1. CONSULTING TOOLKIT
Consulting Skills:
Profit Trees
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2. Profit/ROCE Trees are used to diagnose opportunities through
comparisons of profit drivers across time or other businesses
WHAT? Breaking down the key drivers of profitability to a
detailed level
WHY? •The ROCE Tree shows the key drivers of profitability
on one map
•They become powerful diagnostic tools when
compared
–across time
–across businesses
HOW? 1) Start with ROCE or profit on the left
2) Break down ratios mathematically step-by-step
3) Choose breakdown to highlight key dynamics
© 2007-2012 IES Development Ltd. All Rights Reserved

3. ROCE Trees break down a business’s return to its profit
drivers
Market share %
Operating 15
10
Income $m Revenue $m 5
0
1,500 '96 '97 '98 '99 '00
1,000
60 500
x
ROCE %
40
20
0
'96 '97 '98 '99 '00 Industry sales $m
ROCE, % 0
'96 '97 '98 '99 '00
x 15,000
20 10,000
10 Op margin % 5,000
0
0 16 '96 '97 '98 '99 '00
'96 '97 '98 '99 '00
14
12
'96 '97 '98 '99 '00
x
(1 - tax rate) %
34
33
32
31
'96 '97 '98 '99 '00
Capital Employed $m
600
400
200
0
'96 '97 '98 '99 '00
© 2007-2012 IES Development Ltd. All Rights Reserved

4. There are three tips to gain insight from ROCE Trees
•Combine key financial and operational metrics. Like Issue
trees, try different cuts to get new insights
•Compare across different businesses to see how different business
models work to deliver returns
•Compare across time to see what drivers caused financial results
© 2007-2012 IES Development Ltd. All Rights Reserved

5. The best way to learn is to do one yourself……..
CLASS EXERCISE
Create a Profit Tree for a
consulting business
© 2007-2012 IES Development Ltd. All Rights Reserved

6. ROCE Trees break down a business’s profit drivers
Basket Size
Gross Margin
$/Transaction
Margin %
Intensity
Store Sales
28.6
$/Sqft/Week 24
$/Store/
Week
PROFIT TREE FOR A RETAIL BUSINESS 20.5
Store Sales 19,050 Transactions
Contribution Intensity No./Week/Store
Rent Intensity
$k/Sq Ft/Yr $/Sqft/Week
$/Sqft/Week
797 666
49.2 Store Size
Sq ft
No. stores
No. 4.5 388
Store Size
Sq ft
Store 138
Operating Depreciation
Profit $m 388 $/Sqft/Week
27.5
EBIT
$m Store SOP Staff cost 0.7
$k/Store/Yr $k/Store/Yr
16.8
83.3
199
Stock Cover
Other store
Weeks
cost
Central
$k/Store/Yr 13.0
Overheads
Pre-tax Stock
ROCE
$m 26.1 $m
% 10.7
Working Purchases
46 Capital
19.9
$m
$m
79.7
11.6
Capital Supplier
Employed Credit
$m $m
Fixed Asset Credit terms
36.6 $m 8.3 Weeks
© 2007-2012 IES Development Ltd. All Rights Reserved
25.0 5.4

7. KPIs for a consulting company are typically Utilisation%, Mark-
up Rate and Proposal Success Rate%
Mark-up Rate
(Billing/cost)
[%]
PROFIT TREE FOR A PEOPLE PROJECT-BASED COMPANY
(e.g. Consulting)
Billing Rate
[$k/manday] x
Number of
Projects
Profit per
Manday
_ Average
Consultant
Cost
[No./year] [$k/manday]
Effective [$k/manday]
Profit (without Consultant
Net Profit
sales cost)
per Project x Cost
[$k/manday]
from
Projects
[$m/year]
x [$k]
Average
Project
Consultant
Utilisation
Rate
[%]
Size
Consulting
_
Net Profit
(inc sales cost)
per Project
_ [Mandays]
Sales Cost
Company
Annual Profit [$k] Per New Client
[$m/year] Proposal
Sales Cost per [$k]
New Client Won
[$k]
x
Sales Cost
Company New Client
Per Project
Overhead Cost Proposal
[$k]
[$m/year] Success Rate
Repeat/Upsell [%]
(1- Project Rate
[%]
© 2007-2012 IES Development Ltd. All Rights Reserved

8. You can use a profit driver tree to understand a company’s
economics
AIRLINE PROFIT DRIVERS Number of
Passengers
[No./year]
Number of
Passenger Miles
x
[Miles/year] Average
Trip Length
Net Profit [Miles]
from flying
[$m/year] x Revenue per
Retail Price per
Passenger Mile
[$/PM]
x Passenger Mile [$/PM]
Sales
Ground Ops Cost
per APM
_ (1- Commission [%] [$/APM]
Annual Profit
[$m/year]
Profit per
Passenger Mile _ Cost per Flying Cost
[$/PM] Available
Passenger Mile + per APM
[$/APM]
Cost per [$/APM]
Overhead Cost Passenger Maintenance Cost
[$m/year] Mile ($/PM) per APM
Load Factor [$/APM]
[%]
© 2007-2012 IES Development Ltd. All Rights Reserved

9. Netflix profitability is driven by 6 Key Performance Measures
SUBSCRIPTION BUSINESS PROFIT DRIVERS Average
(e.g. Netflix) Subscription
[$/month]
Net Profit
from Renting
_ Average
shipments
[No./month] Subscription
[$/customer] Average cost/shipment
Net Profit
from Renting x Cost/Customer
[$/month]
x [$/shipment]
[$m/year] Number of Average Cost
Customers per Shipment +
_ [No./year] [$/shipment]
Fulfilment
Net New Customers cost/shipment
Marketing Cost
[No./year] [$/shipment]
Marketing per Free Trial
Annual Profit
[$m/year] Cost
[$m/year]
x Acquisition Cost/
New Customer
[$/customer]
[$/trial]
Effective Acquisition Cost
per Net New Customer
_ [$/customer] Trial Conversion
Rate [%]
Technology Cost Churn
[$m/year] (1- [%]
Overhead Cost
[$m/year] +
Admin Cost
[$m/year]
© 2007-2012 IES Development Ltd. All Rights Reserved

10. Netflix profitability is driven by 6 Key Performance Measures
Sell-out share
FMCG BUSINESS PROFIT DRIVERS (%)
(e.g. Diageo)
Market share
(%) x
Weighted
Distribution
Sales
x (%)
($m/year)
Market size
($m/year)
Average Price
($/unit)
Profit
Contribution
x Gross margin Mix Effect
[$m/year] (%) (%)
Annual Profit
[$m/year] _
Net margin
(%) _ Average Cost
($/unit)
Advertising
A&P (brand building) (%)
Overhead
Allocation
Investment
(%)
+ Promotion
[$m/year] (volume related) (%)
© 2007-2012 IES Development Ltd. All Rights Reserved