The Service Industry Dashboard
STRATEGIC FINANCIAL ANALYSIS | THE NEW DUPONT MODEL
©
© BUSINESS ANALYTIX, INC.
Strategic Inputs that Every Service
Industry Manager Needs
•
What drives my long-term revenue
and profitability growth?
•
Is my cost structure bloated?
•
What are the risks that I should
guard against?
•
What impacts my long term success?
•
How can I maximize the value of my
business?
© BUSINESS ANALYSIS, INC. 2013
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Using numbers to manage a Service business
The need to re-invent the DuPont Model
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History of the (Traditional) DuPont
Model
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Developed in 1914 by F. Donaldson Brown of
chemical company DuPont de Nemours & Co
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A technique that can be used to analyze the
financial profitability of a company taking into
account operational (P&L) as well as investment &
financing (Balance Sheet) parameters
•
Pioneering “dashboard” technique in the context
of the then existing manufacturing economy
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The Traditional
DuPont Formula
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Need for a Reinvented DuPont Model
Rise of the service industry in the postindustrialization economy requires
reinvention of legacy analytical models
Manufacturing
Service
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How to Reapply the DuPont
Formula to a Service Business?
MODIFICATIONS TO TRADITIONAL DUPONT FORMULA
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Reworking the DuPont for the Service
Industry
STEP 1
IDENTIFY
STEP 2
REPLACE
STEP 3
COMPUTE
•Recognize the differences
•Develop new, relevant
parameters
•Measure and monitor
multi-dimensional metrics
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The Service Industry Differences
MANUFACTURING
SERVICE INDUSTRY
Assets mainly consist of
Property, Plant &
Equipment; i.e. fixed
and tangible assets –
often reported at their
book value in books
Assets consist of “soft”
assets such as
assembled workforce,
homegrown technology
and software – often
not reflected in books at
all.
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The Service Industry Differences
MANUFACTURING
SERVICE INDUSTRY
Defining variable
direct costs is often
cumbersome and prone
to distortion due to
inventory accounting.
⤑
⤑
Traditional DuPont
ignores Operational
leverage
⤑
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Variable direct costs
are often easily
identifiable and can take
a chunk of revenue
dollars
Operational leverage of
a service business is key
to its risk profile
⤑
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The Service Industry Differences
MANUFACTURING
SERVICE INDUSTRY
⤑
The revenue is
generated by one-time
sales transactions of
product produced
⤑
Insignificant recurring
revenue (mostly the
maintenance revenue)
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© BUSINESS ANALYSIS, INC. 2013
The revenue may hinge
upon certain drivers such
as software install base or
subscriber base or quite
simply “assembled
workforce”
Considerable recurring
revenue (service fees,
royalties, etc.)
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BASE FOR
RECURRING
REVENUE
VALUATION
MULTIPLIER
SERVICE
DRIVER
OFTEN NONFINANCIAL
OFF-BALANCE
SHEET
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DETERMINES
SUSTAINED
COMPETITIVE
ADVANTAGE
Identifying the
Service Driver
SERVICE DRIVER IS
OFTEN THE STRATEGY
KEY FOR A SERVICE
INDUSTRY MANAGER
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Some Examples of Service Drivers
SERVICE INDUSTRY
SERVICE DRIVER
SOFTWARE
LICENSE-BASE
TELECOMMUNICATION
SUBSCRIBER-BASE
NEW MEDIA
UNIQUE DAILY VISITORS
CONSULTING
BILLABLE MAN-HOURS
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VALUATION
REVENUE
SERVICE
DRIVER
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WHY DO THE
SERVICE
DRIVERS
DESERVE A
KEY POSITION
ON YOUR
STRATEGY
DASHBOARD?
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Using numbers to manage a Service business
The Service DuPont Model
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Constructing Inferences from Numbers
Step 1: Determining the Objectives
OPERATIONAL
EFFICIENCY
OPERATING
RISK-REWARD
INVESTMENT
EFFICIENCY –
BUSINESS
BANKABILITY
ENTERPRISE
PROFITABILITY
FINANCIAL
RISK-REWARD
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ENTERPRISE
VALUATION
EQUITY
HOLDER’S RISK
& REWARDS
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Constructing Inferences from Numbers
Step 2: Organization
FO
TOTAL
INVESTMENT
(ASSETS)
DVC
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EQUITY
SERVICE
DRIVER
(UNITS)
REV
NET INCOME
REV
NET INCOME
DVC
TOTAL
INVESTMENT
(ASSETS)
FO
SERVICE
DRIVER
(UNITS)
EQUITY
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The Service Industry Dashboard Powered by the Service DuPont
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⤑ CORPORATE DASHBOARDS &
STRATEGY PLANS
⤑ DUE DILIGENCE & FINANCIAL
OVERSIGHT
⤑ COST CONTROL
⤑ VALUATION STRATEGIES
⤑ TECHNOLOGY ECONOMICS
⤑ PRICING STRATEGIES
⤑ CAPITALIZATION STRATEGIES
Rajiv Hazaray
BUSINESS ANALYTIX, INC.
+1 (267) 259.8102
rajiv.h@business-analytix.com
STRATEGIC FINANCE for the
SERVICE INDUSTRY
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