stewart version or other such programs, and in using them to drive corporate planning, budgeting, control, and compensation systems.
Sometimes, the company's approach to economic profit--essentially, a measurement that subtracts the cost of all capital invested in an enterprise from aftertax net operating earnings--is just designed improperly.
John Donovan, global director of value-based management at Deloitte Consulting, tells of one distribution company that created an economic-profit plan and bonus system, but failed to provide a way to parcel out incentives over time to reward longer-term gains in shareholder value. That damaging short-term emphasis led company managers to fatten their bonus checks by halting investment in new growth, embittering top management so much that it eventually stopped using value-based numbers entirely.
Many corporations say other problems involve the complexity of the new metrics. For some managements, that complexity leads to trouble integrating the economic-profit approach into their enterprise resource planning systems-- something that vendors are only now addressing with new software products.
Training the Trainers
Perhaps the greatest challenge, though, is how to popularize the EVA concept within the ranks so that workers and their front-line managers will find it a useful tool. "They need to know what the actionable things are that they can do" to change EVA, says Justin Pettit, a partner at Stern Stewart. Managers help by drawing examples of decision-making within the basic operating levels of the company, but those managers must also learn what kinds of lessons appeal most to their subordinates.
"There's a lot of behavioral science" in getting the EVA calculation right and making it meaningful to the workforce, comments Pettit. And some behaviors are simply hard to predict.
In fact, according to companies that claim to have had success with EVA, it works well only if the metrics are explained clearly and reinforced frequently among all employees. Often, of course, workers haven't a clue what terms like "economic profit" mean. "You can't make it a black box," says David Young, a professor of accounting at INSEAD, a business school in Fontainebleau, France, who is writing a book on EVA.
Herman Miller Inc., the $1.7 billion Zeeland, Michigan, maker of office furniture, may hold the speed record for an EVA rollout, boasts chief financial officer Brian Walker. But the company gave equal attention to achieving a high level of comprehension among all of its employees when it installed EVA throughout its 7,900-person organization in several stages during 1996. The roll-out strategy, says Walker, was to instruct its own managers--250 of them--first, and put them in charge of the broader training effort. Stern Stewart helped with the high- level instruction, he says, and "really pushed us and made us embrace this whole train-the-trainer approach."
That tack forced the team leaders, generally not finance people, to study EVA as intensely as teachers expecting a tough class of students. "One of the keys was having nonfinancial people deliver the concepts," Walker says. Because the trainers were familiar to their teams, the trainees felt comfortable peppering them with questions. "Everybody assumes [the supervisor] is fair game," he says.
High Anxiety
The trainers, who had to teach a two-hour course on "EVA 101" followed six months later by the more-advanced EVA 201, approached the assignment with a certain amount of dread. "The anxiety level went up threefold," says Dave Guy, vice president, finance. But because the EVA message was delivered from the top down in a cascading succession of trainings, from executive to supervisor to team member, Guy believes a more-substantial knowledge of how the metric works took hold at Herman Miller.
Workers now have precise information on just how to boost their EVA numbers, according to Chris Sanford, an office-panel assembler working in the Zeeland plant. Each dollar saved from replacing a glass-fiber product with a new honeycomb filler, for example, contributes 60 cents to EVA, as does each dollar saved by replacing the wood sheathing on the top of the panel with a cheaper material based on a wood-dust product.
Reader Comments» Post a comment