Good value hunters think holistically, i.e., they address revenue and cost together, and they don’t separate people, process, structure, technology, and change management
To improve profitability organizations can hunt for value on the revenue and the cost side of the business. In practice they focus disproportionately (or even solely) on the cost-side. This is done for a variety of reasons, some of which are:
· Accuracy: Cost is something known and measurable, whereas potential net new revenue is based on a set of assumptions that may or may not be realized.
· Timing: Cost savings can start immediately, whereas net new revenue usually depends on several initiatives being completed over time.
· Structural focus: Cost savings initiatives can easily be siloed (e.g., “let’s cut 10% of the cost of our Suppliers” may be assigned to the Procurement Department), whereas most net new revenue initiatives are – to different extends – cross-departmental.
· Executive Sponsorship: Cost savings projects usually fall under the CFO/COO, whereas net new revenue projects usually fall under Sales, Strategy, and Marketing. In most organizations, different functions carry more relative power than others (CFO and COO may be #2 and #3 in terms of organizational power) and that drives a prioritization bias toward cost vs revenue initiatives.
At Pariveda, we have successfully completed engagements that originated as revenue-side and/or cost-side, and some broadly applicable findings are:
· Efforts to increase profitability produce the best results when they combine both revenue and cost in one comprehensive program. Designing a program as a portfolio of projects can speed up the realization of benefits and ensure that the program pays for itself.
· Technology is a significant enabler whether it is used for revenue upside or cost cutting.
· Process, people (including structure), and technology always go together. Projects that are imbalanced in favoring one dimension over the other, will not realize all of their expected value or they may even fail completely.
· Change management is frequently mentioned and discussed at the start and then neglected. Transformations that are accompanied by substantial change management have high chances of materializing. Conversely, good solutions with poor – or absent – change management may never properly materialize.
Value hunting produces the best results when it combines both revenue and cost in one comprehensive program
The charts above are indicative of two separate engagements for companies in the Energy and the Logistics sectors. In both cases, the original mandate was the reduction of IT cost. Within the first three weeks of the projects the joint Pariveda-Client team was able to identify improvements in three broad categories, namely Supply / Demand, Automation / Technology, and Organizational. The origin of these improvements spans across three dimensions: people (including structure), process, technology. The upside of each improvement can affect cost, or revenue, or both. Examples of improvements across categories, origins, and cost vs revenue are:
· Supply / Demand (technology-driven; revenue upside): Due to better client and product analytics, we are can grow demand through enabling our sales force to increase existing clients’ share of wallet and better target new clients.
· Automation / Technology (process-driven, cost upside): Because of increased process automation – and thus less manual work and fewer errors – we can decrease the necessary effort per task and therefore a percentage of total person-hours can be saved.
· Organizational (people/technology-driven, revenue and cost upside): Knowledge exists in experts’ heads, as opposed to living in processes and searchable information. By moving important knowledge into processes (rule-based workflow system) and into a searchable knowledge-base, we can (a) release expert capacity to design new products and services and (b) reduce the unit cost of the knowledge-demanding tasks.
An additional benefit of thinking concurrently about both revenue and cost is that quick wins will be uncovered early in the process. This will allow the engagement to create a fast return vis-à-vis the needed investment. We have been able to design and execute programs in a way that they fund themselves, by using upside from one phase to cover the investment needed for the next phase.
Finally, optimal prioritization of improvements happens only when both revenue and cost are taken into account. Cost savings may be easier to identify, but are finite, whereas revenue upside may be harder to identify and quantify, but it’s infinite. The optimal balance is to use fast, quantifiable, but finite improvements to pay for a portfolio of potentially infinite ones.
Technology is a significant enabler whether it is used for revenue upside or cost cutting
The charts above refer to the same cases from the previous section. Most upside originates from Technology improvements. This is magnified by the fact that many process and people improvements also have a technology component, and therefore the technology contribution is even greater than what is indicated by the charts. Examples from recent engagements in the Energy, Logistics, and Automotive sectors are:
Consolidating CRM systems allowed a company to generate a single view of the customer:
· This enabled the company’s marketing and sales-force to increase average client share of wallet by a minimum of 10% by providing more targeted solutions and proactively identifying potential needs.
· It also reduced the operating expense for these systems by 50%.
· Finally, it released 5% of IT resource-capacity who subsequently concentrated in growing the business rather than just keeping the lights on.
Creating an omnichannel customer journey, attracted new and improved the loyalty of existing customers:
· This engagement allowed customers to seamlessly move back and forth between the virtual world and the physical world throughout the car ownership journey, from pre-buying research to the actual purchase, to ownership and beyond.
· It enabled the attraction of younger customers who prefer to blur the boundaries of physical and online. Customers can complete several steps of the buying process online rather than at a dealership.
· It also enabled proactive and targeted communication during the car-ownership period, including maintenance, upselling of additional services, and product-specific information.
· Besides the present-term benefits, this resulted in increased probability that a current owner would buy his/her next car from the same manufacturer, rather than re-starting their next buying journey on a blank slate.
Improved data quality enabled enhanced reporting, extended offerings, and better decision-making:
· A subset of the reporting was recurring. By automating the recurring reporting, the company was able to decrease the associated costs by 80%.
· Client-specific reporting was provided on an ad-hoc basis. This has traditionally been time-consuming, and thus the offering was provided only to the most important clients. After improving data quality, a report-generation engine was built that clients can use directly. From this additional capability, the company gained 5% on profit as well as greater client lock-on.
· Additionally, better data quality resulted in better decision making by the company’s leadership, as there is now a single version of the truth and the ability to identify the correct root causes behind operational issues.
Process, people, and technology always go together
A typical situation we find at the beginning of some of our client-relationships is the following:
· Knowledge resides mainly in people’s heads.
· Technology is disjointed, both internally and externally.
· Processes between departments are broken.
· People are circumventing technology limitations by creating local (i.e., situation-specific) processes to do their jobs.
This creates a vicious cycle whereby processes become less standardized, more local knowledge resides in more people’s heads, and technology can never catch-up. The whole point of technology is to deal with scale and there can be no scale if every process and every piece of knowledge is unique/local. We can break the vicious cycle by making process, people (including structure), and technology work with — rather than fight — each other. We do this by including all three dimensions in everything we do, all the time.
For example, some organizations view Business Process Reengineering as the archetypal process-only project. By having this narrow view, companies may fail to realize a significant percentage of potential value, because they:
· Failed to include the technology dimension: Automating a group of process steps within a system may “break” the link to other internal or external systems and thus there is unforeseen cost in fixing these links.
· Failed to include the people dimension: Eliminating a group of process steps may result in cost-cutting through labor efficiencies. However, after terminating a specific resource, a company may discover that they have lost all the tacit knowledge this person carried with her and now a few expert tasks cannot be carried out as well as before.
In our experience, only by treating process, people, and technology as an unbreakable system can we guarantee that our value hunting efforts will realize their goals.
Change management is frequently mentioned and discussed at the start and then neglected
There is no way to avoid the “change dip.” Everyone understands this, and it is the usual starting-point agreement – i.e., an axiom – when organizations prepare to embark on a transformation journey. Given this widespread agreement, it is strange that organizations forget all about Change Management right after they start a Program or shortly thereafter.
Here are some best practices to consider:
· Key players will need to devote time: These players should be providing input to the Program (SME role) and managing their teams towards Program acceptance (change champion role).
· Key players should identify backfills as soon as possible: Key players should empower their subordinates and also prepare them to keep the lights on with the supervisor not being around as often as before.
· Program metrics must be agreed before the transformation starts: The transformation program will need specific metrics to monitor its progress and health. These metrics may already exist or may need to be defined and sourced. Embarking on a transformation without metrics is like building a car and forgetting to include a gauge to see if the car has gas or not.
· Process efficiency will initially drop: Success is to move to a new best practice state. This will require training. It may also require bringing in new resources who will need to get acclimated to the organization and climb the learning curve. Reduction in productivity is a certainty. Key players must be prepared to continuously support the change during the “change dip”.
· Setbacks happen: No matter how excellent the planning and the resources and the executive support may be, there will be setbacks. When setbacks take place, some stakeholders may want to shift to the old status quo. Top management should demonstrate continuous and unconditional support to the Program.
To illustrate the above points, let us offer the following examples from two recent transformation engagements:
· One client’s approach was to not secure in advance key player time or prepare suitable backfills, but instead provide assurances that “we will provide to the project the right people on an as needed basis.” The reality was that key players were always prioritizing fire-fighting and day-to-day duties rather than participating on the transformational program. There is a paradox here: (a) Experts cannot participate in the transformational program, because they are consumed by fire-fighting, but at the same time (b) as long as experts cannot participate in the transformational program, root-causes of problems will not get fixed, and therefore the amount of fire-fighting will not be reduced.
· Another client opted for the exact opposite approach, i.e. they did not start the transformational program until they (a) formally secured backfills for the key players, (b) formally transferred the key players to the Program, (c) changed everyone’s job description to represent the new reality and (d) incentivized the key experts for excelling in their new duties.
As expected, the “change dip” was much shallower (i.e., smaller hit on productivity) and narrower (i.e., shorter time to realize some improvement) in the latter case.
As mentioned at the beginning of this paper, there are several reasons organizations choose to focus their value-hunting efforts only on cost or only on revenue. The same reasons obstruct the ability to treat people (including structure), process, and technology as an unbreakable system. Managers have learned that the best way to treat an issue is to break it down into manageable subparts and then tackle each subpart in isolation. In this process of isolated problem-solving, identifying systemic relationships is often overlooked.
We have found that the greatest value can be generated when a solution encompasses all dimensions together:
· Revenue and cost
· People, process, and technology
· Change management
In some cases management thinks that funding constraints mandate that a project cannot be that broad. This is a self-imposed limitation; the organization still has at least two options:
· Option A: Go deep in scope, but cover only one of the aforementioned dimensions. For example, reengineer all processes within one department.
· Option B: Cover all dimensions, but for a limited scope. For example, identify cost and revenue upside that stems from people, process, and technology improvements, but only for the major end-to-end flows and the cross-departmental touchpoints.
We have seen value created in both ways through successful transformational programs. But by far the highest and most sustainable value has been produced when organizations select Option B, combined with a portfolio view of projects and strong change management.
Prepared by Dimitrios Vilaetis, Vice President at Pariveda’s Dallas office, Q1 2019
Dimitrios Vilaetis has over 20 years of international experience in Corporate Strategy and IT Strategy, both in Management Consulting and in industry. He focuses on creating/unlocking corporate value stemming from either the revenue or the cost side of business. As a Management Consultant, in addition to Corporate and IT Strategy, Dimitrios has worked on organizational, process, and change management projects. As an Executive in both banking and technology companies, he led cross-functional teams to convert strategy into execution and results.