Overview of Dimension 4 for Maximising Exit Value
Overview and History
The Dimension 4® (D4) method has been in use for 25 years, following the development of the method within a number of different organisations. It was created by the Chairman of Isochron, Alan Fowler, a former Executive Consultant in EY. The method has been licensed and used in over 25 organisations, including PwC, the Scottish Government and Serco, either as-is or as the white-lable base for their own methodology.
D4 is an end-to-end planning and change approach which is focused on achieving the end-game business outcomes and plan backwards from there. As well as establishing a shared vision, it defines the tangible outcomes, the plan for getting there, the costs and benefits for achieving the these outcomes, and how to manage the people involved in delivering these.
It is an ideal approach for planning and executing business owner and investor exit at the maximum possible value. For a Corporate Finance advisor, this delivers significant additional opportunities for building and maintaining long term strategic advisory relationships, while also locking in the client for future transactions.
ESTABLISHING THE VISION AND BUSINESS OUTCOMES
Phase One is to establish the Vision and the tangible outcomes associated with this.
The vision is the ideal exit outcome for both the person and the organisation. Under D4, this is used to establish tangible outcomes for the business and stakeholders. We call these Recognition Events® (REs), and the objective is to make the Vision deliverable. The Recognition Events:
- Are real-life happenings that tell the business owner and other stakeholders such as investors that their expectation has been met (a ‘Show-me’ test)
- Are non-numerical - they are tangible business outcomes supported by estimates later in the process
- Have a date, location and context so they can be inspected
- Once agreed, are not negotiable - they are the end goals that MUST be achieved
- But... how to make them happen is flexible; the vision and REs are not determined by how you get there.
These outcomes are described in the present tense and in terms of what is observed at that time, i.e. imagine yourself into the future and describe what you see. For example:
“We have acquired our main UK competitor and have successfully integrated our product lines. In the integration steering committee meeting, my Sales Director tells me that Reps from both legacy businesses are successfully selling all our products. It is October 2020”
“I visit our new branch office in Dubai and see that it’s successfully engaging both new local customers and servicing our UK client base. It is 9th June 2021”
"It's September 2022 and have sold my company for more than I expected, my investors are delighted.“
It is also important to note that the REs should reflect the needs of all the stakeholders that are paying for the business outcome.
We recommend that no more than 5 REs are defined, otherwise the planning to achieve these becomes excessively complex. As such, these may reflect relatively high level, rolled-up, business outcomes such as the overall Exit.
Business visions are often amorphous, soft (aspirational), premature (driven by the solution, e.g. focused on the how rather than why), and unrealistic (unachievable targets). By having these tangible 'show-me' outcomes (REs) which demonstrate that the vision has been achieved, you avoid these issues.
By having a clear Vision for Exit and a set of outcomes with a clear path to delivery, the whole organisation can be aligned behind this goal.
Phase Two is to work on the Planning for these Recognition Events, i.e. how the Exit Value maximisation will be delivered.
We assume that people are competent and capable, and will achieve the outcome so long as there is a clear direction with broad support. The direction is provided by the REs, so the next step is to figure out how to get there. As with the Vision, we start from the end (using imaginary hindsight) and look back in time from each RE by asking the question "...and how did that happen?".
When planning is done from the start to the end, there is an explosion of uncertainty as you move into the future. By starting from the destination and working backwards, you force yourself to think about the key milestones or Tipping Points (TP) that make it inevitable that you achieve the REs. Only once you have this overall Backcast Plan in place, should you start considering the forecast planning to address how to achieve the individual tipping points.
For each RE, we recommend that the "...and how did that happen?" question is asked up to 3 times to establish those Tipping Points. The Tipping Points are described in the past tense, further reinforcing the future vision. For example:
Recognition Event - “I visit our new branch office in Dubai and see that it’s successfully engaging both new local customers and servicing our UK client base. It is 9th June 2021”
...and how did that happen
3rd Tipping Point - “We landed several new label clients through a marketing campaign for the Joint Venture.” Owner - Marketing (Dubai JV), Date - March 2021
...and how did that happen
2nd Tipping Point - “We established a Joint Venture with one of our largest customers to help them establish their business in the UAE.” Owner - Client Relationship Manager, Date - January 2021.
...and how did that happen
1st Tipping Point - “We held joint strategic planning workshops with our largest clients to understand their key priorities and how we could support them in achieving these.” Owner - Client Relationship Manager, Date - January 2020
These Tipping Points (TP) become the milestones in your Exit Backcast Plan, for example:
Each TP may be linked to more than one RE which means that if there are problems achieving a TP, this can influence more than one tangible outcome. When combined with the Financial estimation approach described below, it becomes easy to identify the financial impact that a problem with a TP will have. This provides a clear business mandate for resolving this issue and continuing on the path to Exit.
Responsibility for achieving TPs must be delegated to the management team - indeed, they should actively seek to take responsibility for them as this should relate to individual’s day-to-day responsibilities. This pushes the responsibility for delivery of the REs down into the heart of the business, and avoids the need for complex project management at the top level. While each TP will have significant forward planning underneath it, the planning and delivery for this lies within the business.
When it comes to executing against the Exit plan, a GPS analogy can be used. The end destination (RE) is fixed, but how you get there (via TPs / milestones) is adjustable - you can reroute your journey. Specifically in this case, problems in achieving the TPs can be used as a challenge to figure out a smarter way to achieve the Exit.
Phase Three is the Financial Estimation of the costs and benefits, i.e. the Exit valuation and the costs to achieve these.
The objective here is to establish the Financial Benefits (and costs) of the Vision. We use the Value Drivers in the business to show this, i.e. how will the REs increase Exit value by:
- Increasing Revenue
- Decreasing Cost
- Increasing Asset Value
For each RE, we would ask “If this is how the business works in the future, what would the (benefit) impact be on the cashflow / costs / assets?”. We would then extend this by further comparing the vision to all possible value drivers to see if there are any other sources of value. Isochron uses a reference list of 70 Value Drivers, but this is determined by the nature of the business and the chart of accounts
By quantifying these outcomes, and the impact they will have on the key Value Drivers for the business, a future picture of Revenue, Profit, Cashflow and Asset Value can be established, determining the target valuation at a defined point in the future.
By understanding when and how these financial outcomes will be achieved, we can establish the Value Flashpoints® where this can be recognised - separately from the REs, e.g.:
- “I am shown the payment received from sale of the empty property”
- "The business is sold and my investors receive a satisfactory price for their shares"
These Value Flashpoints will be validated with the CFO, and form the basis of future business plans and budgets - further driving the company to achieve these goals.
The usual problem with financial planning is that business cases are unnecessarily complex. Business cases built in Excel are notorious for having the wrong basis for facts and containing significant errors. Research has shown that estimates by experts are often wrong by orders of magnitude.
To avoid this, D4 uses two techniques - Fermi Estimation and the Monte Carlo Box. Fermi Estimates are simplified calculations which are often used in science, and are:
- Acknowledged to be wrong (but to a relatively very small degree)
- Simple in their calculation and methodical in approach
- Allow easy identification, validation and change of faulty assumptions
- Provide a valuable check on the acceptability of results
The Monte Carlo Box uses 4 point analysis of Best case, Worst Case, Most Likely and Risk-Factored (each using Fermi Estimates) to provide a narrow band of expected outcomes, and a wider band of potential outcomes.
The same approach can be taken to calculate range of costs at the Tipping Point Level, i.e. how much will it cost to achieve that TP, rolled up to understand the total cost to achieve.
Each Value Flashpoint may be enabled by multiple Recognition Events, and each Recognition Event may contribute to multiple Value Flashpoints. As such, these can be mapped to provide a matrix of business outcomes and value impact, i.e. how much Exit value each RE drives and by extension, which REs and TPs are most critical in delivering this value.
In the example below - Recognition Event #3 is the most critical to delivering the Exit value:
By having this clear view, there is a strong mandate for action when there are problems achieving any Tipping Point, prioritising resolution of these issues.
The detail defined in these Value Flashpoints can also be used to quickly and simply build an overall Value Case for the CFO, investors and value tracking.
People and Delivery
Of course, all of the above is pointless if the change cannot be delivered. Management of delivery resources is key to the achievement of this
Using all of the above information, we have all the information, including an engaging vision, to get people to support and enable the change without resorting to coercion.
An example of a technique Isochron uses to overcome objections is Transfiguration. This involves engaging people who are resisting change and working with them to understand the reverse of their position. By driving them to come up with the opposite position, and then building that into the plans (as an RE, TP, TP Planning item, adjusting finances), you can demonstrate to them that they are being listened to - often causing them to become engaged and avid supporters of the change.
When all the above comes together, the TPs and REs will have named owners and dates and an engaged delivery team is working together towards achieving these outcomes. When things go wrong, the organisation pulls together to establish the different path (re-routing the GPS), to ensure that the REs are achieved.