VideoArmstrong World In-dustries Inc. has a proud history dating back to 1860, but it has spent the past few decades cranking out financial returns considerably more uneven than the rolling plains surrounding its rural Lancaster County, Pennsylvania, headquarters. Today, the $2.2 billion maker of ceiling tiles and floor coverings is following a new strategic direction it believes will smooth out its inconsistent financial performance. Armstrong's compass for the journey: economic value added (EVA), the performance measure trademarked by consulting firm Stern Stewart & Co. Since implementing EVA on January 1, 1995, Armstrong has sold off its Thomasville furniture subsidiary, merged its American Olean ceramic tile business with a larger company, and rethought the way it runs its remaining operations.
"We're much more attentive to the use of capital and the amount of capital in each business," says Warren Posey, assistant treasurer and director of investor relations. "We have pushed EVA down to all salaried employees worldwide."
Armstrong is one of hundreds of companies that have gotten religion--the value-based metrics religion. Armstrong's particular creed, EVA, is easily the most glamorous of these metrics, all of which are aimed at measuring the degree to which a company's aftertax operating profits exceed or fall short of the cost of the capital it has invested in its business.
Implemented into every facet of corporate decision making, proponents say, value-based performance metrics can help transform ill- performing companies from wastrels into wealth creators, and turn good performers into great ones. Even their harshest critics concede that they can be valuable in helping line managers link the balance sheet to the profit-and-loss statement--something that performance and incentive compensation programs based on earnings per share could never do.
Many companies have concluded that the choice they face is not whether to adopt one of these new metrics, but which one to choose. The choices are multiplying; as noted in these pages last year ("Metric Wars," CFO, October 1996), many management consultants now have a value-metrics practice. The most prominent ones, in addition to Stern Stewart, are The Boston Consulting Group, which offers TBR (total business return); The LEK/Alcar Consulting Group LLC and SVA (shareholder value added); and HOLT Value Associates LP and CFROI (cash flow return on investment). Stern Stewart boasts more than 250 corporate clients, while The Boston Consulting Group says it has worked with about that many companies over the past five years. LEK/Alcar reports having between 50 and 100 clients, while HOLT has only a handful of corporate clients (as opposed to institutional investors).
Meanwhile, older performance metrics are coming back into style. General Motors Corp., for instance, is a well-known proponent of using neither EVA nor TBR but good old RONA (return on net assets)--a measure which, it is safe to say, is in the toolbox of every MBA graduate in the country. General Motors liked the idea that it could, in its view, apply RONA both to its North American operations, which were in a classic turnaround mode, and its international operations, which were operating in a classic growth environment.
The problem is, every purveyor of a performance metric can trot out arguments that favor its acronym at the expense of rivals'. With so many choices and competing claims, how can CFOs determine which metric is best for their business? It's a question of no little consequence. For one thing, the consultants charge steep fees, which reach six figures for larger customers. (Some companies, such as Valmont Industries Inc., have concocted cheaper home-brew versions of EVA for their particular tastes.) But far more important, companies launch ambitious initiatives under the aegis of a performance metric-- particularly when the metric is closely tied to executive compensation.
Take Centura Bank, in Rocky Mount, North Carolina. Since implementing EVA on January 1, 1994, the $7 billion (assets) bank has spent in excess of $30 million to develop alternative delivery channels and new products- -essentially "reinventing the company," confirms a bank spokesperson. "We are convinced that under our old earnings-per- share methodology we wouldn't have taken these steps, because the measurement system would have punished our incentive system so tremendously."
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Given that so much potentially rides on a performance metric, it's easy to see why companies would opt for the market leader. Many companies have decided that selecting Stern Stewart's EVA is the safe and easy choice, akin to selecting Microsoft software for your PCs.
For Minneapolis-based International Multifoods Corp. CFO and senior vice president of finance Bill Trubeck, choosing Stern Stewart was a matter of "going for the gold." "Bring in the best," Trubeck advises. "It may cost more than people want to spend, but in terms of potential return, I think you're way ahead by bringing in the experts to help you. They get you focused and keep you on track."
But independent observers with no ax to grind insist there's no one metric that's right for all companies in all circumstances. "I'd calculate a variety of measures," recommends Carl Noble Jr., adjunct professor of finance at Northwestern University and chairman and CEO of The Alcar Group Inc., a financial software firm he co-founded with another well- known academic, Alfred Rappaport. (Alcar Group is not affiliated with metrics consultants LEK/Alcar Consulting Group.) Says Noble, "I've seen excellent results from all of these consulting firms."
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