Wednesday, October 15, 2014

Stabilizing the Power Pendulum

I was privileged this week to spend a few days with several hundred practitioners in the art of commercial contracting.  The IACCM Annual Americas Forum held in Chicago drew participation from hundreds of companies around the world that are committed to innovation and improvement in contracting process, practices, and skills.

I’ve attended several of the IACCM events over the past 15 years – a testament to the commitment and persistence of the IACCM leadership, notably CEO Tim Cummins.  This year’s conference demonstrated the power of collaboration among the professionals who are committed to improving the quality of Buyer-Supplier relationships.
IACCM (International Association for Contract & Commercial Management) is a unique not-for-profit organization that is committed to improving the quality of commercial contracting.  In this day and age of changing forms of contracting, their mission is more important than ever.

I co-presented a session today focused on the techniques used buy procurement organizations and sales professionals to create new sources of value through collaboration.  Jim Bergman of IACCM joined me in this presentation.  We shared our experiences around techniques to move from transactional buying to shared risk, shared investment, and collaborative innovation. 
While collaborative buyer-supplier relationships are clearly not an everyday occurrence, we observed that certain conditions are essential if the parties share a desire to move beyond a commodity transaction.  These include:

·         Foundation of delivery on core commitments and trust
      ·         Transparency and candor
      ·         Shared risk, shared investment
      ·         Strong contractual documentation

Each of us drew upon our experiences on the buy-side and sell-side of commercial contracting.  In particular, I described the shift among enterprises from requirements-driven to offering-derived contracting.  In a world of “as a service” subscriptions, contracting strategies are increasingly informed by the availability of market-defined offerings. It was a fun session that we named “Stabilizing the Power Pendulum”.
We were followed by an enlightening example of the importance of the IACCM mission.  Dr. John Henke of Oakland University and Planning Perspectives shared the results of his research into the bottom-line contribution attributable to strong and positive supplier relationships, with emphasis on the automotive industry.  It was a compelling example of how strong supplier relationships convert to improved profitability.
It was invigorating to be among so many people who are committed to creating value for their firms through techniques of progressive contracting in a changing world.



Tuesday, October 7, 2014

Build versus Subscribe in a Platform World

Among the many attributes that are different in the world of running a business as a platform, one factor gets brought to the table with increasing frequency:  what’s our new investment framework for proprietary capabilities?
Think about it. The Build-versus-Subscribe decision for a business’ operating capabilities previously led to the creation and nurturing of large organizations of technical and business staff to conceive and implement new functions.  I remember one global bank during the Y2K “event” which cataloged its applications and concluded that over 80% of its operating capability was built in-house. This was a common profile.
The coin is flipping.  Most companies cannot afford to maintain large internal, dedicated staff to develop proprietary capabilities.  Further, they know that innovation comes from a “built for purpose” mindset, and that’s a characteristic of organizations that are serving markets, not unique situations. 

Companies are re-defining the decision criteria for investments in proprietary functionality.  Build-versus-Subscribe requires much more foresight than ever before.  I particularly like the vision of one forward-thinking client who uses a nice taxonomy of future-state traits to help inform the decision making around what his company needs to build for itself versus subscribe to a service.
The criteria for investing in the building of applications functionality centers on five fore questions:

ü  There is an absence of this capability available in the market.  Specifically, is there truly no Service available to which we can subscribe to achieve the functionality we need?

ü  The capability provides distinct competitive differentiation.  If not, then the functionality is common to others and we can gain access to it without carrying the burden of full ownership. We may need to prompt the creation of a market offering, but we don’t need to build the capability for ourselves.

ü  A proprietary capability will be distinguishing for our company over the next N years.  The time horizon varies by business circumstance, but this question forces a consideration of the time and cost to develop functionality in a market of fast-paced innovation. Absence of a market capability today might warrant some form of investment that is external rather than to build for oneself.

ü  The characteristics of the “ecosystem” are aligned with our business strategy.  This recognizes that no business functionality operates in isolation and that dependencies surround virtually every technology-enabled business process – whether built or bought/subscribed. If the source of a capability introduces undue risks or conflicts with the architecture or operating principles of the organization, this may be a significant factor in the decision.

ü  We have the opportunity to monetize our investment at a future date.  This is a speculative question, but one which is becoming more common as companies look to commercialize their innovations in a world of apps-on-demand.  In the past, investments in building application functionality used to be considered the cost of doing business.  Now, those spends are considered opportunities to generate returns more directly than just via improved business performance.
The implications of this move towards subscription over proprietary building of applications are many.  One of the most profound is around the talent required within the enterprise.  I think we will see the skills associated with integration, dev/ops, and risk management take a more prominent place in the organization of the future.  Core development skills will shift with greater pace to the service industry.



Wednesday, September 24, 2014

Big Bets on Platforms

Big news this week on two fronts.  Call me biased, but I see further proof that the future is a world of platforms.

SAP buying Concur is a move that many Shared Services and F&A executives will notice with great interest.  Concur is a clear fast-mover in the world of travel and expense management.  SAP continues to demonstrate that they understand the shifting winds in back-office process management and next-generation ERP, and are determined to reinvent themselves around cloud-based platforms. 

The second notable deal was an industry move.  Cognizant’s buy of Trizetto is well-documented by my friend Phil Fersht on his blog at Horses for Sources.  I won’t repeat any of his fine reporting.  I can tell you this this move is reflective of a well-defined strategy of CEO Frank d’Souza’s to bring relevant platforms of business processing services to the industry segments that Cognizant values most.  I don’t think that Cognizant will stop with Healthcare.  This company understands that the future of business services is platforms.

In both cases, a prominent rationale for the acquisitions was the ambition to achieve leadership in the Business Process as a Service (BPaaS) market.  One for “horizontal” services (travel and expense) and one for “vertical” services (healthcare).  These aren’t the first such moves, but they are both noteworthy for the scale of the moves by ambitious market leaders.

As one considers these moves, I find that the work of my colleague John Rossman in his recent book The Amazon Way offers a great framework for how these business combinations will need to operate in the new world:

John discusses four groups of capabilities that help define a platform company.  Few, if any, companies will embody 100% of these attributes but I suspect that SAP and Cognizant will do their utmost to embrace them.

1)     Business Model:  A platform company will generally have the following business model characteristics:

·         Large Fixed Cost/Significant up-front investments

·         Small marginal costs. Decreasing marginal costs with additional usage

·         Network effects

·         Continuous revenue stream  (subscription based, typically transient customers, low barrier to usage and access)

2)     Operational Attributes:

·         SLAs are well-defined, granular, secure, have good privacy controls

·         Business Continuity – 100% service availability

·         Instrumentation is a core competency – measure and monitor everything.  The capabilities and data are appropriately exposed to partners and clients.

·         Service Analytics – ability to implement efficient feedback loops. Transparency is key.

·         Multi-tenant – Should be able to add substantial amounts of clients, brands or “eco system” partners without modification, separate infrastructure or new “instances”. Shared infrastructure requires the proper placement of governance, data management or public policies to minimize conflict and disruption on the common infrastructure.

·         Zero-provisioned – Adding a partner or client has not cost due the self-service nature of the platform.  External entities should be able to sign up to use capabilities without your assistance

3)     Ecosystem:  A platform company not only enables, but also facilitates other businesses use of their platform.

·         External Innovation – Other enterprises innovate on the platform without anyone in the platform organization needing to know about it.  No gatekeepers!

·         Natural Synergies – A platform business created both intentional and unintentional synergies that increase the value and traction of the platform with each additional partner.  (p. 148)

·         Unplanned customers and innovation -  Successful platforms create both the environment and the tools (such as APIs) which make it easy for customers and partners to use and innovate without direct Client involvement.

4)     Critical Capabilities:

·         APIs and Bulk Operations: Clearly defined “sockets” or interfaces through which others interact with the platform are often hardened APIs. 

·         Analytics:  Should provide robust and deep analytics.

·         Self-Service:  Clientele should be able to graduate from “discovery to operating” without ever talking to someone at the platform business.

·         By-the-Sip pricing:    Service should enable traditionally fixed capital and operating expenses to be transformed to flexible and variable expensed costs.  The ability to quickly scale, both up AND down is key to the model

·         Compliance Capability “As a Service” – Platform businesses provide clients with an unusually high control and assurance for meeting and supporting compliance, as well as audit and tax management. Governance and compliance are facilitated by the platform’s inherent metrics and instrumentation.

·         Data and Content steward ship:  a platform should provide clearly expressed and easily managed policies and assurances on data protection, reconciliation, and delete rights.

·         Change Enabler – Data models, configuration, archiving and key capabilities are designed to accommodate and manage change.

It’s striking to me how the topic of “platforms” is increasingly common in the strategies of companies across all industries and of all states of maturity.  This isn’t just a topic for start-ups.  In fact, one executive recently said to me:  “We’re either going to BE a platform, or be a subscriber to the platforms of others.”  To which I replied, “the most likely outcome is both.”



Tuesday, September 2, 2014

Reality Check

Will today’s outsourcing service providers successfully make the leap in the “As a Service” economy?
Recently, the CIO and CFO of a mid-sized manufacturer asked me about the likelihood that their incumbent outsourcing services providers would be considered “top quartile” in the “as a service” marketplace. 

With a few years remaining on their existing contracts, these executives were wondering about the instructions to give to the Supply Chain organization for the future of these relationships.  Clearly, the market is moving to new levels of performance and different forms of contracting.  Conversations with the existing Services Providers all sounded good – commitments to “outcome based pricing” and to greater innovation through collaborative forums.
I suggested that there are five core questions that all Clients of today’s ITO/BPO service providers should be asking if they truly want to understand the degree of Services commitment those providers are positioning to offer.

1)     What is the Services Roadmap?  Like traditional product companies have ingrained in their DNA, the “As a Service” providers will have a committed roadmap of Services features and functionality, with a defined process for Client input and priorities. 

2)     Is Investment Committed?  While the actual funding levels may not be disclosed, your Services Provider should share the nature of the investment being made to enable the roadmap.  Investment is not pricing.  Investment is the “bet” being made by the Provider that it can serve enough of a market with its offerings to make a decent profit.

3)     What’s My Community?  If your company is the sole customer of a specific Service, it isn’t really a Service.  It’s a project.  Or, an experiment.  Or, a “best intentions” level of effort.  It isn’t a Service if there isn’t a market that is readily identifiable that are subscribers to the same utility.  Don’t expect innovation if you’re the only customer of such an offering – a market of one won’t justify the investment. 

4)     What will be Different?   It’s never too early to engage in the conversation about how the nature of the obligations will change as a relationship evolves to be more Services-based.  I’d expect the responsibilities around capital investment to shift.  I’d also expect to see “configurability” be used to describe the service relationship, not “customized”.  The Service Provider ought to be able to describe a new form of Services relationship that feels much more agile to the Client. 

5)     What’s the Transition Look Like?  It would be a disappointment if the conversation about the shift to a Services-based operating model was predicated by a contractual renewal.  In fact, if the discussions about the topics above aren’t happening now … it’s probably time to look at alternative Services options. 

These criteria apply to all forms of “As a Service” market offerings – from infrastructure (communications, computing, storage, etc.) through to Business Processes.  They form a good litmus test for use in your next Quarterly Review of the health of your outsourcing contract. 
A Provider that is excited for the “As a Service” market will readily engage in this conversation.  A Provider that thinks that outsourcing is the answer might only talk about “transactional pricing” and hope that the Client is satisfied.  Reality checks are happening with great regularity.


Monday, August 18, 2014

Time to Plan

A recent conversation with the EVP for Global Shared Services of a major CPG company went down an interesting line of reasoning that I thought worthy of sharing.  It’s all about the increased cycle-time for planning.
Like many large global companies, this one operates a Shared Services entity that comprises all of the common back-office functions.  Further, there is a fair amount of outsourcing being managed as part of the service strategy.  A sign of maturity, there are global process owners in place who carry responsibility for demand management and services architecture, through to service performance management. 

The outsourcing arrangements were constructed using then-current industry best practices and are yielding favorable cost performance.

With that backdrop, here are the top planning-related concerns that the EVP for Shared Services outlined for me:

1)     The original economic equation that supported outsourcing comprised broad scope of services to a small number of providers under long-term contracts; does this strategy still apply in a world of service-level arbitrage?  In other words, would we be better served by contracting with several providers for essentially identical functionality, and select between them on a much more frequent cycle?

2)     How early in advance of the expiration of my ERP license agreements should I develop the tradeoffs between renewal and migration to best-of-function SaaS platforms?  Are BPaaS options available as internally- or externally-sourced alternatives?  What sort of services integration strategy works best in this situation? 

3)     C-suite executives are looking for agility as the highest-priority commitment.  They need confidence in our ability to scale up and scale down in response to both marketplace trends and changes to our corporate structure (e.g., acquisitions and divestitures).  How do I gauge the agility of our shared services functions, and what form of planning model is considered best practice to accommodate such shifts?
4)     Should the shared services scope of operation reach forward to the middle- and front-office functions of the company by applying the lessons of back-office optimization? 

As we discussed each of those situations, one reality became increasingly obvious.  The planning cycle for the shared services organization needed to change dramatically.  As is common, this organization utilized an annual process for assessing business demands and service performance.  The EVP concluded that she needed a persistent tempo of service planning … a capability and a symbol of the shift towards a utility-oriented model of operation.
The implications of this form of planning – with forward-looking indicators driving decisions around such things as capital investments, services contracting, integration architectures, and so much more – were far-reaching.  In fact, one of the first steps to be taken was to engage Supply Chain leadership around the fact that “What we buy, from whom we buy, and how we buy all must change.”

That fact frames the opportunity and threat of the shift to an “As A Service” economy.


Thursday, July 31, 2014

Correlating “As A Service” with ROIC and Shareholder Value

My thesis for some time has been that the value from adopting progressive “As A Service” operating models – through next-generation outsourcing, subscription-based contracting, and shared services – can be measured through enhanced shareholder value.  But, it’s been an elusive metric to prove.

Does the reduction of capital spend on dedicated assets by partnering with service providers, subscribing to SaaS or BPaaS offerings, and acceleration of Shared Services lead to definitive improvement in the value to shareholders?
I know from conversations with corporate executives that it is a high priority for companies to improve their ROIC.  This is a very tangible metric of strategy and execution.  Furthermore, the Private Equity world grasps this concept intimately – carve-outs are often built to run on SaaS platforms, and new products are almost always designed to be offered on a subscription basis.

To help Alvarez & Marsal be better informed and better positioned to offer clients actionable strategies for ROIC improvement, I commissioned research into the ROIC performance of market leaders in several key industries to identify today’s most promising strategies.
I am sharing a summary of the findings of one industry – US-based Restaurants – to generate further conversation on this topic and gain new insights on what other companies are doing to improve their ROIC. I’d love to hear your feedback.

Here’s what our research told us:
       Companies with high ROIC outperform those with low ROIC across virtually every financial measure

       Companies that improve ROIC the fastest post stronger revenue growth, higher margins and greater capital efficiency than competitors

       High ROIC growth companies can command superior valuations, with investors willing to pay higher prices per share

       ROIC is gaining more management and Board attention and becoming a greater factor in executive comp

Are unconventional levers – techniques borne through the adoption of “As A Service” principles – driving ROIC improvement?
Our findings led us to a hypothesis that several emerging techniques are helping leading companies improve their ROIC. These unconventional levers represent new and innovative thinking that fundamentally reframes business models, supplier relationships and enabling technology to help companies create substantial advantages. The levers include:

       Business process as-a-service
       Leveraged partner and provider networks and partner-based business models 
       Subscription-based procurement and contracting for services vs. products
       Expanded enterprise shared services
       Cloud computing for IT capacity
       Monetized data incidental to the core business
       Leveraged social platforms  
       Enhanced self-service business operations
Why are these strategies working over conventional approaches?  I think that conventional ROIC strategies carry limitations and risks. Most companies try to improve ROIC by improving net operating profit after taxes (NOPAT) through revenue enhancement, tax planning and cost-cutting, or by capital reduction, through divestiture or limiting working capital.  But attempts to increase NOPAT may decrease business agility and management flexibility, while reduction in invested capital may disrupt a company’s normal operations.

The emerging ROIC strategies have one thing in common: they use capital redeployment thereby decreasing invested capital by shifting it to outside parties or using new business models with lower capital intensity. As invested capital becomes more efficient, ROIC improves. Capital redeployment strategies are often more effective than conventional strategies in improving NOPAT because management has greater flexibility to manage invested capital and limit the effects of changes on the core business.

We’ve also observed that industries will benefit differently from ROIC improvement. Several industry sectors show an unusually strong correlation between ROIC improvement and strength in other performance indicators. Across the industries we analyzed, this relationship was more pronounced in Restaurants, Apparel, Food Retail, Personal Products and Construction & Farm Equipment. Many other industries, particularly those that are not highly capital-intensive, feature similarly promising opportunities to improve ROIC. I’ve attached a summary of our findings in the Restaurant sector.  
The influencers of ROIC improvement are of great interest to me and our A&M clients and I view this initial research as the start of many important management conversations on what is driving ROIC. I welcome your thoughts and opinions and will use this forum to update you as we expand our research.  



Wednesday, July 16, 2014

IBM-Apple: All About the Services

All About the Services

I was all set to write a piece this week that was fueled by some of the email that I received after last week’s post (Pretenders Beware) about what it really means to be in the Services business.  Many Clients and service providers reacted to my assertion that a singular focus on transactional pricing was perfume on a pig.  That’s not exactly what I wrote, but you get the picture.
This week, I was going to comment on the practical feasibility of established ITO/BPO providers shifting their business model from being Client-focused to being Services-focused.  I’ll save that for next week because it’s still a worthy topic.  And, it’s one for which I anticipate a fair amount of discussion.

So, what preempted me? 
Yikes!  This IBM-Apple venture has the potential to be a world-changing event for the Services industry.  Talk about a poster child for how Social, Mobile, Analytics & Cloud are brought to reality for businesses, this initiative has the potential to accelerate the shift to subscription-based business operations like few others.

This isn’t about Facebook and Farmville.  This is about industrial-class business functionality provisioned on the most agile of mobile devices and backed by the analytics engine of the world’s most prolific developer of information-based services.  I like the ZDnet summary of the deal.
To me, this is a major disruptive move to the ITO/BPO industry.  Look at what the introduction of WorkDay did to the HRO market.  This new venture has the potential to shift corporate applications strategies overnight.  I’ve already spoken with several CIOs who tell me that they are launching studies to understand how this new industry capability might alter their roadmaps.

If there’s a hitch in this venture, it might very well be the capacity of the partners to keep up with demand.  Reports have stated that IBM and Apple have been working for months on the initiative and that more than a hundred industry-focused enterprise apps are on the horizon.  That should prime the pump for adoption.
I am eager to hear more about the commercial model around this offering.  Most of the people I speak with are expecting an experience analogous to iTunes or the Apple AppStore.  If so, the job of the CIO just hit an inflection bump as their business users look to subscribe to business services that take a wildly different form than the legacy models deployed today.

Who would have thought that Big Blue would have the moxie to lead this charge?  The implications to IBM are far-reaching – from sales and marketing, to client relationship management, to market coverage, to commercial models, to channel strategies, etc.
Even more exciting will be the responses that will follow … what new ventures will emerge to compete in the market that is reformed by the gravitational pull of this entrant?  That is the question worth watching be answered.

Personally, I applaud this move as being rocket fuel for the transition to subscription-based business services.