VideoExecutives had to work harder to bring understanding of EVA down to workers on the factory floor. "The further you complicate it, the more you're going to lose people," says senior director Suzanne McFadden, who, along with CFO John McGovern, served as architect of the current program.
Managers kept the calculation simple and understandable, and talked up EVA in every newsletter and company event. The mantra was, "train, train, train."
Georgia-Pacific hired Stephen Timme and Christine Williams-Timme, financial educators at FinListics Solutions Inc., in Dunwoody, Georgia, to instruct more than 1,500 people in 14 divisions, including 25 mills, in EVA concepts. The two trainers dedicated themselves to finding ways to keep the measurement game interesting to nonfinance people--a task that is increasingly on the front burner at companies trying to install EVA.
Georgia-Pacific and other building-products manufacturers have suffered since the glory days of the mid-1990s, when prices soared and mills ran at near capacity. The company produced a slight negative EVA in 1996 and 1997, and didn't publish aggregate economic-profit figures last year, noting that it had split in two and issued shares in separately traded Georgia-Pacific Group and The Timber Co. entities.
But in several divisions at Georgia-Pacific, this second incarnation of EVA has made a substantial difference, leading employees, for example, to propose various cost-saving measures that benefited both the "traditional" bottom line and the EVA numbers that help determine their bonuses. Still, progress in building worker understanding has been somewhat uneven. While manufacturing groups with profit-and-loss responsibility put together EVA numbers fairly easily, support groups often have had to invent ways to calculate a plausible EVA for their operations.
Failing the Laugh Test
Susan Moore, the vice president for environmental affairs, says it took two years, for example, to figure out how to submit defensible numbers for her department to Correll. The first year, the 60 people in her group calculated EVA from both ongoing and proposed projects. They came up with an EVA figure of $550 million-- which was essentially an aggregation of all cost savings.
The number, Moore notes ruefully, "did not pass the laugh test." The EVA figure was a whopping 50 percent of the whole corporation's net income that year, a preposterous sum for a single staff department. Perhaps, suggested the chief executive sarcastically, Georgia-Pacific should change its entire business to environmental affairs. Moore and her people went back to the drawing board and reworked their assumptions, calculating EVA as a negotiated share of gains from environmental efforts in collaboration with the company's mills. The unrelenting focus on EVA, Moore says, has brought the group around to a new understanding: A staff group can quantify the business value of its services.
Despite the negative EVA results, progress is being made on the value-based front, says Moore. "We are thinking more clearly, and we are prioritizing our projects," she says, adding that the review of EVA numbers allows employees to "better appreciate the economics of what they do."
An example is in the use of consultants for certain work--such as the writing of complex permits--that could be done in-house with a better EVA return. After taking that action in 1996, the company brought $600,000 of consulting work back in-house, twice its goal for the year. Last year, it replaced $800,000 of the outside consulting work.
One EVA-inspired engineer in Moore's department, seeking to cut expenses for waste disposal, developed a new process to dry plant waste and burn it. The process required no capital; it saved $120,000. Far from getting a chuckle from Correll, this time the engineer got a letter of praise--and a bigger bonus.
Bill Birchard, a CFO contributing editor, is co-author of the recently published book Counting What Counts (Perseus Books).
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AN ASSIST FROM SOFTWARE?
Some products may help bring economic profit to the troops.
What financial manager wouldn't want to show front-line supervisors a list of activities that create or destroy value? Or link shop-floor workers' results directly to the bonus system? Or give team leaders computer tools for simulating potential value-boosting process changes?
But despite the flood of accounting software, companies using Economic Value Added (EVA) or other economic-profit measurement systems generally haven't gotten much help from off-the-shelf applications providing these capabilities.
With the potential market so large, vendors are certainly working on it. But they are largely playing catch-up. Lawson Software says it has shipped a "strategic ledger," yielding some shop-floor-level economic-profit data already. SAP says it has begun shipping SAP Strategic Enterprise Management software (SEM), which offers some economic-profit capabilities systemwide. PeopleSoft plans to ship a "workbench" for its Enterprise Performance Management software in December. And Oracle Corp. is looking to early 2000 for the first shipment of a module for its SEM software.
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