CESSE MID-WINTER MEETINGResponding To Economic Changes:Don’t Let a Good Crisis Pass You By

David L. Schutt, PhD

SAE International• Professional society [501(c)(3)] serving the aerospace,

automotive and commercial vehicle industries– Strong industry engagement

• 128,000 members in over 100 countries• Core competencies

– technical standards/publications– life-long-learning

• $60 Million/annum; 200 Staff

• Two Affiliates– Performance Review Institute: $28 Million/annum; 85 staff– Industry Technology Consortia: $3 Million/annum; virtual staff

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Situation: 3Q-2008On the Upside• 100 year history of success

– Recovered from 9/11• Profitable operations and

investments returns (2003-2007)– Strong Q1-3 performance– Net assets approximately

$43 million (>70% of ops)• Significant industry

engagement and support (pride)

01 March 2011 CESSE Mid-Winter Meeting 3

Situation: 3Q-2008Warning Flags• Complacent• Insular• Believed own propaganda• Planned in the rear-view mirror• “Beat Dead Horses”• New product cupboard empty• No contingency plan• Limited understanding of

business model

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Situation: 1Q-2009The Burning Platform• Global economy

– Going into a deep and likely prolonged recession

• The Mobility Industry – Radical downsizing and restructuring

• SAE International– Experiencing profound revenue

shortfalls– Cultural impedance results in

insufficient response to changing business environment

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Situation: 1Q-2009This Time it’s Different…• The worldwide economy will be slow to

recover and consumer behavior will be “permanently” moderated

• Our industries will be fundamentally different

– Smaller OEMs/Primes– Consolidated supply chain– Fewer engineers– Different needs and expectations of and

ability to support SAE International• Expectations of professional/technical

organizations will be radically different– Demographic shifts will be accelerated– Value proposition expectations will be

higher– New business models will be required

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January February March April May June July August Sept. October Nov. December$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

Outlook: 2Q-2009

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Markets RapidlyDeteriorated in 1Q09

Markets Began Softening in 2H08

2006 Actual2007 Actual2008 Actual2009 ActualProjection

7

Outlook for Balance of the Year Remains Bleak

1Q2009 Financials: The “Perfect Storm”000s omitted 2008 2009

Actual ProjectedOperations

Revenue $57,269 Expense 57,606 Net Operating Results (337) (18,500)

Non-Operating ActivitiesNet Developmental Activities (2,823)Net General Investment Fund (12,901)SAE Foundation Transfer (61)Net Non-Operating Results (15,785)

Pension Adjustment (15,286)

Change in Net Assets (31,408)

Net Assets - Beginning of year 43,055 11,647

Net Assets - End of year $11,647 $ (-6,853)

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Urgent & Profound Action Required• Reserves will be inadequate to

redress shortfall as well as invest for the future (particularly if downturn is sustained)

• Current business models and cost structures based on premises that will not survive recession

• Portfolio of programs, products and services based on evaporating value proposition

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Situation Ripe for Change• Board hired new CEO in the

context that change was needed– Political capital/goodwill was

high• Majority of Board members’

companies going through cathartic transformation—recognized that professional society could/should as well

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Two-fold StrategyResize (Sustainability)• Reduce expenses by $20

Million (35% of total budget)– Staff reductions– Changed operating paradigms

• Eliminate legacy ballast—including governance

• Significantly reduce fixed costs

• Capitalize on vendors willing/need to (re)negotiate

• Secured $10 M Loan (Cash Flow)

Reposition (Growth)• Transform portfolio

– People/paper to digital/virtual– Delivery-based to information-

pull– Legacy to new value

proposition– Local to global marketplace

• Redefine business models• Balance short-term mission

needs with long-term vision realization

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Three Levels of Action DevelopedLevel One: Sustainability

– Focus on core business; reduced offerings

– Divest non-core business/activity

– Meet financial management objectives going forward

Level Two– Selling physical assets

– Exit core businesses– Additional revenue loss

implications

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Level Three

Decision FrameworkContext for Assessment• Everything was “on the table”, but in

the end all things were not treated equally

• Overhead and administration first; Program, Product and Service (PPS) development and delivery second (Target 2:1 – Overhead:PPS)

• Preserve existing and sustainable revenue streams, with priority given to those that produce a positive margin

• Preserve mission-related activities to the extent possible

Evaluation Parameters• Mission/Vision/Ends/Strategic

Plan• Value to future

organization/strategy – growth in valued PPS

• Market performance– $, utilization, customer

satisfaction• Core vs. Non-core

competencies• Return on Revenue (ROR)

– Fixed/Variable cost structure01 March 2011 CESSE Mid-Winter Meeting 13

Financial Performance Scenarios

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Mill

ions 1Q - 2009

Distribution of $18M of Reductions

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15%6%

38%

41%

SALARIES & BENEFITS - OVERHEADSALARIES & BENEFITS - PRODUCTDIRECT PRODUCT COSTS INDIRECT COSTS & OVERHEAD

15%6%

38%

41%

SALARIES & BENEFITS - OVERHEADSALARIES & BENEFITS - PRODUCTDIRECT PRODUCT COSTS INDIRECT COSTS & OVERHEAD

$7.36 M

$2.74 M

$1.13 M

$6.73 M

Cost Reduction Realization

16

2009 Ap-

proved

Q109 Q209 Q309 Q409 2010 Baseline (15,000,000)

(10,000,000)

(5,000,000)

-

5,000,000

10,000,000

15,000,000

20,000,000

ExpensesMargin

RIF #1achieve FMP

RIF #2 Operating at 25% budget

RIF #3Implement

Level 1

Portfolio Restructure

Cost Restructure

Exit non-coreReduce Outyear

Costs

Reduced Lease

Legacy and extraordinary costs carry through fiscal

year

01 March 2011 CESSE Mid-Winter Meeting

White Water Ahead!• Reducing member services• Exiting legacy programs• Sacrificing sacred cows• Confronting the unexpected

and the unintended• Moving forward in

unchartered territory• Not having all of the answers

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But not without a rudder• We had a solid

– Mission– Strategic plan

• We took the long view• We dialogued and partnered

with– Members– Customers– Vendors

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Ten-year Strategy

Success FactorsThe Right (Amount)

People• “The Bus”• Performance

management• Alignment and

excellence• Enable and empower

• RIFs can be healthy

Manage the Board• Educate!• Present a compelling

case for change—needs for… and benefit of…

• Over communicate throughout the process

• Be clear, honest, and comprehensive

• Demonstrate progress against plan: get it right going in

• Equip them to be advocates—especially the President

Other Things• Cut deeper and faster

than you need to• Strike fast and fully—

strategically, not uniformly

• Be honest about what is core business

• Know your business cycles (with respect to economy)

• Customer Focus– VoC• Staged performance

plan• Keep the long view

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So, Where Are We Today?Operations• Sustainable operations• Renewed product portfolio—

unencumbered by legacy• Member/Staff alignment on a

high-value strategic direction and plan

• Mission, values and strategic plan embedded throughout organization

• New business model(s) in place• Progress against key growth

targets• Compliance with 3 of 6 financial

metrics—full compliance by 2012• Retained membership

Financial Performance$Millions 2008 2009 2010 2011

Revenue 57.3 41.8 43.5 45.9Expenses 57.6 41.3 41.2 45.7Net Ops (0.3) 0.4 2.3 0.2Net Non-Ops (31.1) 4.7 2.6 1.0Change Net Assets (31.4) 5.1 4.9 1.2Net Assets @ YE 11.6 16.2 21.1 22.3

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A NEW, EXCITING AND BRIGHTDAY IS DAWNING