When The Pillsbury Co. tried to bake the principles of economic value added (EVA) into its operating philosophy, it brought out large, schematic maps of a hypothetical factory. Employees could trace the flow of value in and out of the company, from revenue to net operating profit after taxes to weighted average cost of capital. And rather than rely on standard lectures, Pillsbury, a division of Diageo, trained 250 senior managers to “coach” their own departments through an interactive learning session that encourages employees to figure out for themselves the workings of EVA, commonly called economic profit.
As a result, “you saw the lights go on in people’s eyes,” says Donna Scudder, director of organizational development at Pillsbury. She says you could see employees thinking, “Oh, this really does impact my work environment.” Now Diageo is rolling out a grass-roots economic profit program in its Guinness division.
Corporate enthusiasm for instilling the discipline of economic-profit models often gets bogged down in the delivery of the message to the rank and file (see “Metrics for the Masses,” May 1999). A diagram of EVA at one Fortune 500 company, complained a witness, looked like the wiring pattern for a Boeing 747. The process, which arrives at an economic value or profit figure after deducting a capital charge from net operating profits after taxes, isn’t terribly complex, but its relevance often eludes employees.
Recognizing an opportunity, an outfit called Economic Profit Frontiers, based in Ann Arbor, Mich., has devised a learning program that visualizes sometimes hard-to-grasp notions and creates simulations so employees can see the concepts in action–and has put them to work at places like Diageo. “We don’t tell them what they have to know,” says Peter Gorman, co- founder and president. “We allow them to discover it through our process. We do simulations where you start to make choices about which business decisions are going to make the most economic profit and therefore make the most sense to pursue.”
Economic Profit Frontiers isn’t in the business of selling the notion of EVA to companies. They leave that to firms like Stern Stewart & Co. “What Diageo found was that not everyone understands economic profit well enough to have that as a goal,” says Gorman. “Then the need for us comes up.” Gorman says the company’s methods are more efficient than the usual consultant-lectures- the-crowd approach “because you don’t rely on that one person or group of people.”