10 issues that matter

(First of two parts) 

In these challenging times, companies have to think “out of the box” to stay ahead of competition. The business sector has to constantly pursue innovation or lag behind.

Organizations should constantly look into developing new business processes that will help them keep pace with the changing financial systems and markets. Research and endless efforts to come up with strategic and innovative tools will play a big role in organizations to equip them in the economic transformation. Calculated risks may also have to be taken along the way to take advantage of opportunities.

The article below, published in Agenda Magazine (March-April 2010), an Advisory Services publication by KPMG International Global Advisory, discusses strategies and business processes which are currently being undertaken by some organizations to improve their performance and increase the return on investments.

Please take time to read the article below as it highlights the top ten business procedures and methodologies in this time of economic transition. Furthermore, it provides insightful recommendations and gives real accounts of organizations which utilized such innovative business processes and strategies.

With the business landscape changing by the day, here are 10 challenges to prioritize in 2010.

1. Speed sourcing

You would like to outsource part of your business, but need a return in four months, not nine. What can you do? Some firms are trying a revved up, slimmed down strategy called ‘speed sourcing’. It isn’t for the risk- averse, but the principles involved could help any CFO. Instead of exhaustively reviewing every supplier, you focus only on companies in the very top tier or those who specialize in your sector.

Instead of a detailed tender document, you issue a succinct ‘request for services’ which gives the essential info about your business and goal.

Suppliers then respond with a high-level pitch and, after a quick series of negotiations, a contract that focuses only on must-haves (key conditions, price, timeline, liability) is signed. One Fortune 500 clothing group which used this process outsourced some services in less than half the time it normally took.

For some, the risk of such a strategy is too great. Others fear that speed sourcing may leave buyers and suppliers with fatally different expectations. Still, with estimates suggesting 70 percent of IT outsourcing deals are renegotiated within two years, the standard approach isn’t working that well.

2. IFRS as an opportunity

The next wave of IFRS adoptions in locations such as the US, Japan and India brings us one step closer to a single set of high-quality global accounting standards, but only smart CFOs will recognize that the benefits of IFRS can more than outweigh the costs of conversion.

“IFRS conversion can be a catalyst to help reshape the entire finance function and its people,” says Gary Reader, who leads KPMG’s Global IFRS initiative. “For instance, it can help improve the quality of the reporting process. A new global accounting language can emerge, which can help geographically disparate business units to work together more closely.”

Similarly, Oracle CFO Jeff Epstein advises: “Waiting until the last minute is not sensible; our strategy has been to ‘simplify, standardize, centralize and automate’ and we’ve continued to do that as we’ve begun to adopt IFRS.”

Understanding the accounting impact is essential but you also need to get to grips with the necessary changes to the systems, processes and people. The wider business impacts are likely to be more far reaching than you imagined.

3. Smarter logistics

Why pay all the time for a product you only use 70 percent of the time? Performance-based logistics (PBL), or ‘power by the hour’, offers a way out of this conundrum.

With PBL, suppliers are compensated for actual product performance, not the promise of efficiency or savings. Such tightly defined contracts help buyers control costs and maximize value.

The defense and aerospace sectors have already discovered the benefits. Every time the US Department of Defense buys a jet or stealth bomber from Lockheed Martin, it pays not for the physical product, but for how often it can fly. The department saves $5 million (3.4 million euro) on every PBL contract which is why, in 2009, it spent $5 billion (3.4 billion euro) through such deals. Some US states – notably Florida and Maine – have begun using this approach.

For PBL to work, both sides need to agree how to measure performance. Serguei Netessine, associate professor of operations and information management at the Wharton School, says this represents what he calls “servicization: transforming the business from just buying parts and products to procuring services”.

4. Is reverse innovation the way forward?

Developing in emerging markets first is an enticing strategy for multinationals.

Globalization has traditionally been quite simple: innovate in the West and ship your products out to emerging markets. When US companies moved into Europe or Japan, they found a customer base similar to their domestic one, which meant it was easy to adapt existing products. But emerging markets like China and India are now a significant force, and that means multinationals must radically alter their mindsets.

The middle class in India or China is fundamentally different to its American equivalent. The average per capita income of the Indian middle class is $1,000 (700 euro); in the US it’s $40,000 (28,000 euro). There’s no product you can create for the West that you can simply adapt for India.

Reverse innovation offers an answer. It means focusing on customers in emerging markets – and their problems – first. By innovating and introducing products in emerging markets, they become applicable to developed nations too. When General Electric created a backpack-sized, low-cost ultrasound machine for rural China, it had to shift its centre of gravity. As well as development and manufacturing resources in China, it needed a strategic marketing capability there. It worked, and the product is now used in the West too.

The biggest challenge is organizational: if you can’t get that right, you can make a mess both of your existing innovation and reverse innovation. The first step is establishing internally that emerging markets are a strategic priority. The CEO needs to visit those markets to see the challenges and opportunities. Next comes the courage to invest resources in emerging markets, with effective devolution of power.

GE, Unilever, Procter & Gamble and Nokia are already making reverse innovation a priority. But it will affect everyone eventually and will fundamentally reinvent the nature of multinationals.                                                     (To be concluded)

(Roberto G. Manabat is the chairman and chief executive officer of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])