The global services industry had its best two quarters ever. And, the next few would be marked by measured optimism. A look at how customers and service providers plan to respond.
Read the Article at Global Service Media
Sphere: Related ContentIn my talks and seminars I often ask the audience to recall a particularly negative customer experiences they have encountered. The audiences are typically business people who are interested in customer relationships. My first agenda is to get them to relive the emotions they feel when they encounter a bad experience. They do recall the experiences and they do relive the negative emotional experience, in fact, some have a little difficulty letting go. I do this so they have a personal frame of reference about negative customer experience and to imprint the powerful negative impact.
As an interesting aside, two business entities almost always dominated the negative experience list—call centers and cellular phone companies.
My next exercise is to get them to describe a notable customer experience. In this case the companies involved are more varied but there is a common thread. The experience almost always involves a situation where someone listened to them, empathized with them and did something to directly enhance THEIR unique experience. Once again, the participants become emotional; in this case the emotions are positive and usually lead to unabashedly advocating the company to others in the group. I am still surprised by the fact that while everyone can remember a negative customer experience, there are some who have to work hard at remembering a great one.
This sets the stage for discussing the psychological principles underlying compelling customer experience and the business strategies to put them into action. If the participants don’t have these anchors to reflect back on, their efforts to engineer a better customer experience for their customers are too clinical or sterile. They don’t focus on the essence of customer experiences—which are emotional.
By John I. Todor, Perfect CEM
Sphere: Related ContentMarketers are continually hopping onto social media marketing as a perfectly productive means of reaching out to more and more people. Even if they are not able to measure the numbers yet, they are keen on using this tool as an effective means of creating the right buzz about themselves.
In an innovative big to promote itself, Aquafina created a contest on video networking website MySpace for users to create a winning video. The reward was a trip to none-other-than the Sundance Film Festival. The brand has profiled itself on MySpace since 2006, filling in with podcasts and film festival updates. This was one of their most innovative and effective ways to reach out to the film community. The influence that social media marketing of this kind provides cannot be met with a single line ad.
Closer home, a recent instance is the promotion of Bollywood [s1] film Tashan on Facebook, YouTube and Orkut. Promoters of the film have created a community specific to the film. On Facebook, it runs with the tagline, “Don’t worry about who you are, just carry your Tashan in your heart.” The film got popular even before it was released and the reader profile perfectly complimented the audience the film required.
Social media marketing can be a tricky game. If your existence on the web is simply a platform for your company, you might want to get involved with B2B media marketing that allows you to access the communities you specifically want to target. You can access this on networks like ITtoolbox or LinkedIn.
On the other hand, you can involve more publicly by hosting podcasts, webcasts and blogs for your brand on the numerous social networking websites with their readership of anything like a million. Since people are talking about you anyway, you might as well don the discussion hat and play along. It will only benefit your brand. Cincom Systems, an IT organization has made available a series of online educational & promotional videos, podcasts and screencasts, on the social media sites YouTube, Ning and Facebook. The famous bollywood actor Amitab Bachan, Aamir Khan and other are now hooked to blogging. Marketing experts like Dale Wolf runs the perfect customer experience management (www.perfectcem.com) blog, Steve Kayser’s Expert Access newsletter has managed to achieve a phenomenal global subscription base of nearly 141,000 subscribers. These examples truly accentuate the importance of these next generation tools for marketers.
For those who have still not recognized the perfectly simple and productive marketing tool that social media provides, it is time to wake up and smell the coffee. There is no challenging the tremendous traffic that a good posting can attract. These will be people who can add to your business and a lot of them will be ones who will keep coming back to your website.
Thanks to Web 2.0 you can use this master of a marketer to attract more links to your website or the company. The idea is to create a posting or an advertisement that connects to the user on the website you are choosing to harness. Added to this is the low cost advantage that all of us are eventually happy to employ. Search engines also pick up websites that receive natural links from known domain names. These are some first hand advantages of social media marketing that many of us are meaning to ignore so very far into its development.
It’s easy to assume that most of the traffic generated thus will not be productive. But a trend that has been noticed is that while initially you might see a spurt of visitors, the numbers will stabilize soon after. And this will be the number to reckon with. It could be clients, customers, partners, potential partners,. All of whom need to be on your list. It is also not presumptuous to say that a lot of the secondary traffic that visits your website could be people interested in what you provide.
Simply advertising on Web 2.0 is an efficient means of attracting traffic to your website. Because the number of users is so high on this case, it adds to the traffic you will eventually attract. Again, the only trick is to make it available to your target audience because the click, as we all know, is only a flick of a second.
While the profits of such marketing do not add up immediately or even evidently, it will generate a linkage on the web that will support your business through mentions, connects and recommendations. Social media marketing perfectly compliments your other forms of marketing. It can even be a support system for you as this is one means of communication that has no time span or recurring costs involved.
Another term touted with as much ease as social media marketing these days is ‘social media optimization’. With this, brands aim to alter their website such that it makes it easily searchable and receives more mention on blogs and podcasts etc. Adding a blog to your own website is a greater way of going about it. If your website is static, it will get more dynamic with regular updates and with several links connecting to anything that you post.
Social media marketing can therefore be a great means to promote your site through social media networks as well as within 3D worlds like Second Life and There.com.
Instead of randomly rushing through this sea of information, marketers prefer to build on a specific idea for brand awareness and then encourage brand attention and feedback with increased albeit more casual visibility. What cautions them is the user feedback that can also be negative. But one cannot forget that users in this case also become contributors and when the product is good, gladly act as ambassadors. As more threads are attached to your name, viral marketing picks up at an unprecedented pace. And this is where the crux of the game lies.
Marketers are therefore now busy fine tuning themselves to the new needs of this growing media that cannot be ignored. Social media marketing is far removed from traditional concepts of marketing. This makes it a more challenging medium but one that can be most effective in the medium to long run.
Intellectuals are still pondering over measurements that most correctly define the reach of this new media. There are four broad measures identified so far—audience, content tracking, online media analysis and online market research. Whatever the measurements and whatever its reach, opinion is unanimous for social media marketing. There seems to be nothing like it in the near future.
[s1]The Indian Film Industry like Hollywood
Sphere: Related ContentI have never heard a speech like this, where Mr. Mahindra brings an interesting reference of the current India IT industry to an old India Mythology at the recent NASSCOM leadership Forum. This is the first occasion where I have been a part of a speech that relates market situation to mythology. Its great.
Defeating its own Hiranyakashyaps (Courtesy - NASSCOM)
Reinvention, regrouping and re-thinking its ways out of challenges is the way to go for the IT-BPO industry.Innovation was the theme that laced the keynote by Anand Mahindra, vice chairman and managing director of Mahindra & Mahindra, who, in an interesting twist, led the discussion on “Building a Knowledge Economy for Growth,” with references to Indian mythology instead of technology!
In this article, we capture some of the innovative ideas that Mahindra presented at the Conclave, for the IT-BPO industry to combat its Hiranyakashyaps.
“I think there are some urgent pressures and imperatives the industry has to deal with at this point, which need different answers. Therefore, I'm going to talk about something completely different: I will talk about the Trimurti.
Most Indians will know the Trimurti–the trinity in Indian mythology including Brahma the creator, Vishnu the sustainer and Shiva the destroyer. There is a wonderful depiction of this in stone, just ten kilometers across the bay, at Elephanta. Both as a businessman, and as someone who tends to see life in visual images, the Trimurti reminds me of India's IT industry. Think of it.
The Indian IT industry has gone through a stage, where like Brahma, it created something out of nothing. It created a new and global industry. It created a service sector that is today, a major pillar of our GDP. But most importantly, it created a perception of a new India, both in the world and in Indian hearts and minds.
But creation is only the first phase. The industry has to move on to the next phase of sustaining that creation—move to the realm of Vishnu the preserver. Creation is a one-time affair. Sustaining that creation is obviously a longer haul, subject to many attacks and crises. Perhaps that is why Vishnu comes not in one, but in ten incarnations.
Every time there is a new danger, he changes his avatar to a form best suited to meet that danger. At various times he has come as a fish, as a tortoise, as a dwarf. But his most interesting avatar came when he had to fight the demon Hiranyakashyap. Hiranyakashyap was a bad guy, who had obtained an amazing boon from the gods. Neither man nor beast could kill him; he could not be killed by daylight or at night-time, within his home or outside it, on the ground or in the sky. All this made him pretty invincible–he went on a rampage, and only Vishnu could tackle him.
The IT industry today faces challenges every bit as complex as those Hiranyakashyap posed for Vishnu. It is hit by a macroeconomic tsunami of adverse currency changes, rapidly escalating costs in both salaries and infrastructure and inadequate talent pools below the Tier 1 and 2 institutions.
At the Company level, firms are begin to feel the penalties of poor differentiation and lack of focus (trying to be all things to all people); and an over-emphasis on high volumes and price competition. Suddenly, the industry seems to have fallen off its pedestal; You are facing your very own Hiranyakashyap.
It's interesting to see how Vishnu dealt with him. The demon pretty much had all bases covered. So Vishnu took on the avatar of Narasimha to bypass the boon. Narasimha was a hybrid creature, half man half lion, and therefore neither man nor beast.
He killed Hiranyakashyap at twilight, which is neither day nor night. He killed him in the courtyard, which is neither inside a house nor outside it. And he killed the demon by placing him across his knee and tearing him apart, thus circumventing the terms of the boon that he could not be killed either on the ground or in the sky. Now that's what I call an innovative algorithm!
So what are the lessons for the IT industry in this story? Well, the first thing Vishnu did was to reinvent himself. It was not the gentle and contemplative Vishnu who fought Hiranyakashyap–it was the fearsome Narasimha avatar. Vishnu reinvented himself to suit the circumstances. The circumstances have changed drastically. The IT industry must reinvent itself.
Do I have all the answers on the modes of re-invention? No, obviously not, otherwise I'd be out there filing patents, although I can suggest two broad approaches.
First, why don't we design business models that challenge traditional industry approaches and then transform our organizations, people and processes to execute. If we simply keep knocking on the doors of clients with our traditional offshoring options, we'll meet the fate of hearing aid salespersons: our best customers won't hear the doobell!
A few weeks ago, an Indian car company made a game-changing move. Maybe the Nano will ultimately not retail for a hundred thousand rupees. Maybe it won't have great margins, or replace as many motorcycles as it would like to, but it was a game changing move; it fired a shot that was heard around the world. Can the IT world make any such claim?
There was an old saying, apparently adopted by the IT industry, that the secret of success is to jump every time opportunity knocks. And how do you know when opportunity knocks? You don't, you just keep jumping!
So when are we going to stop simply jumping every time a client seems to sneeze, and actually create products and IP that become their own opportunities?
Let's look at new areas where India may have natural advantage. I remember C.K Prahlad telling us that we didn't realize how important it was to leverage emerging innovation ecosystems in our country. He gave us the example of how, due to a fortunate coincidence, India's IT and automotive industries were situated in roughly the same geographic clusters. So why wasn't, according to Michael Porter's competitive theories, a world beating automotive telematics industry taking shape here.
Why aren't IT companies using the massive potential of India's soft power, the film and TV business to exploit technological dominance of what Telcos call the “last mile” but is actually the “first mile” in the brave new interactive world?
Secondly, why don't we try to focus on a vertical industry (e.g., telecom) or horizontal domain (e.g., supply chain management) selecting the key dimensions of competitive differentiation–product versus service, breadth versus depth, speed of delivery, customer service responsiveness, fixed or outcome-based pricing, proprietary technology or intellectual property, and so on.
And let's be prepared to make hard decisions along the way–change people who don't fit, walk away from businesses that doesn't fit.
Along with re-invention, during the course of reinventing himself, Vishnu figured out the loopholes in the boon, and regrouped his physical and mental aspects to take advantage of these loopholes. That's something the IT industry can do as well. It has often been pointed out that the Chinese word for crisis is also the Chinese word for opportunity I love that mindset. I truly believe that the adverse rate of the dollar can be viewed as the glass half empty or the glass half full. Sure it affects margins. But it's also a chance to take advantage of the loophole and buy the IT industry what it doesn’t have, so it can regroup its structure to meet the challenge.
To me, the fact that our currency is more valuable and our price earnings ratios are still higher than average, means that we can acquire the front-ends and the large IT businesses that we never thought we could before. And the bigger the better. If people are egging us on to leapfrog, then they should also cheer the IT companies bidding for organizations bigger than themselves. It's happening all the time today in the manufacturing sector—Tata Corus being the stellar example—and we at Mahindra, while starting from scratch, have inorganically compiled together a portfolio of acquisitions that make us the fourth largest steel forging company in the world today.
This is not without historical precedent. If you look at Japan and South Korea, both of them went through a phase of enduring the worlds' skepticism, then painstakingly building strong and competent domestic businesses, and then on the back of global liquidity support and strong price earnings ratios, compressing time by acquiring global firms and their customer credibility.
In effect, by acquiring the strengths and skill sets needed, the IT-BPO industry can regroup its profile and create a new entity, which can vanquish challenges as effectively as Vishnu vanquished Hiranyakashyap.
And finally, while reinventing itself, the industry will have to bring in some of the aspects of the third element of the Trimurti–that of Shiva the destroyer.
Destroy for example the premise that cost arbitrage is the way to go. Recognize that the low cost, high volume offshore outsourcing battle has already been fought and won. Often, when strategic frames grow rigid, companies, like countries, tend to keep fighting the LAST war. If the industry I not already on the winners list, it needs to think of other ways to compete on value and differentiation, rather than price and scale.
Destroy the premise that success comes only from size, and desist from comparisons with other Indian companies. There are still many IT companies in India who define success as "we want to be one of the top ten Indian IT companies." Why not, for example, "we want to be the world's #1 banking back office solutions provider?"
And lastly, perhaps the time has come to destroy the notion that the world may be its oyster but India is not. There is a huge domestic market in middle class and corporate India that has not been plumbed. Even selling to the bottom of the pyramid is profitable today. But it needs a creative destruction of the current mindset and a re-think on many of the assumptions we hold dear.
Therefore, in conclusion, it can be said that perhaps there really isn't that much distance between avatars in the mythological sense and avatars in the technology sense. Perhaps they are both symbolic expressions of the same reality. In their different ways, they both underline the same message–that it is necessary in any situation to reinvent, regroup and re-think our way out of whatever challenges confront us. It’s time then for the Indian IT-BPO industry to wake up and make the world different.”
Sphere: Related ContentThe sub-prime situation in the US is far from over and Indian companies which get business from US clients stand to be impacted. If companies are not placing orders to manufacture things like cars or PCs out of China, then it is bound to impact their economy. By June 2009 the US would be back on its feet.
Bala V Balachandran, the 71-year-old distinguished professor with Kellogg School of Management goes by a simple philosophy - In the long run, you go and I go, there should be no ego.
The first Indian to be hired by Kellogg three decades back, the outspoken professor is concerned about the way the Indian and US economy seems to be heading. Add to that he laments about lack of leader and visionaries in India.
"The sub-prime situation in the US is far from over and Indian companies which get business from US clients stand to be impacted," he told HT on the sidelines of the opening of a new campus of his business school, Great Lakes Institute of Management, Chennai. His statement rings a loud bell considering that he has taught a lot of students who have now gone on to become key decision makers in financial companies in the US and the world.
According to him, the first signs are evident from IT companies who are reporting lower than expected net profits in the last two quarters and have given muted business outlook for the rest of the year.
"This fact is evident by the retrenchments that a few Indian and global IT companies made recently," he says.
According to him it is not services companies (like Infosys or Wipro) but even Chinese companies who are feeling the impact of the sub prime situation.
"If companies are not placing orders to manufacture things like cars or PCs out of China, then it is bound to impact their economy," he says. Ask him about when the US will come out of a recession and he assures that by June 2009 the US would be back on its feet.
While he is convinced that India's economic fundamentals are strong, he is concerned about the rising inflation. "A huge chunk of the middle class has moved up thereby making more money available, creating more demand, thereby resulting in this inflation scenario," he explains.
According to him, this rising inflation is a global problem and not an Indian one and he is convinced that the FM is addressing it in the right manner.
Courtesy - The Hindustan Times
Sphere: Related ContentCincom Smalltalk announces the release of ObjectStudio® 8.1 and VisualWorks® 7.6, each with a number of significant improvements, including support for Seaside 2.8--the high-productivity web application development system. Seaside is open source and portable across multiple Smalltalk implementations.
Cincom ObjectStudio 8.1 is the first Vista-certified Smalltalk available. It now uses the industry-leading VisualWorks VM and has access to all of the standard VisualWorks components--including Seaside. Cincom has also updated its Sybase and ODBC support.
Cincom VisualWorks 7.6 has enhanced integration and revamped and refined browsing tools. Along with a greatly improved MacOSX VM, Cincom VisualWorks 7.6 also supports Microsoft Vista, OSX Leopard and MySQL, and includes a supported object-relational mapping framework (GLORP).
For further information, please visit the Cincom Smalltalk Product Manager’s blog,
the Cincom Smalltalk Product Evangelist’s blog, and the Cincom Smalltalk website.
Related links:
Screencast: Introducing ObjectStudio 8.1
Screencast: Using VW libraries in ObjectStudio
Cincom Smalltalk Screencast archive
The newest Cincom Smalltalk podcast
Cincom Smalltalk podcast archive
About Cincom Smalltalk
Cincom Smalltalk is a cross-platform development technology that helps developers build applications quickly and efficiently from highly scalable web applications to classic client/server systems. Cincom Smalltalk brings better productivity than Java, Ruby, Python, C# or VisualBasic. Bring your products to market faster with Cincom Smalltalk.
Sphere: Related ContentAn interview with Kevin Clancy and Peter Krieg, co-authors "Your Gut Is Still Not Smarter Than Your Head"
A "Blink" Is Just a "Blink"
Why is the tenure of CMOs depressingly low? Instead of popping Alka-Seltzer, Kevin Clancy and co-author Peter Krieg offer an alternative prescription to relieve marketing performance anxiety.
Is marketing really all about the "blink" as Gladwell might have us think? Or can companies truly put into place a successful marketing strategy founded in discipline and a fact-based approach? Is there a way that 2008 will truly be the year that CMOs don’t take flight and companies boost both brand and market performance?
Interview Kevin Clancy and Peter Krieg:
Nettie (NH): While CMOs are popping Alka-Seltzer and trying to increase their now average tenure of less than 22 months, what are the top three things they can do today to get a handle on their marketing efforts?
Clancy: We get this question from folks, a lot—what are those three critical things I can do today to dramatically improve marketing performance tomorrow. I always give the same answer. It’s not exactly a well-kept secret that most executives—marketing and otherwise—have no idea who their most profitable and least profitable customers are. And forget about prospects! It’s a drag on performance to waste time and resources on buyers who offer little in the way of economic value to a company, so the first thing CMOs can do is to filter out the chaff and find a target worth targeting.
Next if you don’t want your brand to be a commodity, don’t treat it like one. CMOs need to find a positioning based, not on what everyone else in the category is doing, but on real buyer problems.
Finally, no matter how dead-on the targeting and positioning, if they get lost in the shuffle during implementation of the strategy—in an ad campaign, for example—there’s no effect. So treat implementation as a priority, not an afterthought.
NH: You say relying on gut instinct to make decisions is dangerous and that it should not be the determinator for marketing programs. In the world of instantaneous "gut-check" marketing and the hub-bub about "Blink," what do you think CMOs should be utilizing instead of gut?
Clancy: In marketing, as in life, the best approach rarely lies in the extremes. Yes, relying on gut instinct and intuition alone to make a marketing decision is foolhardy. But we’d never say all you need are numbers and data to make a decision either. There is plenty of suspect data out there that can lead CMOs in the entirely wrong direction. When it comes to making marketing decisions, nothing beats a balance of personal judgment and seasoned experience with careful analysis of unimpeachable data.
NH: You've said CMOs should "lose their fear of numbers"—what does that mean and why is it important?
Clancy: At most companies today, market researchers and marketing managers are about as close to a productive working relationship as the Democrats and Republicans in Congress. Researchers very often talk in terms of analysis techniques that mean little to marketers and the data they tend to present rarely provides a clear course of action. So like kids and spinach, marketers know they need the research, but they don’t want to eat it—it’s too complex, not really helpful, and who knows if it’s even any good to begin with? In lieu of buyer research, marketers rely on competitive information and their own sense of what customers will or won’t like to make a decision. Given that the average ROI of most marketing programs these days is zero or negative, this approach doesn’t seem to be working very well. CMOs need to take steps to address their current issues with research, otherwise they’ll be left having to explain to the CEO and CFO why he or she has nothing but his or her good name to back up a major marketing decision.
NH: You advocate that marketers should "start buying media by hearts and minds, not numbers." Explain?
Clancy: The only way to buy media these days is by the number of people exposed to commercial message. You can imagine how frustrating this is for marketers who are spending millions and would like to know that target buyers not only see their ad, but also pay attention and respond to it. There’s plenty of talk about coming up with metrics and ratings systems to capture levels of "engagement" in different media such as TV. The theory goes the more "engaged" or involved a viewer in a program, the more likely he or she is to tune into the ads during the show. Our own work at Copernicus in this area has found program involvement accounts for half of the attention paid to an ad and casts a long, positive shadow on persuasion among those aware of the ad. But CMOs need to get serious about tracking ad response by level of engagement to establish exactly what the added investment that will likely be required to secure ad time in a highly engaging program, magazine, radio show, website, billboard, etc., will return to them to move the dream of more impactful media buying closer to reality.
Do Sales and Marketing Really Have to Collaborate?
NH: Why is it important for marketers and sales folks to get along?
Clancy/Krieg: Here’s another flashpoint for marketers—their relationship with the sales team. They just don’t get along and, unfortunately, too many companies just accept this as the natural order of things. Marketers can’t afford to let this continue. I said before that implementation of strategy is just as important—if not more so—than the strategy itself. If you can’t get sales on board with a marketing program, marketing performance suffers.
CMOs would do themselves a big favor if they took the first step toward detente and tried to patch things up. Start with a new mindset—treat sales as a client instead of a competitor. Have your team find key targets for them in available sales databases. Come up with different scripts for different targets. Show them the money—in other words, how the information you are giving them will help make more of it—and they will show you the love.
NH: Why is 100% customer satisfaction unprofitable? And how should that determine where companies should spend their money in marketing?
Clancy/Krieg: Throughout the 1990s, management consultants preached the virtues of 100% customer satisfaction. Many companies—Xerox for one—made this their overarching corporate goal. And even with all that push behind it, the average cross-industry customer satisfaction score still hovers just below 75%. Now, obviously there’s plenty of room for improvement, but the question is how much and where exactly to improve. True, profitability rises as satisfaction increases, but only up to a point. After that, the cost of delighting the customer by delivering ever-increasing satisfaction rises faster than the payoff in profits. The key is to identify critical drivers—the things customers truly want in a category and what they are or aren’t getting from your brand and competitors—and rough out the costs to find the optimal point for improvement. Throughout the 1990s, management consultants preached the virtues of 100% customer satisfaction. Many companies—Xerox for one—made this their overarching corporate goal. And even with all that push behind it, the average cross-industry customer satisfaction score still hovers just below 75%. Now, obviously there’s plenty of room for improvement, but the question is how much and where exactly to improve. True, profitability rises as satisfaction increases, but only up to a point. After that, the cost of delighting the customer by delivering ever-increasing satisfaction rises faster than the payoff in profits. The key is to identify critical drivers—the things customers truly want in a category and what they are or aren’t getting from your brand and competitors—and rough out the costs to find the optimal point for improvement.
NH: What are companies missing out on if they're not pushing a full marketing effort to "those who already love their products"?
Clancy/Krieg: They are missing the opportunity to foster loyalty and grow an existing business relationship. The cost of sales to folks who are already familiar with your brand and already predisposed to buying it are so much lower than the cost of finding and wooing an entirely new customer who may already be loyal to a competitor.
Is Data the New Black?
NH: Data, data, data—why is data so important and how can companies get better at collecting it and using it for marketing decisions?
Clancy/Krieg: Very few marketers complain that they don’t have data—most are overwhelmed by the reams of information they have warehoused in various databases. What they complain about is having data that they can use to make decisions about who to target, how to differentiate their brands, how to reach them with media, what new products will be of interest, and much more. In order to get the kind of information and insights that you need, you need to start by understanding who in the marketing organization will be using the information and how they would like to use it—what decision are they trying to make. Marketers should also understand what some of the limitations of different research exercises are. Ethnography is a "hot" research technique, for instance, but you can’t project findings onto a larger population.
Q: Is there a tip or two that you have for marketers to stave off the recession blues?
Clancy/Krieg: A typical gut reaction in a recession is to cut back marketing budgets dramatically. Tough times, the belt gets tightened. We understand the sentiments. Just consider that all ofyour competitors are also likely cutting back—so why not buck the trend and increase your share of voice in the marketplace? Another typical gut reaction is to assume buyers are much more price-sensitive during a recession, meaning marketers cut prices. During tougher economic times, price becomes a more important consideration, but not necessarily—not even customarily—the most important consideration. In fact, our research suggests that price is the primary consideration for only 15%-35% of buyers in most product and service categories, so even in a recession there are a multitude of other compelling ways to differentiate your brand other than through a low price.
by Nettie Hartsock, Cincom Expert Access
Sphere: Related ContentRather than view a potential recession as something you can only “ride out,” seize the moment to drive changes that will reduce operating spend and free up cash for projects that will create competitive advantage.
A slowdown in economic growth normally means weaker customer demand, lower margins, reduced profitability, and lower free cash flow. Your industry sector, global revenue diversification, and capitalization strategy will dictate your individual circumstance and corresponding actions. As a global strategic advisory firm, The Hackett Group believes the following actions are critical considerations, whose priority will be determined by circumstance.
The Hackett Group’s recommendations fall into two general categories:
• Inefficiency kills competitiveness. In order to maintain profitability and cash flow in times of weaker demand and margin pressure, it is imperative to understand and target inefficiencies throughout the organization. Some combination of both rapid and strategic cost reduction initiatives is critical to short-term results, as well as long-term competitiveness.
• Cash is king. Freeing up unnecessary working capital is the cheapest form of financing. During periods of economic growth, the focus on the balance sheet wanes, leading to increased inventories, receivables, and inefficient management of sourcing relationships and payables.
Rather than view the current economic downturn as something that you can only “ride out,” seize the moment and use the sense of urgency created by it to drive changes in the organization that will quickly reduce operating spend to appropriate levels and free up cash, which can then be invested in projects that will create competitive advantage. Change usually happens on the back of a major disruptive event, like the housing meltdown, and we are generally in a recession long before it is acknowledged in reported GDP data. Seize this moment, and use it to drive change. It is amazing how many improvement initiatives have their origin in a compelling event that forces buy-in from executive management, line workers, and other stakeholders.
World-Class Operation
The best preparation for being able to recognize and exploit opportunity is to implement world-class performance programs. When times are good, it is easy to overlook many cost-saving opportunities in back-office functions, since many of the changes required to harvest these savings are challenging and far from sexy, compared with other core business opportunities. We continue to see the gap widen between the industry peer-group averages and those companies that perform at world-class levels (Fig. 1).
A combination of rapid and long-term strategic cost-reduction initiatives can yield hard dollar savings that drop almost immediately to the bottom line and represent permanent cash/profit savings.
• Identify immediate opportunities for near-term cost reduction by taking a fact-based approach to what other leading companies have achieved. This is not sitting around the conference room determining what across-the-board costs you plan to take out. Rather, this is a thoughtful exercise based upon reliable performance metrics, by both function and process, which illustrates where you have excessive cost.
• Up the ante on shared services. If there is any single business practice that has
resulted in dramatic cost savings for G&A functions, it has been the implementation of the shared services business model. The shared services model leverages two sound principles in effective cost reduction: scale leverage and standardization. Our 2007 Global Shared Services study found that 65 percent of firms implementing shared services achieved savings in excess of 20 percent of costs, while 27 percent actually achieved savings in excess of 40 percent.
• Recognize the implications of the services globalization mega-trend on all back-office processes, and implement strategies to move this work from high-cost to low-cost regions. Globalization of work is no longer a leading-edge strategy; it should be considered a best practice for any company striving to achieve world-class performance. The Hackett Group has determined that the typical, $22-billion Global 1000 company has a minimum of $120 million in labor arbitrage savings if it were to fully implement a globalization strategy in its core G&A processes.
Next, take a long look at tackling the more strategic transformation projects. Focus on projects that will ensure that the company’s G&A functions are operating at world-class levels in both efficiency and effectiveness. This strategy will yield a greater payoff than simply reducing labor costs. World-class performers can eliminate labor when processes and technology are optimized and complexity is reduced. Hackett research has shown that the typical Global 1000 company can save $189 million when globalization efforts are combined with world-class transformation initiatives.
In These Times of Financial Uncertainty, Cash Is King Again
Freeing up excess working capital is the cheapest form of financing. Therefore, know where the hidden piggy banks are buried within your organization. According to REL, the working capital division of The Hackett Group, there is a tremendous amount of cash unnecessarily tied up in the typical company’s working capital. Indeed, the typical $22 billion Global 1000 company has an average of $2.9 billion in excess working capital, compared with companies that have achieved upper-quartile performance in their industries (Fig. 2).
Start by looking at cash flow opportunities presented by inventory, payables and receivables. This is an area of almost unlimited possibilities, many of which can produce very actionable items for improving cash positions. Even modest adjustments to cash payments can help stabilize an organization.
• Perform a detailed analysis of the entire customer payment process, beginning with the initial terms and conditions that were established during the sale. It is critical to understand the gap between when customers should pay and when they actually do pay. You need to fully understand the root causes of why customers pay late.
• Review your inventory and inventory strategy. It is startling how quickly slow-moving items can escalate the level of inventory and resulting cash tied up in an unproductive use. Establish a process to systemically review the inventory turns of key products.
• Review your existing supply base, and look to consolidate your spend and increase your buying power. Then leverage this to negotiate more favorable costs, terms, discounts, service, lead times, and quality.
Next, review your sourcing strategy. Any organization that must compete globally must make its sourcing strategy a top priority. The global market is changing so fast that a thorough evaluation of your supply chain done just two or three years ago may be out of date today.
From a sourcing perspective, it is very difficult to ignore the cost savings available from sourcing products/parts from low-cost regions, especially Asia. However, a word of caution for this strategy: REL’s research has shown that companies that have successfully reduced their cost of goods sold (COGS) and attained their desired gross margin improvements have also experienced increases in inventory levels. In other words, companies are buying/making cheaper products, but due to the massive increase in distance and lead time, have many more units of product in their supply chain.
Globalization from both sourcing/making products in low-cost countries to ship to major western markets as well as supply a fast-growing new base of customers in Asia will be a significant challenge. This is not just from a quality-control perspective, but it is also difficult to reap greater rewards from this sourcing opportunity so that you do not just pick up gross margin gains. It can simultaneously reduce inventory levels and improve order fill rates to your customers. The challenge can be boiled down to three broad areas: demand forecasting; speed across the supply chain, including physical manufacturing, shipping, and planning lead times; and supply chain flexibility.
Another equally rewarding theme of advanced working capital optimization involves collaborative working capital. This is where there is a much closer relationship between your company, your customers, and your suppliers. The basic premise of this approach is getting the best possible visibility of “true demand” – something that in most cases is nothing like the ordering pattern that you receive from your customers.
Strategic Implications
The Hackett Group’s message of the power of world-class performance, always important in times of economic growth, has even more applicability during market downturns and in times of economic uncertainty. The best companies not only survive during these times; they position themselves to take advantage of opportunities as the market improves. As the data from our benchmarks and other studies shows, top-performing companies consistently invest in their people, processes and technology to differentiate themselves from the rest of the pack, in good times and bad. In an increasingly competitive global environment, the margin between winners and losers might well come down to the efficiency of the G&A areas as well as the effectiveness of these groups and their ability to positively impact the overall business. FAO
By Bryan Hall, Michel Janssen, Stephen M. Payne, & Wayne Mincey. Bryan Hall is practice leader, finance executive advisory program, The Hackett Group. Michel Janssen is chief research officer, The Hackett Group. Stephen M. Payne is president, REL, responsible for all aspects of The Hackett Group’s global business. Wayne Mincey is president, The Hackett Group. Courtesy - FAO Today
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