You can find part 1 of this series on the topic of business transformation by clicking here. Click here for part 3 on key learnings in revenue growth. And finally, click here for the last part on Serviceware as the key to solving current problems of digitization.
Over many years of looking at the dynamics of my corporate balance sheet, P&L, and cash flow, I had one long-lasting grumble. Copious amounts of notes to the accounts, compliance reporting, and nice "corporate" pictures were covering up the real issues we had to deal with on a daily basis. Our internal planning and reporting systems and processes were sound but very “traditional” and not helpful in enabling our operability to adapt quickly in a volatile business world.
How could we improve the quality of our execution and provide our customers with an outstanding experience, whilst freeing up budget to finance innovation and creativity?
To answer this, I needed a new way of looking at the business. In my quest to maximize and sustain long-term shareholder value, I kept a close watch on four major areas of operability to ensure our strategies would deliver on the strategic goals we had set, namely: Revenue, Operating Margin, Asset Efficiency, and Operational Execution. Let us have a closer look at each of them.
1. Revenue: “The lifeblood of every company”
Growth was a key value metric, not just in absolute terms but in comparative terms. Similarly, the makeup of our revenue was another key strategic value lever, how much of our revenue was “at risk,” this was mainly new business revenue. If our revenue was made up of more recurring elements that are generally less risky, this provided a higher value rating as reflected in our share price.
My task was always to try to have our annual recurring revenue at a level that at least covered our operating expenses while leaving new business revenues to deliver the EBIT growth we planned. New business revenue is always more difficult to get a grasp on when compared to other value drivers. The challenge was to develop new sales strategies which made the task of new business sales growth easier. At the same time, we had to reduce costs in other areas of the business to sustain and increase these new sales acquisition plans and execution investments. Here, we always had more investment demands than we could afford.
2. Operating Margin: “Every penny a prisoner”
Focusing on cost optimization was crucial since it had such an overreaching impact on all areas of our business. If we could free up costs whilst sustaining and improving quality in everything we did internally and externally (thereby improving our Net Promoter Score), we had a fundamental strategic building block for improving our overall value.
With this foundation we would be able to make more fundamental investment decisions: Should we reallocate budget into our customer innovation areas like new products, sales, or marketing? Or should we try to go for a short-term improvement in our EBIT numbers? Maybe even both?
This was not just about reducing overall SG&A costs and/or Cost of Goods Sold (COGS) but about trying to ensure the best business value for the money we were spending. Costs to "keep the lights on" were necessary, but I was more interested in new developments and initiatives.
If we could free up costs, whilst sustaining and improving quality in everything we did internally and externally (improving our Net Promoter Score), we had a fundamental strategic building block for improving our overall value.
However, redistributing the budget was not as simple as I thought. I was unable to take big cost decisions for fear of destabilizing our current customer experience and the fundamental way our business operated. I had little or no data to help us make these bigger and bolder steps.
There were countless open questions on the table: What value were we getting from our SG&A cost buckets, or more particularly, the G&A functions? What to outsource? Where to outsource? What is the impact on quality? How do we benefit from emerging technologies? Do we set up a business services division or company and sell these services in the market to other software companies so that our back-office costs were being covered?
Of course, there was some data I could rely on. Our ERP systems handled the basics of our formal accounting needs and some fundamental reporting. Our CRM systems were also providing data points and we had teams of Excel analysts drilling into the ERP and CRM data to provide some answers, but they all struggled with telling me the answer to the big questions: How are we spending our money and what value were we getting from our functional spend, in particular our IT spending which was increasing year after year? Are we paying too much relative to our peers?
The answers to these questions affected the whole financial process from budgeting to reporting of actuals. Decisive data here would allow senior and middle management to positively impact our operability, quality, and cost return.
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3. Asset efficiency: “Cash is king”
Cash optimization and how we leveraged our Property, Plant & Equipment (PP&E) investments were the two focus areas of our assets base. Remote working specifically was beginning to take more and more of an effect on how we planned for our real estate needs. On the PP&E part of our business, our HQ was a wholly owned piece of real estate on our balance sheet, bought 10 years before I had joined the company. It was a fantastic place to work, a sprawling estate in the English countryside and it housed the main product development teams, the back office functions and senior management.
However, this real estate capital was not helping the business of making and selling software. We needed to make some decisions not only regarding the HQ, but regarding all of our locations across the globe, all of which were costing us a lot of money based on a “come into the office” culture which had started to change in the late 90’s/early 2000’s.
We housed our own data center and global networking connections before Azure’s and Amazon’s Infrastructure as a Service (IaaS) model became a viable alternative to providing the technology we needed. However, I found it very hard to know if our asset was being fully optimized for value since all I could see from my financial reporting was a cost bucket called “IT cost”. At best, I could subdivide it further into hardware, software, and services (i.e. labor). But the main questions remained: What is all this stuff delivering in terms of value to my strategic goal of improving long term shareholder value? I knew I had to have it, but did I need to own it? Was the amount of spend I was investing right? What were the elements of these assets which helped deliver the high-level strategic goals we had?
My CIO reported to the CFO and was a great technical person, but he had a hard time thinking like a businessman. My CFO acted as a translator, but he also struggled to get the basic business messages about value-enhancing investments across. Both of them could give great guidance, but they could never get down to the nitty-gritty: what did all of these IT costs and investments bring for the business in terms of true value?
Cash was king in our business (as it is in most if not all businesses). On one hand, our cash needed to be handled carefully to allow for the financial security to make big investment decisions. On the other hand, you cannot solely rely on that security and need to plan for bold decisions, so cash does not sit idle on the balance sheet.
Today, in a world where everything is a Service (XaaS), cash optimization is becoming easier as the need to buy assets with your own cash slowly vanishes from many business areas. However, the C-suite still needs to determine what assets they might need to hold on the balance sheet, which assets they need to finance through the P&L and the accruals needed to be declared on the balance sheet to account for long term finance contracts.
Alongside these considerations, there remains a number of other important decisions e.g. what services from external suppliers are needed, how long are they needed for, what impact do these external suppliers have on quality and NPS targets, how many of them are needed and how do we control and optimize our costs in these areas? The answers to these questions have become much more complex than they werer a decade ago and the C-suite needs to adjust to that complexity. Providing executive reporting and gaining essential data to make these adjustments has now become a key element of running and managing enterprises and assets.
4. Operational Execution: "Culture and communication to change the game"
To achieve the transformation goals we had set back then, we needed to underpin our plans with the right people and a culture which would deliver results. In my opinion, this was the most important part of our transformation strategy. We needed to invest in the people who were ready for the transition journey and replace others who we felt would stop our progress. This was difficult to execute personally since we had incredibly loyal, long tenure staff who were personable and had been committed to the company for many years before I had joined. However, I knew that they would not embrace the changes we needed to make.
I had to start with the senior team and then work through the organization over a 12-month period to make a full assessment of our human capital. We had to make a lot of changes at all levels across the globe and it took three times as long as I had anticipated. All of these proceedings needed to be communicated to our shareholders in a clear and constructive way.
Alongside a shift in personnel, we needed a shift in culture. The company had become unambitious, lethargic, and it lacked vision. The C-suite – which had been in place for some time – had found it difficult to find a solution to the malaise which had created a slow but inevitable decline in the company’s revenue in the prior decade.
The values were sound but not published, communicated, or “lived” and the culture was not that of an expanding, ambitious company in a growth market. I naively thought I could turn this ship around quickly, but it took a full eight years before I felt the company had transitioned to a new outlook. C-suite leadership was essential in demonstrating the culture we wanted to develop, but we also needed tools to incentivize the correct behavior. A cultural shift would only work with the right change management.
Our HR Director and CFO were key assets in defining effective change tools to drive the company culture we wanted to develop. I found these to be in limited supply and apart from some incentive schemes around “new Intellectual Property copyrights”, we really struggled to find means to accelerate a culture of entrepreneurial thinking, cost consciousness and responsibility.
We wanted everyone to treat the company’s profits as if they were their own. Ideally, this shift in thinking would develop organically, but it might need some incentivization to profoundly impact and transform company culture.
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