Plotting out future performance

If it's the fourth quarter, it must be time to finish the long-range business plan

BY JUNU KIM

The current year still has one more quarter to go, but people across the enterprise are currently busy looking at the future. As is normally the case this time of year, Boeing is compiling its long-range business plan, a key report that the company uses to assess its financial performance and outline its internal expectations for shareholder value creation.

Boeing uses the long-range business plan to guide its future business performance, not only from a corporate perspective but also from an individual business-unit standpoint, said David Ramey, vice president of Financial Planning and Analysis. Through the plan, Boeing effectively sets targets for its business performance. The plan is also a key input into external guidance Boeing Investor Relations provides to the financial community. The efforts that Boeing people put into meeting these targets, through cost containment, revenue generation and increased efficiencies, can help boost not only the value of the company's stock but also the payouts from performance-based compensation programs such as the Employee Incentive Plan.

"Boeing is a business, and we are all responsible to our shareholders. Without them, we wouldn't exist," Ramey said. "Each employee needs to act like a business person and understand his or her impact on the long-range business plan and how he or she contributes to it, in terms of lowering costs, increasing revenue and minimizing cash expenditures."

The long-range business plan looks forward for five years. The plan currently in development will focus on Boeing's performance from 2004 to 2008.

The long-range business plan utilizes a metric known as economic profit*, a figure that reflects the value Boeing people are creating for the company's stakeholders and is the primary measure of how Boeing and its employees are doing. Boeing defines economic profit as the company's net operating profit after taxes, minus a charge for assets. These terms take into account entities such as revenues; expenses such as labor, overhead, materials, research and development expenses, and sales and marketing expenses; taxes; and assets such as inventory, equipment and land. (Click here for more information on economic profit.)

Boeing creates the long-range business plan in a "flow up" manner, starting with business unit input. In other words, the business units determine how much economic profit they will generate in the span of the long-range business plan being created. These projections are based on assumptions of business gains and marketplace conditions; for example, Commercial Airplanes' projections for when the jetliner marketplace will recover from its current state can affect its forecast. The business unit forecasts may reflect input from the new Independent Cost Evaluation team.

The general expectation of the Boeing board of directors, which approves the long-range business plan, is that the business units and the company continue continue to improve performance each quarter and year. However, in the forward-planning process the company needs to recognize market conditions such as the current downturn in commercial aviation.

The Financial Planning & Analysis team at World Headquarters integrates business-unit plans into a single plan. The team looks to ensure that the forecasts spell out improved performance and also addresses any differences in the business units' assumptions.

Once the team compiles the coordinated plan, it presents the plan to Boeing Chairman and CEO Phil Condit and Chief Financial Officer Mike Sears. After their review and any further adjustments by the business units, the plan is presented to the board of directors during the fourth quarter.

If the board believes the plan calls for sufficient value creation for Boeing shareholders, the plan is approved. Then, every month the Financial Planning & Analysis team discusses each business unit's and total company performance with the CFO; the Executive Council and the board of directors also review performance at least quarterly. Financial Planning & Analysis ensures the financial information is integrated and properly reflects the roll up of all the business units.

Because certain key compensation benefits are tied to economic profit, Boeing people have incentive to help the company meet its financial goals. Indeed, employees can help bolster economic profit by doing things to run a healthy core business, such as containing costs, helping implement efficiencies and reduce cycle times.

"We'd like everyone to think like a business person," Ramey said. "Lowering costs, increasing sales, bringing in cash faster, getting a job done in less cycle time—all those things contribute to running a healthy business."

junu.kim@boeing.com

* Represents a non-GAAP (Generally Accepted Accounting Principles) measure. Boeing does not intend for the information to be considered in isolation or as a substitute for the related GAAP measures. Other companies may define the measures differently.