Linking Strategic Planning with Operational Planning, Thomson Reuters
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Financial Planning & Analysis San Diego 2012
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Linking Strategic Planning with Operational Planning, Thomson Reuters
- 1. Thomson Reuters Linking Strategic Planning with Operational Planning Dan Surette Director of Finance February 24th , 2012
- 2. Special Note Safe Harbor / Forward-Looking Statements • This presentation contains forward-looking statements, including those about Thomson Reuters outlook and prospects. Forward-looking statements are those which are not historical facts. These and other statements that relate to future results and events are based on Thomson Reuters current expectations. • Our actual results in future periods may differ materially from those currently expected because of a number of risks and uncertainties. The risks and uncertainties that we believe are material are outlined in our disclosure filings and materials, which you can find on www.thomsonreuters.com. Please consult these documents for a more complete understanding of these risks and uncertainties. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. Our outlook is provided for the purpose of providing information about current expectations for 2012. This information may not be appropriate for other purposes. 2
- 3. Our Business 333 We are the world's leading source of intelligent information for businesses and professionals, combining industry expertise with innovative technology to deliver critical information to leading decision makers TAX & ACCOUNTING: $1.1B Checkpoint is used by all of the top 100 U.S. accounting firms HEALTHCARE & SCIENCE: $0.9B Informing healthcare decisions affecting over 150 million lives Used by over 20 million researchers worldwide MEDIA: $0.3B Reuters news and information reaches one billion people daily FINANCIAL: $7.1B Provides financial applications for over half a million professionals globally LEGAL: $3.7B Westlaw is relied upon by 99% of the National Law Journal's top 250 U.S. law firms MARKETS DIVISION: $7.4B PROFESSIONAL DIVISION: $5.6B Note: Represents legacy structure, as of January 1, 2012 Thomson Reuters eliminated its Professional and Markets Divisions and reorganized into four reportable segments: Legal, Tax & Accounting, IP & Science and Financial & Risk
- 4. Competitive Advantage 444 Industry Leader True Global Presence Combining deep employee expertise across our verticals with innovative technology to deliver critical information to leading decision makers in the financial, legal, tax and accounting, healthcare and science and media markets, powered by the world's most trusted news organization For Professionals, By Professionals Attractive Business Model • Over $10 billion in revenue • The world’s leading source of intelligent information for businesses and professionals • Serving customers through offices in more than 300 cities in more than 100 countries • Revenue stream: 59% Americas, 30% EMEA, 11% Asia • Subscription based • 86% of portfolio recurring revenue • Strong & consistent cash generation capabilities
- 5. Key Financial Principles 555 Drives shareholder value by providing: • Optimal financial flexibility to support business/strategic objectives • Ability to “stretch” if/when required for the right opportunities Drives shareholder value by: • Deploying capital towards most attractive opportunities • Exiting underperforming and/or non- strategic businesses • Capital allocation linked to business strategy & operating performance • Portfolio Optimization • Disciplined Acquisition process • Disciplined Capex management process Drives shareholder value through: • Attractive and growing return of capital to shareholders (dividends and stock buybacks) balanced with re-investment in the business (Capex & acquisitions) • Target strong growth • Capital intensity • W/C management #2 Focus on free cash flow • Target Net Debt / EBITDA of 2.0x • Access to capital markets • Balance investments and returns #3 Support business objectives with a robust capital strategy #1 Invest to drive long-term growth & returns
- 6. Business Model 666 • Strong financial profiles • Mission critical information • Many professionals, highly distributed • Complex or risk-oriented • Deep domain expertise • Managing structured and unstructured data • Applying user context • World-class technology leadership • Global / large communities Attractive professional information market segments… …where we can deploy our core competencies
- 7. 7 STEP 2: Measure our Performance STEP 3: Take Action For each segment we participate in, we ask: • Is the sector large & growing? • What is the short- and long- term outlook for growth? • Are there benefits or efficiencies of scale? • Do we have any natural advantages that position us for success? How do we stack up? • How does our financial performance compare to our competitors’? • Are we gaining or losing market share? • Are our margins best in class, average or below average? • What is our trajectory? Proactively shift the business • Invest to add the right capabilities (buy or build) • Transition away from or evolve businesses that no longer have the right characteristics • Example: Transition from print to electronic STEP 1: Evaluate our Market Segments Putting Growth & Returns into Practice
- 8. 8 Disciplined Approach • Deliver a disciplined review of the growth & returns performance for share in each segments • Track the size and estimated future growth rates for the market segments we participate in • Identification of segments for further study Revenue Growth Margin High Low HighLow
- 9. Business Growth vs Market Growth Example: for discussion purposes only 9 $X.XB Avg. Revenues +1% Below Market Growth % +1% Above Market Growth % Key: Market Growth Line “Above Market Growth” “Below Market Growth” Segment Revenue Growth % is: Market Growth % CAGR Within 1% of Market Growth % OrganicRevenueGrowth%CAGR 0% 5% 10% 15% 0% 5% 10% 15%
- 10. 10 Past Process Strategic Plan Operating Plan July • Developed by Strategy Groups and presented to the Board • Analyze markets where we compete • Develop view of Thomson Reuters in terms of markets • Size in terms of relative market share • Growth vs market • Internal view of company Growth and profits in certain markets December • Developed by Finance Groups and delivered and delivered to the Board • Aggregate financials across the company • Develop view of the company in terms of management reporting • Growth rates determined as reasonable based primarily off of past performance • Analysis around growth, revenue flow through and FCF conversion Strategy Finance
- 11. 11 Strategic Planning Westlaw Online Legal Briefs Large Law Small Law Corp Law Large Law Small Law Corp Law Market Segments Operating Segments
- 12. 12 Proposed Changes Key Shortcoming Proposed Solution • Strategic rollup of businesses based on Market segments • No way to translate results in market segments to results in operating segments • No way to use market growth as key indicator of business growth • Align Operating segments with Market segments • Or at least a way to reconcile between the two
- 13. 13 Revised Process Strategic Plan Operating Plan • Partners with Finance in development of Strategic and Operating plans • Agrees with Finance on agreed upon market/operating segments where we have revenues • Provides short term and long term market growth in agreed upon segments • Utilizes business growth as provided by Finance • More grounded and robust analysis as market share revenues tie to Business forecasts • Partners with Strategy in the development of Operating and Strategic plans • Agrees with Strategy on agreed upon operating/market segments where we have revenues • Provides short term and long term business growth in agreed upon segments • Utilizes market growth as provided by Strategy • More grounded and robust analysis as market growth projections are a leading indicator for Business Growth Strategy Finance July December
- 14. 14 Systems Support Example: for discussion purposes only 2010 2011 2012 2013 2014 2015 2011 2012 LT CAGR 2010 2011 2012 2011 2012 LT Growth Learning Division k-12 1,000 1,050 1,113 1,180 1,262 1,351 5% 6% 6% 5,000 5,250 5,565 5% 6% 5% College 500 520 541 562 585 608 4% 4% 4% 5,000 5,150 5,305 3% 3% 4% Post Grad 400 428 467 513 564 621 7% 9% 10% 6,000 6,300 6,678 5% 6% 7% Continued Ed 400 424 437 445 450 454 6% 3% 2% 8,000 8,320 8,653 4% 4% 4% Testing Services 300 315 334 354 375 398 5% 6% 6% 1,200 1,260 1,336 5% 6% 8% Revenues Organic Growth Total Market Market Growth Business Data Market Data K-12 SBU Rest of Market - 1,000 2,000 3,000 4,000 5,000 6,000 2012 Market Growth % CAGR OrganicRevenueGrowth%CAGR 0% 5% 10% 15% 0% 5% 10% 15%
- 15. 15 Execution on Strategic Planning Strategic Plan InvestmentsOperating Plan • High growth sectors • Investment needs • Acquisition assessment • Large capex projects • Consistency in Targets • Market Growth – leading indicator
- 16. 16 Insights • Market growth is a leading indicator for operating segments long term • Short term variability depending on health of business vs market • Can highlight consistent underperformance or overperformance • Large investments are not always in the highest growth businesses • Portfolio investing is more about largest returns • Leveraging large profitable businesses (low growth) can have larger rewards than investing in growth • Forcing businesses to reconcile between market segments and operating segments provides increased visibility • Reduces flexibility around ‘soft’ targets • Increased communication/visibility to hedges
Hinweis der Redaktion
- Good morning. Thanks to everyone for attending. I gotta say that I have seen a lot of great presentations and looking forward to more today. Before I jump into the slides, let me give you a quick overview of what I am planning to share. I work for Thomson Reuters, in the corporate FP&A group supporting the annual planning process. And I am not sure how many folks are familiar with Thomson Reuters, so I will get into the details of some of the products we deliver. But what I am going to focus most of my time on is what I am going to call ‘our own innovations’ in planning. We have continually been looking for ways to validate our planning process. And when I say validate, what I am trying to get at is having some way to benchmark our plan and targets. A good way to accomplish this is through rolling forecasts, but we have struggled a bit in implementing rolling forecasts across the entire business. Some of our operating units have embraced these forecasts and put significant effort in maintaining them.. However other operating units don’t put the necessary effort into them (they don’t see the value). And so as we consolidate the plan, its impossible to get a comfort level with a consolidated rolling forecast if not everyone is on board with them. So, we have had to find other resources throughout the company, and we had to be a bit creative in ensuring Plans are genuine as presented to us. I’ll get into this further, we ended up relying on much of the data that goes into our strategic planning that helps validate our planning process and operating targets. A bonus to this was that in taking this approach we found a natural to link Strategic plans and operating plans. So that initiatives set out from strategic view are reflected in annual operating targets.
- So let me jump into what our company does. Thomson Reuters generates approximately $13B in revenue a year. We provide intelligent information for professionals throughout the world. Now that is a tagline “intelligent information” and I am sure some marketing company was paid hansomely to come up with that. But let me give you a better sense for what we do… consider one of our key legal product lines, Westlaw. Westlaw provides information to attorney, mostly in the US. If we look back 20 years, (this is actually before we even owned Westlaw), the legal industry relied on published legal books for all of their work. These were caselaw books, and Westlaw was a leading publisher in this market. Flash-forward to today, we still publish a lot books, but attorneys are not waiting for their annual set of caselaw books to show up at the office. The industry (although slow) still moves at a more real time pace, and the content content/data/info is all provided in a searchabel database. So we don’t have to print as many books, and attorneys now pay for content that is real time and it is much easier to search a database then cram through a pile of books. And we also have wrap around tools that just make an attorney’s research job a bit easier. That is the sense of intelligent information, we provide information to professionals to make their jobs more efficient. And we do this in multiple professional industies besides the legal space. For those of you familiar with the company, historically Thomson was very strong with all the businesses on the right side of this slide (Legal info, Tax info and Science (IP) info). In 2008, Thomson purchased Reuters, combining top of the line financial information with the remaining core information businesses within Thomson. Most of you probably recognize Reuters through its international media arm, they are known worldwide similar to the BBC or Associated Press. But the reality is that this is only a very small piece of the total business. LOOK AT THE SLIDE.
- As I discussed on the last slide, we provide information to professionals and I think I have covered that off. What I want to focus on here is the global nature of our business (~40% of revenues ourside US), which means from a planning perspective we deal with a number of currency issues. This is something we inherited when we purchased Reuters and we have had to come up to speed on planning by currency and providing guidance to properly hedge our currency exposures. But what makes life a bit easier for the finance staff around the company is the business model and the nature of contracts in this industry…. So almost 90% of revenue are recurring. That means that the biggest factor in determining revenues is renewal rates on our products. There is an additional 10% of revenues that are more unpredictable and new sales play a big role. But… for … the .. Most.. Part, revenues are fairly steady. For me, where I get to with such a big recurring base is that we tend to follow market trends. In other words, as market is increasing, we are typically going to see the benefits from that in our pricing and renewal rates. Said another way, we are not a niche player in most of our markets, our recurring base of revenue ensures the base tends to follow and/or set market trends. Its not a rule in every market, but in general we tend to be consistent with market.
- Thomson Reuters has historically been managed on a portfolio basis. I think I mentioned earlier that we didn’t own our Westlaw product line 20 years ago… that’s true, it wasn’t acquired until the late 90’s. In fact, if you look back 40 years, some of our biggest assets were in oil wells in the north sea and even in the early 1990’s we were concentrated in 2 markets… newspapers and the travel industry. But over the past 15 years, we have been focused on the professional information business (and agacencies). And despite this focus, we are constantly re-evaluating our portfolio (its somehow in our nature). Our acquisition investment is sizeable in any given year (over a billion dollars in 2011). And we have never had a problem identifying businesses that no longer fit our long term strategy and shed those as needed (in 2011, we announced the sale of our Healthcare business). Despite strong revenue growth and multiple leading indicators for the markets, we made the tough decision to put Healthcare on the market, because it was the right thing to do for our company. Through constantly evaluating our portfolio of businesses, we rely upon these guiding principles. We probably over-analyze markets, but we feel it’s the #1 determinate of long term growth. As we invest, it is with a focus on long term returns, but that is not an isolated variable. Our investments have to be within our core capabilities (long term investing has to be met with long term scale) driving both top line growth and cash flow growth.
- I don’t want to overstress this, but it all comes down to the markets we are in and our ability to be successful in those markets. To give you a sense for this, lets look at the case for our Healthcare business. Healthcare information is a hot market right now. There is a ton of buzz around terms like ‘electronic medical records’, ‘consumer driven healthcare’, ‘medicare efficiency’, etc. All of these rely on information in the healthcare market. Trends are great in this industry and it’s a core reason why so many Private Equity companies are hot on this space, as well as new strategic entrants…there are some big companies out there that are starting to signal efforts to get into this market. For all intents, this would be a market we should be double investing in. However, for us its more than just high growth markets, it also has to be a market we can leverage long term. And we made a good go at this market, but it just doesn’t fit our mold any longer. However, as we do look at target market, some interesting capabilities we have are providing content to corporate risk professionals. As Sarbanes Oxly has changed this market, and more global regulations are driving the need for more of this content and software.
- So our methodology in flushing out target markets, we go through a lot of effort in sizing up each market we are in (or want to be in). And some may ask ...why go through all this trouble of breaking down our business into addressable market segments. This is how we evaluate our portfolio. First we look at the segments in general to see if those are the right market segments to be in. This is determined by relative size of market, competitive landscape, fragmentation, trends, etc. Then we ask how do we stack up in this market, are we a market leader, niche player, are we gaining share / losing share, etc. Then it is a matter of determining next steps... Opportunity to invest for growth (organic or acquisition investment), hold tight in certain markets, or if it is a market that is no longer attractive because of either market dynamics or our own position in that market, it might lead to a decision to exit that market.
- Let me take you through a couple of the ways we display this graphically. So on this slide is the very basics in what we call growth and returns analysis. On the vertical axis is revenue growth, with the companies overall growth as the benchmark in the center. And on the horizontal axis is the measure of returns based on profit margin (again the companies overall margin serves as the benchmark). In other words, anything above the line is considered high growth vs low growth below the line and anything right of the center axis has higher profitability. What we are doing is isolating our segments into 4 quadrants. None of these quadrants are good or bad, its just defines these segments for us. And this doesn’t give us any answers...we no longer use terms like dogs, rising stars and cash cows, but dividing segments into these quadrants drives the first level of questions. Why do we have companies that are low growth / low margin... Are they dogs, are they in a tough market right now. Natural questions for the high growth / low profit businesses ... Can we make some small tack-on acquisitions that will easily drive scale and drive more profitability, Can we cut costs without impacting growth, etc.
- On this slide is a look at how our own revenue growth stacks up to market. On the vertical axis is our own revenue growth and on the horizontal axis is the market growth. So anything above this dotted line grows faster than market and likewise anything below the line trails market growth. Again, these slices of data are not intended to draw any sort of conclusions. It is just another data point to ask another level of questions. I like to assess this view over time… so if I see a segment that is continually growing below market, it begs the question of why… no focus on the space, just poor products, too large for the space, etc. And its one thing to see a segment drop below this line temporarily, but its tough being committed to a segment that is continually down there. If we are growing less than market than over time we are losing significant market share. Likewise, if I see a segment that is continually beating market, I question the validity of that. Sure companies can have great years where they are outpacing competition… but for how long. And if we have been truly just outperforming, how long can we expect that to last.
- So I think I have stressed our focus on markets and the regular work we complete in evaluating our portfolio of businesses. A majority of that work is part of regular analysis going into our strategic reviews. What we have struggled with is somehow connecting all of that rich content/market insight within our annual planning process. We have all put lip service into how our strategic plans point to long term goals and operating plans define short term execution towards those goals. But for us, there was a bit of a disconnect. For the most part, our Strategy organization owned the strategic reviews to the Board, and defined everything by market segment. What I am trying to illustrate in this slide is that our Strategy Organization was on a path to complete their review in July, and our Finance Organization was on a separate path to complete our review by December. And there was a bit of a mis-match...To give you a sense for this, consider how each group defines the addressable business. For the operating Plan, Finance relies on management reporting of operating segments to roll up an aggregate Plan. Management reporting is defined by Organizational Structure, leadership and product lines. For instance we could have management reporting around a key product line like WestLaw Online and a separate operating unit like Legal Briefs which each serve multiple markets (small law firms, large law firms, corporate law offices, etc). As each group rolls up revenue figures across the company, we are each doing so differently, and at different times of the year.
- Let me use this slide to illustrate the point I was trying to make about rolling up figures differently. Lets assume the grey bars are operating units and the blue boxes are the markets that they serve. As the strategy group focuses on revenue in the markets we serve ... Click... They will pull the revenues for ... Click... Large law firms... Click... Small law firms... Click and corporate law offices. Meanwhile, for an operating Plan, we would focus on revenues from the operating segments.. Click. And here is where we ran into issues in aligning strategic plans with operating plans. Lets say in this situation, we identify Large Law firms as a growth market, where we will focus on organic investment as well as significant acquisition activity. From an operating Plan, we should expect higher growth, higher levels of investment spend, etc. However, because this activity is buried across multiple operating segments, it gets lost in the shuffle. And my only way of targeting/challenging an operating segment like Westlaw Online is to see how forecasts compare to historicals.
- So great, we have a lot of rich data/content to help us look at our market segment, but how that translates into operating plans was a bit muddled. So for us, the key problem was a mis-match between our market segments and operating segments. And this might seem like a really easy answer for solving this great dilemma, but all you have to do align operating segments with market segments. In other words, instead of having a GM for Westlaw, we could have a GM for Large Law firms, that would sell all products into that customer set. This is much easier said than done, but over the past few years, Thomson Reuters has committed to improving customer strategy. To a point that some of our businesses have aligned according to customer segment. This is difficult and does take time, but we are moving in that direction. For all other segments, there has to be a reconcilement between revenue from market segments and revenue from operating segments.
- As the finance group and strategy group become more aligned, we determined that consistency among all of our deliverables is extremely important. The analysis may be different (and even conclusions may be different), but core data supporting these deliverables had to be the same. So we agreed that anytime we collect the data, whether for strategic plan, operating plan or special project we have to see the breakout by operating segments and by market segments. From a finance perspective, the first thing we realized was that we now had a simple way to validate our operating Plan. For every segment submitted in the operating Plan, we had market growth figures that we could rely on for a benchmark. Instead of trying to judge historicals and ‘trajectory’ of a business, we had relative growth based on market of where we should expect our own businesses to come in. If some segments came in below market, we could easily turn back to the strategic plan to see if there was any explanation or simply challenge the business to grow closer to or at market. Likewise we could validate decisions from the strategic review. If a certain segment was highlighted for its potential and we had committed to investing in that business for further growth, then we better see that coming through in operating plans.
- Now this is a lot of data floating around and it can take up massive spreadsheets. And so we formalized this process by utilized submissions in our planning system (we use cognos). Again, this takes coordination with the Strategy group, but the idea is that the finance side of the shop enters in all of the business data (this is our revenue in defined market segments). And Strategy owns the process for entering market growth data into the system. The result is a fairly tidy database that either team can utilize for planning purposes, but also for other one off-analysis. For instance, we regularly dive into this as we look at acquisitions. It gives us a quick snapshot to size up the market we putting more money into and our current position in that market. The nice part of this is we can also utilize the system to populate charts for us. Here in this example... By the way this is pure example, we sold the learning division about 5 years ago so I really am just making up number to illustrate this... But I have circled in blue the figures that would be pulled to pre-populate a market share chart. And the figures circled in red can pre-populate the chart we looked at earlier that compares our own growth vs market.
- Where we are getting to on that this is no longer a once a year complicated exercise, but more fluid and on-going. Its also made us more connected, its less silo’s between strategy and finance and more cooperation in putting both the strategic plan and operating plan together.
- So I will open it up for questions in a moment, but let me touch on some key insights. So not every company is going to have an already established growth & returns process to tap into. But market insights are out there and what we have found is that utilizing market info can go a long way in analyzing your operating plan. Looking at this slide, I think we have touched enough on point 1 and point 2. But what I found most interesting in our first run of pulling all this together is that it provides a lot of visibility into the businesses. Forcing the businesses to reconcile between operating segments and market segments and having access to market returns means that there is little room to hide anything. If I take a business managers perspective for a minute, if I am submitting my Plan, in order for me to put a hedge in any of my number, I would have to come off market growth... Or at least come off growth commitments I made in the strategic reviews. In other words, if I said in the strategic review that the post grad segment was going to grow at market at 5% and now 6 months later I want to put a hedge in my plan, I have come off those earlier statements with a lower growth rate. Now, this doesn’t stop hedging, but does make it much more transparent across the company.