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ITW – interesting things this week # 4

ITW – interesting things this week # 4

by alexander roan

Welcome to the fourth edition of ITW – ‘Interesting Things this Week’ 🙌🏻

In this newsletter, I share content from across the web that I found interesting. It’s loosely focussed on business transformation, and I try to avoid duplication with mainstream media.

This weeks post is around 1,000 words and a 4 minute read.

1) Nissan refocuses on its core business

The Economist wrote an interesting piece on Nissan CEO Uchido Makato’s plans for the brand. The situation Nissan finds itself in is a common trap for large corporations. A long period of growth leads to a drop in standards, a dilution of focus, and poor performance. In the case of Nissan, it seems that poor sales tactics in key markets and mismanagement of the product line were contributing factors. In this situation Uchida-san feels like the right leader, his approach to scale down and re-focus Nissan on a revitalised line of core products is sensible. To me, this was reminiscent of working under AG Lafley’s organisation at P&G back in 2000 when the company faced a similar situation. This is an important scenario to take into account when making strategic plans. Always check that the correct focus is placed on core products. Make sure that in-market sales strategies don’t risk long-term performance, to make short-term sales.

2) McKinsey wrote about centralising business operations

Last week I wrote about cost reduction. One of the biggest opportunities for cost reduction is centralisation. By this, I mean co-locating functions such as finance, human resources, purchasing and legal. Essentially all functions that don’t need to be in the field (e.g. sales) or at a specific facility (e.g. production). Centralisation brings a long list of potential benefits:

  • Moving to a low-cost location can provide significant labour cost savings;
  • Moving to a different location can provide a better talent pool;
  • Co-location reduces the overall number of managers required;
  • Scale drives more efficient ways of working;
  • Scale increases skills and knowledge;
  • It’s easier to implement and manage controls;
  • It’s easier to manage consistency of service levels;
  • It’s easier to manage information technology.

Centralisation is closely connected to process and systems improvements. This brings up a key question, whether to improve things before or after centralizing. McKinsey wrote a good article on the merits of shift then fix versus fix then shift. I think they reach the right conclusion; the best approach depends on the situation.

However, the article does miss a few factors; perhaps for brevity. The cited two options can be further expanded to four:

  • Centralise work w/out any improvement;
  • Centralise work and then improve it after it’s centralised;
  • Improve the work first and then centralise;
  • Both centralise and improve the work at the same time (by a project team).

The first is often overlooked. It is possible to centralise with no or a minimal amount of change and still gain labour cost and management consolidation savings.

Shift, then fix is often not an option due to a lack of capacity and capability to do the fixing. Companies in this situation can take advantage of centralising with an outsourcer on a shift, then fix basis. If a deal is well structured, an outsourcer can do the fixing for the company. The contract can be structured in such a way to incentivise this and deliver savings back to the company. I like this approach as it hands over topics such as robotic process automation or lean process improvement to the outsourcer and lets the company focus on its core business. A good outsourcer should, in theory at least, be an expert in process and systems improvement.

3. Bain wrote about assessing Change Power

Over the last decade, I’ve been both impressed and depressed by change management. Impressed by how a few simple adjustments to strategy or a program can make a massive difference in success rate. Depressed by the number of job postings and professionals that claim to want or be change managers, but have little substance other than being good at communications.

This leads to an important question. What exactly is change management and how do we measure it. Bain has developed a model composed of 9 elements that can be used to measure change.

Source: Bain & Company

I would propose these 9 elements are a good starting point, but this can be further customised the individual situation of a company. Considering the 9:

  • The ability of leadership to set direction is clearly important, I would also add the ability to ‘communicate or deploy’ that direction;
  • The capacity and choreography under ‘teaming for change’ is often overlooked, during strategic planning companies often create a long wish-list of change, but rarely appropriately consider the resources required to execute;
  • Development is a noteworthy focus on the skills needed to be able to identify and execute the right change. A solid example is digital, many companies lack the knowledge and risk being misled into the wrong programs by software companies.

Having a model for change management at the strategic and individual program level is something I would recommend as a top priority. I’d suggest using this as a basis for capability development and running regular self-assessments.

4. Analytics teams within Finance

CFO.com wrote about analytics within Finance. As expected their survey shows that most analytics work is done centrally. They also cite a low rate of outsourcing.

The potential benefits of outsourcing are often overlooked for analytics. Outsourcing is still seen as most suitable for low-skill, commodity work. However, outsourcing can also be a way to access large teams of highly skilled people.

Building an internal analytics team will face a number of challenges; building a high degree of expertise in what may be a small team, attracting top talent for some industries. With scale, an outsourcer can overcome many of these challenges and have both variety and depth of expertise in analytics e.g. employing statisticians, mathematicians, functional experts (e.g. finance) as well as experts covering a range of software products and programming languages.

I would consider an 80% outsourced and 20% internal model for analytics, assuming an outsourcer with the right capability can be identified. The 20% internal act as business partners and focus on understanding the business context and questions that analytics should be investigating.

What I’ve been up to this week?

This week I took a break from writing. Last week I finished a fairly long article on the chart of accounts. This article does mention SAP in the title, but the majority of the article is systems agnostic; this should work as a guide to the CoA in any environment.

And finally, something fun…

Have you played Pokemon Go? Have you heard of the mega-popular board game ‘Settlers of Catan’? Well, Niantic; the Pokemon Go developer is currently developing an augmented reality game based on Catan. A/R has been slow to evolve, but the gigantic success of Pokemon Go makes me wonder if Catan will be successful and what else the future will bring.


This newsletter is also available via e-mail, you can subscribe here.

ITW # 3 – a guide to cost reduction

ITW # 3 – a guide to cost reduction

by alexander roan

Welcome to the third edition of ITW – ‘Interesting Things this Week’ 🙌🏻

This weeks newsletter is dedicated to cost reduciton. In the news; the independent wrote about cost cutting in UK retail, the BBC wrote about layoffs for aviation workers and UK job cuts in general. HSBC were also in the headlines as they decided to continue with their plan to lose 35,000 employees. The OECD reported that global economic activity is expected to fall by 6% in 2020 and OECD unemployment to climb to 9.2% from 5.4% in 2019. A theme of 2020 for many companies will be the need to cut costs as a way to mitigate reduced income.

With this as a backdrop I’d like to talk further about the approach to cost reduction.

1) Cost reduction and CSR

Whenever discussing cost reduction it’s important to consider corporate social responsibility as a starting point. Ideally companies can find the right balance between reducing costs and thinking about employee and business partner (e.g. supplier) impacts. Employee layoffs can have a devastating effect on individuals. Business partner changes can put companies out of business. When planning and executing cost reduction these impacts should be considered. In real life this might mean trying to offer employees other options (reduced hours / different contract terms / new profit generating roles) or business partners a revised agreement.

2) A model for cost reduction

A good starting point for cost reduction is to consider the type of costs incurred within the business. Accounting provides a consistent way to look at this. Costs are either tied directly to production or not. For example; in a manufacturing environment there are factories with machines, operated by people to produce products. Cost accounting is used to calculate ‘cost of goods sold (COGS)’. This is the cost that can be directly tied to converting the input materials to the finished product. In this case by adding the raw material, labour and utility costs.

figure 1: cost structure

In addition to COGS there are operating expenses. They include the entire cost of departments such as accounting, human resources and IT. They also includes the costs of headquaters or sales offices. The majority of operating expenses are sales, general and administrative costs (SG&A). This is sometimes further broken down to sales costs (S&A) e.g. advertising campaigns and general and administrative costs (G&A) e.g. rent and utilities.

In service industries there are no COGS so SG&A is even more important.

This structure will be useful in planning cost reduction initiatives. Each cost area can be considered in turn. Typically SG&A is seen as one of the top priorities of cost reduction as it’s somewhat independent of production and sales volume.

Approach to cost reduction

A basic approach to cost reduction that many organisations follow is to set blanket cost cutting targets across the entire enterprise. Why? – perhaps because identifying the best place to cut costs requires a lot of analysis, thought and difficult decisions. Setting blanket targets across seems to be an easy way out and hands the responsibility to individual budget owners.

Costs are normally managed as part of annual budgets. This annual budget settting process is complicated. It can take as long as 6 to 9 months to set budgets. Typically the executive set high level targets on sales, margin and costs. These are then filtered down through management layers to individual budget owners. There is then a back and forth that can continue for several months to agree the budgets. The targets are often moving during this process.

Budgeting is often based on previous year actuals. If the executive takes last years budgets and asks each team to cut costs by 5%, each budget owner will try to negotiate a lower % cut. This leads to an allocation of investment based on the individual budget owners ability to justify and negotiate. The company might make it’s 5% target, but at the cost of reducing investment in the wrong areas.

A better approach to cost reduction would be to start from strategy and think carefully about the right areas to reduce costs.

During this strategy review the executive can carefully consider the products / services and markets and the different cost categories present across the business. An approach would be to build a matrix by cost category and product / service and answer some questions:

  • How closely tied is the cost to sales and production;
  • Has cost been challenged or reviewed in that area previously;
  • Is that department a key dependency for high volume or highly profitable products / services or customers segments;
  • How easy is it to make changes to the area in question;
  • etc.

This kind of analysis would be useful for deliberating the right focus areas for cost reduction. These will differ based on industry / market etc. Another useful tool is to apply zero-based budgeting. This will move away from assuming previous year budgets are the right starting point.

A word on benchmarking

Benchmarking is a common tool which helps to reduce costs. Ratios of different cost to revenue factors are often used to get a broad idea of whether a particular part of a company is efficient and shows value for money. The cost of the finance function as a percentage of revenue is an example of this.

But benchmarking can also be used in more granular ways. Two examples:

  • Checking salary rates against competitors – easier than ever with the advent of online comparison tools;
  • Internal benchmarking of departments / functions against one another, this can be done with sales offices, manufacturing sites etc. Where the benchmarked areas have slight differences complexity measures can be identified to adjust the benchmarks.

Ten ways to cut costs

Over the years I’ve seen or been involved in several cost related programs. Here are ten areas where I’ve seen good results.

1. Focus on core products / services

My first employer; Procter & Gamble, is a good story of the importance of focussing on core products and services. Around 2000 P&G were struggling. They had become ‘fat’. Too many new products and services and a large unorganised support function (high SG&A costs). A.G. Lafley joined the company in 2000 and two key strategies helped with the recovery:

  • Focus on core brands / products;
  • Build an efficient back office (simplify, standardise, centralise).

This needs to be carefully planned and will results in a high degree of mid and long term benefits.

2. Cancel projects

The success and cost rates of projects is rarely a focal point of strategy. Every company should have a central PMO that monitors the benefits to cost ratio for all programmes. This is a low effort / light touch PMO. Projects can be expensive, the key is to carefully control project budgets and stop or re-direct them quickly.

3. Create a central procurement organisation

For large organisation scale can be leveraged by procuring centrally. This goes for everything from raw materials to pencils. Rather than individual facilities / locations / teams making their own purchases, all purchases can be handled by a central team. This is an opportunity to buy at scale and also build a procurement and negotiation centre of excellence.

4. Centralise operations – finance, IT, HR, legal, marketing etc.

If staff are decentralised across locations there will be an opportunity to improve rent and utilities costs as well as reduce overall management effort by centralising teams. This can be done for all staff not directly tied to production or field sales. Centralisation has a lot of additional benefits for culture, quality and controls. Centralising functions will also have a knock on effect by simplifying requriements from IT, HR and property services.

5. Offshoring

Offshoring whether based on a captive or outsourced model can massively reduce laboour cost. I’ve seen savings off over 50% on labour, this can be a huge proportion of SG&A, particularly in service industries. This does require detailed planning and very careful execution. However it’s easy to calculate potential savings. First calculate a blended fully loaded cost for the functions you are considering e.g. finance staff, and then calculate the equivelant for any target country of interest. The information to calculate this is easily available freely online.

Outsourcing has somewhat of a bad reputation. Based on my experience this is normally due poor execution. Most of the time the companies squeeze the outsourcing supplier to far on price and hence receive poor service levels. Cost reduction should always be balanced with quality.

6. Review IT licensing

One of the patterns in IT over the last decades has been an ever increasing number of technology products, services and suppliers. It’s worthwhile to consider rationalisation in this space. Is each application needed? Do we have the right number of licenses? Can terms be renegotiated?

7. Deep dive into sales costs

For companies with field sales there may be opportunities to reduce costs. The key factor is to figure out what costs drive success in sales. Travel, events, conferences etc. should be carefully analysed to understand how much they impact sales. Moving events online, or reducing budget for entertainment can result in significant savings.

8. Deep dive into employee costs

Layoffs are one option to save on employees, but there are also opportunities to reduce labour costs. Is the salary banding simple and efficient? Are the package related costs (benefits) good value? Is there an opportunity to change contract structures? Would employees consider a 4-day week?

9. Discounts

Discounting can easily be overlooked on cost reduction initiatives as it happens at the point of sale. Discounts can total up to have a large impact on margin. This is true especially in industries like Pharmaceuticals where complex pricing structures are used.

10. Process improvement

Methods such a Lean culture and tools such as automation (RPA) can be key drivers of effort reduction, however these do not reduce costs on their own. There must be layoffs or re-assignment of people to revenue generating roles.

What the experts say

I’ve taken a look at some of the leaders in strategy and management to see what they have recently published on cost reduction.

McKinsey

McKinsey recently wrote this article about cost reduction, noting that it’s a top priority for most corporations and observing that cost targets seem to be fairly unfoccused. The following diagram is a useful illustration of how organisations normally set blanket targets:

Source: McKinsey

Bain

Bain currently have a webinar that looks at zero-based budgeting and five key themes of cost reduction. They also have an insight article that covers the less widely focussed on fixed product costs together with sustainability. It’s interesting to consider how a move to more sustainable packaging can cut costs. This is a good example of considering cost and CSR together:

Bain also have an article focussing on where to cut costs. They recommend focussing strategically on the right areas of the business. The ‘where to play’ and ‘how to win’ diagrams are useful and are normally an effective way to structure the discussion about the products / services and market segments to focus on and invest in vs. the ones to consider downsizing or as they note below divesting.

Source: Bain

Strategy& (PwC)

One of the first insights posted on Strategy& includes a downloadable PDF where they share a fairly comprehensive plan and approach to tackle cost. At a glance this includes a starting point of thinking clearly abot strategy and the market and then moving onto action. I like the categorisation of short term, mid term and long term actions.

And finally..

With this being the third edition of my newsletter I decided to try something a little different by focusing on a specific topic. Would you prefer future newsletters of this type or a more general format? What would be useful to include; theory, case studies, analysis / links to expert views?


I’ll also be sending this newsletter via e-mail in future, if you would like to receive it in you inbox please subscribe:

ITW – interesting things this week # 2

ITW – interesting things this week # 2

by alexander roan

Welcome to the second edition of ITW – ‘Interesting Things this Week’ 🙌🏻

In this newsletter I’ll be sharing some content from across the web that I found interesting. It’ll be loosely connected to business strategy and operations transformation, and I’ll try to avoid duplication with mainstream media.

This weeks post is around 1,000 words and a 4 minute read.

1) Too many management books!

I enjoyed Bartleby’s brief post on business books at the economist. Particularly his description of the management books piled on the economist’s desks:

Admittedly, many of these books are hard to read. The authors use “architect” as a verb and “learnings” as a noun. They randomly Capitalise every Other word. And they are overly fond of PEAs (pointless esoteric acronyms).

I think that many of the authors of management books follow a pattern of reverse engineering an ‘approach’ or ‘method’ for success. They seem to do this based on their own anecdotal experience. They rarely consider probability or simply ‘being in the right place at the right time’. There are many ways to manage a business I’m personally wary of anyone that tries to codify it into a simple set of rules.

2) Investments in gaming and at home fitness

CB insights posted about funding increases in home fitness and gaming.

Considering these two industries together reminded me of Nintendo’s ringfit which attempts to combine the addictiveness of role playing games with the benefits of a home workout (personal note – if I had been exercising for those few years I played World of Warcraft I’d probably be like Hercules now!) I haven’t played ringfit, but I heard it’s surprisingly fun. As people have been spending more time at home in 2020, many have noted the benefits of not having to commute to work or gyms etc. Online fitness training videos on YouTube and other platforms are very popular. I wonder if there will be other ringfit-like products. There must be a lot of potential to apply motion sensors, peripherals, augmented reality, virtual reality and other technologies to various different styles of exercise.

3) Skills for remote managers

The ICAEW shared a useful and concise summary of considerations for those managing teams remotely. The advice also makes sense for simply being part of a remote team. The author writes about four skills:

  • Communicate effectively
  • Provide context
  • Create clarity
  • Focus on culture

In practice managers tend to communicate based on tasks. Context and clarity is often missing. I believe that this starts from strategy deployment. Many organisations fail to deploy strategy well, this leads to a lack of context across teams in an organisation. Remote working means contact time may be reduced and the ability to have nuanced discussions over a coffee may be missed.

5) The future of maintenance

McKinsey shared an interesting article on asset maintenance.

In 2019 I had the opportunity to work with Programmed; a maintenance business in Australia and New Zealand. If you don’t work in engineering or a related disciplines you probably don’t consider asset maintenance much. It’s a massive topic hidden in plain sight. Every element of the infrastructure around us has to be maintainted. There are a lot of challenges within the industry, including things like:

  • What’s the right frequency for maintenance
  • When should we do maintenance
  • How do we handle complex or aging assets that require unique skills
  • How do we deal with assets that are widely spread out

How well you can manage these factors has a big impact on cost and effort.

Maintenance is an industry with a high level of potential to benefit from new technologies. The addition of sensors and online connectivity; aka ‘internet of things’, coupled with increasing computational capabilities means that algorithms can now better predict failures and optimise maintenance schedules. Another example is using augmented reality which can help provide instructions on maintenance of complex assets. I highlighted this in my recent article about digital too. I also thought the mention of drones for assets monitoring was interesting.

5) OpenAI releases a commerical AI based text generator

I read a Wired article reporting that OpenAI were releasing a commercial version of their neural network based text generator technology via an API (application programming interface).

There are many text generators out there, but this is interesting as it represents a change of stance from OpenAI who previously cited ‘fears of misuse’ as a reason not to release this technology on an open commercial basis.

What is a text generator? – given a text prompt, it will return some text attempting to match the pattern you gave it. You can “program” it by showing IT examples of what you’d like it to do; its success generally varies depending on how complex the task is. Wired explained that if you give it simplified paragraphs written for school kids, then give it one unsimplified paragraph, it will then attempt to simplify it.

The technology doesn’t work perfectly yet, but it’s very close to passing for human.

The term AI may give a false impression of what this technology does. It’s easy to assume the text output is based on some human-like intelligence.

However that’s not correct. The neural network is trained a mass of web and digital book data. The transformations it makes are based on it’s training data. This means that any bias / style / innacuracies etc. in the training data will be present in the way the output is transformed. Think widely published racism, conspirancy theories, slang etc.

Philosophically; as a human, when we write content we have the ability to think about our writing in light of the context of current events and people around us, we can question what we write as we write based on our own intellect. A neural network cannot do that, it applies the patterns that were present in past writing.

In the current climate there is a lot of media focus on overcoming biases of the past. This is at odds with the way neural networks work.

What I’ve been up to this week?

This week I wrote an article encouraging project managers, program managers and PMO professionals to focus more on strategy and people. This was based around a lot of common mistakes and efficiencies I saw in change programs in recent years.

And finally, something fun…

Media seems to have gone a bit post-apocolyptic in the past decade. During this time I highly recommend the light hearted tropes of korean drama. Romance, comedy and the best cliffhangers!

I recommend ‘crash landing on you’ as a starting point, which is currently airing on Netflix.

https://www.imdb.com/title/tt10850932/

https://www.netflix.com/title/81159258


I’ll also be sending this newsletter via e-mail in future, if you would like to receive it in you inbox please subscribe:

ITW – Interesting things this week # 1

ITW – Interesting things this week # 1

by alexander roan

Welcome to the inaugural version of ITW – ‘Interesting Things this Week’ 🙌🏻

In this newsletter I’ll be sharing some content from across the web that I found interesting. It’ll be loosely connected to business strategy and operations transformation, and I’ll try to avoid duplication with mainstream media.

This weeks post is around 900 words and a 3.5 minute read.

1) Opening an account

(by builtformars)

In this post ‘builtformars’ analyses the different experiences while opening a bank acccount across challenger and traditional banks. While the blog is focussed on UX, it’s also an interesting study on process. Whilst reading this I was thinking that a similar analysis could be carried out across various processes to easily compare customer experience across competitors. It’s a fairly cheap and low effort way to gain some insights, and isn’t often done so pro-actively.

2) Public attitudes on the fair use of data and algorithms in finance

(by the behavioural insights team and centre for data ethics and innovation)

Neural networks are the most common form of machine learning applied to decision making. These networks can; given an input, categorise it which is a kind of decision making. They do this based on ‘training data’. The classic examples relate to images. If you train a neural network with 1,000,000 images of cats from the internet the networks gain a degress of accuracy in being able to identify when a cat is present in an image on the internet. The accuracy is based on the range of cat images provided during the training stage.

Because of this training bias is big issue. Consider a neural network that reviews loan applications, it might be trained on previous loan applications and whether they were approved or rejected. Any bias in this training data will be designed into the neural network.

The report linked looks at the perceptions of the fairness of proxy information used in algorithms. If for example a neural network finds a pattern of certain postcodes having a high rejection rate, this may represent; just for illustration, an area where ethnic minorities live, in this case the postcode may be acting as a proxy for ethnicity.

The CDEI and BIT study looks at public perction on the use of algorithms. Unsurprisingly one of the conclusion is that the there is a negative perception of algorithms in loan-making.

Even though this technology is not well understood by the general public it’s promising to see that the public are cautious here. I expect that we wil see more focus on fairness and bias as these technologies find more and more commercial applications.

3) Morality in business

An example of good morals and an example of questionable morals

On Monday I read about Javier Rodriquez, CEO of DaVita; a chain of kidney treatment centres. His company automatically qualified for and received nearly $250 million from the US health care enhancement act (part of the pandemic relief package). The company and it’s directors decided to return the money as they felt they didn’t weren’t in need of it.

On the other hand, last night I read about Take-Two Interactive; the parent company of Rockstar, producer of the massively successful games Grand Theft Auto and Red Dead Redemption. Apparantly they cancelled a contract with a smaller developer; Star Theory Games, and then proceeded to poach over a 1/3 of the staff. It seems they started poaching even before the contract cancellation was finalised or communicated.

What’s the right line between profits and morality? A lot of companies incude a section on corporate social responsibility in their annual reports, but this tends to address topics like diversity, the environmen etc. I don’t see much on morality and ethics within commercials or supply chain.

4) Another failed use-case for blockchain

Recently I wrote a short article on how blockchain works. Once you understand how it works and how it compares to other technologies it becomes much easier to identify the use-cases that hold genuine value. On Tuesday I heard that Civil a blockchain journalim start up has closed down. I think this is a clear example of being excited about a technology and just looking for applications w/out really thinking about how appropriate it is and what the value proprosition is.

5) The Endangered Asian Century

I came across an interesting article from Lee Hsien Loong; no other than the prime minister of Singapore, addressing APAC and the sometimes difficult position the countries are palced in between America and China.

I remember since my University days; way back in 1996 – 2000, there was always talk of asia pacific becoming the economic super power of the world, with the west in decline. It’s interesting to see a slightly different perspective.


What I’ve been up to this week?

If you are interested in ERP or SAP I wrote about their HANA and S/4HANA products.

And finally, something fun…

When I’m working, or exercising or even taking a nap I sometimes like to play some music in the background. Recently I’ve been into lofi music. It’s super relaxing and it’s not at all intrusive so you can enjoy it while doing other things. You can look up some excellent artists like Jinfang, Tomppabeats or Nujabes or you can tune into one of the many streaming channels on youtube and let them do all the hard work of curating a playlist, I particularly like a channel called “ChilledCow”


I’ll also be sending this newsletter via e-mail in future, if you would like to receive it in you inbox please subscribe: