Creating value withperformance management
ColoplastCase Study | Anders Olesen, Partner, CFO Services© Beyond Budge

CO LO PL A ST

CREATING VALUE
WITH PERFORMANCE
MANAGEMENTnian© Basico. Reproduction is authorised provided the source is acknowledged.

ReFo poll oEnabling
performancePl

Background
Coloplast has been on a fan­tastic journey over the recent
ten years. When the company
embarked on this journey, its
performance was rather poor
compared to that of its com­
petitors. Today, Coloplast ranksnt iosla sna resu&ngr t i - upw

The overall purpose is to create
the foundation for unleashing/realising the company’s fullpotential. In our view, it is actuallymore about enabling performance
than about managing perform­
ance. The prerequisite for this isa holistic and coherent manage­
ment model, which results in thedesired behaviour throughout
the company.

The company’s finance department was already familiar with
the Beyond Budgeting principles,

In 2009, Anders LonningSkovgaard was Director ofPerformance Management in thefinance department. It was thus
natural for him to assume a keyrole in the ensuing transform­ation. Anders led the project
team that, over the following
twelve months, implemented
a totally new planning model
referred to as: “Turning Ambition
into Action”.

ngnia r t io nds

In the previous issue of Content,
we described our Performance
Model, which is practical anduseful when helping companies
translate strategy into action.
You will find a more detailed de­scription of the model in the Sep­
tember 2018 issue of Content.

The purpose of Coloplast’s im­pressive journey has constantly
been to become the world’s best
performing medico company,
and in this respect focus on
performance management wasdecisive.

and the leadership change ten
years ago became a welcome
occasion to put them to the test.
This combination turned out to be
extremely beneficial for Colo­plast’s development.

te g& M y treaC

oloplast has achieved
great success with theirperformance manage­
ment method, which has muchin common with Basico’s general
Performance Model; see fig. 1.

among the world’s best perform­
ing and most valuable medicocompanies. Not least becauseof the company’s efficiency andearnings performance, whichis exceptional and the highest
within their industry.

St r aBy Anders OlesenPartner, CFO Servicesgco
R e Re w&FIGURE 1: BASICO’S PERFORMANCE MODELFIGURE 2: THIS IS HOW WE LEAD IN COLOPLAST, SOURCE: COLOPLAST

Already then, Coloplast was –together with Basico – active in
the Beyond Budgeting network,and right from the start we havefollowed Coloplast’s Beyond
Budgeting journey with greatinterest. Under the headline “Nomore budgets”, Content fea­
tured an article on the beginningof their journey in June 2010.
Coloplast’s management
model“Our management model isfocused on value creation. This
is at the core of our way of managing. And this is reflected in ourprocesses and tools, which havebeen developed to support ourleadership principles and overall
strategy. This connection isextremely important for our ability to execute effectively”, says
Anders Lonning-Skovgaard.
Coloplast’s management model
has much in common with Basi­co’s Performance Model (figure1), and in the following we will
describe this briefly.
In general, the purpose of themodel is to create value byensuring coherence between
strategy and action.

© Basico. Reproduction is authorised provided the source is acknowledged.

Strategy translation andmeasures
On the basis of the company’smission, vision and values,
Coloplast has developed astrategic plan with a three-tofive-year horizon at Group leveland for each business area.
These plans are prepared ona relatively high level (i.e. withlimited details). They outline thedirection and ambition level, andthey contain the most importantpriorities and activities. Ambi­
tions are high and help create awinning mentality.
Based on the strategic plan,
Coloplast develops one-yearplans, which they refer to as
their Agenda. These plans con­tain the most significant activi­
ties within each of the strategicareas: innovation, customers,efficiency and leadership.
The Agenda helps translate theoverall strategy into specific ac­
tivities. It is an important internal
communication tool as it helps
employees focus on what to donext in order to create value inthe longer term.

For each of the strategic goals
and activities, the KPIs have been
defined that are best at answer­
ing the important questions: “Are
we moving in the right direction?”,“Is the customer satisfied?”, “Are
we doing the right thing?”, “Are
we making progress?”, and “Are
we moving fast enough?”.

Great efforts have been made tosecure the quality of these data,
which means that we now havemeaningful and value-creating
discussions when we report andfollow up on these key figures.
Our reporting and follow-up
is consistent across businessareas, regions and functions”,
says Anders Lonning-Skovgaard.

In this connection, Coloplast
uses forward-looking KPIs (lead­ing indicators) and non-financial
measures such as number of
new patients.
Reporting & follow-up”We focus on the relatively few
key figures that say something
about our ability to create value.

Especially, the high data quality,
the standardization of reporting
formats as well as the mannerin which business reviews are
made have contributed toincreased insights and a muchhigher process quality andefficiency.

CONTACT US
How do you get started?
We hope that this article, which illustrates the value ofa coherent management model, has inspired you toexplore the potential in your company. If so, we recom­mend that you seek assistance for your journey.
Contact Anders Olesen, Partner, CFO Services
aolesen@basico.dk • +45 2510 2200

”We have truly achieved one setof numbers, and it is of utmost
importance with such transparency in our data”, says Anders
Lonning-Skovgaard.
What is also interesting is that
their reporting focuses on thedevelopment of realized data;
i.e. they focus on trend analysis
of key measures. Contrary to manyother companies, Coloplast
makes almost no variance anal­
yses since it is a lengthy and (inmost cases) worthless exercise.
Planning
When Coloplast introduced its
new management model, thecompany wanted to avoid themany negative side-effects
related to the traditional annual
budget process.
”Our budgets were not coherent
with our strategy, they resulted inwrong and undesired behavior,
we spent oceans of time making
them, and, on top of that, they
were useless a few months into
the accounting period”, Anders

Lonning-Skovgaard explains andcontinues: “There is a risk of traditional budgeting taking place
locally, in parallel with and inaddition to the established processes on group level. We areaware of this and are constantly
striving to streamline these.”
A core element of Coloplast’s
model was to replace the annual
budget by processes that were
far more efficient and designed
to solve the specific challenges.
In this connection, Coloplast
chose to follow the generalrecommendation from the
Beyond Budgeting network: Foreach of the budget purposes(ref. figure 3: Ambition, Forecast,
Capital Allocation and Incen­
tives), Coloplast established a
new and separate process.
”This method increased thequality of our work substantially,
and at the same time, we avoided
the problems associated withthe annual budget”, says AndersLonning-Skovgaard.

Membership of Beyond Budgeting Round Table
Anders Lonning-Skovgaard:”We have been a member of BBRT since the start of our journeyin 2009. Initially, this provided us with important inspiration
for developing our new management model. It is still very
useful to be a member of BBRT. For example, we urge new
employees to attend BBRT meetings since it gives them a good
network and a better understanding of our management model.”Now, Coloplast prepares quarterly
rolling forecasts that cover thefollowing five quarters. Their
forecasts contain far fewer
details than previously, and it has
increased agility and provided a
far better overview than before.
The new Capital Allocation
process, in particular, has in­creased agility and contributed
to improved decision-making.
“It has been one of the mostimportant contributions to ourvalue creation. We have an
investment committee thatmeets monthly and evaluates theinvestment proposals received.
Investments are accepted orrejected depending on theircontribution to our strategic
agenda, the potential for valuecreation, alternatives, as wellas whether sufficient cash flow
is available. The absence ofannual budgets and pre-allocated investment pools increases
our ability to quickly allocate ourresources to where they create
most value”, stresses Anders
Lonning-Skovgaard.
With regards to the balance ofthe external financial guidance,
Anders Lonning-Skovgaard

FIGURE 3: WE DECIDED TO FOCUS OUR PERFORMANCE DIALOGUE, SOURCE: COLOPLAST© Basico. Reproduction is authorised provided the source is acknowledged.

CFO ANDERS LONNING-SKOVGAARD
Coloplast since 2006:• Executive Vice President & CFO since 2014.
• Earlier: Chief Information Officer, Director of Performance Manage­
ment and Finance Manager.
• Project manager for the implementation of Beyond Budgeting anda new management model.
Carlsberg 1999-2005
M.Sc. Finance & Accounting
Photo: Coloplastsays that the secret is to remain
focused on both short-termand long-term goals: “Sometimes you have to postpone anotherwise good, long-term investment in order to protect theguidance. It is an act of balance
for management to safeguard
the results and guidance in theshort term without jeopardizingmotivation. The aim is to work
dynamically with the capital allocation to ensure that resources
are continuously invested where
the return is the highest; just as
the resources should be re-allocated should investment cases
develop contrary to expectations, and if new opportunities
appear.”Recognition & rewards
Coloplast has also come far inthis respect. Now, they havebonus systems that support theoverall strategy and they haverooted out and abolished mostindividual bonus goals. The
latter is an important, but often
overlooked element: In brief,
individual bonus goals will, moreoften than not, result in undesir­able behaviour and constitute aconsiderable complexity (cost).
At Group and head office level,
Coloplast only works with common
goals, and elsewhere in theorganization, it is now the gen­eral rule to establish common© Basico. Reproduction is authorised provided the source is acknowledged.

(regional/local) goals.
”The challenge is that it takes
time to get the right mind-set inplace and to make people accept that they cannot affect theirbonus directly”, says Anders
Lonning-Skovgaard.
This was the last field that
Coloplast delved into when they
introduced their new manage­
ment model.
With the wisdom of hindsight,
this should have been on theagenda earlier. The point is thatthe management model should
be coherent at any time; thisrequires one to work with theseareas in parallel rather thanconsecutively.
Next step
Coloplast has come far, but
the company is constantly striv­
ing to optimise its model andprocesses.
One focus area is digitalisa­
tion: Coloplast uses Power BI
extensively in order to supportand improve the quality of theirreporting and data analysis.
”We still spend too much time inour production and supply chain
planning in too much detail,so this also has our attention”,
Anders Lonning-Skovgaardconcludes. ■Value creation in Coloplast
Coloplast’s management model has had a dramatic impact
on value creation. Since its introduction ten years ago,
Coloplast has been one of the most successful and value
creating of the listed companies in Denmark (NasdaqCopenhagen)• Turnover has doubled during the period. The market
share has increased considerably in all major markets.
• Earnings (EBIT margin) have been at 30-34 per cent forseveral years. This is the highest – and approx. twice themedian – in their industry.
• Coloplast’s customer and patient satisfaction ranks at
the top of the most recent Patient View Survey.
• Coloplast is one of the most innovative and forwardlooking companies in this industry. Investments in R&D
account for 4 per cent of turnover.
• As of January 2019, the market capitalization of Colo­plast is DKK 127 billion, which is higher than that of farlarger listed companies on Nasdaq Copenhagen.
• During the ten-year period, the shareholders have had
an average annual return on investment (CAGR) of morethan 25 per cent.

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