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Ted Black is somewhat of a ROAM specialist. He utilises the return on assets managed model to help pinpoint opportunities for measurable, bottom line, team driven projects. He’s previously applied the model to Apple and AB InBev, as the suitor of SABMiller [JSE:SAB]. In the piece below Black moves upstream and takes a look at packaging group Nampak [JSE:NPK].
He takes a look at employee targets, and by using the ROAM model shows a varying take on this critical number. It’s an interesting look at ways to tie a bonus or profit sharing scheme into one number. – Stuart Lowman
By Ted Black*
ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects
Peter F. Drucker said that, “Every enterprise is a learning and teaching institution. Training and development must be built into it on all levels - training and development that never stop.”
How do you best do that?
Focus on a number – one that’s critical for the success of the enterprise. Every firm has one. It may differ from time to time as conditions change but once you know what it is, a campaign to improve it will have a big impact on the value of the firm over the next few years.
Ask managers what their critical number is and they may say profit or maybe cash. They might even quote you one from a host of “key performance indicators” in a “Balanced Scorecard”. The shrewd ones have a ratio in mind that drives profit and cash. Often it is unique to their business. Let’s take an example.
Last time we looked at SABMiller through a ROAM looking glass. Compared to AB InBev, as SAB is a low cost producer, improving its Gross Margin through pricing tactics seems as if it might be a critical number. Moving upstream, one of its suppliers in South Africa is Nampak.
It is well-positioned and dominates the packaging sector especially with its crown jewel Bevcan. Using the Cash ROAM model, what could its critical number be?
First, here is the overall Cash ROAM impact on Nampak’s value (Market Cap ÷ Assets).
The link between ROAM and the VOF is clear. So the next question is, “Which is the senior synergist in the ROAM equation for Nampak?”
Is it the one that managers, Boards and analysts tend to put first … the operating margin?
Their Cash ROS% shows no weakness. As to be expected there is quite big, year-to-year, random variation but on average it has been around 13%. That’s good.
What about the next measure … the one we tend to ignore and rarely give the importance it should be? This is the sales productivity of the asset base, or ATO (Sales÷Assets).
When you look at this chart that covers a twenty-year period, you have to wonder if the Board or top management have ever been made aware of the impact a declining ATO makes on ROAM and the value of the firm. Either they weren’t informed, didn’t understand or dismissed it. Knowing how accountants give feedback to operating people, the last reason probably doesn’t apply.
You make change with one number, not many of them. The good news is they can change course and head north-east with this one critical number.
Imagine what could happen if Nampak’s entire management – operating and resource people – focused their minds on this customer and sales-driven number – ATO – for a couple of years or so.
What if the bonus or profit sharing schemes were all tied to this one number? What if HR worked with Finance to make it an educational tool to teach and show how each person, team and function can make a contribution toward improving this critical ROAM number and in so doing, strengthen the company?
What do you think?
Better still, what could happen in your company with a similar focus on one, critical ROAM number?
• Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at tblack@astrovoice.co.za.
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